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Early Retirees, Manage Income to Snare a Health Insurance Subsidy

Taking early retirement? Here's how to lower health insurance premiums until you're eligible for Medicare.

If you retire early and have to buy health insurance on your own, those premiums are likely to be some of your largest expenses until you turn 65 and can enroll in Medicare. Early retirees have it particularly hard because health insurance for people in their fifties and early sixties can cost up to three times as much as coverage for younger people.

But you could qualify for a subsidy to help pay a big chunk of the premiums if you buy insurance through your state health insurance marketplace. And you may be able to make some financial moves to qualify for more assistance—especially if you have retired from full-time work and have more flexibility with how you receive your income.

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To qualify for a subsidy, your modified adjusted gross income must be less than 400% of the federal poverty level. For 2018 coverage, that’s $48,240 for singles or $64,960 for a couple. The lower your income, the higher your subsidy (although your income must be at least 100% of the federal poverty level, which is $12,060 for singles or $16,240 for couples).

Qualifying for a subsidy can make a big difference in your premiums. For example, a 60-year-old single man in Pittsburgh who earns $40,000 could qualify for a subsidy of $439 per month in 2018. That would lower the monthly cost of some silver-level plans from $730 per month to about $300. If he bought a bronze plan, which usually has higher deductibles and more cost-sharing than silver plans, his monthly premiums could drop from more than $500 to about $100 or less.

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The subsidy is a premium tax credit, and it is based on your income for the current year, which you estimate when you buy a policy. But you still have time to make some moves to help reduce your income before the end of the year, which could lower your premiums now or result in a refund when you file your 2018 income tax return. You can only qualify for a subsidy if you bought coverage through your state insurance marketplace (either through Healthcare.gov or your state’s exchange, depending on the state).

Steps to Trim Income

The modified adjusted gross income figure that determines eligibility for the subsidy is based on your adjusted gross income on Form 1040 plus tax-exempt foreign income, tax-exempt Social Security benefits and tax-exempt interest.

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You can reduce your income by making tax-deductible contributions to a traditional IRA, if you or your spouse has some earned income; to a health savings account, if you have a high-deductible health insurance policy; or to a simplified employee pension or solo 401(k), if you have any self-employment income. “Essentially, any tax-deferred vehicle will help lower your MAGI,” says Ron Mastrogiovanni, chief executive officer of HealthView Services, which specializes in financial planning for health care expenses.

You can also control how much money you withdraw from tax-deferred IRAs or 401(k)s in the last few months of the year, perhaps delaying some withdrawals until 2019. Or you could instead take money from a tax-free Roth account, which wouldn’t be included in the calculations. Selling losing stocks or minimizing capital gains can help, too. And if you have any self-employment income, your business expenses can reduce your income. Also be careful about moves that can make your taxable income higher than usual, such as converting a traditional IRA to a Roth.

It’s important to keep the subsidy in mind when choosing a policy for 2019 health coverage. Open enrollment for marketplace coverage runs from November 1 to December 15 (with a longer deadline in some states). Although Affordable Care Act–compliant plans are also available outside the state exchanges, it’s a good idea to buy coverage from the marketplace if there’s a chance you could qualify for a subsidy. For 2019 policies, you will get a subsidy if your income is less than $48,560 for singles or $65,840 for couples.

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