Health Care Subsidies in Retirement – What You Need to Know
Health care costs are one of the largest expenses for many people. According to an article published by Fidelity, “How to Plan for Rising Health Care Costs,” the main drivers of skyrocketing health care costs are:
- people living longer
- health care inflation continuing to outpace the rate of general inflation
- the average American retiring at age 62 (three years before Medicare eligibility)
Despite rising health care costs, one strategy that can help reduce these costs for many taxpayers is the use of the Affordable Care Act credit (ACA). By utilizing the ACA, taxpayers combine tax and health care planning strategies to possibly reduce their health care costs by thousands of dollars each year.
The ideal taxpayers who can benefit most from this strategy have either retired before age 65 and have limited insurance options, or own small businesses.
According to HealthCare.gov, the Affordable Care Act makes affordable health insurance available by providing subsidies for households with incomes between 100% and 400% of the poverty level. The maximum income threshold in 2020 is approximately $69,000 for a family of two (approximately $51,000 if single). If implemented correctly, the subsidies can amount to tens of thousands of dollars in savings.
For 2020, the federal poverty guidelines are as follows:
| Household Size | Poverty Level | 400% of Poverty Level |
|---|---|---|
| 1 | $12,760 | $51,040 |
| 2 | $17,240 | $68,960 |
| 3 | $21,720 | $86,880 |
| 4 | $26,200 | $104,800 |
| 5 | $30,680 | $122,720 |
| 6 | $35,160 | $140,640 |
| 7 | $39,640 | $158,560 |
| 8 | $44,120 | $176,480 |
A few important items to note:
- If a taxpayer’s income is even $1 above the upper income limit (400% of the poverty line), they will be ineligible to receive the entire subsidy (the same applies if you earn $1 under 100% of the poverty line).
- Income for purposes of the ACA is calculated differently than it is for other tax planning purposes. For instance, nontaxable Social Security benefits and tax-exempt interest count as income for ACA eligibility (as well as your dependents’ income).
Several tax planning strategies can be utilized to qualify for the ACA. For instance, taxpayers with income above the threshold may want to consider reducing their portfolio income and contributing to their HSA and IRA to reduce their income (remember that you can only contribute to an IRA if you have earned income). Taxpayers with income below the threshold may want to increase their income by realizing capital gains and pursuing Roth conversions. It is important to analyze your income on a yearly basis to make sure you qualify for the ACA subsidies.
An Example
As an example, a self-employed person whose main goals are early retirement and increased tax savings could reduce his income below 400% of the poverty line (to qualify for the ACA subsidies) by maximizing a Health Savings Account and contributing to a Solo 401(k). This would help him bolster his retirement savings while reducing his family’s total income.
If you or someone you know is interested in saving on health care costs, consider speaking with a professional. Many qualified financial advisors offer tax, health care, and insurance strategies that can help you move closer to realizing your goals.
This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique circumstances.