The Affordable Care Act is a bit of a tease for early retirees. On the one hand, it offers those not yet eligible for Medicare an insurance option at potentially less cost than what was previously available. We have the individual mandate to thank for that. On the other hand, even a more modest premium can be difficult for early retirees to afford.
For many people, the subsidies offered under Obamacare may be the answer. The key is to understand how the subsidies work. Those who currently do not qualify for subsidies may, with a little tax planning, be able to find some financial help after all.
Qualifying for the subsidy. There are two features of Obamacare's premium tax credits that are important for early retirees to understand. First, the highest household income that can qualify for a subsidy is 400 percent of the federal poverty level. In 2013, that amount for an individual is $45,960 and for a family of two is $62,040. It's likely to be slightly higher in 2014. If a household income exceeds 400 percent of the federal poverty level by even one dollar the subsidy is lost.
Second, the amount of a subsidy decreases as household income increases. For example, household incomes between 200 and 250 percent of the federal poverty level will be required to pay 6.3 to 8.05 percent of income toward health insurance premiums, according to the Kaiser Family Foundation. Household incomes between 300 and 400 percent must contribute 9.5 percent of income toward premiums.
Armed with this knowledge and a little tax planning, some early retirees may be able to save a bundle. For those just over the 400 percent threshold, reducing household income could result in hundreds or even thousands of dollars in subsidies. For others already under 400 percent, reducing household income further may be an effective way to increase their subsidy.
Reducing household income. Household income under Obamacare is based on MAGI (modified adjusted gross income). There are some creative ways to reduce a household's MAGI with a little planning.
First, it's important to understand how Obamacare calculates household income using MAGI. MAGI includes items one would expect, such as wages, salaries, tips, taxable interest and ordinary dividends. It also includes IRA distributions.
In addition, several items are deducted in the MAGI calculation. These include contributions to certain retirement accounts, alimony paid and moving expenses. Other items are also deducted that may come as a surprise, such as penalties on early withdrawals from savings and certain self-employment expenses, including contributions to qualified retirement plans.
For those just over the 400 percent threshold, MAGI holds some interesting options. For example, anyone who has opened a CD may be able to close it early, incur the early withdrawal penalty and thereby bring household income under the threshold. Similarly, those with some level of income may reduce household income by increasing retirement contributions. Those fully retired may consider taking a retirement distribution this year instead of waiting until 2014.
Be sure to consult with a tax professional before making any decisions. The Affordable Care Act and the calculation of MAGI come with complex rules and nuances that can significantly affect the outcome of any decision.
Where to go for subsidies. The federal government runs the health care exchanges for 36 states. The remaining states run their own exchanges. For the federally run exchanges, subsidies will be available for those who purchase insurance through the healthcare.gov website or via eHealth. For the remaining states, health insurance must be purchased through the state exchanges.
Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing.