One of the top concerns for individuals considering retirement is the cost of healthcare.
If you retire before age 65 (Medicare eligibility), the premiums alone for a silver-level plan on the healthcare exchange for a 62-year-old couple are around $24,000/year.
But a premium tax credit (PTC) might help.
The PTC is a refundable tax credit designed to make monthly health insurance premiums more affordable for eligible individuals who are unable to obtain coverage through their employer or a government health insurance plan such as Medicare.
How valuable can the PTC be for healthcare costs? Let’s take a look at an example.
The hypothetical couple noted above, age 62, living in Green Bay, Wis., projected $68,000 of modified adjusted gross income (MAGI) when applying for health insurance through the federal marketplace. That income was too high to qualify for PTC, which means that under the silver-level plan they faced:
- Annual premiums of almost $24,000
- A family deductible of $10,400
- Out-of-pocket maximum of $16,300
If their projected income for 2020 was $67,000 they were eligible for a PTC of $1,417/month, and would now face:
- Annual insurance premium of $6,504
- A family deductible of $10,400
- Out-of-pocket maximum of $16,300
Lowering income by only $1,000 saved them $17,000 in healthcare premiums.
Now let’s take the example one step further.
Let’s say instead the couple was able to reduce income for tax purposes to $25,000 for 2020. That would make them eligible for a PTC of $1,880/month, which means that under the silver-level plan they face:
- Annual insurance premium of $950
- A family deductible is only $500
- Out-of-pocket maximum is only $2,000
By lowering their income level, the couple would save:
- $23,050 in annual premiums
- $9,900 in deductibles
- $14,300 in possible out-of-pocket costs
Income doesn’t equal cash flow
How can you drop your income in retirement from $68,000 to $25,000? Or far enough to be eligible for PTC?
With good financial planning started years in advance.
When you’re retired, cash flow isn’t the same as income. The income level being assessed is MAGI, which is close to your adjusted gross income (AGI), but adds back in a few items, most notably tax-exempt interest and nontaxable Social Security earnings.
As a retiree you can be spending $6,000 a month, but that doesn’t necessarily mean your tax return shows income of $72,000.
It depends on where that cash flow is coming from. A few key items to consider:
Roth distributions are not taxable and don’t factor into MAGI. You can plan years in advance by building up a healthy balance of retirement savings in a Roth IRA or Roth 401(k) account. Traditional retirement distribution planning encourages you to delay Roth distributions in retirement but qualifying for PTC could be a great reason to pull from a Roth account early.
After-tax (non-IRA) investments in stocks and bonds held in a brokerage account may be used to help fund cash flow. Depending on your cost basis, you may be able to generate sufficient cash flow for retirement while minimizing realized capital gains.
Health savings account (HSA) distributions are not taxable if used for qualified healthcare expenses. Marketplace insurance premiums don’t qualify as qualified expenses, but other out-of-pocket healthcare costs likely will. Also, a little-known fact is you can take a qualified distribution from an HSA for prior year unreimbursed expenses provided you had your HSA open at the time and you retain copies of your receipts.
Consider investments early
How you manage your investment portfolio throughout the year also plays a key role.
Realizing capital gains, even a few thousand dollars, can have a significant impact on your eligibility. You may want to review your after-tax investment holdings and determine whether they are receiving the appropriate level of tax-management. Active investment fund managers are well known for distributing larger capital gains distributions at year-end when compared to index and other passively managed investments.
Another area of planning impacted is Social Security and pension plans.
Upon retirement many individuals elect to begin taking their Social Security benefit and/or workplace pension plan payments. Doing so boosts your MAGI and may force you to pay higher insurance premiums.
Often times these elections take place before healthcare planning begins, and by the time you figure out what benefits have been lost it could be too late.
Qualifying for these healthcare benefits can be a multi-year financial planning process, and one that has huge implications for you and your family. There is no better time than now to start planning for these retirement healthcare costs.
If you have questions or would like help in this planning, please contact a financial planner at Wipfli Financial Advisors.
