5 Ways to Minimize Your Retirement Income and Maximize Health Insurance Tax Credits

Many retirees sign up for Medicare at age 65 as their primary form of medical insurance. However, if you retire before age 65 without coverage from a former employer, you may find yourself looking for coverage through the Health Insurance Market­place. Depending on your income and household size, you may qualify for federal tax credits, a combi­nation of credits and subsidies, or Medicaid. The surprising part is that some high net worth and high income earners can qualify.

For example, a household of two 62-year-olds living in Chester County, PA with an income of $55,000 may qualify for a $913/month tax credit, according to Healthcare​.gov.

The key is finding ways to keep your income low. The same couple with an income over $62,040 (400% of the federal poverty level in 2014) would not qualify for any savings!

Here are 5 ways you can lower your Modified Adjusted Gross Income (MAGI):

1. Fund a Retirement Account – If you still have wages from a job and you qualify, contributing to a tax-deferred 401(k) or other plan will directly lower your taxable income.
2. Defer Retirement Account Withdrawals – If you are taking distri­b­u­tions from your portfolio for living expenses, draw from your non-retirement accounts first. Invest­ments that are sold here to generate cash for withdrawals are generally taxed on just the gains. On the other hand, IRA withdrawals typically count 100% as ordinary income. You might also make use of tax-free withdrawals from your Roth IRA (if eligible).
3. Use Investment Losses – If you have a non-retirement account, it’s a good year-end habit to determine if you can take investment losses and net them with gains.
4. Wait to Take Social Security – A lot can go into this decision, but not drawing on Social Security means less income.
5. Keep Interest Income in Retirement Accounts – Investing more efficiently is dependent upon proper asset location. Hold interest-bearing invest­ments (e.g., bonds) in your retirement accounts, instead of non-retirement accounts. Then, hold equity invest­ments (e.g., stocks) that don’t pay dividends (and hopefully just appre­ciate in value) in non-retirement accounts.