The President’s health reform law has created a lot of uncertainty, as new taxes begin this year for the uninsured and the implementation of employer mandates are delayed. One overlooked bright spot of the Affordable Care Act (ACA) is the opportunity it creates for those wishing to retire before age 65. People who can otherwise afford to retire before age 65 often remain at their jobs to keep their insurance coverage. Anyone with a pre-existing condition may not even be able to obtain private insurance. ACA prohibits denying coverage for pre-existing conditions.
Now, those wishing to retire before reaching Medicare age can purchase insurance on the healthcare exchanges. Insurance companies can set premiums up to three times higher for those over age 50. However, the final cost of these policies may be held down by cost-sharing subsidies and refundable tax credits to cover the premiums. Qualifying for the tax credits is based on income, and proper income planning can help assure an early retiree that the premiums are affordable. In 2014, subsidies are available for single filers with annual income between $11,490 and $45,960, and for joint filers with income from $23,550 to $94,320 (family of four). Premiums cannot be more than 9.5% of income at the upper end of these ranges.
The income calculation to qualify for the subsidies is based on modified adjusted gross income, which includes wages, interest, dividends, capital gains, pensions, withdrawals from retirement plans, and, potentially, Social Security benefits. Many of these types of income can be controlled and minimized. The timing of drawing pension benefits, using growth oriented investments in taxable accounts, and sheltering earned income with retirement plans are all tools and techniques we can use to reduce taxes and now, insurance costs.
Taking early retirement requires careful planning, because financial requirements are compounded by additional years of life expectancy. Your money needs to last even longer. ACA may provide an opportunity to make early retirement a possibility by reducing the cost of one of the biggest expenses retirees face.