by Pam Hillier

The ACA and Early Retirement


Depending on an individual’s situation, the ACA has been a very welcome piece of legislation that has allowed some to be able to find health insurance subsidized by the government because their households fall below a certain percentage of the federal poverty level. Those households struggled financially and the ACA has helped to improve their healthcare situation. For others, the ACA has had a negative impact and caused significant financial burden to their households. While they have had to endure significant cost increases to maintain health insurance, they’ve had little, or no, disposable income to do so. Bottom line – they are struggling.

There is one group of Americans however that stand to financially benefit from the ACA quite significantly – regardless of the amount of asset they have accumulated over the years – AND they may be able to retire earlier than they had originally planned with the help of subsidized healthcare.

In the United States, citizens are not eligible for old age Medicare until they reach age 65 and so they need to purchase their own health insurance should they retire early and leave their employer’s health plan. This has been a significant financial reason for many Americans to remain in the workforce until at least age 65.

Household income under the ACA is based on modified adjusted gross income, or MAGI, and it’s important to understand how the ACA calculates household income using MAGI. As you’d expect, it includes wages, salaries, tips, taxable interest and ordinary dividends. And it also includes IRA distributions. But it also allows for several items to be deducted in the calculation like contributions to certain retirement accounts, alimony, moving expenses, penalties on early withdrawals from savings, and certain self-employment expenses, including contributions to qualified retirement plans. There are creative, allowable ways to reduce MAGI with a little planning.

Subsidies and tax credits are not available for households with MAGI over 400 percent of the federal poverty level which for 2015 is $47,080 for an individual and $63,720 for a family of two. Under 400 percent, subsidies and tax credits are available on a sliding scale commensurate with need.

For those just over the 400 percent threshold, there could be some interesting options. 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 another year.

It is conceivable for some households – even for those that own their homes and have paid down all their debt – to retire early, live on a low monthly retirement income AND have their health insurance and health care costs subsidized by the US Government until reaching Medicare age.

Please note that caution should be exercised and individuals must consult with their CPA or tax professional before making any decisions. The Affordable Care Act and the calculation of modified adjusted gross income is complex and there are many rules that can significantly impact the outcome of any decision.

National healthcare open enrollment starts November 1st and ends on December 15th. To make an appointment with one of our trusted advisors please contact us at 906.228.7500.

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