Early Retirement Health Insurance: Bridging the Gap to Medicare

How the Income Limit Works

When you buy coverage through the Health Insurance Marketplace, the government may pay part of your monthly premium. That help is called a Premium Tax Credit, and whether you get it depends entirely on your household income for the year.

Most tax rules phase out gradually. This one does not. Below the income limit you receive the credit. One dollar above it, you receive nothing. There is no partial credit, no sliding scale, and no rounding in your favor. That abrupt edge is why it is usually called the subsidy cliff.

From 2021 through 2025, temporary legislation suspended this limit. Those provisions expired at the end of 2025, so the cliff is back for 2026. The limit is set at four times the federal poverty level for your household size.

Figures apply to the 48 contiguous states and Washington, D.C.

One more detail matters here. The credit is usually paid in advance, based on the income you estimate when you enroll. If your actual income ends up over the limit, the IRS asks for all of it back at tax time. An estimate that looked fine in November can turn into a large bill in April.

What Counts as Income

A common assumption is that a large portfolio disqualifies you. It does not. Eligibility has nothing to do with how much you have saved. It depends only on the income you actually report that year. A household with two million dollars invested can qualify, and a household with far less can lose the credit by pulling money from the wrong account.

The specific measure is called Modified Adjusted Gross Income (MAGI). It starts with the income figure on your tax return and adds back three things that catch people off guard:

• Municipal bond interest. Income that is free of federal tax still counts here. Holding Georgia municipal bonds for the tax benefit can quietly work against you during these years.
• All of your Social Security benefits. Regular income tax reaches at most 85% of your benefits. This calculation counts every dollar.
• Certain foreign income that is otherwise excluded from your return.

Because Social Security counts in full, claiming it at 62 raises your income in exactly the years you may want it lowest. Waiting also produces a larger benefit for life, which is why the timing question is worth working through carefully. Our Social Security claiming guide covers that decision on its own terms.

Where Your Spending Money Comes From

Here is the part that surprises most people: the amount you spend and the income you report are two different numbers. You can withdraw a large amount of cash and report very little income, depending on which account it comes from. That gap is the main thing you control.

A regular brokerage account illustrates the point. If you sell $100,000 of stock that you originally bought for $90,000, you have $100,000 to spend but only $10,000 counts as income. The rest is simply your own money coming back. Selling shares with a smaller gain lets you raise cash without raising income much.

A Roth IRA goes further. Qualified withdrawals do not count at all, which makes a Roth balance genuinely useful during these years. Traditional IRA and 401(k) withdrawals are the opposite, counting in full. Many households draw from the traditional account only up to the income limit and cover the rest from Roth or brokerage money. The trade-off is that money left in a traditional account still has to come out eventually, usually at a higher income later. Our withdrawal strategy guide works through that sequencing in more depth.

Investments can also generate income you did not ask for. Mutual funds often distribute capital gains in December, which can push you over the limit after the enrollment window has closed. Selling losing investments to offset those gains, an approach called tax-loss harvesting, can pull your income back under the line. Moving from $86,000 to $83,000 is a small tax adjustment that can preserve a very large credit.

The Roth Conversion Trade-Off

A Roth conversion means moving money from a traditional IRA into a Roth IRA and paying the tax on it now, so it grows tax-free afterward. The years between retiring and starting Social Security are often the natural time to do this, because your income is temporarily low.

The problem is that a conversion counts as income. That is the whole point of it for tax purposes, and it is also what makes it collide with the health insurance limit. Converting $40,000 on top of $60,000 of other income puts a couple at $100,000, past the $84,600 limit, and costs them the credit. The tax saved on the conversion can easily be smaller than the insurance help given up.

This does not mean conversions are a poor idea. It means the right size of a conversion in these years depends on two limits rather than one, and the health insurance limit is often the tighter of the two.

If you need money from a traditional retirement account before 59½, there are ways to avoid the usual 10% early withdrawal penalty, including several IRS exceptions tied to your age and how you left your job. They avoid the penalty, but the withdrawal still counts as income, so they create the same tension with the insurance limit.

If You Own a Business

Early retirees who kept a consultancy or small business have options that other retirees do not. Moving health costs from personal spending to business expenses changes both what you can deduct and, in some cases, the income figure that determines your credit.

If you report business profit on your tax return, you can generally deduct your health insurance premiums directly, which lowers the income used for the insurance calculation. The deduction is limited to what your business actually earned, and it is unavailable for any month you or your spouse could have joined an employer's plan.

Sole proprietors have a further option. Under a formal arrangement, a business can hire a spouse as a genuine employee and reimburse the family's medical costs as a business expense, which covers more than premiums alone. Courts have upheld these arrangements, but only where the spouse does real work for reasonable pay and the business keeps proper records. The cases that fail usually fail on documentation rather than on the concept.

This approach does not work inside an S-Corporation. Tax rules treat significant owners and their family members differently from regular employees, which closes off the reimbursement route. Owners in that situation generally take the premium deduction instead, and the paperwork has to be handled precisely to preserve it. This is an area where the details decide the outcome, so it is worth reviewing with a tax professional who knows your entity type.

Health Savings Accounts

A Health Savings Account (HSA) is worth understanding here because it is one of the few levers that still works late in the year. Contributions reduce the income figure used for the insurance calculation, whether or not you itemize deductions. If you discover in December that you are slightly over the limit, a contribution may bring you back under it.

To contribute, you need to be enrolled in a qualifying high-deductible health plan and not yet on Medicare. These plans carry larger deductibles in exchange for lower premiums, which is a real trade-off if you expect significant medical costs during the year.

Limits per IRS Revenue Procedure 2025-19.

One detail catches married couples regularly. The extra $1,000 for those 55 and older applies per person, not per account. If both spouses are eligible, capturing both requires opening a second account in the other spouse's name. HSA money can also pay for long-term care insurance premiums, within annual limits based on age.

Bottom Line

Get Personalized Retirement Planning Help

As a Georgia-based fee-only fiduciary, Foxholm Financial works with STEM professionals, educators, and business owners approaching or already in retirement. We serve clients in Decatur, Buckhead, Sandy Springs, Dunwoody, Roswell, and Marietta, and throughout the greater Atlanta area.

If you want your pre-Medicare years mapped out alongside Roth conversion timing and withdrawal planning, a Strategic Retirement Review covers the full picture. For a narrower question, such as how large a conversion you can make this year, an hourly consulting engagement can model your numbers. You can contact us to discuss which approach fits.

Related Guides