Affordable Care Act Subsidies – How to Qualify for Them with Marty James, CPA, PFS

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Affordable Care Act Subsidies – How to Qualify for Them with Marty James, CPA, PFS Show Notes

Making his third appearance on The Guided Retirement Show, Marty James, CPA, PFS joins Dean Barber to discuss how to qualify for Affordable Care Act subsidies. Qualifying for the Affordable Care Act subsidies can greatly reduce the cost of health insurance prior to becoming eligible for Medicare. Who doesn’t want that?! Marty and Dean are both excited to touch on this topic, so let’s see what they have to share.

In this podcast interview, you’ll learn:

Aspects of the Affordable Care Act That Can Help People Who Need Financial Assistance with Health Care
How Someone Who Has Accumulated A Lot of Money Can Benefit from Affordable Care Act Subsidies
Affordable Care Act Subsidies Before and After 2026
How to Utilize Roth IRAs and HSAs

Affordable Care Act Subsidies Before 2026

Let’s start by discussing Affordable Care Act subsidies as they are today and up to January 1, 2026. That is a significant date for several reasons. One, as we’ve discussed on several occasions, the Tax Cuts and Jobs Act is scheduled to sunset on December 31, 2025. Additionally, the Inflation Reduction Act that the Senate passed in 2022 a three-year extension that allows people to get enhanced Affordable Care Act subsidies through 2025.₁

Navigating ACA Subsidies on the Marketplace and Kaiser Foundation Calculators

The way it currently works is that you sign up on the Marketplace on HealthCare.gov and enter in what your income will be.₂ You’ll then receive an advanced premium credit against that income.

“If you were supposed to be paying like $2,000 a month, if your income is low enough, you might be paying $300 a month. And at the end of the year, if my income was $100,000 and not, say, $60,000, I would need to pay that all back with my tax return.” – Marty James, CPA, PFS

It was different when the Affordable Care Act was enacted in March 2010,₃ but the way it was calculated changed in 2021 so that it’s based on the federal poverty rate.₄ Since it was increased, more people became eligible for these premium tax credits. It became easier to keep your income lower than it was before.

Another resource that people can use is the Kaiser Family Foundation’s health insurance marketplace calculator.₅ Again, you’ll be asked to plug in your household income. Keep in mind that your household income isn’t necessarily your taxable income. If you’re on Social Security, you must include your total Social Security benefits in your household income.

What’s Your Definition of Income?

For many people, their definition of income is, “how much money is coming into my checking account that I can spend each month?” But that’s not how CPAs like Marty and government officials see it. If Marty had money in his Roth account and took it out, that’s not counted as household income.

“That’s one of the secrets to getting your income low enough to qualify for these ACA credits.” – Marty James, CPA, PFS

When people retire prior to Medicare age, their actual tax rate is higher in those first few years of retirement before they turn 65 than it will be going forward. The idea is to plan for that.

What Does and Doesn’t Count as Income with the Affordable Care Act?

We gave one example with the Roth, but let’s review some other income sources and explain if they count as income when it comes to the Affordable Care Act. If you take money out of your bank account or brokerage account, capital gains would count as income. But the principal payments back to you—your basis—wouldn’t count as income.

Dean has had municipal bonds on his mind lately after talking about them on America’s Wealth Management Show with AllianceBernstein’s David Mitchell. So, Dean asked Marty if tax-free income from municipal bonds would be counted as income. It would, in fact, count as income.

“It’s A, getting money out of a Roth IRA and using that to live on to qualify for the credits. Or B, spending the principal of a bank account or brokerage account.” – Dean Barber

Qualifying for ACA Subsidies

So, if you want to retire before turning 65, how should you position yourself so you can qualify for as many Affordable Care Act subsidies as possible? If you know you want to retire before turning 65 and your financial plan has given you a good idea how much money you’ll need in your first years of retirement, Marty says to consider funding a Roth 401(k) and making Roth contributions or doing Roth conversions.

“Sometimes in this situation, if I know I’m trying to qualify for these credits, it’s worth crossing over the tax bracket. The earlier you can start this, the better.” – Marty James, CPA, PFS

Disqualifying Yourself from ACA Subsidies Due to a Lack of Planning

Marty and Dean have witnessed far too many people who retire prior to turning 65 that aren’t aware of the Affordable Care Act subsidies. In that year that they retire, let’s say that they go on COBRA.₆ Then, they do a larger Roth conversion to fund those years of retirement prior to turning 65. In this situation, Marty says it’s OK to pay the taxes on that conversion.

“If I had a $100,000 conversion and only end up putting $75,000 in my Roth, that’s still OK because I’m going to spend this money soon. It’s not like I need to get a lot of tax-free growth going forward.” – Marty James, CPA, PFS

Are you thinking about this from a longer-term perspective and if the Affordable Care Act will be around for years to come? Determining how to qualify for Affordable Care Act subsidies is important to consider if you’re in your 40s and 50s and want to retire before turning 65.

“There’s a huge difference between having $300 to $400 a month in health insurance expenses vs. around $2,000 a month in health insurance expenses.” – Dean Barber

The “worst-case scenario” of this would be having too much money in your Roth and not spending it because you worked until 65. There’s still no downside because you have a bigger tax-free account.

Another Way to Bridge the Gap Until Turning 65: Utilizing an HSA

Utilizing a Roth IRA isn’t the only option here, though. In Marty’s second appearance on The Guided Retirement Show, he and Dean talked about the tax advantages of Health Savings Accounts. An HSA is another way to bridge that gap to Medicare age because pulling money out of an HSA isn’t counted as income.

“The concept is that I don’t spend money out of my HSA but keep all my receipts that I had from 10 years ago. Then, I start reimbursing myself from my HSA from that. That wouldn’t count and would keep my cash flow up and income down.” – Marty James, CPA, PFS

HSA Contribution Limits

For example, let’s say that you max out your HSA plan for 10 years. The maximum amount that individuals can contribute to HSAs in 2024 is $4,150.₇ It’s $8,300 for families. And, if you’re 55 or older, you can make a $1,000 catch-up contribution.

As you’re funding your HSA plan, instead of using it in the current calendar year, Dean says to consider paying for all your medications, co-pays, etc. out of pocket. You can invest that money. And as long as you’ve saved all your receipts, you can start taking money out of your HSA plan to reimburse yourself for those expenses from years ago.

“That can be money that you live on as well as your Roth IRA. Both of those don’t count as income toward qualifying for ACA credits.” – Dean Barber

A couple could also have one spouse start claiming Social Security since one spouse’s income won’t likely disqualify you from being eligible for the Affordable Care Act subsidies. A strategy for when to claim Social Security needs to be well thought out as you and your spouse begin to plan for retirement.

Dean and Marty have heard from countless people over the years that they can’t retire before 65 because they need to wait to become eligible for Medicare. Positioning yourself to qualify for the Affordable Care Act subsidies can help with being able to confidently retire before 65.

Affordable Care Act Subsidies After 2025

Having a forward-looking plan that considers important factors such as health insurance coverage and qualifying for ACA credits is critical. Speaking of forward-looking, let’s look ahead to 2026.

As we mentioned earlier, the new calculation for Affordable Care Act subsidies was only supposed to last for two years, but it was extended through the end of 2025. If you won’t turn 65 until 2026 or later, it’s important to understand that you could be facing much higher premiums.

New Income Limits in 2026

Let’s break this down for those people who are planning to retire in 2026 or later but won’t yet be 65. This is one of many examples of why planning several years in advance of your retirement is critical. In preparation to illustrate this scenario, Marty used the Kaiser Family Foundation’s Calculator and went back and looked at the 2020 calculations to qualify for Affordable Care Act subsidies.

In the scenario Marty went through, he had two 62-year-olds that were non-smokers and had $67,000 of total household income. Their monthly premium was about $546, or about $6,500 a year. When up bumped their total household income to $68,000, their monthly premium was $2,072, or about $25,000 a year. Marty doesn’t foresee another extension coming either, so this is something that you need to be planning for.

“What incentive does the government have for people to leave the workforce, stop paying into Social Security, and start collecting Social Security? I just don’t see the incentive for the government to do that.” – Marty James, CPA, PFS

Think about that. Subtract $6,500 from $25,000. That’s a difference of $18,500 a year in premiums. Adding that additional cost to whatever the normal taxes would be on that, you’re talking about spending more than a third of their money on health insurance. And that’s an after-tax premium because you have to pay for your health insurance with after-tax dollars.

Don’t Fall Off the $67,000 Cliff

When the tax credits for the ACA were originally created, they were designed to help lower income families afford health insurance. If you have low income, you can qualify no matter your age. The message that we want to get across is primarily for those who have been high income earners, have a decent amount of money saved, and have an opportunity to retire earlier.

“If you have money in a Roth IRA, an HSA, and principal of taxable accounts that you can spend, can you set yourself up so you can get all the income you need to live on deposited to your checking account and still not go over that $67,000 cliff?” – Dean Barber

The CFP® Professional and CPA Relationship

Marty and Dean’s answer to the question Dean just posed is yes. They’ve done it for people and hope to do so for even more people going forward. To them, that is just as important as tax savings.

“It’s huge. I consider as tax as anything that costs me money because of my income. That’s a tax to me.” – Marty James, CPA PFS

Dean and Marty have a lot of the same thoughts regarding taxes. They want to create a forward-looking tax strategy to pay as little tax as possible for people over their lifetime. At Modern Wealth Management, our CFP® Professionals work alongside our CPAs to create that longer-term tax strategy. One of the things they keep in mind is how to qualify for Affordable Care Act subsidies.

Focus on What You Get to Keep, Not How Much You Make

It’s not just about preparing a tax return and seeing how little you can pay in taxes this year. It’s understanding that over the long-term, taxes are going to be one of the largest wealth-eroding factors that people face in retirement. The more we can mitigate taxes by properly structuring people’s investments, income streams, etc., the more money they’ll get to keep. That’s the goal.

“We’ve run financial plans that showed people that they weren’t going to be able to retire at 62 and pay that full premium. Just by implementing these strategies, they’re off to the races and have no issues.” – Marty James, CPA, PFS

We’re Here to Help You and Your Friends and Family

We hope you’ve found what Marty and Dean have shared about Affordable Care Act subsidies to be informative. Again, the earlier you start building your financial plan that takes this into consideration, the better. And if you don’t yet have a financial plan, we can help you with that as well. Start a conversation with our team below to address whatever questions you have and to start planning.

Schedule a Meeting

We’re not talking about being shady when we talk about qualifying for Affordable Care Act subsidies. We’re talking about using the tax laws the way they’re written to your best advantage. Please don’t hesitate to reach out with any questions that you have on anything that Marty and Dean covered.

Resources Mentioned in This Article

Other Sources

[1] https://www.kff.org/policy-watch/five-things-to-know-about-renewal-of-extra-affordable-care-act-subsidies-in-inflation-reduction-act/

[2] https://www.healthcare.gov/glossary/marketplace/

[3] https://www.hhs.gov/healthcare/about-the-aca/index.html

[4] https://www.cbpp.org/research/health/health-provisions-in-american-rescue-plan-act-improve-access-to-health-coverage

[5] https://www.kff.org/interactive/subsidy-calculator/

[6] https://www.dol.gov/general/topic/health-plans/cobra

[7] https://www.kiplinger.com/taxes/irs-new-msa-hsa-and-fsa-limits

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC, does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.