Health Insurance Strategies for Retirement

Kristie L. Weber | Posted: August 13, 2018

Health Care in Retirement Before Medicare

If you’re considering retiring before you’re eligible for Medicare, but aren’t sure you’ll be able to purchase affordable health care during that time, this white paper is designed for you. By carefully selecting how and when you take various forms of retirement income, you can potentially save thousands of dollars in health insurance costs.

The Affordable Care Act

The Affordable Care Act (ACA) put in place comprehensive health insurance reform that has improved access, affordability, and quality in health care for many Americans. It has also opened a bevy of options for individuals who have been diligent savers throughout their working years and are entertaining the possibility of retiring prior to turning age 65, at which point they would be eligible for Medicare.

One of the key components for reducing your health care cost, related to the Affordable Care Act, is to reduce your Modified Adjusted Gross Income (MAGI). This can be reduced during your retirement years by using a few different strategies:

  • Delay taking your Social Security income
  • Delay taking your pension in select scenarios
  • Maximize deductions
  • Plan to have a sufficient amount of money in the proper types of investments and have an effective distribution strategy from those investments.

Before understanding the distribution strategies associated with health care cost reduction, it is important to understand how the different savings, retirement accounts, and investments are taxed.

Understanding the Three Tax Buckets

Imagine you had to fit all of your investments into one of three buckets: The Taxable bucket; the Tax-Deferred bucket; or the Tax-Free bucket.

The Taxable bucket includes any type of investment for which you receive a 1099 on an annual basis. These funds receive no special tax treatment, and you will typically be taxed on interest and dividends as they are paid, in addition to any gains you make upon sale of investments in this bucket.

The Tax-Deferred bucket includes any retirement accounts to which you have contributed money on a tax-deductible or pre-tax basis. These accounts typically allow for tax-deferred growth, which means that you are not taxed on income or gains as they occur, but when you eventually take retirement income, the funds you withdraw will be taxed as ordinary income.

Finally, the Tax-Free bucket includes accounts to which you contribute with after-tax money; you do not get any special tax breaks up front in this bucket, but all contributions and growth can be withdrawn income tax-free for qualified reasons.

Each of these different buckets has their own unique characteristics. Some are more suited for certain needs than others, so it is important to plan accordingly.

Now that you have a good understanding of how the different tax buckets work, let’s look at which of these buckets are friendly if you choose to select health care from the Affordable Care Act (ACA) Marketplace.

Using the Tax Buckets for Health Care Planning

The Taxable bucket, also what we call the non-qualified bucket, may be a good option if you do not want to show income when distributions are taken. There are caveats to this, however. If you have highly appreciated assets that you sell, like stocks, any capital gains from those stocks would count as taxable income, which could potentially decrease your ACA tax credits.

It’s important to be careful with the types of investments that you select for this bucket. It’s also important to take distributions from the proper investments within this bucket. When done correctly, this may be a way to fulfill your income needs without disqualifying you from tax credits.

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About the author

Kristie L. Weber

Kristie is a Paraplanner who strives to deliver exceptional client service. Kristie works with lead and senior advisers of the firm. She enjoys being creative away from the office by gardening, refurbishing old furniture and writing. Also, Kristie and her family are fond of spending time outdoors hiking and biking.

Certifications, Licenses, and Registrations

  • LPL Registered Representative LPL Financial, Member FINRA/SIPC
  • Accident, Life, Health, and Variable Life/Variable Annuity Insurance Licenses

Education and Training

  • Series 7, 66
  • Bachelors Degree - Criminal Justice; University of Wisconsin - Eau Claire

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