As more Americans retire before age 65 and are not yet eligible for Medicare, many turn to Marketplace health insurance for coverage. This option offers lower monthly premiums through the end of 2025, thanks to boosted tax breaks. However, experts warn that younger retirees may face a costly tax surprise if they do not plan properly.
Marketplace Coverage for Young Retirees
According to data from the Kaiser Family Foundation, as of open enrollment 2024, more than 5.1 million Americans aged 55 to 64 had Marketplace coverage, a significant increase from roughly 3.4 million in 2021. This demonstrates the growing reliance on Marketplace health insurance among younger retirees.
Boosted Tax Breaks
In 2021, Congress temporarily enhanced the premium tax credit, which allows Marketplace enrollees to lower monthly premiums upfront or claim the tax break when filing their return. Originally covering 2021 and 2022, lawmakers extended this benefit through 2025. This extension has provided younger retirees with an opportunity to leverage lower premiums after leaving the workforce.
Understanding the Premium Tax Credit
The premium tax credit is a valuable benefit for Marketplace enrollees, as it helps reduce the cost of health insurance premiums. Eligibility for the credit is based on income, with households earning between 100% and 400% of the federal poverty level qualifying for the credit prior to 2021. The American Rescue Plan Act removed these income limits temporarily and capped premiums at 8.5% of income during the pandemic.
Calculating Eligibility
Calculating eligibility for the premium tax credit can be complex, as it is based on the difference between a benchmark premium and a maximum contribution based on a percentage of income. It is crucial to report any changes in circumstances immediately to ensure accurate adjustments are made. Failure to do so may result in overpaying or underpaying Marketplace premiums, which are reconciled on the tax return.
Common Issues with the Premium Tax Credit
While the premium tax credit can save eligible younger retirees hundreds or even thousands of dollars per year, it is important to be aware of factors that can affect eligibility. Higher income levels can phase out eligibility for the credit, making it essential to plan strategically.
Social Security and Roth IRA Conversions
Claiming Social Security at age 62 can impact eligibility for the premium tax credit, as the entire payment, including the nontaxable portion, counts towards the eligibility calculation. It may be beneficial to wait until at least age 65 to claim Social Security if you are claiming the premium tax credit. Similarly, converting funds from a traditional IRA to a Roth IRA can also affect income levels and eligibility for the credit.
Long-Term Tax Planning
The goal of tax planning in retirement is to minimize taxes over your projected lifespan, rather than focusing solely on one or two years. Strategies such as delaying Social Security claims and implementing Roth IRA conversions strategically can help achieve this goal. It is essential to consider the long-term implications of financial decisions in retirement.
Conclusion
In conclusion, younger retirees relying on Marketplace health insurance should be aware of the potential tax implications associated with the premium tax credit. Proper planning and strategic decision-making can help avoid costly surprises and maximize the benefits of this tax break. By understanding how the premium tax credit works and considering factors that can affect eligibility, retirees can make informed choices to optimize their financial situation in retirement.