By Justin Fundalinski, MBA | May 24, 2017

health insuranceWith the House passing a bill to replace the Affordable Care Act (better known as ObamaCare), an excellent cost savings strategy for retirees under the age of 65 could be lost. However, there is a long road for the new health care bill before anything is finalized (or even approved by the Senate for that matter). The strategy discussed this month uses the rules set forth by the Affordable Care Act to maximize the Premium Tax Credit (a tax credit to that is used to offset healthcare premiums for those who purchase health insurance in the “Health Insurance Marketplace.”)

What Exactly Is The Premium Tax Credit?

To answer this I defer to the IRS’s definition[1]:

“The premium tax credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange, beginning in 2014. The size of your premium tax credit is based on a sliding scale. Those who have a lower income get a larger credit to help cover the cost of their insurance. When you enroll in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the premium tax credit, or APTC). Or, you can choose to get all of the benefit of the credit when you file your tax return for the year.”

As a take away from this little except, notice that it says nothing about assets. It is entirely based on income.

How Much Can The Premium Tax Credit Benefit Someone?

How much you can get from this tax credit can be very substantial, but it all depends on your income and household size. Of course, the more income you have or the smaller the household the less the credit you can get.   Unfortunately, there is very little aggregated data to give a nice consolidated summary of how much the credit is, but I have a few examples.  In Colorado:

  • At a maximum, a family of two can save just over $1,400 monthly on healthcare premiums.
  • At a maximum, a single individual can save over $700 monthly on healthcare premiums.

These amounts are nothing to squawk at!

How Do I Get Premium Tax Credit?

Individuals and families can get a premium tax credit if their household income is anywhere between 100% and 400% of the federal poverty level. Currently these income levels look like this[2].

  • $11,770 (100%) up to $47,080 (400%) for one individual
  • $15,930 (100%) up to $63,720 (400%) for a family of two
  • $24,250 (100%) up to $97,000 (400%) for a family of four

Clearly you do not need to have a lot of income to be quickly phased out of this credit (and much less to get the maximum credits), however don’t quit reading this article yet. Retirees (or soon to be retirees) that are younger than age 65 have a lot a lot of control over how they generate income and some simple income and withdrawal strategies can avoid what is counted as income for Premium Tax Credit eligibility!

How Can I Manipulate My Income To Get A Premium Tax Credit?

In order to get the Premium Tax Credit, the IRS looks at your Adjusted Gross Income (essentially all your taxable income such as capital gains, taxable Social Security, dividends, earned income, etc…) and adds to it some other items that are not taxable (primarily the big hitters in this category are interest from state and local bonds, and the non-taxable portion of Social Security benefits).  Fortunately, there are lots of income items that are not added to your income. Some of these items being:  income drawn from a Roth IRA account, basis withdrawn from capital assets, as well as proceeds from a loan.

Upon retirement, you have a lot of discretion in how you generate income for yourself. You can draw from different types of accounts/assets and you can delay or not delay your Social Security, pension, or annuity benefits.

Using a HELOC

Now, if you have large Roth IRA accounts or a lot of basis in taxable accounts you could potentially bridge all your income needs for a few years (until you reach age 65 and you are eligible for Medicare), and get a hefty Premium Tax Credit.  However, if you don’t have such resources or it does not make sense from a long term planning perspective to drain those accounts you are not quite out of luck yet!  One of the largest assets that many retirees have is the equity built in their home.   An excellent planning strategy that we have seen is to generate just enough income from withdrawals of qualified assets or Social Security/Pension income to maximize your Premium Tax Credit. Then bridge the rest of your income needs by drawing from a Home Equity Line of Credit (HELOC).  You can save thousands of dollars in medical premiums and pay off the loan at a later date from assets that you would have debited anyways.

Of course, there are many nuances, technicalities, and planning aspects that need to be considered beyond this basic concept.   Not only that, everybody’s situation is very different.   If you are in the market for insurance and wish you could lower your monthly premiums feel free to give us a call.  We can help you navigate through this cost saving strategy.