Many younger retirees in the United States are not yet eligible for Medicare before the age of 65. As a result, they often turn to Marketplace health insurance, which offers lower monthly premiums due to boosted tax breaks until the end of 2025. This has led to an increase in the number of Americans aged 55 to 64 with Marketplace coverage in recent years, with 5.1 million individuals enrolled in 2024, up from 3.4 million in 2021.
Despite the benefits of lower premiums, experts warn that retirees can face a costly tax surprise if they do not plan properly. The premium tax credit, which allows Marketplace enrollees to lower monthly premiums upfront or claim the tax break when filing their return, is tied to earnings. This means that as income rises, some retirees may be subject to a “phantom tax,” according to financial planner Tommy Lucas.
Understanding Premium Tax Credit Eligibility
Prior to 2021, households with incomes between 100% and 400% of the federal poverty level were eligible for the premium tax credit. However, the American Rescue Plan Act temporarily removed those limits and capped premiums at 8.5% of income during the pandemic. 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 for younger retirees to be aware of the impact of their financial decisions on the premium tax credit. For instance, claiming Social Security at age 62 can affect eligibility, as the entire payment, including the nontaxable portion, counts towards the calculation. Similarly, conducting Roth IRA conversions can also impact eligibility, as they involve transferring funds from a traditional IRA to a Roth IRA for tax-free growth in the future.
To maximize the benefits of the premium tax credit, experts recommend waiting until at least age 65 to claim Social Security if you are claiming the credit. This can help maintain eligibility and prevent a phase-out due to higher income. Additionally, reporting any changes in circumstances immediately is essential to ensure that necessary adjustments are made and prevent overpaying or underpaying Marketplace premiums, which are reconciled on your tax return.
While Marketplace insurance offers valuable benefits for younger retirees, it is important to understand the potential pitfalls and hidden costs associated with the premium tax credit. Proper planning and careful consideration of financial decisions can help retirees avoid unexpected tax surprises and maximize their savings in retirement. By staying informed and seeking professional advice, retirees can navigate the complexities of the Marketplace with confidence.