Many younger retirees in America rely on Marketplace health insurance as they are not eligible for Medicare before the age of 65. According to data from the Kaiser Family Foundation, more than 5.1 million Americans aged 55 to 64 had Marketplace coverage in 2024, up from roughly 3.4 million in 2021. This is largely due to the boosted tax breaks that offer lower monthly premiums through the end of 2025.
While Marketplace insurance can provide benefits tied to earnings and lower premiums for younger retirees, there is a potential costly tax surprise that many may face without proper planning. Certified financial planner Tommy Lucas warns of a “phantom tax” that can impact retirees when income rises. It is essential to consider this potential tax implication when utilizing Marketplace coverage.
Calculating premium tax credit eligibility can be complicated for Marketplace enrollees. Previously, households with income between 100% and 400% of the federal poverty level were eligible for the premium tax credit. However, the American Rescue Plan Act removed those limits temporarily and capped premiums at 8.5% of income during the pandemic. This change has made it crucial for retirees to understand their eligibility and make necessary adjustments.
Claiming Social Security at age 62 can significantly affect the eligibility calculation for the premium tax credit. The entire Social Security payment, including the nontaxable portion, counts towards the calculation. It is recommended to wait until at least age 65 to claim Social Security if you are also claiming the premium tax credit. Similarly, income boosts through Roth IRA conversions can impact eligibility for the tax credit, as they transfer pretax or nondeductible IRA funds to a Roth IRA.
For younger retirees relying on Marketplace health insurance, it is essential to carefully plan and understand the potential tax implications. Changes in reporting circumstances should be communicated immediately to make necessary adjustments to avoid overpaying or underpaying Marketplace premiums. By being aware of the impact of income sources such as Social Security and IRA conversions, retirees can optimize their benefits and avoid any costly surprises down the line.
While Marketplace health insurance offers lower premiums and benefits for younger retirees, the potential tax implications must not be overlooked. Proper planning, understanding eligibility criteria, and making necessary adjustments are crucial for maximizing the benefits of Marketplace coverage. By being proactive and knowledgeable about the financial aspects of healthcare in retirement, young retirees can navigate the system more effectively and avoid any unforeseen financial burden.