How ACA Health Insurance Can Affect Your Retirement Income

It’s understandable to be uncertain about how capital gains will impact your retirement income and the potential benefits of Roth conversions. Federal taxes can indeed complicate retirement planning, and the Affordable Care Act (ACA) adds another layer of considerations.

Understanding ACA and Its Impact on Retirement Income

The ACA, also known as Obamacare, subsidizes health insurance for low- and moderate-income families through a program called Marketplace health insurance. The subsidies are based on your Modified Adjusted Gross Income (MAGI), which includes taxable income plus certain tax-exempt income.

For 2024, the MAGI limit for a family of four to qualify for ACA subsidies is $62,260. Any income above this threshold reduces your subsidy eligibility.

Roth Conversions and ACA Subsidies

Roth conversions involve converting your traditional IRA or 401(k) to a Roth account. While Roth withdrawals are tax-free in retirement, the conversion itself triggers a tax liability.

If you plan to convert traditional retirement accounts to Roth accounts, consider the impact on your MAGI. Roth conversions increase your MAGI, which can reduce or eliminate your ACA subsidies. This could result in higher health insurance premiums.

Example:

Let’s say your taxable income is $50,000 and you receive an ACA subsidy of $1,000 per month. If you convert $10,000 from a traditional IRA to a Roth account, your MAGI increases to $60,000. This may eliminate your ACA subsidy, resulting in an additional $12,000 in health insurance premiums over the year.

Balancing Tax Savings and ACA Subsidies

It’s important to weigh the potential tax savings of a Roth conversion against the potential loss of ACA subsidies. Consider factors such as:

Your current income and tax bracket
Your estimated retirement income and tax bracket
Your expected health insurance costs in retirement

If you expect your retirement income to be higher than your current income, a Roth conversion may be beneficial over the long term. However, if you rely heavily on ACA subsidies and anticipate lower retirement income, a Roth conversion may not be the best option.

Seeking Professional Guidance

Given the complexities of tax planning and ACA subsidies, it’s advisable to consult with a licensed agent to assess your specific situation. They can provide personalized guidance to help you make informed decisions about your retirement savings and ACA coverage.