Marketplace health insurance has become increasingly popular among Americans aged 55 to 64, with more than 5.1 million individuals in this age group enrolled as of open enrollment 2024. This is a significant increase from the roughly 3.4 million in 2021, according to data from the Kaiser Family Foundation. The appeal of Marketplace coverage lies in its lower monthly premiums, especially with the boosted tax breaks that have been in effect until the end of 2025.
While Marketplace health insurance can offer cost-effective coverage for younger retirees, experts warn that proper planning is crucial to avoid a costly tax surprise. The premium tax credit, which allows Marketplace enrollees to reduce their monthly premiums upfront or claim the tax break when filing their return, is a valuable benefit that can be affected by various financial moves in retirement.
Before 2021, 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 temporarily removed these income 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 determined by a percentage of income.
Certain financial decisions in retirement can impact eligibility for the premium tax credit. For example, claiming Social Security at age 62 can affect eligibility, as the entire Social Security payment counts toward the calculation. Similarly, engaging in Roth individual retirement account conversions can also impact income levels and potentially phase out eligibility for the tax credit.
For individuals claiming the premium tax credit, it may be beneficial to delay claiming Social Security until at least age 65 to avoid jeopardizing eligibility. Careful consideration of all sources of income and their impact on the premium tax credit is essential to ensure that retirees maximize their benefits while avoiding any unforeseen tax implications.
While Marketplace health insurance can offer affordable coverage for younger retirees, it is important to understand the potential tax pitfalls associated with the premium tax credit. By engaging in careful planning and being aware of how various financial decisions can impact eligibility for the tax credit, retirees can avoid unnecessary tax surprises and ensure that they make the most of their retirement benefits.
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