With open enrollment right around the corner, I’ve been thinking quite a bit about health insurance.
And since I get a TON of questions on the issue, I know many of you are thinking of it too.
That’s why I’ve already posted ideas on how to save money on medical costs.
It’s also the reason for this post, which discusses how people can get low-cost or even free health insurance, even if they have millions in the bank.
This will be especially good news for early retirees (or those planning to be) and will give them something to consider as they set up their retirement finances.
Everyone is Worried About Retirement Health Insurance and Medical Costs
It’s easily the biggest question/concern in retirement: what do you do for health insurance?
In my millionaire interviews I ask what concerns them about retirement. Paying for (or even finding) health insurance is at the top of the list.
And if they’re worried about these costs with millions in the bank, how does the average Joe even stand a chance?
They are right to be concerned as the costs for insurance alone (let alone a major medical issue) is sky-high and there are few good solutions.
Here are what I consider the top health insurance solutions for early retirees:
- The Affordable Care Act (ACA) — The major problem here is that it’s not very affordable even at moderate income levels.
- COBRA — You can carry over insurance from a former employer but it’s generally very expensive. It’s also only good for the first 18 months of retirement.
- Healthshare ministries — Personally, I like this solution. It’s what we do and it’s worked out for us (in addition to Samaritan Ministries, which we use, I also recommend Medi-Share). But some are unwilling or unable to abide by the rules or simply don’t want to take the risk on something that’s “not real insurance.”
- Work for insurance — You can always retire and then pick up the lowest time-costing job that has health insurance (Starbucks anyone?). Of course that could kind of put a damper on your retirement.
There just aren’t a lot of great choices when it comes to retirement health insurance. This leaves us all looking for solutions.
Income Versus Wealth
One solution is to take advantage of very affordable or even free health insurance — even if you have a very high net worth.
How can this be?
Basically a health insurance hack exists because the U.S. government doesn’t understand the difference between income and wealth (just like many journalists).
For those of you wondering, here’s the difference…
Income is “money (or some equivalent value) that an individual or business receives in exchange for providing a good or service or through investing capital. Income is used to fund day-to-day expenditures. For individuals, income is most often received in the form of wages or salary.”
Most people get the majority of their income through working (i.e. “earned income”).
Of course this changes in retirement when major sources of income might be dividends, real estate, interest, part-time work, Social Security, a side business, and the like.
Income is “money coming in”. It’s not wealth in and of itself, but can be turned into wealth if used properly. In E-S-I terminology, income is clearly in the “E” category.
Net worth, on the other hand, is a measure of wealth. Quite literally it’s defined as “assets minus liabilities” — what you are left with if you sold all your assets and paid all your debts. It’s the measure we use when we say someone is a millionaire. It’s not that they have a million dollars in income each year — being a millionaire means their net worth is above one million dollars.
Having a high net worth is the reward for earning, saving, and investing properly. It’s the goal of this site — to help you do those three things well so you can become wealthy.
On a quick side note, while having a high income gives you a better chance to have a high net worth, many times it doesn’t work out that way.
This is because people tend to spend most of their income, save and invest little, and as such not grow their net worths. The extreme examples of this we all see often are athletes and actors who make fortunes in income, but end up going broke (low net worth) because they spend it all.
The ACA, and it’s related government-funded subsidies, is based on income, not wealth.
Here’s a quick summary of the situation:
The Affordable Care Act’s (ACA) premium subsidies (premium tax credits) have no asset test. Neither does the expansion of Medicaid under the ACA. In both cases, eligibility is simply based on income. It doesn’t matter how much money people have in the bank or the stock market, or how much their homes are worth. The assistance available via expanded Medicaid or premium subsidies depends only on annual income.
And another take on the issue:
Why are well-to-do individuals qualifying either for expanded free Medicaid or for APTC to help reduce the cost of private insurance? The shocking answer is because Obamacare does away with the requirement that people must prove they have low assets before qualifying for Medicaid or a subsidy for private insurance. If a millionaire can arrange his or her finances so they are receiving a low income—low on paper at least—they will qualify for help with their health insurance premiums.
And one final one just to pile on a bit:
The Affordable Care Act (i.e., Obamacare) doesn’t have an asset test for eligibility — it only looks at income. You could have $100 million in Berkshire Hathaway stock and still qualify for a big refundable tax credit under the Obamacare law. It’s actually quite easy to minimize taxable income by planning ahead and arranging your portfolio to focus on capital gains and returns of capital while limiting interest & dividend income. When I was doing my long term planning for early retirement 25 years ago at age 38, I expected to be paying about $20,000/year for health insurance by the time I turned age 60. I’m actually paying less than $20/year in health insurance premiums after taking the time to understand the Obamacare law.
So the short answer to “how can someone who is wealthy (high net worth) get free or low-cost health insurance through the ACA?” is to keep their income low to qualify for as many subsidies as possible.
Yes, it’s that simple.
Examples of Millionaires Getting Low-Cost or Free Health Insurance
If you want some examples of wealthy people doing exactly this, I have a few for you…
Example 1
In Retirement Interview 16, the interviewee, who has a net worth of over $1.5 million, said the following in response to my question “How did you handle deciding on and paying for healthcare?”:
Healthcare has been the wild card in the deck from day one. I fully expected us to be paying at least $2,000 per month for coverage.
Before we retired, I went to speak to a local independent insurance agent. Long story short, we qualified for a 100% subsidy on Obamacare.
Our taxable income is flexible. By keeping it low we qualify for the maximum subsidy. Another reason I’m glad we had the large cash balance to live on.
Of course, the ACA is a work in progress. This benefit may go away. But for now, our healthcare is free.
A small eruption ensued in the comments as people reacted to someone with $1.5 million getting free health care from the government. We’ll ignore those issues for now and come back to them at the end.
Example 2
This comes from the blog Root of Good, a site I follow and like quite well. He posts infrequently though, because…well, he has a life to live. Ha!
In this post you can see that his net worth is over $2.1 million.
In this post he details the hoops he had to jump through to make it all work (and we know with the government there are always lots of hoops), but in the end he gives this conclusion:
Mrs. RoG, the two oldest kids, and I are all eligible for an Exchange policy with a $909 monthly subsidy, reducing the monthly premium to $125 for a $0 deductible gold plated silver plan with 94% cost sharing subsidies.
In other words, he had a family health insurance plan through the ACA with a monthly cost of $1,035. Because his income was low enough, he qualified for a government subsidy of $909 per month. So his final cost is $126 per month (I rounded up).
We’ll get to the “how’s” of this in a bit, but for now just know it’s because he kept his income low (despite having a high net worth).
Examples 3-5
Going back to this post, here are several more examples:
People with significant wealth and assets are qualifying for the Obamacare subsidy in surprisingly large numbers. In fact every single agent that I’ve talked to that specializes in health insurance has witnessed millionaires qualify for government help with their health insurance. Here are a few examples:
- One real estate investor who owns 20 properties, along with his wife, both qualified for free health insurance through Medicaid.
- A restaurateur sold a chain of 10 fast food restaurants and retired. His wife, has qualified for free Medicaid health insurance under the new Obamacare law despite their having a large portfolio of many millions of dollars. (Medicaid is a welfare program and should not be confused with Medicare.)
- One retired engineer who manages a large 401K portfolio receives $400 each month to subsidize his family’s health insurance premiums with a commercial carrier.
I could go on but I think you get the idea. Keep income low and get free or low-cost health insurance.
How High Net Worth Individuals Can Get Free or Low-Cost Health Insurance Under the ACA
So how does someone get free health insurance (or at least reduce the cost)?
I’ll begin by saying I am not an expert in either taxes or the ACA, so I’ll speak in generalities and give basic concepts. From there you’ll need to do research into the specifics, exceptions, etc. that pertain to your particular life circumstances.
That being said, here’s what you need to know get free or low-cost health insurance:
1. The ACA gives subsidies to people with low incomes.
Here’s a run-down of how the process works as well as what you can expect for 2020. Be sure to bring your law degree, MBA, and an extra measure of patience to understand it. That said, it is pretty thorough.
The highlights are better explained in this post IMO. Let’s begin with a quick overview:
There are two different types of ACA subsidies, each working in different ways to control healthcare costs for low-to-middle income families.
The first type of subsidy, the premium tax credit, limits the amount that households pay on insurance premiums. The second type of subsidy, reserved for those with very low incomes, are cost-sharing reductions that limit out-of-pocket healthcare expenses. This impacts things like deductibles, copayments, or coinsurance.
Note that both subsidies are based on annual household income. No consideration is given to assets. Therefore, early retirees with low recognized income can benefit from both of these subsidies, regardless of how much wealth they have accumulated.
Ok, there are government subsidies and they are tied to income — I think we’ve established that. Now, what sort of income? Here are the specifics:
There are two key numbers related to income that you need to know, in order to determine if you will qualify for subsidies under the ACA. The first is your household income, quantified in the law by your Modified Adjusted Gross Income (MAGI). The second is the multiple of your MAGI to the Federal Poverty Limit (FPL).
In layman’s terms:
- Your MAGI is determined from your income tax filings plus a couple extra additions. We’ll cover this below.
- That income number is then compared to the FPL.
- Based on the percentage your MAGI is of the FPL, you are then assigned a percentage of your income that you should pay for health insurance.
- As long as your MAGI is between 100% and 400% of the FPL (there are variations for household size, etc.), you will qualify for health insurance subsidies.
- The lower your income in that range, the more subsidies you get.
Here’s a chart with the income/percentage numbers for 2020.
If you want to play with your specific financials in this area, here’s a calculator that can help.
2. The key income to focus on is MAGI.
As you can see, you will need to manage your Modified Adjusted Gross Income (MAGI) in order to qualify for health insurance subsidies.
But what is MAGI?
Well, it all begins with the better-known Adjusted Gross Income (AGI). Here’s a summary of AGI:
Your AGI is the total amount of income you make in a year, minus certain deductible expenses. The AGI is found on line 37 of IRS Form 1040, on line 21 of IRS Form 1040A, and on line 4 of IRS Form 1040EZ. The IRS has a new Form 1040 for the 2019 tax season. The location of your adjusted gross income may change, but the same concepts will apply in determining how to calculate your AGI.
As of this time (I’m writing this at the end of August 2019), the IRS is working on Form 1040 for 2019. Here’s the draft they have so far.
You can see from the form that AGI is on line 8b. It’s basically your various sources of income less “Adjustments to income from Schedule 1, line 22”.
I know, clear as mud. But that’s the IRS for you. Asking your CPA for help in this is probably well worth the cost.
Once you have your AGI, you get MAGI by adding back the following:
- Any deductions you took for IRA contributions.
- Any deductions you took for student loan interest or tuition.
- Half of your self-employment tax.
- Passive income or loss.
- Excluded foreign income.
- Rental losses.
- Interest from EE savings bonds used to pay higher education expenses.
- Employer-paid adoption expenses.
- Losses from a publicly traded partnership.
If you prefer, here’s an infographic that calculates MAGI.
3. There are ways to keep MAGI low.
It’s difficult to find a step-by-step guide to keeping MAGI low (can you imagine how boring that would be to read?), but I found some helpful sites to check out.
Here’s an old one from the Bogleheads forum that suggests the following:
Consider placing your fixed income investments in tax advantaged accounts and holding just stocks in your taxable. Then by a combination of tax loss harvesting and lot selection you’ll have greater control over your taxable income.
Here’s an option employing an HSA:
HSA’s, retirement accounts like 401ks, and other tax advantaged investment vehicles can be a smart choice for lowering GI, AGI, and MAGI. Specifically for ObamaCare, HSA’s really stand out.
Not only can you lower your MAGI with an HSA (it lowers AGI and isn’t added back to MAGI), you can also accumulate interest tax-free, and spend money on out-of-pocket medical (and dental and vision) tax-free. The healthcare savings really add up!
This article offers the following:
Early retirees are in a unique position. They have great control over how they recognize their income. This is achieved by utilizing a variety of combinations of retirement and taxable accounts to limit their income tax burden.
The ability to take money from savings, Roth IRA accounts, or basis from taxable investments allows for creativity in creating cash flow that allows for spending well above these amounts, without recognizing a high income as captured with MAGI.
These strategies can be used to keep MAGI low to maximize ACA subsidies. Thus, limiting health care costs.
Here’s my take:
- As an early retiree we’ve talked about the need to cover your retirement expenses from income, assets, or a combination.
- The more you can fund your retirement from assets (i.e. savings) and the less you require from income, the lower your MAGI will be.
- The ideal situation would be that you earn a low income that keeps you in the 100% to 400% FPL range with the rest of your expenses coming from assets (cash saved and the like).
In the end, everyone will probably have a different strategy for keeping MAGI low based on their particular financial situation.
4. Do not fall off the MAGI cliff!
Managing MAGI is much more difficult than “keeping it low.” In fact, you want your MAGI to be between 100% and 400% of FPL. Being higher or lower could result in less than optimal circumstances.
If you’re above 400%, you get no subsidies. You probably realize that by now but I want to be completely clear.
What you may not realize is that if you are below 100%, you don’t get subsidies either. You get Medicaid. Do not pass go. Do not collect $200.
Medicaid has its issues which most people reading this would not want to deal with (like limiting providers).
So you will need to work to be sure your income isn’t too high OR too low.
Here’s a good case study on the things you might need to consider as you sort this out for yourself.
5. Do not get subsidies and then not qualify for them.
The ACA is set up so that you estimate your MAGI for a given year and then pay/get subsidies accordingly.
Then once your taxes are completed the next year, your MAGI is confirmed to be sure you were paid as appropriate.
Here’s where a big problem can occur…
Let’s say you think your MAGI is going to be 200% of FPL. You apply for, get, and pay for insurance, along with the appropriate subsidies, at this level.
But then something happens during the year which pushes your MAGI above 400% of FPL. Guess who owes the entire health insurance cost for the whole year? Yep, you do! You will have to make up the difference between what you paid and what you would have paid without the subsidies. Needless to say, this can be a big number since, as we stated up above, the ACA is generally not very affordable.
Here’s a bleak summary of what could happen:
If your income winds up being even one dollar above the cutoff limit for receiving the premium tax credit health insurance subsidy, you’ll have to pay back the entire subsidy amount when you file your taxes. This could be thousands of dollars if you badly underestimated your income or if you live in an area of high health insurance premiums. Since you wouldn’t have been getting a health insurance subsidy if you were rolling in money, coming up with thousands of dollars unexpectedly is going to hurt.
In other words, you need to play this game very well in order to get the benefit and yet not be bitten in the behind by the cliffs on either side.
Where Does This Plan Stand Ethically?
Those are the basics of how to do it. But what about the ethics of it?
Is it “wrong” for a wealthy person or family to game the system to get free or low-cost health insurance?
The Our Next Life blog addressed this issue as follows:
It seems to be a given among those who are already retired that they get subsidized coverage through the ACA. And among the aspiring early retirees who we’ve seen mention it, there seems to be a consensus that taking the subsidies is the way to go. But we’re curious: does anyone else feel some level of moral ickiness in accepting the subsidy? Has anyone actually opted out of the subsidy on moral grounds, and just sucked up the high cost of an unsubsidized plan? Or do you think it’s a non-issue to take the subsidy because those are the rules of the system we have right now, and there’s no other affordable option?
BTW, they take the subsidy, so apparently it’s not that icky. 😉
Based on some comments on this site, there are some who think it is morally wrong. What do you think?
My Overall Thoughts on This Issue
Here are my summary thoughts on what we’ve discussed today:
- This is not really an option for our family. We would have to do some major financial restructuring to even come close to getting subsidies. Between our rental income, what this site earns, dividends, interest, and other income investments, we are well over $100k in income per year. To qualify for health insurance subsidies we’d need to sell the rental units and ESI Money and/or move investments from income-producing to growth only. I don’t see us doing that.
- We are happy with our solution for health “insurance”, Samaritan Ministries. You can read about our experiences in the three-part series starting with Picking the Right Early Retirement Health Insurance: Reviewing the Options. In addition, we also recommend Medi-Share. Here’s our review of it.
- I don’t see anything wrong with working the system to get the subsidies. The federal government set up the rules and as long as you play by them, what’s the issue? It’s clearly not illegal and I don’t think it’s immoral. If you feel icky about it, don’t do it. If you don’t, go for it!
BTW, for those who want another perspective on the health sharing ministries, check out this video:
As I wrap this up, let me say that the above could be incorrect or incomplete. This is a complicated issue as well as subject to change in a hot political climate. Let me know if I need to make any changes, additions, deletions, etc.
Otherwise, what are your thoughts on this process? Is anyone doing it? What’s been your experience?
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.
Good Morning Everyone
My wife and kids (college age) have been on Medishare for six years with an Aflac accident policy as they are very active in sports and always end up in urgent care! We choose a pretty high AHP (Annual Household Portion known in the insurance world as a deductible). For those unfamiliar, Medishare will not cover those with drug or alcohol issues for instance if those contribute to an accident that required medical care. It does not provide preventative. My wife qualifies for the Healthy Incentive which saves a few bucks. The premium is about $550 a month with I believe a $7500 or 8k AHP.
All I can tell you is that my son has had two major deals in the past few years. One was a broken collarbone with an outpatient surgery ridiculous bill of $44,000. The this past July an appendectomy with a bill over two days of 90k. Outrageous. People usually are afraid of healthshare ministries because they are not confident they will pay up. Well, Medishare paid over 75% of those bills and the providers discounted the rest as Medishare negotiates with them. That 75% is well above what Medicare, Medicaid, or other major insurers pay.
Just some info on real world examples. PLUS when you contact Medishare a caring individual talks to you about your condition and asks to pray with you. Some may not like that but most do.
Great work here, Sam.
Thanks for sharing this! I have had the same sort of experience with SM!
I have a slight moral issue with it. In theory, ACA was setup for uninsured people to be able to have insurance. To continue the theory, it was setup for people who couldn’t afford insurance for any number of reasons. To be able to afford it but not pay for it, seems to chip away and implode the system. Not to mention nothing is for free so other paying insured people are paying for it either through income taxes or workplace insurance or both. That said I said slight because I too work to minimize my taxes so I suppose, the people who employ this strategy probably think healthcare is a right, and they are working to minimize what they see as a tax by another name.
As a taxpayer it pisses me off to pay for these high net worth freeloaders. One crazy government, for sure.
@Mel- Do you have the same outrage for high net worth people that do back door Roth’s? What about wealthy people that take itemized deductions? Aren’t these all ways that you are paying for these freeloaders?
Don’t hate the player, hate the game…
The ACA made catastrophic policies that used to be very reasonably priced unavailable because they no longer met the government definition of medical insurance. No insurance company could offer them anymore because the policy has to cover all the things the ACA says.
You may not realize how much the ACA screwed over people on private insurance. The ACA took the affordable options off the table to be replaced by a plan they decided was better for us. They called it the affordable care act but the only thing affordable about it was many people were getting subsidies. The insurance itself is actually quite unaffordable. The best policy I could get (2 years ago, likely much worse now) would be a 13K family deductible with 18K in annual premiums. I would have to have pay 31K in premiums and deductibles before I would see any money in insurance payments. Sound “affordable?”
Those getting subsidies (all of them) are free loading off the rest of us. Why is it only the people with assets that you consider to be free loading? So by not taking the subsidies people are agreeing to pay far more than they used to have to pay so that other people can get cheap to free insurance. That is wrong!
The number of people with assets who are able to arrange their income to qualify is low (I am unable to do it which is why I am on a sharing ministry because I refuse to be financially raped by the cost of an ACA policy at full price.) The vast majority of those getting subsidies have litle income or assets.
Just let those of us with assets leave the ACA system entirely. Let us buy the kind of insurance we want that covers less and is affordable and then you won’t have to be pissed anymore. But the government doesn’t want that, because only those people without assets or income would be left in the system and then who is going to pay for it.
Well said! ACA took away commercial options. I have no other insurance choice. It’s like taxes, follow the rules and use the subsidy (66% for me, making cost equal to pre -retirement cost). No different than taking IRA/401K tax benefits, GI bill, mortgage deduction, …
Seems to me this is a strategy that must be employed 1 year after your retire as opposed to right away…. dont you have to show your most recent tax returns for the ACA approval process?
and presumably – if you are working then it will show a higher level of W2 income. Now fast forward 1 year – if you are living off of savings, roth, etc that subsequent year, your tax return ( 1 year later) will show significantly less earned income. Therefore putting you in position to take advantage of a stratey like this.
Am I missing it?
I believe you can do it immediately depending on time of year. For instance, if it’s December, the cost will be based on what you earn the next year, so you’re good to go.
If you retire in September and already have $200k in earnings, I think you need to suck it up for the rest of that year (maybe take COBRA), then use the strategy above for the next year.
Again, those are just my suspicions. Anyone know for sure?
During the ACA open enrollment, you are asked to ‘estimate’ your next year’s income. There is no validation of the estimate you give (until you file next year’s tax return some 13-16 months later). ACA subsidies are available in year 1 of retirement.
thank you Dave
This just goes to show that because of the convuluted way the government designs things there are loopholes that savvy people can take advantage of.
Even filing for income taxes is a truly asinine process. The government already has all the information you are providing on these tax forms but makes you waste time and or pay someone to do it for you.. It could be as simple as getting a bill from the government saying this is what you owe.
Haha! I know. It’s such a farce!
Thank you, ESI! if you already covered this and I missed it, I apologize:
“Many of the family members who open a probate estate for a deceased loved one rarely realize that if their loved one received Medicaid benefits during their lifetime, Medicaid can file a claim against the Estate and lay claim to much – if not all – of the Estate’s assets.”
“The bottom line is that if your loved one is considering Medicaid coverage (or Medicaid expansion coverage under the ACA) the family should visit a skilled elder law or estate planning attorney to discuss the implications of estate recovery. If the family is considering opening a probate estate for a deceased loved one who was a Medicaid recipient, the family should fully explore their options for probate with a skilled probate attorney.”
https://agrlegalservices.com/medicaid-the-affordable-care-act-and-estate-recovery-what-clients-should-know/
This is a good point for people with assets to avoid qualifying for Medicaid. Medicaid is for those with no income or assets. So it makes sense if you die and there suddenly appear a bunch of assets in your name that the department running Medicaid in your state would go after it.
My wife and I have had ACA plans since our COBRA coverage ran out at the end of 2015. In my analysis before pulling the trigger to retire, I found that ACA plans for us would be about 1500 per month and left it at that. It wasn’t until I started digging into the subsidy question during the first year of our retirement that I realized we would be eligible for full subsidy.
We had cash and online savings accounts to cover 2 years of living expenses so we actually had to do IRA conversions to get to 138% of FPL (Medicaid non-expansion state) so we wouldn’t be forced into Medicaid.
As for refusing the subsidy, SCOTUS indicated that the individual mandate is a tax and the subsidies are administered through the tax laws. To walk away from a tax credit that is worth $10k plus seems personally irresponsible to me. I didn’t write the laws, I am simply following the law as written.
Absent the ACA subsidies, we would be converting IRA assets to Roth via conversions at a much more aggressive rate. Every year, I calculate the effective tax rate on each dollar of conversion (including impact on ACA subsidies).
2 thumbs up Dave!
Agree with all of this (as well as the previous poster that talked about how ACA destroyed the individual insurance market). The bit about leaving that huge tax credit on the table is key – especially when you think of the kind of disproportionately (relative to my peers) high taxes I’ve had to pay as a high earner over my career.
If the ACA is still around when I retire, you can bet your a** that I’ll take the subsidies.
Before I retired early, I looked into one of the healthshare ministries (can’t remember the name). My problem is that I have Type 1 diabetes, which these services are not really set up for or interested in (my impression).
However, they were willing to give me a trial period (not the right term, I’m fuzzy on the details).
Bottom line, the trial period was several years. After that time, I could get 100% of any payout needed. Until then, I would have had to pay all of it, plus get some real insurance.
Like I said, I’m fuzzy on the details now, but I know based on my preexisting condition, I didn’t feel like these services were for me.
Just FYI in case this info helps somebody who is researching these services. Otherwise, they seem like a great idea.
I don’t think people should not feel bad for taking the subsidy. Prior to ACA retirees were able to get a catastrophic plan for a few hundred dollars a month. Once ACA was in place these catastrophic type plans were not eligible and it forced people onto other, more expensive, plans. IMO this is a way for retirees to get back to what they were paying before ACA. Also remember “ if you like your plan you can keep your plan. If you like your doctor you can keep your doctor”. They lied to us.
Unfortunately this discussion doesn’t relate to the enormous cost of dental care as we age. A crown, implant or even partial bridge can set you back the cost of a top of the line 75″ flat screen TV. And there is no way to insure against this.
I believe the article has the formula for MAGI incorrect. MAGI is a tax term with different meanings depending on the situation.
For ACA subsidy reconciliation, the instructions for firm 8962 defines MAGI as:
AGI (1040 line 7)
+ tax exempt interest (1040 line 2a)
+ Form 2555 lines 45 & 50
+ Social Security not subject to tax
There is no adding back in IRA contributions or other deductions.
Hope that helps.
WAIT, Why cant I just call up Blue Cross to insure me?
I don’t need an employer to find a company and pay for Health Insurance.
Sure it might cost much more than ACA but I should be able to get insurance through any of the large insurers.
Great idea. I did exactly that last year. I could not find an offer that didn’t fit the ACA definition and price. No “catastrophic only” plans. So I retired with ACA as the only insurance option.
Warning!!!…occasional sarcasm ahead…
We are currently in our third year of ACA (early retired in 2017 at 50/51). We are definitely utilizing the ACA subsidies, and it covers nearly 98% of our monthly ACA premiums, which would be nearly $1500 per month without the subsidy for a married couple our ages.
The bottom line is…This is a form of taxation (and/or tax refund)…plain and simple. In fact, that’s how the Supreme Court ruled in determining the ACA was legal. For those railing on the use of subsidies (based on some moral high ground) by those of us with assets, ask yourself a few questions…Did you reject your $24,000 standard deduction (ex. Married filing jointly) on your taxes last year because you had a few assets? Do you reject other tax credits and deductions (child tax credits, saving credits, childcare credits, health savings deduction, IRA deduction, etc.) provided by the IRS laws because you own assets or a business? Do you pay more in taxes than your Form 1040 requires at the end of the day? Are you sending an extra “special” (moral high ground) check to Uncle Sam each year just because you’re a morally perfect person and can afford to do more? Yeah, I thought not… All of these “perks” are just forms of taxes and tax credits at the end of the day. We all navigate them as best we can legally determine.
For those still reading and genuinely interested, we utilize real estate investments to manage our income. We own over fifty rental units. Real estate provides some unique opportunities within our tax laws. Understanding that 50% of rental income is typically business expenses and capital expenses, you can uniquely manage (shelter) a large portion of the other 50% of actual income with a depreciation deduction, further significantly lowering your MAGI (thus keeping below the ACA Cliff). Throw in additional “perks” (yes, that was said in a sarcastic tone for those still claiming moral outrage…and yet still reading along because they actually want to know how to do it too!) like the HSA deduction in 2020 for $7000 (married couple) and an additional $1000 catchup contributions for turning 55 next year, and you have any number of legal tools (provided by the IRS no less!) at your disposal to manage (lower) your MAGI.
For those screaming right now, lose the moral outrage…You know you are navigating (“taking advantage”- – yes…sarcasm again!) the legal tax rules yourself for any number of legal deductions. Heck, I’ll bet many of you even pay a tax professional to help you! 🤔
Oh…I almost forgot! ESI another great article! One of the best articulted articles I have seen on Healthcare in FIRE.
Pretty impressive that you can own over fifty rentals and still stay below the ACA limits. Couldn’t agree more with your comments as this is just taxation thus take advantage of every advantage you can get. I lived through the pain of having to pay full freight for ACA, for 8 months in 2018, as I was 401% FPL! I took everything I could think of to get below the 400% FPL but I was a W-2 employee for approx. 4 months in 2018 so already had a bunch of $ from wages. I am hoping to take advantage of the subsidies in 2020!
Dave, one of the great things with rental units, the more you have, the bigger your depreciation becomes, offsetting larger amounts of income. It’s a balancing act, but REI has some great advantages for managing your MAGI. The one downside I should mention, because rental income is just that….income (although not earned income allowing IRA contributions), it does limit my ability to do any significant 401k to Roth conversions trying to stay under the ACA Cliff. I guess that is a First World problem…and one advantage of straight up capital gains income.
I see nothing wrong with what you are doing, you are doing this legally.
Sadly, we’re likely going with “Work for Insurance”. Fortunately, my wife likes her clinical healthcare job where flexible hours and part-time work with benefits is an option. It would really suck if 9-5, 5 days a week in-office jobs were the only good jobs available that offer insurance.
I’ve been early retired for 12 years. I’ve been paying full freight ACA for as long as it has been in existence. I used to have a much better health plan at a much more reasonable cost but thanks to ACA, it was eliminated. So much for presidential promises.
Like you it would be very difficult for me to qualify for subsidies, I’d have to reorg my entire portfolio. So I just bite the bullet and pay for it, as well as subsidize many others with the Net Investment Income Tax. No individual mandate and yet NIIT is still in effect, go figure…
ACA is far from affordable.
It seems like if you are anywhere near the 400% level, it makes sense to lower your income to qualify for the subsidies. But if you have built up a significant amount of resources, and your income is 4-5 times (or more) that level, you just have to bite the bullet and pay the costs. I pay about 14K per year in health insurance costs, and plan to have retirement income of 200K+. Mostly from dividend stocks, rentals and an easy (mostly passive) side hustle. Seems counterproductive to cut my income by an amount that would be many times what I pay for the insurance just to qualify for the subsidy. Am I correct in thinking this way?
I think it depends more on your personal expenses. If your expenses are over 4x FPL, then you can’t cut income. If they are under, you have the option to “reduce” your income. That means reducing dividend paying stocks in taxable accounts, incurring more rental expenses, increasing biz expenses.
I see nothing wrong with your approach either, if you have enough money to throw around, healthcare premium is just a small amount of your budget
For me and my wife ACA was a godsend. She had a pre-existing condition and was unable to get insurance at ANY price. We live in a red state and the only way she could have been covered is going on the state Medicaid program which stipulates a ridiculously low income level.
ACA is not perfect but it provides coverage to a large segment of the population. Lets tweak it and not abandon it. Denying healthcare is something Jesus would have frowned on.
Acts of desperation, emblematic of these strange times. I can appreciate a realpolitik approach, beyond morality even, and yet a little flame forever remains inside, reminding me these are the actions of animals only, reacting to unnerving situations set before them. In reality, the hypocrisy of the ‘religious’ also knows few bounds when it comes to an actual greater good. Some of you may be comforted to know I am done . . . tried to keep trudging through this strange snow, but it’s become pointless and unacceptable; redundancy of the MI’s have become numbing, the lightly deranged vanity here and there dispiriting. Some of it was interesting, yes, but what have I actually learned? It’s not always wise to pay down the mortgage in a big hurry. I’ll need a different, new sort of education to gain more virtue and clarity. Richard, WA. HL.
HUH ? Must be a question/comment or something in this post. Colorado druggie?
No sir–more a genteel condemnation and divorce from further ‘acts of desperation.’ Ever had a little too much of something, felt too smart or perhaps out of place despite knowing others instead are more lost, that your instincts are more correct regardless? Probably not if you enjoy hanging around here. I don’t dig ditches for peanuts, now or then. It might very well take a Colorado druggie and a few mounds of cocaine to tolerate more, including snarky lowbrow commentary, but perhaps even druggies have some standards. Strangely enough, ESI is no more a fan of MMM than they are of all this business, whereas I’m generally done with both. You really want to overdose on vanity, instead of a light brushing like this? Try reading every post there. Neither one is a mountain worth climbing, upon second thought, and I’m more of day hiker anyway. It’s not like I haven’t figured more than enough out, just a process of adding on, going forward. Budgets are Sexy was the first to be tossed; too frivolous and trendy, not enough hard meat. I give ESI high marks for maintaining my interest the longest until it was lost. It’s really not their problem, just for others. Closed-in millionaires and the morbidly curious? Everyone finds their place, eventually. Early Retirement Extreme has some hay to chew on, meanwhile. Seems a little limited and idiosyncratic, but an extreme alternate view, the only thing I really crave, knowing what I know. There was a little bit of that here also, to be fair. Beyond that, back to the books, my own instincts and strategies.
‘Lucifer represents the light of intellect, wisdom and power unique to each individual with the courage to ascend to this responsibility . . . to become a god is to fully understand that you possess the power to create and sustain your path in life and illuminate the light of self-determined potential.’ WORD. Points 1 and 11, courtesy of and great thanks to Michael W. Ford. Extracted from The Bible of the Adversary. HL, brother.
Yeah, what a great brother. Greater content, a few typos . . . you can’t have it all. That’s the first lesson, for the wiser. That non-stop boogie chasing digs early graves, every industry I’ve known. Trophy wives or not, I daresay; only a better early death, perhaps, in regard to the former. And yet one bad divorce can destroy you, like one bad medical condition. So marry again? How about never, not even once. See what I mean? I just need a different sort of jazz, that’s all. Everybody’s different, some more than others.