Reducing income during retirement to qualify for healthcare subsidy

The recent passage of the healthcare overhaul has prompted me to look closer at the issue of early retirement. There is a choice to work less and spend more time with family. Or even retire early and have the government subsidies your health care insurance by keeping income levels below 4x the poverty rate (see this Health Reform Subsidy Calculator).

The following is a list of items to reduce income:

  • If you have kids, and you want to help to pay for their college, plan to have more of it funded by 529 accounts. If you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI.
  • Pay off mortgage if possible to eliminate income requirement. Again, same thing as college funding, if you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI. Without a mortgage, you have less need to realize capital gains or draw down from tax-deferred accounts.
  • Derive income for ongoing expenses from tax exempt bonds (tax exempt income does not figure into MAGI).
  • Use a short term tax exempt fund to hold non-immediate cash needs instead of a high yield savings account. Perhaps top up the checking account once or twice a month. This reduces the amount of interest payments reported in MAGI.
  • Shift equity investments into lower yield equivalents, while still keeping the general composition of the portfolio reasonably unchanged. One potential candidate would be to invest in US LargeCap Growth instead of US LargeCap Blend. Does not work for US SmallCap (US SmallCap Growth has a poor historical record).
  • Invest in rental property and use rental income to fund ongoing expenses (rental income is typically offset by property depreciation).
  • Look into MLP investments that shield income for as long as the investment is not sold (you can control when to sell if necessary).
  • Delay signing up social security.

Even though it looks like I could potentially benefit from the healthcare reform if I retire early, I don’t agree with the changes. They simply penalize people who are successful and are a disincentive to work. This can’t be good for the economy. But that is another story.

1 Comment

  1. Daddy Paul

    Very good article. This information you do not see every day. Thank you.


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