In today’s episode, we’re tackling some big topics relating to year-end tax planning:
- How the ACA subsidy formula really works
- The “$1 cliff” that can cost you $17,000 or more
- Which income sources to use — and avoid — in early retirement
- How to coordinate investment, tax, and income strategies to seek maximum benefits
Listen Now:
The Smart Take:
For many retirees, healthcare costs before Medicare can be one of the biggest financial shocks — often exceeding $25,000 a year. But with the right planning, that same $25,000 can turn into a tax credit instead of an expense.
In this episode, Tyler Emrick, CFA®, CFP® dives into how the Affordable Care Act’s (ACA) Premium Tax Credits work, what is and what isn’t expiring after 2025, and how affluent retirees can still qualify through smart income control. From understanding Modified Adjusted Gross Income (MAGI) to leveraging Roth accounts and taxable savings, you’ll see how advanced tax planning can make a big difference in bridging the healthcare gap to Medicare.
Go Deeper Into the Conversation:
0:00 – Intro
1:34 – Tax legislation
4:21 – Deductible gifting
6:50 – Donor Advised Funds
16:08 – Qualified Charitable Distributions
21:00 – Non-deductible gifting
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
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The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
The government has been shut down for weeks, and the key debate is over these healthcare subsidies and the potential end of enhanced ACA tax credits. In this episode, we’ll explain how these credits work, what can change in 2025, and how smart planning can still set you up to utilize these all-important tax credits.
Walter Storholt:
Hey, welcome to another edition of Retire Smarter. I’m Walter Storholt, as always, joined by Tyler Emrick, a CERTIFIED FINANCIAL PLANNER, chartered financial analyst, and one of the wealth advisors at True Wealth Design. And our whole goal on this show is to help you retire smarter, learn a little something about the financial world each and every time. And Tyler, I’m glad we’re going to get to talk about this healthcare conversation today, and the ACA, because yeah, last couple of weeks, right, just hearing nothing but the two sides of the political spectrum yelling at each other, and the consequences, and whose fault it is, and all that.
Tyler Emrick:
Right.
Walter Storholt:
I’m like, I hear all the yelling, but I want to actually learn something, like what’s at stake, what’s changing, what’s going to be the big difference out of all of this? And none of that noise seems to make it through social media, right, so I’m excited to actually get some details from you today, as I know you always deliver us some great ones.
Tyler Emrick:
Oh, yeah, we have a good one. Yeah, I think we got a good one. This is a super important topic to a lot of retirees, especially those retirees that are hoping to maybe retire before Medicare age of 65. So yeah, it should be a fun one, and buckle up, and hopefully we’ll learn a few good things. Because as we speak, now the government is still shut down, but Walt, I think there might be a vote here today, to kind of get things passed through.
Walter Storholt:
Yeah, literally as we’re recording. I mean, let’s just say it, it’s November 12th, Wednesday, at like 11:30 Eastern, right?
Tyler Emrick:
Yes.
Walter Storholt:
So just for context, we could finish this recording and we go to publish this later in the day, or on Thursday, and something might’ve changed from that actual status, but yeah.
Tyler Emrick:
You’ve got it. Yep. No, absolutely. But yeah, fun to be here, man. And yeah, it’s been a good start. Actually, we got a little bit of snow. We got our first snow up here in Northeast Ohio.
Walter Storholt:
Very nice.
Tyler Emrick:
We did. I don’t know if I… It’s a little early.
Walter Storholt:
I mean, if you like snow, I guess.
Tyler Emrick:
Yeah. I guess, right? Yeah. So I was walking out a couple days ago, I always take my daughter to school for kindergarten, and as we were walking out, she just rushes out the door before I got out.
Walter Storholt:
Nice.
Tyler Emrick:
And of course, I’m like, “Oh, okay. Man, really excited to get to school.” No, she was excited to grab a snowball and hit me with it as I was coming out the door.
Walter Storholt:
There it is.
Tyler Emrick:
She got me pretty good.
Walter Storholt:
So not the snowfall, but actually some accumulation, nice.
Tyler Emrick:
We did have a little accumulation. I don’t know if we can see out the window there, it looks like it’s all kind of dried up.
Walter Storholt:
Okay.
Tyler Emrick:
We got hit pretty heavy a couple days ago.
Walter Storholt:
Nice.
Tyler Emrick:
It’s all about gone. But yeah, man, the winter is here already, up here in Northeast Ohio, so I don’t know how it’s doing out your way.
Walter Storholt:
We had the aurora borealis last night, so that was kind of cool to see.
Tyler Emrick:
Oh, okay.
Walter Storholt:
We have not been fortunate to catch those Northern Lights where we are, when other people have been seeing them the last couple of years. I feel like it always makes the news when that happens.
Tyler Emrick:
Sure.
Walter Storholt:
But last night we got it, so I got a couple of good photos on the phone, and yeah, turned out pretty well. No snow for us. We were actually in the 70s yesterday.
Tyler Emrick:
Geez, you got to one-up me, right? Talking about nice lights in the sky.
Walter Storholt:
I’d rather one-up you with snow.
Tyler Emrick:
Cleveland, Ohio, we’re a little gray. We got a little cloudiness. The sun’s peeking through maybe, a little bit.
Walter Storholt:
Out here in Colorado, we are way under snowpack apparently, and it’s like the third-latest first snow of the season for Denver already, so we’re setting records for no snow unfortunately, but-
Tyler Emrick:
Oh, no, that’s not good for our skiers out there, snowboarders.
Walter Storholt:
That right. But maybe it just means we’ll make up for lost time with a really big December, January. We’ll see.
Tyler Emrick:
Yeah. I guess you never know.
Walter Storholt:
Yeah.
Tyler Emrick:
Yeah, same thing here, up here in Northeast Ohio, we’re all over the place.
Walter Storholt:
Yep, yep.
Tyler Emrick:
Yeah.
Walter Storholt:
Well, let’s dive into healthcare and the ACA, and set the stage for us.
Tyler Emrick:
Let’s do it. Yeah, absolutely. And as we maybe just start at a high level, I mean we opened up with what’s going on with the government shutdown. I mean, there is a pretty big sticking point. As with anything, right, there’s a spectrum here, of things that are trying to get accomplished, but one of the big ones that certainly we’re going to talk about today, are these what we call enhanced premium tax credits, that were essentially established in 2021 under the American Rescue Plan. That was right in the thick of COVID, so there was quite a bit of legislation getting passed there to help families out in a number of different ways, and then it was actually extended through 2025, with the Inflation Reduction Act. So what’s happening is unless new legislation gets passed, which doesn’t look like that’s going to be the case, come 2026, we’re going to see some pretty substantial changes to Affordable Care Act, and the insurance costs for families that are on an ACA plan and using it.
So that’s really at the crux of what we’re going to talk about today, and we’re just going to make sure we paint the picture of what families need to know about the changes, what are the key drivers that they need to be thinking about, so that way they can still have an opportunity to maybe manage some of those healthcare costs come 2026. That’s what we’re getting into today.
Walter Storholt:
As I’m understanding you, we really need to focus on the fact that this is going to impact folks that are pre-65. They’re the ones most impacted by this going on, because once we hit Medicare age, we’re less impacted by the ACA, I guess.
Tyler Emrick:
You’ve got it. Absolutely. Or not even really impacted, right? Because once you hit 65, you’re going to have eligibility for Medicare.
Walter Storholt:
Cool.
Tyler Emrick:
And then for those of the individuals that are working, obviously, if you have access to an employer plan afforded to you through there, and it can affect some, or certainly affects most individuals before age 65. If you’re looking to retire and you do not have access to some type of retiree healthcare through your employer or through the state, or through the federal government, or something like that, we do have some other options that individuals could look at, things like Cobra, for example. That’s the same healthcare that you have while you’re working. Generally speaking, that would be available to you for 18 months after you lose coverage. So some individuals that are maybe retiring at 64 might decide, “Well, hey, I’m going to stay on Cobra for a year, and then once I turn 65, head on to Medicare.” So for those individuals, individual healthcare plans, ACA plans really aren’t going to be in the picture, but for those individuals where Cobra might be very expensive, or they’re going to be coverage for more than 18 months before they reach 65, then the ACA plan is the big starting point.
There are some other options out there, but that’s the first place people are going to go and look.
Walter Storholt:
Yeah, makes sense.
Tyler Emrick:
Now, these ACA plans, as we think about it from a high level standpoint, the cost of them are going to be based off of a number of different factors. Specifically, they’re going to be based off your age. They’re going to be based off your location, this is actually down to zip code, okay? And whether you use tobacco. So those are the three things that are going to really drive that starting point of what an individual healthcare policy from a cost standpoint is going to look like for you. So for example, let’s take a married couple, age 62, maybe just retired, non-smokers, and they go out on the ACA network, and they start to get a framework for like, “Well, hey, what are the costs for these individual healthcare plans?” Now, the healthcare plans, well, the way they’re set up are, they’re actually categories of healthcare plans. They start with bronze level plans, they go to silver, gold, and some areas even have platinum plans that are available to them.
So if you hear these terms, they’re just a way to categorize the healthcare coverage that you’re targeting. So bronze level plans are really meant to cover around 60% of your total healthcare costs. Silver level plans are meant to cover 70%, gold level plans are meant to cover about 80%. So the general consensus here, Walt, is like, “Well, hey, as you’re kind of moving up that scale, going from bronze to silver to gold, you’re getting a little bit better coverage,” right, or at least the healthcare plan is meant to cover a little bit more of your healthcare cost as a starting point, okay? Now, there’s other factors that come into play here, things like, “Hey, are these plans paired with an HSA account or not, or do they qualify?” So there are some other caveats here, but when you first go on, you’re going to be inundated with, “Well, hey, do you want a bronze plan, a silver plan, a gold plan,” or so on and so forth, okay?
So for that couple that I mentioned earlier, hey, 62 non-smokers, the costs are generally going to start around, for a bronze level plan, around $17,000 a year. To go up to a silver plan, which the silver plan that I researched for the podcast today is the second lowest cost silver plan, that’s going to become a little important as we start thinking about the healthcare credits and how much money that you get. But the second lowest cost silver plan jumps up to about $26,000 per year, so almost a $10,000 jump going from bronze to silver plans, so not insignificant, Walt, when you think about the options. And then if we go to gold level plans, hey, we’re seeing a pretty sizable jump there too. So that’s where we get at, from like, “Hey, affordability, cost, what are we looking at,” that’s what a couple, 62, is looking at.
Walter Storholt:
Not that affordable to begin with, and then the fact that it gets worse is not a very exciting proposition for folks.
Tyler Emrick:
Sure. Well, absolutely. Well, and that’s where these premium tax credits come into play, right? Because the job of these premium tax credits there are to essentially try to help cover those big numbers, right?
Walter Storholt:
Yeah.
Tyler Emrick:
The premium tax credit can be upwards of $25,000 a year. I mean, that’s quite substantial. So the way we like to think about these premium tax credits are they’re a refundable tax credit from the federal government that effectively caps what you pay for premiums, healthcare premiums, as a percentage income. So that’s a mouthful, I actually read it from my notes here. I think of it a little bit different way, but let me read that again. The premium tax credit is a refundable tax credit, so that’s, “Hey, the government is giving you some money to lower your healthcare costs,” and the idea of these credits are to, based off of your income, cap the amount of money that you have to fork out and pay for your premiums. And the way that they look at your income is they attribute your income in a given year, and they go and look at what we call the federal poverty line.
So the federal poverty line is set, you can look it up online, and essentially, if your income is between 100% to 400% of that federal poverty line, then you are going to qualify for some level of these premium tax credits. And again, that federal poverty line is different from zip code to zip code, that’s where we get into the intricacies of like, “Well, hey, where you’re at in the US is going to affect things here a little bit,” okay?Now, to give you a bit of an idea of, well, what is the federal poverty level at 100% and 400%, i.e., where’s my income need to be at to qualify for some of this help from the government? So 100% of the federal poverty line is a little over $21,000 a year for that couple that we mentioned earlier, that is 62. Non-smokers. That income goes all the way up to 400%, which is about a little over $84,000 a year.
So in theory here, if this family’s income is somewhere between $21,000 and roughly $84,000, they’re going to get some help to lower their healthcare premiums in the form of these premium tax credits. You follow me there, Walt? Make sense?
Walter Storholt:
Probably, if they were high earners, this is the big difference, right? Probably, a high earner in their later working years, they’re not qualifying for any of these tax credits, but if they’ve retired early, income takes a dip, now all of a sudden they can actually benefit from some of these credits.
Tyler Emrick:
You are correct. And the low end of this scale actually becomes more important as we look at 2026 too, because if your income’s lower than that $21,000 mark, well then now you are qualifying for Medicaid. So you’re not even going out on the individual healthcare network, you’re getting your healthcare through Medicaid. That’s not Medicare. Medicare is at 65. Medicaid would actually step in at that time, right? So the way we can think about these premium tax credits is, okay, if your income is between these two numbers, $21,000 roughly and $84,000, then well, the government wants to cap the amount of costs that you have towards your healthcare premium. That cap goes from 2% on the low end, all the way up to 10%. To give that in dollar terms roughly, “Hey, if you’re at that $21,000 a year mark roughly, they’re wanting to cap your premium around $400 a year.” At 10%, it’s around 84,000, or $8,480. $84, 000, that would be pretty expensive, Walt. $8,400 a year.
Walter Storholt:
Might be worth self-insuring at that point, for sure.
Tyler Emrick:
Yes, absolutely. So okay, we’ve identified there’s these premium tax credits, we’ve identified healthcare can be pretty expensive. Premium tax credits are meant to lower that healthcare cost on the ACA. Well, what are the changes? What is the impact here? Why do we have a government shutdown and what is one side trying to fight for, and there’s other minutiae here, but what are we looking at here with the ending of that enhanced premium tax credits? Well, that federal poverty line and your income level becomes extremely important come 2026, because what happens is in the last couple years here, the last few years here, what’s happened is if your income was above 400%, so i.e., that family made more than $84,000 a year, you actually still got premium credits to offset your healthcare costs. Come next year, roughly that $84,000 mark for the family that I just described, now it’s important that you got to look up your own specific zip code, ages, right, those factors.
But for this example that we were touching on, the 84,000, if you are $1 over 400% federal poverty line, you literally get no help or no premium tax credits to offset it.
Walter Storholt:
Oh, wow. Okay. So it’s become a hard cutoff.
Tyler Emrick:
It is a hard cliff, right? And you think about managing to that, wow, literally, if you were $1 over, you go from getting thousands of dollars of help towards your healthcare premiums to nothing. So for those families that can control their income, i.e. the family, like you mentioned earlier, right? Hey, you’re not working anymore, you might have a multitude of accounts to pull money from. Well, hey, you have some flexibility here to potentially manage that income. We’ll get more into that here, later in the podcast. But if you have less control over your income, and you can’t get it within that 400% of the federal poverty line, well then hey, you could be staring down a pretty big bill for your healthcare and not getting any type of help. So it introduces this cliff idea, or not introduces it, but goes back to the way it was before that COVID legislation, and then it also, the cap on what they expect you to pay is actually lowered, i.e., “Hey, they’re expecting you to pay more towards your healthcare premiums,” even if you are within that 100 to 400%.
So there’s two big changes there, really, as you’re thinking about it, you’re looking to retire next year, you’re going to need to go on the ACA network, there’s a huge planning opportunity here, and it become much, much more difficult from a plan standpoint to make sure, like, “Well, hey, can we stick within these income limits to be able to get a piece of these premium tax credits,” okay?
Walter Storholt:
Okay.
Tyler Emrick:
Yep. Now, I mentioned earlier, where we were talking about, “Well, hey, when you go on the ACA Healthcare Network, there’s categories of plans,” right? Bronze, silver, gold.
Walter Storholt:
It’s an overwhelming amount. It’s an overwhelming amount. So while we were chatting, I was just doing my own quote over here, just to kind of get the experience while we were talking. It’s given me-
Tyler Emrick:
Because you can do it online, Walt, right? Literally, right? I mean, healthcare.gov, right?
Walter Storholt:
I’ve done it online right now, and it’s giving me 69 options. So the entire first page is bronze plans, and then I’ve got seven more pages I can scroll through. Let me see what my range is. Okay, so my lowest, I’m 38. I didn’t put in many parameters, but just zip code and age, and my zone is $380 a month to I think almost $700 a month, so that’s my ballpark range.
Tyler Emrick:
For single, right?
Walter Storholt:
Actually, that’s only given… And that’s a single, and that’s actually only taking me up to silver plans. So I don’t know, can I not even get-
Tyler Emrick:
As you go to gold… So that’s where the zip code kind of comes into play, Walt, right?
Walter Storholt:
Okay.
Tyler Emrick:
Where it’s like, “Hey, well what’s available to you in your zip code, your area, and your age bracket?” And over time, some plans come and go, and so on and so forth, right, so it can be kind of challenging. I mean, I think about even here, in Northeast Ohio, there are some very popular healthcare networks. If you were in a zip, some zip codes don’t offer those healthcare networks and some of those hospital systems.
Walter Storholt:
Okay.
Tyler Emrick:
So even though you might have gone to a specialist, or a doctor at a particular healthcare system, if you’re going on an individual healthcare plan, you’re in a zip code that doesn’t have that in network, now you’re getting into some limitations and some of the downsides to individual healthcare, as you think about the breadth of plans available and some of the options.
Speaker 3:
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Walter Storholt:
Yeah. Because there’s names of healthcare networks and things I’ve never heard of on here, then there’s the ones like Anthem, Anthem, Blue Cross, whatever. Okay, I’m recognizing that one.
Tyler Emrick:
Yes.
Walter Storholt:
But now we’re still at only a silver tier, I guess, and $600 a month.
Tyler Emrick:
The silver tier is very important, yeah. Because the silver tier is where the government is going to basically use that plan cost to help determine what your premium tax credits are going to be, right? So if your income is in those ranges that we mentioned earlier, now what’s going to happen is they’re going to go to your area, your zip code, look at what we call the second lowest cost silver plan. So for the couple that we were talking about before, that’s around a little over $26,000 a year from a cost standpoint for them. And what they’re going to do, is they’re going to use that to then say, “All right, where’s your income going to fall and what percentage is your expected contribution to the plan?”
So that’s just your household income times the expected contribution percentage, we take that number, and then we subtract it from the benchmark plan premium, which is that second lowest cost silver plan, and that gives you a rough idea of how much in premium tax credits you’re going to get to offset it. Now, that might sound complicated. The beautiful thing is, Walt, they have calculators online that literally do this for you.
Walter Storholt:
Okay.
Tyler Emrick:
We don’t have to do any math, but as we kind of go back to our example here on the couple, 62-
Walter Storholt:
Just the step to get to know this information is the hard part, I would imagine, for a lot of people, right? It’s dense.
Tyler Emrick:
Is it out here, right? What do we need to be focused on? Absolutely, right. I always say they like to keep financial advisors employed, so they make it as complicated as possible.
Walter Storholt:
Yes, exactly.
Tyler Emrick:
Now, but if we go back to-
Walter Storholt:
The whole industries out of just helping you pick healthcare plans, right? There’s people who have built companies around literally just healthcare plan guidance for folks.
Tyler Emrick:
Guidance. Well, it’s a big piece of the advice that we provide as a financial advisor. I mean, you should be leaning on your financial advisor to-
Walter Storholt:
Okay, well, that’s great to know.
Tyler Emrick:
To go through these plans and options.
Walter Storholt:
Like, “Hey, here’s three plans, I think, what are my pluses and minuses for these?”
Tyler Emrick:
Correct.
Walter Storholt:
Okay.
Tyler Emrick:
Well, it can go that granular, but the big one would be, “Well, what is my income going to be for the year? How high are we going to be? How much do I tell them when I go in the plan? How much help am I going to get? Should I go with an HSA eligible plan? Should I not? Should I go with this silver plan? Where’s my sweet spot?”
Walter Storholt:
Is the higher deductible better for me or not based on my situation?
Tyler Emrick:
Correct, right, all of those things. A lot of times the way we do it here at True Wealth is like we’ll have that high level conversation. Obviously, we’ll have some expectations on what we expect your income to be in the year where you need this coverage, and then we’ll basically kind of say, “Well, hey, based off that information, this is the credit that might be available to us. Here are the plan options. Here’s where we should start our search.” And then when we get down into the granularity, maybe we partner with one of our healthcare specialists to take your docs, your scripts, kind of filter through all those plans that you just looked up, and zero in on a couple that would really meet the needs, not only from a, hey, hospitals, doctors, scripts, but then also coverage, deductibles, premium tax credit, that type of thing, right?
Walter Storholt:
Yeah.
Tyler Emrick:
But the premium tax credit’s going to vary quite drastically. Meaning that, hey, at the 400% poverty level, meaning if this family that we talked about before, again, couple, 62, both need a ACA plan, if their income is about $84,000 a year, well, they’re going to get just under $18,000 of premium tax credits to lower their healthcare costs. That’s a pretty substantial amount. But if we’re able to manage their income to the lower end of that spectrum, closer to the 25, $30,000 range, that tax credit then jumps up to $25,000 a year. So you’re almost getting $10,000 more per year off your healthcare premiums if you can manage your income within those ranges. That’s a big difference. You add in the fact that, “Well, hey, if I’m $1 over come next year, that $84,000 roughly number,” that we mentioned, you go from getting $17,000 of help to zero.
Walter Storholt:
So a $17,000-plus difference right there?
Tyler Emrick:
For that family, right? Now, this is going to vary based off your age. This is going to vary based off of your zip code.
Walter Storholt:
That gives us the scale of what we’re talking about here.
Tyler Emrick:
And how important it can be, right?
Walter Storholt:
Yeah. Because sometimes you hear a lot of quibbling about $100 versus $110, right? This is in a different category.
Tyler Emrick:
It is, right? And a lot of families have competing objectives, of like, “Well, hey, can I even manage my income down there?” We’ll get to that a little bit further, but a lot of families are surprised on some of the tools and things that we have available from a planning standpoint to manage your income and keep it within those ranges for a short period of time. A lot of families only need this for a year or two. Maybe they want to retire at 63, right? So then it’s like, “Well, if you’re planning for this beforehand, you’re going to be able to set up your accounts in a way to be able to make sure that what you need to live off of when you’re 63 and 64 is not going to necessarily hit your tax return,” i.e., being able to then maximize the amount of premium tax credits that you’re getting, right?
So a huge planning opportunity. I mean, if you’re thinking about retirement, and you’re talking to your financial advisor, and you’re looking retire anytime before 65, and thinking, “Man, am I going to have to go on healthcare,” this should be a huge piece of the conversation that you’re talking about. Because as we just mentioned, there’s up to $25,000 of money on the table here for you to pick up. And Walt, you could imagine, well, if I’m getting a higher tax credit to lower my healthcare premium, well then maybe you choose a better plan. Maybe you don’t, right? You could see how that could drive that decision from a plan selection standpoint.
Walter Storholt:
I’m chuckling, because mom and dad retired a couple years back. Mom retired, I think, at 65, or very close to it, but knowing Dad was going to have a few years to get to that point. He turns 65 in December, next month, and it was funny, because I talked to mom recently on the phone, and she was just really excited for him to turn 65. And all these details you’re giving me today are kind of making me laugh. I understand why she’s so excited to get him into Medicare now, and just simplify this whole thing, and get him into that system. Yeah.
Tyler Emrick:
You’ve got it. No, absolutely. Now, a couple little housekeeping items on this for families just to keep in mind, right? One is your plan selection has nothing to do with the actual subsidy. Remember how I said the second, that silver plan, second lowest premium silver plan affects the premium? That’s a back end calculation. That doesn’t mean that you have to necessarily select that particular plan.
Walter Storholt:
As a consumer, we don’t have to worry about that affecting us so much from a “Which plan do I choose” standpoint?
Tyler Emrick:
Plan selection, yes.
Walter Storholt:
Okay.
Tyler Emrick:
Correct. In practical application too, the way this works is, is like, “Hey, you’re looking up these plan options let’s say you decide on one.” Well, what you’re going to have to do when you apply, is you’re going to have to tell them how much an income you’re going to make that year. They will use that number to calculate the subsidy. They’ll break the subsidy down monthly, and then they will just lower your premium, right? Quick math, hey, $1,000 is your premium per month, they calculate your subsidy, they divide it monthly. All right, that’s going to lower your premium by $700, now you just pay three, right?
Walter Storholt:
Your discount does not change based on the plan you choose.
Tyler Emrick:
Correct. The tax credit does not.
Walter Storholt:
Whether you choose a… Right. What you’re paying for your price for the plan doesn’t change if it’s a bronze… Your percentage discount, I guess that’s what I’m trying to say, doesn’t change if you’re choosing a bronze versus a gold versus a silver plan.
Tyler Emrick:
I would think of it as the premium tax credits you receive, the big numbers, these are fixed based off your income.
Walter Storholt:
Right.
Tyler Emrick:
They’re going to just basically then divide that over, annualize it, right, and then just whatever that dollar amount is, they’ll go to whatever plan you pick, and that amount lowers the premium monthly, so they front-load it for you.
Walter Storholt:
There’s no incentivizing, like “If you pick a gold plan, we’ll give you even more of a discount,” versus a bronze or silver
Tyler Emrick:
There is a little bit of that, that’s where that silver plan comes into play.
Walter Storholt:
Okay.
Tyler Emrick:
Now, I wouldn’t even plan to… There is a little bit of that potentially coming into play. Potentially.
Walter Storholt:
Okay.
Tyler Emrick:
It might not be directly that way, but there are some caveats. That’s why a specialist, and someone that works through these plans and knows them in your area, there are maybe some incentives to pick a little plan from a cost standpoint, maybe not a direct representation off the premium tax credit, but certainly, from a plan cost standpoint, there’s some of that at play here, for sure. For sure.
Walter Storholt:
Okay, okay. There’s lot of nuance there, we won’t dive into it today, but we will sometime.
Tyler Emrick:
Yep. So it’s important for you to know all the… I love it. At the end of the year, and we’re going through these and reviewing them for the upcoming year, because we’re in enrollment right now for these plans. I mean, in November, we’re looking at the plans for next year, for 2026, and kind of making tweaks, “Do you need to change your plans, do you not?” So everybody’s saying, “What’s my income for next year? What’s my income projection for next year? What was that again?” Because then we have to give them that, so then that way we can formalize, and say, “Well, what’s the monthly cost going to be?” Now, if your incomes ends up being a little higher or a little lower, when you file your taxes, you’re going to have to settle up with the IRS, right?
Walter Storholt:
That was my next question. Okay.
Tyler Emrick:
Meaning that, yes. Now, there used to be, under the old laws, now there used to be a way for us to potentially plan around that and pick up some benefits. There’s some changes, where that’s not the case, so it’s pretty much going to be clear cut come 2026, where, “Hey, if you say your income’s X and it ends up being higher than that, well, when you file your return, you’re going to have to pay back some of those premium tax credits that you’ve received monthly throughout the year,” right? Likewise, if your incomes ends up being lower, then you might pick up some more credit when you file your tax return.
Walter Storholt:
But in this case, with that hard cutoff, that could be a very nasty surprise if you get it wrong next year.
Tyler Emrick:
Could you imagine, right? Hey, you’re getting-
Walter Storholt:
“Hey, you owe us $17,000,” right?
Tyler Emrick:
It could be a very big deal.
Walter Storholt:
Yeah.
Tyler Emrick:
A very big deal. So one, that’s why the government’s shut down. One of the reasons, figuring that out. We might have some… Maybe there’s some changes here before the end of the year. If there are, we’ll certainly come on and update you, and let you know here. But certainly, this is what it’s looking like 2026 is going to be for families, and I just think it’s extremely important that we be mindful of that. And as I think about, well, hey, how are we winding this out, and always bringing it back to the planning aspect of it, would be, it’s very important… I’ve been very loosey-goosey with my term “Income,” but as you know, the details matter. Well, what do we mean by income? What is income? Is it taxable income? Is it adjusted gross income? Is it modified adjusted gross income? What are all these terminologies here that go into the calculation of what is your income for this particular circumstance?
Because your income for how much you’re paying taxes and taxable income is not what we’re looking for here. What we are looking for is what we call modified adjusted gross income. It’s actually not even a line item on your tax return, Walt. So it is a calculation to where we do look at your 1040, your tax return. There’s a line item on there called adjusted gross income. We start with that, and then we start adding back things to make it higher, right? Things like the portion of your social security that wasn’t taxable gets added back in. Non-exempt tax interest, like if you have some interest that’s not being taxed federally, but you got to add that back in. So that is the number that we are looking at, is modified adjusted to gross income.
So you think about this from a planning standpoint, and there might be some listeners here, if you’ve made it this long, and you’re like, “Hey, this isn’t going to apply to me, I’m going to make too much money, what does this matter,” right? Well, this is where the planning kind of comes into play, right? And where you have saved all your accounts over your working years matter. Because hey, if you have saved in a Roth account, let’s say, right, and you’ve built up a good nest egg there, of a couple hundred thousand dollars, and you need $100,000 a year to live off of, well, theoretically, if you retire, you have no wages, there’s nothing stopping you probably from going to your Roth account and just living off of that. That Roth account distributions does not hit your tax return. It does not go towards modified adjusted gross income, right?
I’m not recommending that, or saying that’s the way, but I’m using it to illustrate the opportunity, to say, “Hey, if you are an individual that wants to retire before 65 and you’re worried about healthcare, well, the first place you got to start is, well, what could I live off of in retirement, and is that going to affect my tax return, and thus affect the amount that I’m going to get in these premium tax credits?” If you have saved for retirement, all your money is in a 401k, and that’s what you have to live off of, well, if it’s all pretax money, when you pull it out of the 401k that hits your tax return and goes towards the modified adjusted gross income calculation, right?
So we have individuals that have very sizable savings and accumulated wealth, but they’ve built in these flexibility to be able to access different accounts tax-free, whether it be a taxable brokerage account, a Roth, or savings, whatever it might be, to where then they could live off of that for a couple of years, potentially, 63 and 65, and then manage their income pretty tightly to be able to maximize the premium tax credits that they’re getting from the government, right?
I would urge individuals, don’t just dismiss that this isn’t going to be available to you, right? We got to do this in the greater, the grander picture, the bigger scheme, like, “Hey, do we want to plan for this? Do we want to maximize this, or does it make more sense to just take your income up higher and go from there?” Every family’s different. Every family has different levers to pool, and the question becomes, “Well, hey, Walt, does it fit into your plan? Is this a way for us to get the best bang for our buck with the assets that you have and the amount that you have saved?” When you start talking about $25,000 up for grabs, well, that can get pretty sizable, right?
Walter Storholt:
Very sizable. And I mean, we’re just talking about a lot of levers that you can pull. I’m thinking about how people will save up money in their HSA, and then use that to pay the premiums as a strategy between those years of retiring and when they can qualify for Medicare. So if you coupled that with making sure you can leverage this to lower those discounts, I mean, you could have some really strategic moves that save quite a bit of money all around this healthcare conversation.
Tyler Emrick:
You could. Now, you got to be careful. Certain plan premiums aren’t eligible for HSA distribution.
Walter Storholt:
There’s always a caveat.
Tyler Emrick:
You got to be a little mindful in there, right? But certainly, deductibles, co-pays, that type of stuff can be there. You know me and HSA, HSAs are great. We love HSAs around here.
Walter Storholt:
Yeah, yeah.
Tyler Emrick:
But to your point, it’s like, “Hey, if you got HSA to cover some of those out-of-pocket expenses, or co-pays, and things like that, or if you pick a plan that is HSA-eligible, well, when you contribute to an HSA, that lowers your income, that lowers your modified adjusted gross income.” So not only are you saving in taxes, but then you’re also getting a higher premium tax credit, right? So a lot of families will pair their ACA plan selection, choose a plan that’s HSA-eligible, because they get a double benefit, right? We’re all talking about like, “Hey, how high your income here matters,” right? Well, if you can contribute five, six, seven, $8,000 to an HSA, well that lowers your income by that, and we’re going to pick that even more money up in a premium tax credit, right?
Walter Storholt:
Nice. Yeah.
Tyler Emrick:
So that is a wonderful strategy to be looking at here, but it’s impactful. I mean, anybody looking to retire before 65, this is probably going to be a pretty reasonable conversation to have with your advisor, for sure.
Walter Storholt:
Yeah. Take me real quick, before we wrap up, Tyler, under the hood at True Wealth Design, because I’m thinking this is one of those things that I didn’t know I needed to know. If I’m just the average investor out there, I don’t even know to come to you, to say, “Hey, I think I’m close to this number, how can I save this 17K,” or whatever that number ends up being for somebody’s particular situation? So is this where you guys, as the value of an advisor, are proactively reaching out to your families and clients you work with, and say, “Hey, you’re close to this. I see an opportunity here.” Is that where you guys are really stepping up and pointing these things out to people?
Tyler Emrick:
Oh, absolutely. I mean, that’s why our Q4 meetings here, this is our busiest time of year. I’ve probably mentioned it multiple times on the podcast in the past, if you’ve listened to a few of these. But right now, that’s what we’re doing with all our families and our retirees, right? We are looking at the upcoming year, and saying, “Hey, how much do we need to live off of and where do we want to pull that money from, and which accounts?” If you were on an ACA-eligible plan, well, that is baked into the plan, right?
That is a very important factor, of like, “Well, hey, we’re going to go into next year. Here’s our income target. This is where we want you to be. And to get there, this is where your money’s going to come from to live off of. Hey, this is where your car purchase money is going to come from. This is the amount of gains we’re going to realize in your taxable account, and if we do all that right and use these as our levers, at the end of the year, you’re going to be at $80,000 giving us a $4,000 buffer to that, and that hard cliff and you’re going to pick up the $17,000 of free premium tax credits.” I mean, it’s a big deal, but I would even go back further, Walt. There’s families that don’t think they could retire because of healthcare costs, but until they know this is an opportunity, they’re not even considering retirement.
They can change your retirement strategy, and when you go, and make it possible. Countless individuals and families that we have worked with, where they have literally said that first conversation, “When do you want to retire,” always is a lot of times 65, right? “Oh, I can’t retire before 67 or 65, healthcare would be too costly.” But when you get down, and that’s why the plan is so important, is to kind of, one, identify, do you have enough assets to go? Then two, well, if you do, how can we make this a real possibility for you and alleviate some of those concerns? “Hey, let’s go and look at your doctors. Let’s look at the plans that are available right now. Let’s look at how we could manage your income and what the true cost might be. What’s the worst case scenario? If it works out well, how does it go,” and kind of help with those types of decisions.
And when you start talking about, “Hey, I’m retiring two years earlier than I expected,” that’s a huge difference from just the way you live your life and how you’re using your wealth to enrich whatever you’re trying to accomplish. And yeah, I mean, I think that’s a big piece, so if you’re not working with your advisor, or your advisor’s not having those conversations to press you on, “Well, is that a possibility and how would that work,” then hey, that’s what an advisor’s for, in my opinion.
Walter Storholt:
You guys are experienced enough to spot those assumptions that people walk through the door with, and say, “Let’s take a little closer look at that,” and-
Tyler Emrick:
I wish I could spot. I ask. Hey, come on, question-asker, Walt, I got to ask. But no, absolutely. That’s why we get to know… Well, that’s why if you’re only meeting with your advisor once a year, and they’re talking about your investment portfolio, and saying bye, and sending you a birthday card saying happy birthday once a year, those types of conversations, yeah, investments are important, but you got to know who you’re working with and the family, and what they’re trying to accomplish to be able to identify, “Well, hey, is this a possibility? Have you thought about this? What would it work? How would it work,” right?
Walter Storholt:
Yeah.
Tyler Emrick:
That’s when you really start to change, I think, the family’s lives that you’re meeting with.
Walter Storholt:
One thing I’ve learned from you over the years, and Kevin as well, is there’s just… I use the word levers a lot, right? But there’s so many. You could not touch the portfolio in a way, right? You could not even worry about what the investments are, and you guys could pull all of these other levers to still make a huge difference in somebody’s financial life without even touching the main thing that most people think makes the biggest difference.
Tyler Emrick:
Think about adding 17, $25,000 to your portfolio performance every year just by the income planning.
Walter Storholt:
Just with a little healthcare plan, right?
Tyler Emrick:
Yeah, absolutely.
Walter Storholt:
Strategic strategy, that’s pretty cool. That’s good stuff.
Tyler Emrick:
You got it.
Walter Storholt:
Well, if you’ve watched today’s episode, and one more time, the caveat to, by the way, this could certainly change, some of these things that… If things go through the way they look like right now, then everything we’ve talked about applies, but the deal could blow up and we end up with something different, so-
Tyler Emrick:
Yeah, if it does change, we’ll definitely do an update and put it out, and likely, it would change for the positive, I would suspect, right? It would be like, “Hey, maybe that cliff is eliminated,” but it still doesn’t change the planning opportunity, right?
Walter Storholt:
Good to know about.
Tyler Emrick:
It maybe makes it less. But as you can see, where you fall at from an income standpoint directly impacts how much of a premium tax credit that you’re going to get, so the planning still there might just be tweaked a bit.
Walter Storholt:
Okay, perfect. Well, if you’ve got questions about your healthcare plan and your overall retirement plan, maybe it’s another area that we didn’t talk about on today’s specific episode, you can obviously check out our other videos and our other episodes, if you’re an audio podcast listener, where we talk about all sorts of different topics in the planning process. Wherever your question comes from, you can always reach out to the True Wealth Design team and set up that time to chat. Easiest way to do it is to go to TrueWealthDesign.com, click on the Let’s Talk button, and that’s going to let you schedule a 20-minute discovery call with the team, and you can talk to an experienced advisor, see if you’re a good fit to work with one another. We’ve got that linked down in the description of today’s show, so it’s easy to find, click on and schedule that visit. You can do that at any time. Again, TrueWealthDesign.com, or click the link in the description to set that all up. Tyler, great details today. Appreciate all of it, and have a great rest of your week.
Tyler Emrick:
Yeah, we’ll catch you on the next one.
Walter Storholt:
Sounds good. For Tyler, I’m Walter, we’ll see you again on Retire Smarter.
Speaker 4:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
