As the eligibility for Medicare begins at age 65 for most Americans, many younger retirees turn to Marketplace health insurance for coverage. This option provides lower monthly premiums until the end of 2025, thanks to enhanced tax breaks. The data from the Kaiser Family Foundation shows a significant increase in Marketplace coverage among Americans aged 55 to 64, from 3.4 million in 2021 to over 5.1 million as of open enrollment 2024.

Despite the benefits of Marketplace insurance, younger retirees can face an unexpected tax surprise if they do not plan properly. The premium tax credit, which allows enrollees to reduce their monthly premiums or claim the tax break during filing, has been extended through 2025. However, the premium tax credit is tied to earnings, meaning that as income increases, retirees might find themselves subject to a “phantom tax.” Certified financial planner Tommy Lucas warns that failure to plan ahead could result in retirees overpaying or underpaying their Marketplace premiums.

Prior to 2021, households with income between 100% and 400% of the federal poverty level were eligible for the premium tax credit. The American Rescue Plan Act removed these limits temporarily, capping 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 percentage of income. It is crucial to report any changes in circumstances promptly to avoid incorrect premium payments that could result in reconciliation at tax time.

While the premium tax credit can provide significant savings for younger retirees, higher income levels can phase out eligibility. Claiming Social Security at age 62 can affect eligibility, as the entire payment, including the nontaxable portion, is considered in the calculation. Certified financial planner Tommy Lucas advises waiting until at least age 65 to claim Social Security if you are claiming the premium tax credit. Additionally, income increases from Roth IRA conversions can impact eligibility, as they involve transferring pre-tax or nondeductible IRA funds to a Roth IRA.

Marketplace health insurance offers attractive benefits for younger retirees, with lower monthly premiums and enhanced tax breaks. However, the premium tax credit eligibility is subject to income levels and changes in circumstances. Proper planning and awareness of the potential “phantom tax” are crucial for retirees to avoid costly surprises. By understanding the factors that affect eligibility, such as claiming Social Security and Roth IRA conversions, younger retirees can make informed decisions to maximize their savings and benefits.

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