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Retiring Before 65? Why Your 401(k) Could Cost You $9,500 a Year in Health Insurance · Align Your Retirement

• 0:00
  SPEAKER_00: Hey, welcome back to Align Your Retirement.
• 0:02
  SPEAKER_00: I'm Hazel Sekko, CFP and CDFA, founder of Align Financial Solutions.
• 0:07
  SPEAKER_00: We are family advisors and fiduciaries 100% of the time.
• 0:11
  SPEAKER_00: Today's episode is about paying for health insurance when you retire before 65, and most of your money is in a 401k and why the account you spend from can matter more than the plan you pick.
• 0:23
  SPEAKER_00: Let's get into it.
• 0:24
  SPEAKER_00: A lot of women I talk to have done the retirement math and know they could stop working at 60.
• 0:30
  SPEAKER_00: Then they price health insurance for the five years before Medicare and they decide to stay.
• 0:36
  SPEAKER_00: What most of them have not been told is that the price is not fixed.
• 0:40
  SPEAKER_00: When you buy your own coverage through the marketplace, the help you get with a premium is based on your income for that year.
• 0:47
  SPEAKER_00: It has nothing to do with how much you have saved.
• 0:50
  SPEAKER_00: And once the paycheck stops, your income is mostly decided by which account you pull your spending money from.
• 0:58
  SPEAKER_00: That is a problem if nearly everything you saved is in a 401k, because every dollar that comes out of it counts as income.
• 1:07
  SPEAKER_00: For 2027 coverage, a single person loses all the help once her income goes over$63,840 and it only takes$1.
• 1:19
  SPEAKER_00: So today I'm going to walk through one hypothetical woman, Diane, who needs$100,000 a year to live on and show you what she pays for health insurance when she takes it all from her 401 compared with when she spreads it across her accounts.
• 1:35
  SPEAKER_00: Then I'll cover the rule that changed to make sure you know what to watch for.
• 1:40
  SPEAKER_00: In past years, if your income ended up higher than you estimated and you got too much help with your health insurance premium, you only had to pay back part of the extra help up to a certain limit.
• 1:52
  SPEAKER_00: Now, starting with 2026 tax returns, that safety net is gone.
• 1:57
  SPEAKER_00: Even a small late-year withdrawal that pushes your income just over the line can mean you have to pay back the entire premium tax credit, which could be thousands of dollars.
• 2:08
  SPEAKER_00: I'll walk you through an example so you see exactly what can happen and what date you need for open enrollment.
• 2:15
  SPEAKER_00: One note, I'm a financial advisor, but I'm not your financial advisor.
• 2:20
  SPEAKER_00: This is education, not advice.
• 2:22
  SPEAKER_00: Grab something to write on.
• 2:23
  SPEAKER_00: Let me introduce you to Diane.
• 2:25
  SPEAKER_00: She's hypothetical, but I have had this conversation many times.
• 2:28
  SPEAKER_00: Diane is 60 and single and she's ready to retire.
• 2:32
  SPEAKER_00: Most of what she's saved is in her 401k.
• 2:36
  SPEAKER_00: She also has a savings account and a small Roth IRA.
• 2:39
  SPEAKER_00: She needs$100,000 a year to live on, and she has five years to cover before Medicare.
• 2:46
  SPEAKER_00: When Diane looks up health insurance, the plan she wants is about$1,300 a month.
• 2:52
  SPEAKER_00: That number is why she thinks she has to keep working.
• 2:55
  SPEAKER_00: What she may not realize is that if she buys coverage through the marketplace, she may still qualify for help paying for the premiums, regardless of how much she has saved for retirement.
• 3:07
  SPEAKER_00: What count is her income for the year as reported on her tax return?
• 3:12
  SPEAKER_00: For 2027 coverage, a single person in most states can get help as long as her income is$63,840 or less.
• 3:22
  SPEAKER_00: If she goes up over that line, even by$1, the help is gone and she pays full price.
• 3:29
  SPEAKER_00: Diane has no paycheck anymore, so you would think she's safely under that line.
• 3:34
  SPEAKER_00: She isn't, and the reason is her$401.
• 3:37
  SPEAKER_00: Diane's first plan is the one most people would make.
• 3:41
  SPEAKER_00: She'll take the$100,000 she needs from her 401k because that is where her money is.
• 3:47
  SPEAKER_00: The trouble is that every dollar that comes out of a traditional 401k or IRA counts as income.
• 3:54
  SPEAKER_00: So on her tax return, Diane looks like someone earning$100,000.
• 3:59
  SPEAKER_00: She's well over the line, she gets no help, and she pays the full$1,300 a month.
• 4:05
  SPEAKER_00: Now, watch what happens when she spends exactly the same amount and only changes where the money comes from.
• 4:12
  SPEAKER_00: Now let's look at another approach Diane could take.
• 4:15
  SPEAKER_00: This time she takes$60,000 from her$401 and the other$40,000 from her savings.
• 4:22
  SPEAKER_00: The money in savings was already taxed, so spending it doesn't count as income.
• 4:26
  SPEAKER_00: Her tax return now shows$60,000, which is under the line.
• 4:31
  SPEAKER_00: At that income, the same plan costs her about$500 a month.
• 4:36
  SPEAKER_00: She's living on the same$100,000 and paying about$9,500 a year less for the same coverage.
• 4:43
  SPEAKER_00: Over the five years until Medicare, that is close to$50,000.
• 4:49
  SPEAKER_00: Each account type is treated differently.
• 4:51
  SPEAKER_00: Withdrawals from a$401 or a traditional IRA count as income in full.
• 4:56
  SPEAKER_00: Cash sitting in the bank doesn't count except for the small interest it earns.
• 5:02
  SPEAKER_00: And qualified Roth withdrawals generally don't count either.
• 5:06
  SPEAKER_00: In a brokerage account, only your gain counts.
• 5:09
  SPEAKER_00: So part of what you sell is income and part isn't.
• 5:13
  SPEAKER_00: So far, this works in Diane's favor, but the rules changed, and one of those changes can turn that$9,500 of help into a$9,500 a bill.
• 5:24
  SPEAKER_00: A friend of Diane's retired a few years ago and told her income wasn't something she had to watch this closely.
• 5:31
  SPEAKER_00: That was true then.
• 5:32
  SPEAKER_00: For a few years there was no hard line, and the help got smaller gradually as income went up.
• 5:39
  SPEAKER_00: That ended after 2025.
• 5:41
  SPEAKER_00: The hard line is back and it applies to 2027 coverage.
• 5:46
  SPEAKER_00: The second change is the one I see catching people.
• 5:49
  SPEAKER_00: When Diane signs up, she estimates her income for the coming year, and the help is paid to her insurer every month based on that estimate.
• 5:58
  SPEAKER_00: At tax time, the IRS compares her estimate with what her income turned out to be.
• 6:04
  SPEAKER_00: If she received more help than her real income allows, she pays it back.
• 6:09
  SPEAKER_00: There used to be limits on how much she would have to repay.
• 6:13
  SPEAKER_00: Starting with 2026 tax returns, those limits are gone.
• 6:17
  SPEAKER_00: Here's how that could go wrong for Diane.
• 6:20
  SPEAKER_00: She estimates$60,000 and gets to help all year.
• 6:25
  SPEAKER_00: In November, her roof needs work and she takes an extra$5,000 from her 401.
• 6:31
  SPEAKER_00: That puts her just over the line, and when she files her taxes, she owes back the full$9,500.
• 6:39
  SPEAKER_00: If she had taken that$5,000 from savings, it would have cost her nothing.
• 6:45
  SPEAKER_00: In these years, any extra withdrawal late in the year deserves a second look before she makes it.
• 6:51
  SPEAKER_00: The last thing Diane needs is the calendar.
• 6:54
  SPEAKER_00: Open enrollment for 2027 coverage on healthcare.gov opens November 1st.
• 7:00
  SPEAKER_00: If she wants her coverage to start January 1st, she needs to choose a plan by December 15th.
• 7:06
  SPEAKER_00: So treat that as your deadline too.
• 7:09
  SPEAKER_00: Some states run their own marketplace and their dates can be a little bit different, so check yours.
• 7:14
  SPEAKER_00: I'll keep the current end date for enrollment in the description.
• 7:18
  SPEAKER_00: You might be thinking, that works for Diane, but nearly everything I have is in my 401.
• 7:23
  SPEAKER_00: That is the most common situation I see, and you can fix it if you start before you retire.
• 7:29
  SPEAKER_00: Diane's second plan only worked because she had money outside of her 401k.
• 7:34
  SPEAKER_00: She needed$40,000 a year from savings for five years, which is$200,000.
• 7:41
  SPEAKER_00: Without it, she would have had no way to stay under the line.
• 7:45
  SPEAKER_00: If you're a few years from retiring before 65, here are three things to do.
• 7:51
  SPEAKER_00: Write these down.
• 7:52
  SPEAKER_00: One, add up what you have outside your pre-tax account.
• 7:56
  SPEAKER_00: That means cash, brokerage account, and Roth.
• 8:00
  SPEAKER_00: Two, count the years between your retirement date and 65 and estimate how much you would need from those accounts each year to keep your income under the line.
• 8:09
  SPEAKER_00: Three, if you come up short, use the working years you have left to fill the gap.
• 8:15
  SPEAKER_00: That could mean sending some of your savings to a brokerage account or a Roth and not putting every extra dollar into the pretext for a 1K.
• 8:23
  SPEAKER_00: What makes sense depends on your tax bracket today, so run the numbers first.
• 8:28
  SPEAKER_00: Before you move any around, there are three cautions.
• 8:33
  SPEAKER_00: And the last one surprises people.
• 8:35
  SPEAKER_00: First, the year you retire, the salary you earned that year account is income.
• 8:41
  SPEAKER_00: So your first year may be over the line no matter what you do.
• 8:45
  SPEAKER_00: Second, a pension, deferred compensation, payouts, and dividends all count as income.
• 8:51
  SPEAKER_00: And for some women, those alone go over the line.
• 8:54
  SPEAKER_00: Third, staying under the line is not always the right call.
• 8:58
  SPEAKER_00: These low income years are also when Roth conversions cost the least.
• 9:03
  SPEAKER_00: And a conversion counts as income.
• 9:06
  SPEAKER_00: For women with larger 401k balances, the conversion can be worth more than the help with a premium.
• 9:12
  SPEAKER_00: You have to look at both year by year.
• 9:15
  SPEAKER_00: Let me pull this all together.
• 9:17
  SPEAKER_00: Diane didn't need more money to retire at 60.
• 9:20
  SPEAKER_00: She needed to know that before 65.
• 9:23
  SPEAKER_00: The price of her health insurance depends on her income, and her income depends on which account she spends from.
• 9:29
  SPEAKER_00: If most of your savings is in a 401k, you can still get help with your premium.
• 9:35
  SPEAKER_00: You need enough saved outside the 401 to live on, and you need to watch that income line all year, including in December.
• 9:43
  SPEAKER_00: Before open enrollment starts on November 1st, take 10 minutes and add up what you have outside your 401.
• 9:50
  SPEAKER_00: Knowing that one number will tell you how much room you have to manage your income in the years before Medicare.
• 9:56
  SPEAKER_00: If you want the bigger picture on retirement taxes, my free guide, the Executive Women's Retirement Tax Playbook, is linked in the show notes.
• 10:04
  SPEAKER_00: The link to Book an Align Call is there too, if you would like to talk through your own situation.
• 10:10
  SPEAKER_00: It's a 15 minute conversation, and we are fee only advisors.
• 10:15
  SPEAKER_00: There is nothing for sale on it.
• 10:17
  SPEAKER_00: If you know a woman who is staying in her job for the health insurance, send her this episode.
• 10:22
  SPEAKER_00: I'm Hazel Secko.
• 10:23
  SPEAKER_00: Talk to you next time.