The landscape of health insurance for younger retirees in the United States has been shifting significantly in recent years. With most Americans not being eligible for Medicare until they reach the age of 65, many people in the 55 to 64 age bracket have turned to Marketplace health insurance for coverage. The number of Americans in this age group with Marketplace coverage has been steadily rising, reaching over 5.1 million by open enrollment in 2024, up from approximately 3.4 million in 2021. This trend is largely due to the availability of lower monthly premiums through the end of 2025, thanks to boosted tax breaks provided by Congress.
While the enhanced premium tax credit has made it more affordable for younger retirees to maintain health insurance coverage through the Marketplace, there is a looming issue that many retirees may not be aware of – the possibility of facing a costly tax surprise if proper planning is not undertaken. This “phantom tax” dilemma arises when the income of retirees rises, potentially making them ineligible for the premium tax credit they have been relying on. This can catch retirees off guard and lead to unexpected financial burdens.
The premium tax credit eligibility is a complex calculation that takes into account various factors such as household income, benchmark premium rates, and the percentage of income that can be contributed towards premiums. The American Rescue Plan Act temporarily removed income limits and capped premiums at 8.5% of income during the pandemic. This means that many younger retirees have been able to benefit from lower premiums, but they must be vigilant in reporting any changes in circumstances that could impact their eligibility for the tax credit.
Strategic Financial Planning in Retirement
Certified financial planners emphasize the importance of strategic financial planning in retirement to avoid falling into the “phantom tax” trap. Claiming Social Security at age 62 can affect eligibility for the premium tax credit, as the entire payment, including the nontaxable portion, is counted towards the calculation. Therefore, it may be more beneficial for retirees to wait until at least age 65 to claim Social Security if they are relying on the tax credit. Additionally, converting funds from a traditional IRA to a Roth IRA can also impact income levels and eligibility for the tax credit, so retirees need to carefully consider these financial moves.
The availability of Marketplace health insurance with enhanced tax breaks has provided a valuable opportunity for younger retirees to maintain affordable coverage. However, the hidden tax trap of the “phantom tax” looms large for those who do not plan strategically. By understanding the intricacies of premium tax credit eligibility and making careful financial decisions in retirement, younger retirees can avoid unexpected tax surprises and ensure financial stability in their golden years.