If you retire before 65, your single biggest controllable expense usually isn't taxes. It's health insurance — and whether you qualify for an ACA subsidy.
The catch: the subsidy is tied to your MAGI (modified adjusted gross income). And in early retirement, you largely choose your MAGI by deciding which accounts to draw from. Most people get that decision exactly backwards.
Where the money comes from changes everything
Say you need $80,000 to live on next year. You can pull it from three very different buckets:
- Taxable — a brokerage account. Only the gains count toward income, so a withdrawal might add very little to MAGI.
- Tax-deferred — a traditional 401(k) or IRA. Every dollar you withdraw is ordinary income, and it all lands in MAGI.
- Tax-free — a Roth. Qualified withdrawals add nothing to MAGI.
Same $80,000 of spending. Wildly different MAGI depending on the mix. And MAGI is the dial that sets your ACA subsidy.
The cliff is steeper than people expect
Under current rules, ACA premium subsidies phase down as income rises. For a couple in their early 60s, the difference between a well-managed MAGI and a careless one can be $20,000–$30,000+ per year in premiums and lost subsidy — every year until Medicare at 65.
Draw that whole $80,000 from your traditional IRA and you may push MAGI high enough to wipe out the subsidy entirely. Draw the same amount mostly from taxable and Roth, and you can keep MAGI low enough to qualify — funding an identical lifestyle for tens of thousands less.
A better default sequence
There's no universal answer, but the instinct that tends to win in the pre-65 years:
- Spend taxable first, harvesting gains deliberately to keep income low.
- Layer in Roth to top up spending without touching MAGI.
- Convert traditional → Roth only up to your MAGI ceiling — fill the room under the subsidy cliff, but don't blow past it.
- Save the big traditional withdrawals for after 65, when ACA is no longer in play.
The exact mix depends on your balances, your spending, and the gap between now and 65. But the principle holds: in early retirement, manage MAGI on purpose, not by accident.
See it on your own numbers
Rules of thumb only get you so far — the right sequence depends on your accounts and the years between you and Medicare. That's exactly what Lumifin models: it runs your real balances through each withdrawal order and shows how your ending balance — and your ACA subsidy — changes year by year.