A guide for early retirees buying health insurance before Medicare (age 65)
MAGI stands for Modified Adjusted Gross Income. It's a tax term — a specific way the IRS measures your income. MAGI determines your tax bracket, whether you can contribute to a Roth IRA, how much of your Social Security gets taxed, and — critically for early retirees — how much you pay for health insurance. The higher your MAGI, the less help you get.
The key insight: your MAGI is often much higher than your paycheck. It includes dividends from your investments, interest from your savings, every dollar you withdraw from a Traditional IRA, and every dollar you convert to a Roth. Many early retirees are surprised to learn that money they're simply moving between accounts — not spending — is raising their MAGI and costing them thousands in lost health insurance subsidies.
If you buy health insurance through the ACA marketplace (Obamacare) before age 65, the government subsidizes your premiums — but only if your MAGI stays below 400% of the Federal Poverty Level.
| Household | 400% FPL Threshold (2026) |
|---|---|
| Single | $61,600 |
| Couple (no dependents) | $83,600 |
| Family of 4 | $127,600 |
Every dollar from these sources pushes your MAGI higher and closer to the cliff:
| Income Source | MAGI Impact | Can You Control It? |
|---|---|---|
| Traditional IRA / 401(k) withdrawals | Dollar-for-dollar | Yes — main lever |
| Roth conversions | Dollar-for-dollar | Yes — timing + amount |
| Capital gains from selling investments | Dollar-for-dollar | Yes — choose which lots |
| Employment / self-employment income | Dollar-for-dollar | Partially |
| Taxable dividends & interest | Dollar-for-dollar | Partially |
| Social Security benefits | Up to 85% | No (once claimed) |
| Pension income | Dollar-for-dollar | No |
These are your secret weapons. You can spend this money without raising your MAGI at all:
| Source | MAGI Impact |
|---|---|
| Roth IRA / Roth 401(k) withdrawals | $0 — completely invisible |
| Return of basis from taxable accounts | $0 — only gains count |
| HSA withdrawals (for medical expenses) | $0 |
| Loans (HELOC, margin, etc.) | $0 |
Here's a real example: a couple, both age 57, with $1.5M across multiple account types. They need $90,000/yr for living expenses.
Over 8 years (age 57 to 65, when Medicare begins), that adds up:
| Year | Age | Without MAGI Awareness | With MAGI Awareness | Saved |
|---|---|---|---|---|
| 1 | 57 | $35,904 | $6,800 | $29,104 |
| 2 | 58 | $36,768 | $6,900 | $29,868 |
| 3 | 59 | $37,680 | $7,000 | $30,680 |
| 4 | 60 | $40,704 | $7,200 | $33,504 |
| 5 | 61 | $41,712 | $7,300 | $34,412 |
| 6 | 62 | $43,080 | $7,500 | $35,580 |
| 7 | 63 | $44,136 | $7,600 | $36,536 |
| 8 | 64 | $45,000 | $7,800 | $37,200 |
| Total | $324,984 | $58,100 | $266,884 | |
The same couple, spending the same amount, saves over a quarter million dollars in healthcare costs just by choosing which accounts to pull from. The money was always there — the difference is the order.
If your MAGI is well below the cliff, you have room to convert Traditional IRA money into a Roth IRA. This raises your MAGI now (but you stay below the cliff), and it reduces your future tax burden when Required Minimum Distributions (RMDs) kick in at age 73.
In the example above, the couple has MAGI of $80,000 with a cliff at $83,600. They could convert up to ~$3,600 more to Roth each year and still keep their subsidy. Over 8 years, that's ~$29,000 moved from a taxable account to a tax-free account — on top of the healthcare savings.
| # | Action |
|---|---|
| 1 | Know your cliff number. Look up 400% FPL for your household size. |
| 2 | Add up your unavoidable MAGI. Pension, Social Security, dividends — what can't you change? |
| 3 | Calculate your MAGI room. Cliff minus unavoidable MAGI = how much you can pull from Traditional accounts. |
| 4 | Fill the gap from Roth + taxable. Whatever spending your Traditional withdrawals don't cover, pull from MAGI-free sources. |
| 5 | Use leftover MAGI room for Roth conversions. If you're below the cliff, convert the remaining room to reduce future taxes. |
This guide shows the strategy. A Financial Clarity Review shows your numbers — exactly how much to pull from each account, your specific cliff threshold, and a year-by-year plan from now until Medicare.
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