At 62, Early Retirees Using Marketplace Coverage Must Watch IRA Withdrawals Closely

Retiring before Medicare eligibility and relying on marketplace health coverage can seem simple, until an extra IRA withdrawal leads to a tax bill later on and reduces the insurance subsidy a retiree expected to keep.

She took additional money from her IRA to remodel her kitchen, and the impact will not be clear until tax forms arrive in January.

Because she retired at 62 and bought coverage through the health insurance marketplace, the withdrawal may have felt like money she could spend. But when the tax documents are filed, she could discover that part of her premium assistance has to be repaid. Her health plan does not change, but her income does.

This is a common trap for people who retire early. If someone leaves work before Medicare begins at 65, they often need several years of insurance, and many turn to the marketplace. The surprise is that the subsidy is tied to total yearly income, dollar for dollar.

How the 2026 Credit Affects Her Premium

The assistance is known as the premium tax credit, a federal subsidy that lowers the monthly premium. It is based on modified adjusted gross income, or MAGI, which generally means taxable income plus certain additions, such as tax-exempt interest and the untaxed portion of Social Security.

From 2021 through 2025, temporarily expanded credits were more generous. Those enhancements ended after 2025, so the original rules apply again in 2026. Eligibility requires household income between 100% and 400% of the poverty line.

Within that range, a person is expected to pay a set percentage of income for a benchmark silver plan, and the credit covers the rest. For 2026, that share ranges from 2.10% at the lowest income levels to 9.96% for people between 300% and 400% of the poverty line. For 2026 coverage, the poverty line for one person is $15,650, putting the upper income limit at $62,600.

How Each IRA Dollar Changes the Bill

Money withdrawn from a traditional IRA or 401(k) is taxable income, so it counts toward MAGI. Qualified Roth withdrawals, assuming the account has been open at least five years and the person is past 59½, are not included in gross income and therefore do not count. If Social Security is claimed early, the entire benefit counts, including the portion that is not taxed.

Assume the benchmark silver plan in her area costs $1,100 per month. Here is roughly what she would pay after the credit:

The final row shows the cliff. Moving from $62,000 to $63,000 adds only $1,000 of income, but it can cost about $7,025 a year in lost credit. Below the cliff, more income raises the premium a little. Above it, the full price applies.

Why the Extra Cost Arrives Later

Most enrollees have the credit sent directly to the insurer each month. This is called an advance payment, and it is based on the income estimate provided when coverage starts. At tax time, the amount is reconciled on Form 8962, which is filed with Form 1040.

If the advance credit turns out to be larger than allowed by actual income, the excess is added to the tax bill. Older rules limited how much people below 400% of poverty had to repay.

That cap was removed by the 2025 tax law, and beginning with tax year 2026, taxpayers must repay the full excess. In practical terms, a kitchen withdrawal could end up costing the remodel expense, the income tax on the distribution, and the subsidy that was no longer owed.

Managing the Gap Years Around a Fixed Income Goal

For most people in this situation, the best strategy is straightforward: choose an income target that stays safely below the cutoff, and take traditional IRA withdrawals only up to that amount. Cover the rest with cash, a regular brokerage account, where only gains on sales count as income, or Roth funds.

Timing is another option. A large withdrawal can be taken in the final working year, when no subsidy is at stake, or delayed until Medicare begins. For most people, taking a lump sum in the middle of the marketplace years is the least favorable choice.

Roth conversions should be treated the same way. Converted amounts are reported as income, so they can push a retiree toward the credit cliff just like a withdrawal. Smaller conversions may work if they stay within the target.

Larger conversions usually make more sense after Medicare starts, during the window between the last paycheck and the first required minimum distribution.

If plans change during the year, the retiree should update income on the marketplace right away. That can adjust the monthly subsidy and reduce or eliminate a repayment surprise later.

The One Number to Know Before Enrolling

Before choosing a plan, the retiree should estimate total MAGI for the year by adding IRA withdrawals, Social Security, interest, dividends, and capital gains. For 2026, a single person needs to keep that figure at or below $62,600. It is wise to leave a cushion, because even a small miss can erase the entire credit.

The key mistake is treating an IRA like a checking account during these years. Big purchases should be planned in advance and paid for with money that does not count as income.