Retiring at 62 and Buying Marketplace Coverage: Why One Extra IRA Dollar Can Inflate Her Health Costs

Quick Read

• Early retirees using ACA marketplace coverage need their 2026 MAGI to stay at or below $62,600; once they go over that level, the subsidy disappears entirely.

• Raising income from $62,000 to $63,000 can mean roughly $7,025 a year in lost premium credits, and even one additional IRA dollar can trigger that outcome.

• Beginning with tax year 2026, repayment limits no longer apply, so any advance credit based on underestimated income must be repaid in full at tax time.

She took extra money from her IRA this fall to renovate her kitchen, and she will not know the full impact until her tax forms arrive in January.

After retiring at 62 and signing up for health insurance on the marketplace, the withdrawal seemed like money she could use. But when the tax documents arrived, she learned she owed back part of the assistance that helped pay for her coverage. Her insurance plan did not change, but her income did.

Many early retirees find themselves in the same position. If you stop working before Medicare begins at 65, you need about three years of coverage, and the marketplace is where many people turn. The surprise is that the subsidy is tied to every dollar of annual income.

How the 2026 Credit Determines Her Premium

The assistance is called the premium tax credit. It is a federal subsidy that lowers the monthly insurance bill. The calculation is based on modified adjusted gross income, or MAGI, which is essentially taxable income plus certain add-backs, such as tax-exempt interest and the untaxed portion of Social Security.

Temporary enhanced credits that ran from 2021 through 2025 expired after 2025, so the older rules apply again in 2026. She qualifies only if household income falls between 100% and 400% of the poverty line.

Inside that band, she is expected to pay a set percentage of income for a benchmark silver plan, and the credit covers the rest. In 2026, that required contribution ranges from 2.10% at the lowest income levels to 9.96% for households between 300% and 400% of the poverty line. For one person in 2026, the poverty line is $15,650, which sets the ceiling at $62,600.

What Each IRA Dollar Does to Her Bill

Every dollar withdrawn from a traditional IRA or 401(k) counts as taxable income, so it is included in MAGI. Qualified Roth withdrawals, assuming she is over 59½ and the account has been open at least five years, do not count. If she starts Social Security early, the full amount counts too, including the portion that is not taxed.

Suppose the benchmark silver plan in her area costs $1,100 a month. Here is an estimate of what she would pay after the credit:

That final line shows the cliff. Moving from $62,000 to $63,000 adds only $1,000 of income, yet it costs about $7,025 a year in lost credit. Below that point, each extra dollar slightly increases the monthly premium. Above it, she pays the full amount.

Why the Bill Arrives Later

Most people have the credit paid directly to their insurer each month. That is called an advance payment, and it is based on the income estimate they made when enrolling. At tax time, the amount is reconciled on Form 8962, filed with Form 1040.

If she received more advance credit than her actual income allows, her tax bill increases by the full excess. In the past, repayment caps limited how much people under 400% of poverty had to pay back.

The 2025 tax law removed those caps, and beginning with tax year 2026, taxpayers must repay the entire excess. That means a kitchen withdrawal could lead not only to the remodeling expense, but also to extra income tax and the full amount of credit she was not entitled to receive.

Managing the Gap Years Around a Fixed Income Target

For most people in this situation, the strategy is straightforward. Choose an income target safely below the cliff and take traditional IRA withdrawals only up to that amount. Use cash, a regular brokerage account, or Roth funds to cover the rest.

Timing matters too. A large withdrawal can be better taken in the final working year, when no subsidy is being received, or delayed until Medicare begins. A lump sum taken during the marketplace years is usually the least favorable choice.

Roth conversions should be handled carefully as well. Converted amounts are reported as income, so they can push someone toward the cliff just like a withdrawal. Smaller conversions that stay below the target can still work.

Larger conversions often make more sense after Medicare starts, during the quiet period between the last paycheck and the first required minimum distribution. If plans change during the year, the marketplace income estimate should be updated right away so the monthly credit can adjust and the repayment shock is reduced or avoided.

The One Number to Know Before Enrolling

Before selecting a plan, she needs a good estimate of total MAGI for the year. That means adding IRA withdrawals, Social Security, interest, dividends, and capital gains. For 2026, a single person must keep that total at or below $62,600. It is wise to leave room, because even being off by one dollar can eliminate the entire credit.

The main mistake is treating the 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.