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Obamacare makes it easier for millionaires to retire early?


Obamacare makes it easier for millionaires to retire early?

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This article was first posted August 18, 2010, revised Nov. 1, 2010.

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With all the complaints that President Obama's health care reform law is going to cause a massive tax increase on "the rich", it's surprising that many millionaire early retirees will be eligible for a substantial tax credit under the law.

According to Phoenix Affluent Marketing Service about 5 million of the 115 million US households had at least $1 million in investable assets in 2009. Phoenix defines "investable assets" as the funds you have beyond the equity in your home and the value of any employer-sponsored retirement plan. TNS Financial Services estimates that 45% of millionaire households are headed by a retiree. On a state-by-state basis, Hawaii had the largest pecentage of millionaires at 6.41% of households while Mississippi had the lowest percentage of millionaires at 3.06%.

Big health insurance subsidies for millionaire early retirees?

Let's say that you are among that elite group of Americans with a $1 million retirement portfolio and you're following the conservative practice of limiting your first year annual withdrawal to $40,000 or 4% of the value of the account. A retiree with a $40,000 annual income would be eligible for a significant subsidy in 2014 when that provision of the health care reform law takes affect. And, of course, most millionaires taking a $40,000 withdrawal from an investment portfolio aren't paying taxes on the whole $40,000 since part of the withdrawal is likely a return of capital rather than interest, dividends, or capital gains. Our millionaire retiree could receive a refundable Federal income tax credit equal to more than 90% of the cost of a private health insurance policy -- he might even qualify for 100% subsidized Medicaid coverage.

Under the new Health Reform law, taxpayers with incomes up to 400% of the Federal Poverty Level (FPL) are eligible for a health insurance subsidy. In 2014, it's estimated that 400% of FPL for a single person will be about $46,000/year. A two-person household would receive a subsidy for incomes up to about $62,000/year and the proverbial family of four for an income up to $94,000/year.

Under the health care reform law insurance premiums can vary as much as 300% based on the age of the applicant. The lowest prices will go to those in their 20's, while the highest charges are levied on those folks just short of eligibility for Medicare at age 65. Health insurance premiums also vary from state-to-state with premiums about 20% above the median in high-cost areas and 10% below the median in low-cost areas. The graph below illustrates both the age-based and location effects on for the annual health premium for single (individual) coverage.

[Health Premium]

Where are the high-cost areas for health insurance?

You can get a good idea on where the high-cost areas are for health insurance by looking at the premiums being charged for the new Pre-Existing Condition Insurance Pool. The program is managed by the Federal Government in 24 states and by the State Insurance Commissioners in the remaining jurisdictions. A standard set of benefits is offered in those 24 states where the US Department of Health and Human Services runs the program, offering a rare chance to compare health insurance premiums across state lines. (Federal funding remains the same whether an individual state decides to manage its own program or let the Feds do it.)

Federal Pre-Existing Condition Insurance Plan
2010 Monthly Premium for 55-64 year old applicant
High-Cost States Lower-Cost States
Florida $773 Hawaii $459
Alabama $721 Wyoming $498
Delaware $714 Idaho $524
Massachusetts $714 West Virginia $557
Nevada $714 Minnesota $583
Arizona $688 Vermont $583
Georgia $688 Mississippi $590
Texas $688 Tennessee $609

Source: www.pcip.gov website.

Benefits: Covered in-network services are subject to a $2,500 annual deductible (except for preventive services) before the plan starts to pay benefits. Once youíve met the deductible, you will pay a $25 copayment for doctor visits, $4 to $30 for most drugs at a retail pharmacy for the first two prescriptions and 50% of the cost of the prescriptions after that. If you use mail order, you will pay $10 for generic drugs or $75 for brand drugs on the plan formulary for a 90 day supply. You will pay 20% of the cost of any other covered benefits received from a network provider. Your out-of-pocket costs cannot be more than $5,950 per year. However, your out-of-pocket costs may be higher if you go outside the planís network.

The Pre-Existing Conditions Insurance Plan ceases operations on Jan 1, 2014 when all Americans can buy insurance from the exchanges. At that point you'll also be eligible for a subsidy in the form of a refundable tax credit if your income meets the requirements.

The chart below illustrates the subsidy for a high-cost area.

Health Care Reform Law
2014 Annual Health Insurance Subsidy/Tax Credit
Age Type of Policy Unsubsidized Annual
Health Insurance Premium
(High-Cost Area)
Premium Payment
Amount of
Tax Credit
Tax Credit as a
Percentage of
Unsubsidized Premium
----------- $40,000 per year annual income (Note: (1)) --------------
59-64 Single $12,206 $3,800 $8,406 69%
59-64 Family $32,902 $1,982 $30,920 94%
55 Single $10,193 $3,800 $6,393 63%
55 Family $23,700 $1,982 $21,718 92%
50 Single $8,374 $3,800 $4,574 55%
50 Family $20,229 $1,982 $18,247 90%
----------- $30,000 per year annual income (Note: (1)) --------------
59-64 Single $12,206 $2,509 $9,697 79%
59-64 Family Eligible for Medicaid
55 Single $10,193 $2,509 $7,685 75%
55 Family Eligible for Medicaid
50 Single $8,374 $2,509 $5,865 70%
50 Family Eligible for Medicaid

Note: (1) - The annual income used to calculate the tax credit is a "Modified Adjusted Gross Income" that includes any tax-exempt income earned by the taxpayer during the year.

Note: (2) - The Kaiser Family Foundation has a useful online calculator you can use to estimate the size of the tax credit.

Why would you want to get on Medicaid?

The maximum out-of-pocket cost (i.e., the cost in addition to the monthly premium you pay) for the health insurance policies sold on the exchanges for an individual or family in 2014 is $4,167 per year. Most state Medicaid programs have little or nothing in the way of out-of-pocket costs for their plan participants. If you can maintain an annual income in retirement low enough to qualify for Medicaid coverage, you can essentially get your health care for free.

Tax, income, and health insurance planning for 2014

There are several things you can do to minimize your taxable income in retirement and increase the value of any health insurance subsidy you may be eligible for.

    1) Limit tax-exempt income -- since tax-exempt income is included in the Modified Adjusted Gross Income calculation for the health insurance subsidy, it's best to minimize it.
    2) Prefer dividends over taxable interest income -- as long as dividends are taxed at a lower rate than interest income, you should favor dividends.
    3) Minimize capital gains, maximize tax-free returns of capital -- if you did any tax-loss harvesting in the market meltdown during the waning days of the Bush Administration, you should be sitting on some unrealized capital losses. By matching the sale of some winners and losers, you may be able to make a sizeable withdrawal from your portfolio without incurring any tax liabilty.
    4) Delay taking Social Security benefits -- as an early retiree ages and enters the 59-64 age bracket, health insurance premiums reach their peak. It may make sense to delay Social Security benefits until age 65 when you qualify for Medicare so that you maximize the value of your health insurance subsidy before then.
    5) Tap your Roth IRA -- you may be able to make tax-free withdrawals from a Roth IRA, though most financial planners advise against it to keep the tax-free compounding of investment returns intact. You should probably exhaust the first four items on this list before considering a Roth IRA withdrawal.

Related Web Sites for additional information.

U.S. Department of Health & Human Services -- www.healthcare.gov - The Obama Administration website that explains the implementation of the new Health Care Reform law.

Kaiser Family Foundation -- Summary of New Health Reform Law - A 13 page PDF document that explains the new Health Care Reform law.

Health Care and Education Affordability Reconciliation Act of 2010 - Full text of Health Care Reform law passed by the Senate and House of Representatives.

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Copyright © 2010 John P. Greaney, All rights reserved.

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