How Retirees Can Pay $0 for Health Insurance Before Medicare | The Limitless Retirement Podcast

Subscribe where ever you listen to Podcasts:

Spotify Podcasts
Apple Podcasts
Google Podcasts

Resources:

Danny Gudorf, a financial planner, discusses the intricacies of health insurance costs for early retirees and how to strategically manage income sources to optimize Modified Adjusted Gross Income (MAGI) for better health insurance subsidies. He emphasizes the importance of understanding how different income sources affect MAGI and the overall retirement plan, including the implications of Roth conversions and the need for careful planning to avoid costly mistakes.

How a $2 Million Couple Could Pay $0 in Monthly Health Insurance Premiums Before Medicare

Imagine having $2 million saved for retirement, spending $75,000 a year, and potentially qualifying for a health insurance plan with a $0 monthly premium before Medicare.

It sounds like a loophole.

It isn't.

The key is understanding one number used by the health insurance marketplace: Modified Adjusted Gross Income, or MAGI.

For early retirees, managing this number can potentially save thousands of dollars in health insurance premiums. But exceeding an important income threshold—even by a relatively small amount—can dramatically change the result.

And that's why health insurance planning shouldn't be separated from your retirement income and tax strategy.

The Expensive Gap Between Retirement and Medicare

Consider a hypothetical couple who are both 60 years old.

They've accumulated $2 million across several types of accounts:

  • Traditional retirement accounts

  • Roth accounts

  • Taxable brokerage investments

  • Cash reserves

They're financially ready to retire.

But there's one major expense standing between them and Medicare eligibility at age 65: health insurance.

If private insurance or COBRA costs between $1,500 and $2,000 per month, five years of premiums could potentially cost well over $100,000.

For many people retiring before Medicare eligibility, health insurance becomes one of the biggest expenses during the first several years of retirement.

This often leads to an assumption:

"We have $2 million. Surely we have too much money to qualify for assistance."

But that's not necessarily how the marketplace evaluates your situation.

Your $2 Million Portfolio Isn't Necessarily the Number That Matters

Marketplace premium assistance generally isn't determined simply by looking at the value of your home, retirement accounts, or overall investment portfolio.

Income is the critical factor.

More specifically, the calculation revolves around MAGI.

That distinction matters.

Having $1 million sitting inside a 401(k), for example, doesn't automatically mean you have $1 million of income.

A brokerage account increasing $100,000 in value on paper doesn't necessarily add $100,000 to your income either.

Instead, the planning question becomes:

How much income reaches your tax return—and where does the cash you're spending actually come from?

This creates an important opportunity for retirees who have accumulated money across different types of accounts.

Two couples might each spend $75,000 during the year.

Yet one could generate $75,000 of reportable income while another might generate only $40,000.

Their lifestyles look almost identical.

Their health insurance costs potentially do not.

The Five Retirement Income Sources You Need to Understand

The source of your retirement cash flow matters because different accounts can have very different effects on MAGI.

1. Earned Income

Maybe you leave your primary career but continue consulting, working part-time, or operating a small business.

That income generally contributes to MAGI.

Even a few months of work can affect the income estimate used for marketplace coverage.

That doesn't mean you shouldn't work.

It simply means that earned income needs to be incorporated into the broader retirement plan.

2. Traditional IRA and 401(k) Withdrawals

Withdrawals from traditional retirement accounts are generally taxable as ordinary income.

If you take $30,000 from a traditional IRA, for example, that could add roughly $30,000 to your income calculation before considering other adjustments.

This makes traditional retirement accounts important—but potentially expensive—sources of cash flow during the pre-Medicare years.

3. Taxable Brokerage Accounts

This is where things get interesting.

Suppose you sell $40,000 of investments from your brokerage account.

You don't necessarily have $40,000 of taxable income.

Imagine those investments originally cost $28,000.

You sell them for $40,000.

Ignoring other tax considerations, you've generated $40,000 of cash flow but only $12,000 represents the capital gain.

That distinction can become extremely valuable when you're trying to fund your lifestyle while managing taxable income.

4. Roth IRA Money

Qualified Roth withdrawals generally don't increase MAGI.

Certain Roth contribution basis may also be available under applicable ordering rules, although conversions and earnings have separate requirements.

That can make Roth assets a powerful source of retirement flexibility.

But there's an important trade-off.

Roth money is also an extremely valuable long-term, tax-free resource. Spending it too aggressively during the first years of retirement may sacrifice benefits you could have enjoyed later.

The goal isn't simply to spend Roth money first.

It's to use it intentionally.

5. Cash and Certain HSA Reimbursements

Spending money that's already sitting in your bank account generally doesn't create taxable income by itself.

Qualified HSA distributions used for eligible medical expenses can also provide tax-advantaged cash flow.

Again, there are trade-offs.

Cash can lose purchasing power over time, while HSA assets may become increasingly valuable as healthcare expenses rise later in retirement.

The bigger point is that each account has a different job.

How $75,000 of Spending Could Create Much Less Taxable Income

Let's return to our hypothetical couple.

They're both 60.

They have $2 million saved.

They need $75,000 to support their lifestyle this year.

For simplicity, assume they don't have wages or a pension and haven't started Social Security.

Instead of automatically withdrawing the entire $75,000 from a traditional IRA, they coordinate several accounts.

First, they sell $40,000 from their brokerage account.

Assume those investments have a $28,000 cost basis.

They receive $40,000 of cash, but only $12,000 represents a long-term capital gain before considering other items on their tax return.

Next, they access $25,000 from an appropriate tax-free Roth source.

They've now generated $65,000 of cash flow while the income created by these transactions remains far below $65,000.

They still need another $10,000.

Suppose that comes from their traditional IRA.

They've now generated the full:

$75,000 of cash flow.

But the three transactions have created only about $22,000 of MAGI before accounting for dividends, interest, and other income or adjustments.

That's where the strategy becomes more nuanced.

Lower Income Isn't Always Better

It might seem logical to keep MAGI as low as possible.

But that's not necessarily the objective.

Depending on the household's state and circumstances, an income level that's too low could bring Medicaid eligibility rules into the discussion.

ACA assistance is tied to household income relative to the applicable federal poverty level, and relevant thresholds can vary based on household size, location, plan year, and applicable law.

So the goal isn't simply:

"How low can we make our taxable income?"

A better question is:

"What income range makes sense for our complete retirement plan?"

Our hypothetical couple might intentionally create additional taxable income.

For example, rather than taking only $10,000 from their traditional IRA, they might take $30,000 and adjust another cash-flow source or reserve excess cash for future spending.

Their estimated MAGI could increase from roughly $22,000 to approximately $42,000 before other income and adjustments.

They haven't necessarily changed their lifestyle.

They've changed the source and timing of their income.

That's the heart of the strategy.

Why a Small Income Mistake Can Become Expensive

There's another reason this planning deserves attention.

When income thresholds or "cliffs" apply, a relatively small amount of additional income can potentially create a much larger change in health insurance costs.

In the hypothetical illustration discussed here, missing an income target by approximately $2,000 could potentially create an annual premium difference of around $20,000.

Your actual numbers could be very different.

That's exactly why you shouldn't build a retirement strategy around a generic threshold or someone else's example.

Instead, the lesson is to understand how sensitive your health insurance costs may be to additional income.

A capital gain you weren't expecting, a mutual fund distribution, extra consulting income, or a retirement-account withdrawal could potentially change the calculation.

And by the time you're preparing your tax return, it may be too late to undo income you've already realized.

Why This Needs to Be a Year-Round Strategy

MAGI management isn't something you calculate once in January and forget about.

At the beginning of the year, you may estimate your:

  • IRA distributions

  • Capital gains

  • Interest and dividends

  • Earned income

  • Roth conversions

  • Other taxable income

Then circumstances change.

Markets move.

Investments generate distributions.

You decide to take an extra vacation.

Consulting work produces more income than expected.

That's why your retirement income strategy should be reviewed throughout the year, with another careful review before year-end while there may still be time to make adjustments.

The Roth Conversion Trade-Off Most Early Retirees Miss

Here's where this strategy becomes even more important.

The years immediately after retirement can sometimes provide an attractive window for Roth conversions.

Your salary may have stopped.

Required minimum distributions may not have started.

You may have an opportunity to move money from traditional retirement accounts into Roth accounts while managing your tax brackets.

But there's a catch:

A Roth conversion generally increases MAGI.

That means you may face a choice.

Do you keep MAGI lower to preserve valuable health insurance assistance today?

Or do you intentionally recognize more income through a Roth conversion because you believe the long-term tax benefit is more valuable?

There isn't one correct answer for everyone.

The decision can depend on your pre-tax account balances, future required minimum distributions, expected tax brackets, state taxes, available subsidies, and the number of years remaining before Medicare.

Some years may favor controlling MAGI.

Other years may justify a larger Roth conversion—even if that means paying more for health insurance.

That's why optimizing only one part of the plan can backfire.

You could save money on health insurance today while creating a much larger tax problem later.

Or you could execute an aggressive Roth conversion and give up health insurance assistance worth more than the expected benefit of that particular conversion.

You need to evaluate both sides.

Your Accounts Need Specific Jobs

The biggest takeaway isn't that every retiree should target one specific MAGI number.

It's that retirement income, taxes, and health insurance should be planned together.

Your portfolio balance alone doesn't determine what your health insurance will cost.

How you generate your spending money can matter tremendously.

Your brokerage account might provide cash while realizing only a portion as taxable gains.

Your Roth account may provide tax-free flexibility.

Cash reserves may cover spending without creating additional income.

Your traditional IRA can then be used deliberately to generate the amount of taxable income that makes sense within the broader strategy.

The appropriate combination may change every year.

And that flexibility can become one of your most valuable assets during the years between retirement and Medicare.

Conclusion: Retirement Spending Is About More Than How Much You Withdraw

If you're preparing to retire before Medicare, don't treat healthcare as an isolated expense.

And don't assume a large portfolio automatically means you're excluded from marketplace assistance.

Instead, look at the relationship between your spending, taxable income, account types, Roth conversions, and healthcare costs.

A couple could have $2 million invested and spend $75,000 a year while producing a very different MAGI depending on where those dollars come from.

That doesn't guarantee a specific premium, subsidy, or tax result.

But it does demonstrate why withdrawal sequencing can matter.

The question isn't only:

"Do I have enough money to retire?"

It's also:

"How should I turn my savings into retirement income without accidentally creating unnecessary taxes or healthcare costs?"

That second question is where thoughtful retirement planning can make a significant difference.

Transcript: Prefer to Read — Click to Open

Danny (00:00.184)

Couple can have two million dollars saved for retirement, spend $75,000 per year, and still qualify for a health insurance plan with a $0 monthly premium before Medicare. That sounds like a loophole, it isn’t. It comes down to understanding one number that the health insurance marketplaces use and building your retirement income plan around that. Get it right, and you could save thousands of dollars each year. Get it wrong.

Even by a relatively small amount, and your health insurance costs could change dramatically. Hey there, my name is Danny Gudarf, a financial planner and owner of Gudarf Financial Group, where we’re a total wealth management firm with tax preparers, estate planning attorneys, and CFPs all working under one roof with retirees just like you every day. Here’s the situation. Imagine you and your spouse are both six years old. You’ve done the hard part.

You’ve saved $2 million across a brokerage account, Roth accounts, and traditional retirement accounts. You’re ready to retire, but Medicare doesn’t begin until 65. That leaves a five-year window where you need health insurance before Medicare begins. If private insurance or Cobra costs $1,500 to $2,000 per month, you could spend well over $100,000 on premiums before Medicare even begins.

For many early retirees, health insurance becomes one of the largest expenses early in their retirement plan. The assumption I hear often is we have too much money to qualify for any help. But the marketplace generally doesn’t determine your premium assistance by looking at your total assets or portfolio balance. It looks at your household income, specifically a calculation based upon modified adjusted gross income or

MAGI, your home value doesn’t automatically count as income. The balance of your 401k doesn’t automatically count. A brokerage account that grew by $100,000 on paper doesn’t add $100,000 to your income. What matters is the income that reaches your tax return. That distinction changes the planning conversation. Instead of asking only how much can we spend, we also need to ask.

Danny (02:23.02)

Where should each dollar come from? Two couples can spend the same $75,000 and have a very different magi. One couple might create $75,000 of reportable income while another might create $40,000. Their lifestyles could look exactly identical, while their health insurance costs can look completely different. To understand why, start with the federal poverty level. ACA systems is tied

To household income relative to that level. The relevant dollar amounts change based upon household size, location, and plan year. In many situations, an early retired couple may try to keep Magi inside a particular range where premium tax credits are meaningful and important. And silver plan cost sharing assistance may be available as well. But go too high, and assistance can decline or even disappear.

Completely, go too low, and Medicaid rules may become part of the conversation depending on what state you live in. This means the goal isn’t simply to report as low of income as possible. The goal is to land in the right range for your household. That requires careful planning because retirement cash flow can come from several places, including each source and how it affects Magi differently.

So let’s walk through the five common income sources we see. The first is earned income. That might be from consulting work, part-time income, or self-employment income after you leave your primary career. Earned income generally adds to magi. If one spouse continues working, even on a limited basis, that income is has to be included when you file your estimate for your ACA premiums. A few months of income can still

Make a difference on your return. The second source is the traditional IRA or 401k. Withdrawals from these accounts are generally taxable as ordinary income. So they usually increase Magi dollar for dollar. If you withdraw $30,000 from a traditional IRA, that could roughly add $30,000 to the income calculations before considering other adjustments. The third source is a taxable brokerage account. This is where

Danny (04:50.168)

People often misunderstand the numbers. If you sell $40,000 of investments, the full $40,000 isn’t necessarily taxable income. Part of that money comes from principal and part of that money comes from capital gains or dividends. Suppose the investments you sell are worth $40,000 and your cost basis is $28,000. The taxable gain is $12,000. You created

$40,000 of cash flow, but only report $12,000 of capital gains before considering any other tax items. The fourth source is Roth IRA. Qualified Roth withdrawals don’t increase your magi. Roth contributions basis may also be accessible under certain separate ordering rules, although conversions and earnings have their own requirements. This makes Roth money especially useful.

When you need to spend it without creating additional taxable income. But Roth assets are also very valuable long-term tax-free resources. So spending them early has a real opportunity cost. We want to use them intentionally rather than automatically. The fifth source is cash, along with certain qualified HSA reimbursements. Spending money already held in a bank account.

Doesn’t create taxable income by itself. Also, qualified HSA distributions used for eligible medical expenses also avoid federal income tax. These resources can provide cash flow without the same magi impact that traditional IRA withdrawals have. The trade-off is that cash may lose purchasing power over time, and HSA dollars can be extremely valuable later in retirement.

Now let’s put these pieces together. We’ll use a hypothetical couple both age 60 with $2 million saved. They want to spend $75,000 this year. For simplicity, let’s assume they have no wages, pension, and they haven’t started Social Security yet. Their goal is to create the cash they need while keeping their magi inside the range that they’ve identified for their ACA plan subsidies. First,

Danny (07:15.618)

They begin by taking $40,000 from their brokerage account. As we discussed, it has a $28,000 cost basis and a $12,000 long-term capital gain. They now have $40,000 of income to spend, but they’ve only created $12,000 of income from this trade. Next, they take $25,000 from Roth Contribution Basis, another qualified tax-free Roth source.

They now have $65,000 of cash flow, while Magi is still roughly $12,000 before any dividends, interest, or other income. They still need another $10,000 to reach their $75,000 spending target. Suppose they take that amount from their traditional IRA. That adds another $10,000 of ordinary income. Total cash flow available to spend is

$75,000. But the three withdrawals have only added up and created about $22,000 of magi before accounting for the rest of the tax return. Here’s where the first version of the plan may fall short. A magi of $22,000 could be too low for the marketplace outcomes they intended, especially in a state where that income points the household towards Medicaid eligibility.

So they might be more deliberate about where they take their taxable income from. Instead of withdrawing $10,000 from the traditional IRA, perhaps they would draw $30,000 and reduce another source or reserve the excess cash for next year. Their estimated Magi would rise from roughly $22,000 to roughly $42,000 again before interest, dividends, and other adjustments. That is the core.

Planning idea. The couple didn’t have to reduce their lifestyle to reduce their health insurance cost. They just changed where their income came from. Brokerage basis supplied some of the cash, Roth money supplied some additional, and a traditional IRA withdrawal created enough taxable income to place them near the intended range. The exact result will vary, but the framework is what matters most.

Danny (09:41.74)

This strategy tends to be most useful for early retirees who have these different tax buckets of money. They may have a taxable brokerage account with a meaningful cost basis, Roth assets, cash reserves, and additional money in Roth or IRA or 401ks. That combination gives them several levers to pull. It may be less meaningful or useful.

For someone whose income is already determined by a large pension, or you have substantial dividends, or other wages, potentially rental income, or other required distributions. But most of your income hasn’t started yet, then you have this flexibility on where to pull it from. There’s another issue you need to understand for 2026. Under the Cliff style rules used in this illustration, crossing an additional income threshold.

Can create a large change in annual premiums. No longer is there a phase out. In this example, a household missing its target by around $2,000 could face a premium difference of around $20,000 in that year. Your number could be very different, but the lesson is the same. When a cliff applies, a small amount of additional income can have a very big effect on the overall outcome.

That’s why this can’t be a January only decision. Start the year with an estimate of where your income, dividends, distributions, and IRA withdrawals will be coming from. Update that estimate during the year and leave room for an unexpected income source like a mutual fund distribution or a capital gain. Then review the plan before year end while you still have time to make adjustments or withdrawals.

Or doing other conversions. Waiting until you prepare the tax return is not a good idea and can be too late because the income for that year has already been realized. Now, one of the most important trade-offs we have to think about: early retirement is often a valuable time for Roth conversions. Your salary is spot, required minimum distributions haven’t started, and you may have room to move money from your traditional IRA.

Danny (12:01.706)

Into a Roth at a very low tax bracket. But a Roth conversion increases your Magi the same way an IRA or 401k distribution will. So which one should you prioritize? There isn’t one answer for everyone. You have to compare the value of the subsidy today with the potential tax savings created by the conversion over the rest of your life. Some years may favor keeping your magi low.

Where other years may favor a larger conversion, even if health insurance costs may rise. The right decision depends upon the size of your pre-tax accounts, future required minimum distributions, your tax brackets, state tax, and how many years remain before Medicare kicks in. The bigger lessons is that health insurance, tax, and retirement withdrawals all belong in the same plan. If you optimize each decision separately,

You can create a very expensive mistake. You might save on premiums while building a future large tax problem. Or you might complete a large Roth conversion while giving up a subsidy that was worth far more than what the Roth conversion may be. Good planning measures both sides before choosing which option is best. So go back to our hypothetical couple. They have $2 million.

They spend $75,000 of their portfolio each year. The portfolio size alone doesn’t determine their ACA premium. The sequence of withdrawals creates the outcome. That’s a powerful shift because it turns health insurance from a fixed early retirement expense into something that you may be able to plan around. And most clients’ biggest fear on retiring early is how are they going to pay for health insurance?

So, as you prepare for retirement, give each account a specific job. The way you combine your brokerage account, Roth money, traditional retirement accounts, and cash can affect your taxable income and what you pay for your health insurance and taxes before Medicare starts. The right withdrawal plan may change each year, so review these decisions together rather than in isolation. If you want to see how all these decisions work together in your own retirement plan,

Danny (14:24.022)

Check out our limitless retirement system video. Top link in the description and the top pinned comment to see how we implement that for people just like you at Gudar Financial Group. And if this was helpful, the next one I want you to watch is where I walk through a $2.5 million portfolio can actually support in monthly spending and retirement. I go deep into the numbers so you can see how spending, withdrawals, and taxes

Work together in a complete plan. Click that video right here.

Back to All Episodes