Key takeaways
- Medicare starts at 65; retiring earlier means buying coverage for the gap through COBRA, a spouse's plan, or the ACA marketplace.
- Marketplace subsidies are based on household income, so the withdrawal plan and the insurance plan are the same plan.
- Roth withdrawals and taxable-account principal do not count as income; IRA withdrawals and conversions do.
- The subsidy cliff returned in 2026: above 400% of the poverty level the subsidy disappears entirely.
The most common reason people give us for working longer than they want to isn't money. It's health insurance. Retiring at 58 or 62 means five to seven years before Medicare, and the price of coverage in those years can look like a second mortgage. It's a real cost. It's also a planable one, and for a lot of early retirees the planning turns a $25,000-a-year problem into a much smaller one.
The four ways to cover the gap
COBRA. Leaving an employer with 20 or more employees entitles you to continue the group plan for 18 months at full cost plus a 2% administrative fee. The coverage is identical to what you had, which matters if you're mid-treatment or attached to specific providers. The price is high, because now you're paying the employer's share too. COBRA is a bridge, not a plan. It runs out.
A spouse's plan. If a working spouse has employer coverage, joining it is almost always the cheapest option. Retirement is a qualifying event that opens enrollment outside the annual window.
Retiree health coverage. A shrinking number of employers, plus many government and university systems, offer retiree medical to long-tenured employees. If you have it, run the numbers against the alternatives, but it's often the right answer.
The ACA marketplace. For everyone else, this is the plan. Coverage can't be denied or priced for health conditions, plans are standardized into metal tiers, and premium subsidies cut the cost based on household income. Florida uses the federal marketplace at healthcare.gov, and a mid-year retirement is a qualifying event.
How marketplace subsidies work in 2026
The premium tax credit caps what you pay for a benchmark silver plan at a percentage of your income, and the government pays the rest. The percentage rises with income. The enhanced subsidies from 2021 through 2025, which had removed the income ceiling, expired at the end of 2025. For 2026, the pre-2021 structure is back: households above 400% of the federal poverty level get no subsidy at all.
For a couple, 400% of the poverty level is roughly $84,000 of modified adjusted gross income in 2026 (the exact figure depends on the prior year's poverty guidelines). One dollar over the line and the entire subsidy, which can exceed $20,000 a year for a couple in their early sixties, is gone. This is a cliff in the fullest sense of the word.
Below the cliff, the subsidy is graduated. A couple at 250% of poverty pays a smaller share of income for the benchmark plan than a couple at 350%. The difference between $60,000 and $80,000 of income can be several thousand dollars of premium.
Income is the lever
The income that counts is modified adjusted gross income: AGI plus tax-exempt interest, non-taxable Social Security, and excluded foreign income. What matters for early retirees is what doesn't count.
- Withdrawals of principal from a taxable brokerage account aren't income. Only the realized gain is.
- Roth IRA withdrawals aren't income (contributions any time; earnings after 59½ and five years).
- Cash in the bank isn't income.
- A home equity line or a loan isn't income.
What does count: traditional IRA and 401(k) withdrawals, Roth conversions, pensions, capital gains, dividends, interest, and Social Security once it starts (all of it, including the part that isn't taxable).
So the withdrawal order becomes a health insurance decision. Take a 60-year-old couple with $400,000 in a brokerage account (basis $250,000), $1.5 million in IRAs, and $150,000 in a Roth. They can fund $90,000 of spending while showing perhaps $40,000 of MAGI: some dividends, a modest realized gain, nothing from the IRA. That keeps them well under the cliff and near the bottom of the subsidy scale. The same couple drawing $90,000 from the IRA instead would show $90,000 of MAGI, lose the subsidy entirely, and pay full price. Same spending, wildly different premium.
The trade-off with Roth conversions
There's a tension. The years before Medicare are also the best Roth conversion years, and conversions are income. A $100,000 conversion that would be taxed in the 12% or 22% bracket can cost $15,000 to $20,000 in lost subsidy on top of the tax. That turns a cheap conversion into an expensive one.
The answer is usually sequencing rather than choosing. Convert up to the subsidy threshold if the bracket math still works, or hold the big conversions until 65, when Medicare replaces the marketplace and the constraint shifts from the subsidy cliff to the IRMAA tiers. For couples with a large IRA and a short gap to 65, eating the subsidy loss for a year or two to convert aggressively can still come out ahead. It has to be modeled, not assumed.
Choosing the plan
Once the income plan is set, the plan choice is about the actual coverage. A bronze plan has the lowest premium and the highest deductible. A silver plan qualifies for cost-sharing reductions if income is below 250% of poverty, which can make it the best value by a mile. A gold plan costs more and covers more. HSA-eligible bronze and silver plans allow HSA contributions ($8,750 for family coverage in 2026, plus $1,000 for each spouse over 55), which are deductible and reduce MAGI further. Since 2026, bronze and catastrophic marketplace plans qualify for HSA contributions under the 2025 tax law.
Network matters more than premium. Check that your physicians and preferred hospital are in network before you choose, because marketplace plans in South Florida are often narrow-network HMOs.
Estimating honestly
When you enroll, you estimate the year's income and get the subsidy in advance. If your actual income comes in higher, you repay the excess with your tax return, and above 400% of poverty the repayment is the entire amount. A projection at enrollment and an update mid-year avoid the April surprise. Underestimating and repaying isn't fraud, but repaying $20,000 is unpleasant, and it's why the income plan has to be followed, not just designed.
Where we come in
For clients retiring before 65, the health insurance plan is built inside the retirement income plan: a target MAGI for each year to 65, the withdrawal sources that hit it, the conversion amounts that fit under it, and the plan choice that matches their doctors. At 65, the target changes to the Medicare thresholds and the plan gets rebuilt. The premium savings over five years are often larger than the tax savings from any single strategy we use.
Frequently asked questions
Can I get subsidies if I have a lot of assets?
Yes. Marketplace subsidies are based on income, not assets. A retiree with $3 million in investments and $50,000 of MAGI qualifies. That's how the policy was written, not a loophole.
What if my spouse is on Medicare and I'm not?
You enroll in a marketplace plan for yourself. The subsidy is still based on household income, including your spouse's Social Security and IRA withdrawals, so the income plan still applies.
Should I delay Social Security to keep income low for subsidies?
Often, yes, and it's the right call on its own merits for most people. Claiming early adds to MAGI and cuts the subsidy while also cutting the lifetime benefit. See when to claim Social Security.
Does COBRA count as coverage for the marketplace?
While on COBRA you can still enroll in the marketplace during open enrollment, but you can't receive subsidies while you're enrolled in COBRA. Dropping COBRA early isn't a qualifying event. COBRA running out is, whenever that happens; otherwise the switch waits for open enrollment.
Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph
This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.
In this article
Want this applied to your own numbers? A 30-minute introductory call is the first step.
See if you’re a fit