Health insurance before Medicare: the early retiree's biggest gap

By Tom, CPA · Updated October 25, 2026

In short: Early retirees need coverage until Medicare at 65. ACA marketplace plans are a common choice, and because premium tax credits depend on MAGI, managing your income is a central part of the plan.

Educational only, not tax or insurance advice. Subsidy rules have changed recently and may change again; check HealthCare.gov and IRS.gov for current rules.

Ask early retirees what surprised them most, and health insurance comes up again and again. Medicare generally starts at 65. If you leave work at 45 or 55, you need a plan for the years in between, and the cost can swing dramatically depending on how you manage your income. This is where tax planning and health planning meet.

Your main options

• COBRA: lets you keep a former employer's group coverage, usually for up to 18 months, but you typically pay the full premium plus an administrative fee. Often a short bridge rather than a long-term answer.
• A spouse's employer plan: if available, often the simplest option.
• Part-time work with benefits: the heart of Barista FIRE.
• ACA marketplace plans: individual coverage through HealthCare.gov or your state's exchange. For many early retirees this is the main option, and it's the one where taxes matter most.
• Medicaid: in states that expanded Medicaid, very low income may qualify you. Rules and asset tests vary by state.
• Other arrangements such as health care sharing ministries aren't insurance and may not cover what you expect. Read the fine print carefully.

How ACA premium tax credits work

The premium tax credit (PTC) lowers the cost of marketplace coverage. Broadly, the credit is the difference between the price of a benchmark “second-lowest-cost silver” plan in your area and an amount you're expected to contribute, which is a percentage of your household income. Lower income generally means a smaller expected contribution and a larger credit.

You can take the credit in advance (lowering your monthly premium) based on estimated income, then reconcile it on your tax return using Form 8962. If your actual income ends up higher than estimated, you may owe some or all of the advance credit back.

What changed for 2026

From 2021 through 2025, temporary “enhanced” credits removed the upper income limit and lowered the expected contribution percentages. Those enhancements expired at the end of 2025. As of this writing, Congress has debated an extension (the House passed one in January 2026) but it has not become law. Under the rules in effect for 2026 coverage:

• Households generally need income between 100% and 400% of the federal poverty line (FPL) to qualify for the credit.
• Above 400% of FPL, there is no credit at all. This is the “subsidy cliff”: a dollar of extra income can cost thousands in lost credits.
• Expected contribution percentages are higher than under the enhanced rules, so many people pay more than they did in 2025.

For 2026 coverage in the 48 contiguous states, CMS lists 400% of FPL as roughly $62,600 for one person and $84,600 for a household of two (Alaska and Hawaii are higher). These figures update annually, and legislation could change the structure again, so verify the current year's numbers before you plan around them.

MAGI: the number to manage

Eligibility and credit size are based on a version of modified adjusted gross income (MAGI). For ACA purposes it's generally your adjusted gross income plus tax-exempt interest, non-taxable Social Security benefits, and excluded foreign income. Things that typically raise it:

• Traditional IRA/401(k) withdrawals and Roth conversions
• Realized capital gains and dividends
• Interest, rental profit, business income, wages

Things that typically don't add to it:

• Withdrawing Roth IRA contributions (and qualified Roth distributions)
• Spending cash you already have
• The return-of-basis portion of a brokerage sale (only the gain counts)

That's why the account mix discussed in FIRE and taxes matters so much. With cash, Roth contributions, and high-basis brokerage assets available, an early retiree can often fund a comfortable lifestyle while reporting a modest MAGI.

Planning moves to consider

• Estimate MAGI carefully when you enroll, and update the marketplace if your income changes during the year.
• Size Roth conversions with the cliff in mind. Staying under 400% of FPL may be worth more than converting extra.
• Time capital gains. Harvesting gains in a year when you're on employer coverage (or Medicare) may avoid subsidy impacts.
• Use pre-tax contributions if you have earned income. Deductible contributions to a traditional IRA, solo 401(k), or HSA can lower MAGI.
• Don't go too low. Income below 100% of FPL may not qualify for the credit, and in expansion states can point you to Medicaid instead. Know which side of the line you want to be on.
• Keep good records so reconciliation at tax time holds no surprises.

The bottom line

Health insurance is often the largest new expense for early retirees and the one most sensitive to tax planning. Under the 2026 rules, the subsidy cliff is back, which makes MAGI management more important than it was a year ago. Build health premiums into your FIRE number, plan conversions and gains around them, and recheck the rules every open enrollment.

This article is general education and not tax or insurance advice. Subsidy rules and FPL figures change; verify at HealthCare.gov and IRS.gov, and consult a qualified professional.