What is MAGI and why it matters for ACA subsidies
Modified Adjusted Gross Income (MAGI) is the single most important number in ACA healthcare planning. It determines your Premium Tax Credit (PTC) — the government subsidy that reduces your monthly health insurance premium on the ACA marketplace.
MAGI includes most forms of income: wages, self-employment income, traditional IRA and 401(k) withdrawals, capital gains, pension income, and all of your Social Security benefits, the non-taxable part included. Critically, Roth IRA withdrawals and HSA withdrawals for qualified medical expenses are excluded from MAGI. This distinction creates a powerful planning opportunity for early retirees who can choose which accounts to draw from.
How ACA Premium Tax Credits work
ACA subsidies are calculated on a sliding scale based on your MAGI as a percentage of the Federal Poverty Level (FPL). For 2026 coverage the PTC uses the 2025 poverty guidelines: $15,650 for one person in the continental US, plus $5,500 for each additional person (higher in Alaska and Hawaii). The 2026 applicable percentage table (IRS Rev. Proc. 2025-25) sets what share of your income you're expected to contribute toward your benchmark silver plan premium, rising smoothly within each band:
- Under 100% FPL: no premium tax credit (26 U.S.C. §36B(c)(1)(A))
- 100%–133% FPL: 2.10% of income
- 133%–150% FPL: 3.14%–4.19% of income
- 150%–200% FPL: 4.19%–6.60% of income
- 200%–250% FPL: 6.60%–8.44% of income
- 250%–300% FPL: 8.44%–9.96% of income
- 300%–400% FPL: 9.96% of income
- Above 400% FPL: no premium tax credit (the enhanced-era cap expired with 2025)
Your Premium Tax Credit equals the difference between your area's benchmark silver plan premium and your expected contribution. If the benchmark plan costs $850/month and your expected contribution is $200/month, your PTC is $650/month ($7,800/year).
Roth vs. traditional: the ACA income planning strategy
The core ACA income planning strategy for early retirees is straightforward: fund your retirement spending primarily from Roth accounts to keep MAGI low and maximize subsidies.
Example: A 55-year-old single retiree needs $50,000/year in spending.
- Scenario A (all traditional): Withdraw $50,000 from a traditional IRA. MAGI = $50,000 (319% FPL). Applicable percentage = 9.96%. Expected contribution = $4,980/year.
- Scenario B (Roth + traditional): Withdraw $25,000 from a Roth IRA + $25,000 from a traditional IRA. MAGI = $25,000 (160% FPL). Applicable percentage ≈ 4.66%. Expected contribution ≈ $1,165/year.
Scenario B lowers the expected contribution by about $3,815 a year with the same spending power (2026 rules, single filer, assuming the benchmark premium exceeds both contributions). Do not push MAGI below 100% FPL ($15,650): below that line there is no premium tax credit. In the 41 Medicaid-expansion states (including DC), adults with income up to 138% of the 2026 poverty line (about $22,025 for one person) generally qualify for Medicaid instead, so there the credit starts above that line. The calculator applies your state's rule.
The ACA subsidy cliff is back in 2026
Before the American Rescue Plan Act of 2021, households above 400% FPL received zero ACA subsidies — the “subsidy cliff.” A single dollar of income above the threshold could cost thousands in lost credits. The enhanced rules removed the cliff by capping premiums at 8.5% of income for everyone.
Those enhanced subsidies expired on December 31, 2025 and, at our last check, had not been extended (the House passed a three-year extension in January 2026; the Senate had not acted). For 2026 coverage the cliff is back: at 400% FPL ($62,600 for one person) you still receive a credit, and one dollar above it you receive none. This calculator uses the 2026 rules. If an extension is enacted, we will update it — and early retirees near 400% FPL should check the current law before setting next year's withdrawal plan.
HSA bridge strategy for pre-Medicare retirees
Health Savings Accounts (HSAs) are the only account type with triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. For ACA planning, the key benefit is that qualified HSA withdrawals are excluded from MAGI.
The HSA bridge strategy: maximize HSA contributions during working years, invest the balance for growth, pay medical expenses out-of-pocket during accumulation, then use the HSA to cover medical costs in early retirement while keeping MAGI low. A well-funded HSA ($80,000–$150,000) can cover premiums, deductibles, and copays for the entire pre-Medicare period.
Pre-Medicare healthcare planning checklist
If you're planning to retire before 65, healthcare is likely your largest variable expense. Here's the planning sequence:
- Estimate your MAGI: Use this calculator to see exactly which income sources count and which don't.
- Build Roth reserves: Start Roth conversions 5+ years before retirement to build a tax-free withdrawal pool. The 5-year rule applies to conversions.
- Fund your HSA: Max out HSA contributions ($4,400 individual / $8,750 family in 2026). Invest for long-term growth.
- Plan around the 400% FPL cliff: keep MAGI below 400% FPL in years you need a credit, and re-check the rules each open-enrollment season in case Congress acts.
- Time capital gains: Realize capital gains in low-MAGI years or spread them across multiple years to avoid subsidy spikes.
- Check your state's Medicaid rules: in the 41 expansion states (including DC), adults with income up to 138% of the poverty line generally get Medicaid. In 8 of the 10 states that have not expanded it, income below the poverty line means neither Medicaid nor a tax credit for most adults: the coverage gap. Wisconsin covers adults up to the poverty line, and Georgia does for people who meet its work requirement or qualify for an exemption.
Frequently asked questions
What is MAGI and how does it affect ACA subsidies?
Modified Adjusted Gross Income (MAGI) is the key number that determines your ACA Premium Tax Credit. MAGI includes: wages, self-employment income, traditional IRA/401k withdrawals, capital gains, pension income, and all of your Social Security benefits, the non-taxable part included. Critically, Roth IRA withdrawals and HSA withdrawals for qualified medical expenses are NOT counted in MAGI. This distinction is the foundation of ACA income planning — by strategically choosing which accounts to withdraw from, early retirees can keep their MAGI low enough to qualify for substantial healthcare subsidies.
How do ACA subsidies work for early retirees?
For 2026 coverage, ACA Premium Tax Credits (PTCs) are available to households with MAGI between 100% and 400% of the Federal Poverty Level (FPL) who do not qualify for Medicaid. The enhanced credits that extended help above 400% FPL expired on December 31, 2025, so above 400% FPL there is no credit at all. For a single person, 400% FPL for 2026 coverage is $62,600 (4 × the 2025 guideline of $15,650). Early retirees (before Medicare at 65) who control their income sources can often qualify for substantial credits by managing MAGI through Roth withdrawals, capital gains timing, and HSA usage — and staying under the 400% line now matters a great deal.
How can Roth withdrawals reduce my healthcare costs?
Qualified Roth IRA and Roth 401(k) withdrawals are excluded from MAGI. A single retiree who needs $50,000 a year can take $25,000 from Roth accounts and $25,000 from traditional accounts, making MAGI $25,000 instead of $50,000. For 2026 coverage, $25,000 is about 160% FPL, where the expected contribution toward the benchmark silver plan is about 4.66% of income (about $1,165 a year) instead of 9.96% (about $4,980) at $50,000. Keep MAGI at or above 100% FPL ($15,650 for one person): below that there is no premium tax credit. In the 41 Medicaid-expansion states (including DC), adults with income up to 138% of the 2026 poverty line (about $22,025 for one person) generally qualify for Medicaid instead, so there the credit starts above that line.
What happened to the enhanced ACA subsidies in 2026?
The enhanced ACA subsidies — enacted in the American Rescue Plan Act (2021) and extended by the Inflation Reduction Act (2022) — expired on December 31, 2025. Two things changed for 2026 coverage: (1) the 400% FPL subsidy cliff returned, so households above 400% FPL receive no premium tax credit at all, and (2) the applicable percentages rose at every income level — for example, at 250% FPL the expected contribution is 8.44% of income, up from 4% under the enhanced schedule (IRS Rev. Proc. 2025-25). The House passed a three-year extension in January 2026, but it had not become law at our last check. This calculator uses the 2026 rules in force.
Can I use an HSA to bridge healthcare costs before Medicare?
Yes — the HSA bridge strategy is one of the most powerful tools for early retirees. HSA withdrawals for qualified medical expenses are tax-free AND excluded from MAGI, making them invisible to the ACA subsidy calculation. Strategy: (1) Maximize HSA contributions during working years, (2) pay medical expenses out-of-pocket and let the HSA grow tax-free, (3) in early retirement, use HSA funds for medical costs (premiums, deductibles, copays) while keeping your MAGI low for maximum ACA subsidies. A well-funded HSA ($100K+) can cover a significant portion of pre-Medicare healthcare costs while preserving subsidy eligibility.