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Health Insurance Before Medicare: ACA Subsidies and the Retirement Bridge Years

By Bob Lobclaw · August 2, 2026

Medicare eligibility starts at 65. Anyone who retires earlier has to cover health insurance some other way until then — the “bridge years.” For most early retirees without access to a former employer’s retiree coverage, that means an ACA marketplace plan, and how much that plan actually costs depends heavily on income — which, unlike a paycheck, is something an early retiree has real control over.

How ACA subsidies are calculated

The premium tax credit (PTC) that subsidizes marketplace coverage is based on two things: the cost of the second-lowest-cost Silver plan in your area, and your household’s Modified Adjusted Gross Income (MAGI) relative to the Federal Poverty Level (FPL). The credit is designed to cap what you pay for that reference plan at a percentage of income that rises as income rises — lower income relative to the FPL means a smaller required contribution and a bigger credit.

Because MAGI is the input, not gross income or net worth, this is one of the few places where an early retiree’s own decisions directly set their health insurance cost. Withdrawals from Roth accounts and HSAs don’t count toward MAGI; withdrawals from traditional IRAs/401(k)s, Roth conversions, and realized capital gains all do. Two retirees with identical net worth and identical spending can pay very different premiums depending on which accounts they draw from.

The subsidy cliff is back for 2026

The ACA originally cut subsidies off entirely at 400% of the FPL — earn one dollar over that line and the entire credit disappeared, not just a portion of it, a design flaw widely known as the “subsidy cliff.” The American Rescue Plan Act temporarily removed the cliff in 2021, capping required contributions at 8.5% of income for everyone regardless of how high their income was, and the Inflation Reduction Act extended those enhanced subsidies through the end of 2025.

Congress did not extend them further. The enhanced subsidies expired on December 31, 2025, and as of January 1, 2026, ACA subsidies reverted to the original, pre-2021 rules — meaning the 400% FPL cliff is back, and the required contribution percentages below that threshold are less generous than they were from 2021–2025. A House bill to extend the enhanced credits for three more years has not passed the Senate, so this status could still change, but as it stands today, going even slightly over 400% of the FPL means losing the subsidy entirely rather than seeing it phase down gradually.

Why this makes MAGI management matter again

With the cliff back, the cost of misjudging income in a bridge year is much higher than it was under the enhanced rules — a Roth conversion or a large capital gain that pushes MAGI just over 400% of the FPL can cost thousands of dollars in lost subsidy, far more than the tax on the extra income itself. A few practical levers early retirees use to manage this:

  • Draw from Roth and HSA balances first in bridge years specifically because those withdrawals don’t count toward MAGI, keeping reported income — and the subsidy calculation — low even while spending normally.
  • Time Roth conversions carefully. Converting traditional IRA money to Roth is often attractive in low-income years, but doing it during ACA bridge years directly trades subsidy dollars for converted dollars — sometimes still worthwhile, but only after running the actual numbers. See the Roth conversion strategies article for the broader trade-offs.
  • Watch capital gains harvesting. Selling appreciated taxable-account assets to fund living expenses raises MAGI the same way ordinary income does; spreading sales across years or favoring accounts that don’t generate MAGI can keep income under a subsidy threshold.
  • Model the actual premium impact, not just the tax bracket impact, before taking a large one-time withdrawal or conversion in a bridge year — the subsidy swing can dwarf the marginal tax rate on the same dollar.

Other bridge-year coverage options

The ACA marketplace isn’t the only option for the gap before 65, though it’s usually the most cost-effective one once a subsidy applies:

  • COBRA continues an employer plan for up to 18 months after leaving a job, but at the full premium plus a 2% administrative fee — usually far more expensive than a subsidized marketplace plan, though sometimes worth it briefly if it avoids a mid-year deductible reset or preserves a specific provider network.
  • A spouse’s employer plan, if one spouse is still working, is often the cheapest and simplest bridge option available.
  • Part-time work with benefits — some employers, including certain large retailers, offer health coverage to part-time staff, which some early retirees use deliberately as a bridge strategy, similar in spirit to the Rule of 55 approach to accessing retirement funds early.

The bottom line

Health insurance is one of the largest and least predictable costs in an early retirement, and with the enhanced ACA subsidies gone as of 2026, the 400% FPL cliff turns income timing into a real financial decision rather than a minor optimization. The healthcare modeling page estimates bridge-year premium costs based on income and location, and the retirement calculator can incorporate those costs into a full withdrawal plan.

Educational content, not personalized financial advice — see the disclaimer.