Healthcare in the United States is stupid expensive.

A new hip costs $40,000 in the US, $13,000 in Mexico, $8,000 in South Africa, and $6,000 in India.

Pharmaceuticals are so expensive, a Utah Public Employees Health Program is sending people to Mexico to buy medications. It’s cheaper to fly to another country than to pay US drug prices.

You can get a shiny new knee in the US for $50,000. Or you can fly first class to Paris, get that same knee for $15,000 and spend the rest of your money on luxury spas, a nebuchadnezzar of Bordeaux, and a brand-new Citroen to proudly parade up the Champs-Élysées.

A trip to Paris sounds great, but there’s a better way to save.

This article shows you how to avoid tens of thousands of dollars of unnecessary healthcare expenses, and retire early.

The loophole

While our government representatives whine and bicker over a solution, you get older and angrier as you work to fund the exorbitant cost of healthcare in early retirement. But there’s no need to wait. You can take advantage of a peculiar healthcare loophole right now.

The Affordable Care Act (also known as ACA or Obamacare) offers subsidies to low-income families. The novel way they define ‘low-income’ is the loophole you can use to get subsidies — regardless of your wealth.

“But government subsidies for a middle-class family like mine are immoral,”

..said nobody, ever.

Here’s how anyone can qualify for healthcare subsidies:

Three rules and one GIGANTIC caution

When you follow these simple rules, you can save tens of thousands of dollars in healthcare costs.

1. First, you’ll organize your finances so your retirement income will fall between 1 and 4 times the federal poverty level (FPL). Feel free to spend like a drunken sailor but you absolutely must keep your ‘income’ (as defined by ACA rules) within that range. More on that in a minute.
2. Next, you’ll buy your healthcare insurance on the ACA exchange at healthcare.gov. It’s the only place you can get government subsidies.
3. Finally, and this is the good part, your income only matters during the time you receive benefits. The million-dollar paycheck you got last year doesn’t count. The Lamborghini in your driveway doesn’t count. Only your income during the time you receive benefits.

CAUTION: The devil is in the details here. If you accidentally miscalculate, and your income falls just one dollar over the threshold, you’ll be forced to pay back all your subsidies when the taxman comes knocking. That will be a whopping tax bill that you’ll regret.

How to exploit the loophole

The IRS requires you to estimate what your income will be during the time you receive benefits. They define income as “MAGI” or “Modified Adjusted Gross Income,” which is a slight modification of what you expect your adjusted gross income to be.

This 1040 form snippet shows how to estimate your AGI. Add up all the taxable sources of income you’ll expect to receive during that time, such as wages, pensions, alimony, interest, tax-deferred withdrawals, rents, and the like.

Then, once you have your AGI, you need to modify it by adding back in the non-taxed portion of Social Security income you’re taking. Better — if you’re not taking SS right now, you might want to delay that to make it easier.

You may also need to add back in some obscure deductions such as certain types of foreign income, tax-exempt interest, and a few more that most of us will never experience. Talk to a specialist if you’re not sure.

For many of us, our AGI and MAGI numbers are the same.

Unlocking subsidies: They don’t care about your already-taxed money.

We all have money in checking and savings accounts that we already paid taxes on. That money never shows up on any IRS tax forms, so isn’t considered as income when calculating ACA subsidies.

So, the key to unlocking subsidies is to split your living expenses between already-taxed and not-yet-taxed money so your taxable income falls between 1 and 4 times the FPL.

It’s simple when you think about it but remember the BIG CAUTION above. If you miss the mark, you’ll have to pay back all your subsidies. Ouch.

But, when you do it right, you’ll save a ton.

How much will you save?

Tens of thousands!

Suppose Mr. and Mrs. Dingle live in Washington State, retired at age 60, spending $100,000 a year, most of which they pull from their not-yet-taxed IRA’s. Their MAGI income is greater than 4x the poverty level, so they pay full price for their coverage, about $1,700 a month for a silver plan. By the time they’re eligible for Medicare, they’ll have spent $102,000 on healthcare premiums alone. Ouch.

Now suppose Mr. and Mrs. Smartz are in the same boat as the Dingles but pull $60,000 from their already-taxed savings account and only $40,000 from their IRAs. For the exact same coverage, they’ll pay just $392 a month — saving $78,000 over the Dingles.

Build your cash position

Some of us have plenty of money in retirement accounts, but not enough already-taxed money in savings to take advantage of the loophole.

If that’s the case, you could keep working and direct as much as you can into post-tax savings.

Or, you might consider withdrawals from your tax-deferred accounts before you retire. Depending on age and income level it could make sense. In a recent article “Seriously, How Much Do You Need to Retire?”, I showed that marginal tax rates don’t change much between $80K and 170k in income for a couple – so a 401k withdrawal might be a good choice for you. But it might not – Talk to a professional before doing that.

Be smart. Take extreme care! This is your money and your retirement

Some caveats:

• For simplicity and brevity, this article has left out a lot of detail. And remember I’m not a licensed financial advisor, so be sure to discuss this idea with your advisor to confirm it’s a good choice for you.
• If you make a tragic math mistake and your MAGI is even $1 over the threshold, you’ll have to pay back all the subsidies when you file your tax returns. That’s a lot of money, so be careful.
• We didn’t talk about ‘cost-sharing’ subsidies. If your MAGI is low enough, your out-of-pocket and deductibles will be reduced as well, saving you even more.
• Healthcare costs on the ACA marketplace vary significantly by plan and location. This article uses average 2020 plan costs in Seattle as an example. Using this tactic in other regions may have different results.
• State income tax should be considered if you’re considering tax-deferred withdrawals before retirement. Washington State does not have one, but in states that do, your savings could be less.
• To take IRA and 401k deferred fund distributions without penalty, you usually need to be at least 59.5 years old. If you’re younger than that be sure to consider the extra cost of penalties.
• Be aware of your investments in Mutual Funds. They may generate tax liabilities even if you don’t withdraw money.
• Be sure to make quarterly tax payments to avoid extra fees.

Above all: Enjoy your retirement!

To contact the author directly, share your confidential feedback HERE, or email: Brian@LifeAfterWork.Zone

NOTE: The author is NOT a licensed investment professional; he’s just a clever guy who spends a lot of time researching and planning for retirement. Whenever you make financial decisions be sure to consult multiple sources and views, be as conservative as you can, and remember to … SAVE!

You’ll find more great resources on https://www.healthcare.gov/