How IRA’s and HSAs work with the ACA

Before-tax and tax deductible contributions (like to a traditional IRA) lower MAGI and increase subsidies. After-tax contributions lower MAGI on withdrawal (like the Roth IRA). HSA’s are tax free in and tax free out, which make them especially cool. This is generally true for ObamaCare’s tax credits and other assistance programs.

In short these means Traditional IRA’s, Traditional 401(k)s, Health Savings Accounts, pre-taxed employer benefits, and other pre-tax or tax deductible contributions can lower your health insurance premium and out-of-pocket health insurance costs (and potentially qualify you for a number of other assistance programs).

Rule of Thumb: If it’s a pre-tax or tax deductible contribution it lowers MAGI now, if it’s an after-tax contribution it lowers MAGI when you withdraw the funds. Early withdrawal penalties can also be deducted from MAGI.

Tips for Maximizing Obamacare Assistance Amounts

With the above information in mind here are a few tips to maximizing savings on health insurance using tax advantaged savings accounts.

Go to HealthCare.Gov: You can use the Marketplace yourself or a private insurer or broker can help you, but if you want cost assistance on healthcare you’ll need to enroll in your state’s Health Insurance Marketplace.

Get a HSA: a Health Savings Account is the king of maximizing health insurance subsidies (go figure). Not only do you get to deduct your full contribution from your MAGI but you get to spend money tax free on medical, dental, and vision care. You can’t pay medical premiums tax free and will incur a withdrawal penalty for non-medical related expenses.

Fund a Traditional IRA or 401(k): Each type of retirement account has it’s perks, but because traditional accounts mean tax advantages now and Roth means tax advantages later you would want a traditional IRA or 401(k) to maximize savings on tax credits now.

Know the Federal Poverty Level and how it relates to assistance: Tax credits, out-of-pocket cost assistance, food assistance, housing assistance, child care assistance, pretty much everything, is tied to the Federal Poverty Level. Claiming an extra $1,000 or deducting an extra $1,000 can make a drastic change in assistance you qualify for. It’s strongly suggested you understand how your actual claimed income and your projected income compare to what assistance programs you are going for. Just under 150% of the Federal Poverty Level is a really powerful place to be for assistance, but be aware that some contributions are limited at lower incomes. TIP: Be wary of subsidy cliffs. If you bring your MAGI down too low or increase it too high it could affect the assistance you qualify for.

Take Advantage of Employer Benefits: If you have employer coverage, you can’t get cost assistance from ObamaCare. But keep in mind, you can be employed part of the year and then gain or lose coverage. In this case pre-taxed FSA and health premium contributions that lower MAGI can help you qualify for greater assistance.

Get a Silver Plan: Silver plans on the Health Insurance marketplace are the only plans that qualify for cost sharing reduction subsidies (CSR). If your income changes and suddenly you qualifies for giant out-of-pocket assistance amounts you don’t have to repay, but you decided to go with a different plan, you aren’t going to be happy.

Understand MAGI, Household Size, and Filing Status: Understanding how MAGI, household size, and filing status affect the above in regard to ObamaCare (and most other assistance programs) is instrumental in maximizing savings.

MAGI: Modified Adjusted Gross Income is Gross Income adjusted for tax deductions with a few things added back in. Many assistance programs including ObamaCare’s tax credits are based on MAGI. Pre-tax contributions like a traditional IRA and tax deductible contributions like a Health Savings Account (HSA) lower your MAGI and thus typically increase eligibility and amounts of assistance programs. Two things to watch out for are 1) some tax advantaged programs use MAGI to determine contribution, so lowering MAGI too much could bar you from contributing 2) some assistance programs like the healthcare tax credit have minimum levels as well, this can bar you from claiming the assistance. TIP: If you want out-of-pocket cost assistance you’ll need

Household Size: Simply, the more people in your tax family the higher your assistance levels are and often the more you can contribute to any given tax advantaged source.

Filing Status: Most assistance program and contribution amounts are going to differ based on filing status. This should be kept in mind when planning out your tax year.

TIP: Each assistance program works differently. Not all assistance programs are based on annual MAGI like ObamaCare’s tax credits. Medicaid is based on monthly MAGI in some states for instance. Furthermore some assistance programs use Gross Income or don’t allow for certain types of deductions.