Early retirement health insurance: bridging the years before Medicare

If you retire before 65 you have four realistic ways to stay covered until Medicare begins: COBRA continuation of your employer plan, an individual policy from the Affordable Care Act marketplace, coverage as a dependent on a working spouse's plan, or an employer retiree plan if you are fortunate enough to be offered one. Which is cheapest depends almost entirely on your household's taxable income, and that link between income and premium is stronger in 2026 than it was for the previous five years.

That is the part most retirement plans get wrong. People model the withdrawal rate carefully and then treat health insurance as a fixed line item. It is not fixed. For a couple retiring at 60, the difference between a well-sequenced withdrawal plan and a careless one can be several thousand dollars a year in premiums alone, on identical spending.

The four routes, at a glance

Route	How long it lasts	What drives the cost
COBRA	Usually 18 months from the qualifying event	The full group premium, plus up to a 2% administration charge
ACA marketplace	Indefinitely, until Medicare	Age, location, plan tier, and your household modified AGI
Spouse's employer plan	While the spouse works	Whatever the employer charges for dependent cover
Employer retiree plan	Per the plan's terms	Whatever subsidy, if any, the employer still provides

A fifth option deserves a mention: part-time work chosen partly for the benefits. It is unglamorous and it works, and for someone retiring at 58 or 59 it can be worth more than the salary attached to it.

COBRA: the same plan, at the real price

COBRA lets you continue your employer's group coverage after leaving. The qualifying event of leaving employment generally gives 18 months of continuation, and the plan may charge up to 102% of the total cost of the coverage — the whole premium, employer share included, plus up to 2% for administration. Other qualifying events, such as divorce or a dependent ageing off the plan, can extend the period to 36 months for the affected beneficiary.

You have at least 60 days to elect, measured from the later of the qualifying event or the date you receive the election notice, and the election is retroactive to the date coverage would otherwise have lapsed. That retroactivity is genuinely useful. Someone who is healthy and reasonably risk-tolerant can decline to elect immediately, keep the money, and still elect within the window if something happens in the interim.

COBRA's real appeal is continuity: the same network, the same doctors, and the deductible you have already partly met this year. Its drawback is that the price is the price, with no subsidy of any kind, and for a family it is often the most expensive option on the table.

One further point that matters for anyone within a few years of 65: COBRA is not coverage based on current employment. That distinction has consequences at Medicare enrolment, and they are covered below.

The marketplace, and what changed in 2026

An individual policy bought through the ACA marketplace cannot be refused or priced for your health history. Premiums vary by age, location and plan tier, and the published price is reduced by a premium tax credit that depends on your household modified adjusted gross income relative to the federal poverty level for your household size.

Between 2021 and 2025, temporary enhanced credits removed the upper income limit on that subsidy and capped benchmark premiums at a percentage of income for everyone. Those enhancements expired on 31 December 2025 and the rules reverted for 2026. The practical consequence is that the eligibility cliff at 400% of the federal poverty level is back: at or just under that threshold a household receives a credit, and just above it the credit is zero. Not smaller — zero.

Legislative efforts to extend the enhanced credits have continued into 2026, with a three-year extension passing the House in January 2026 and stalling in the Senate. Nothing had changed the 2026 rules as this was written. Because this is an area where the law can move mid-year and the poverty-level figures are republished annually, confirm the current position at healthcare.gov or your state exchange before you plan around it.

The open enrolment window runs from 1 November in most states, and losing job-based coverage is a qualifying life event that opens a special enrolment period outside it. Two timing traps are worth naming. Exhausting your COBRA maximum period is a qualifying event; voluntarily dropping COBRA part-way through is not, so someone who elects COBRA and then wants to switch to a marketplace plan in March may find themselves waiting until the next open enrolment. And the special enrolment period triggered by losing employer coverage has a deadline, so it should not be left to run down while you weigh options.

Your taxable income is now a planning variable

With the cliff restored, the income you report is one of the largest levers you control over the cost of cover. Modified AGI for this purpose is broadly your adjusted gross income with certain items added back, including tax-exempt interest and any excluded foreign earned income.

What follows from that is a genuine change in the order you draw money in the pre-Medicare years:

• Withdrawals from a traditional 401(k) or IRA land in AGI in full and push you toward the threshold.
• Taxable brokerage withdrawals only bring the realised gain into income, not the return of your own basis, so the same dollar of spending can cost far less AGI.
• Roth withdrawals and cash savings produce no AGI at all, which makes them disproportionately valuable in exactly these years. Our note on tax-free retirement income sets out which sources genuinely qualify.
• Roth conversions, which are otherwise attractive in the low-income years before Social Security and required minimum distributions begin, add directly to MAGI. The Roth conversion guide covers the mechanics; the point here is that the conversion window and the subsidy window are in direct conflict, and a conversion that saves tax at 22% can cost more than it saves if it tips you over the cliff.

That last tension has no universally right answer. For some households the correct sequence is to accept a higher premium and convert aggressively before Medicare, since IRMAA surcharges create a similar income-sensitivity problem later. For others it is to keep MAGI just under the threshold for five or six years and convert afterwards. The arithmetic has to be run on your actual numbers, and it is worth running.

The HSA, and a rule people miss

If you have a health savings account, the pre-Medicare years are when it earns its keep. The balance can be spent tax-free on qualified medical expenses at any age, and this is exactly when medical spending is being paid from your own pocket.

The premium rules are specific and asymmetric. HSA funds can pay COBRA premiums and can pay health insurance premiums while you are receiving unemployment compensation, both of which are express exceptions. They generally cannot pay ACA marketplace premiums. After 65 they can pay most Medicare premiums, but not Medigap.

Contributing is a different question from spending: you need coverage under a qualifying high-deductible health plan, and contributions must stop once you enrol in Medicare. Our guide to using an HSA for retirement covers the accumulation side.

Where the money comes from before 59½

Bridging to Medicare often means bridging to penalty-free retirement account access as well. Two provisions matter. Separating from service in or after the year you turn 55 allows penalty-free withdrawals from that employer's plan — but not from an IRA — under the rule of 55. And substantially equal periodic payments permit penalty-free IRA withdrawals at any age, at the price of a rigid schedule you cannot vary.

Both add to AGI, which brings you back to the subsidy question. They are tools for accessing money, not for managing income.

At 65, and the COBRA trap

Medicare's initial enrolment period spans seven months: the three months before the month you turn 65, that month, and the three months after. Missing it matters, because the Part B late enrolment penalty is 10% of the standard premium for each full 12-month period you could have been enrolled and were not, and it is generally payable for as long as you keep Part B.

The special enrolment period that lets people delay Part B without penalty exists for those covered by a group health plan based on current employment. COBRA and retiree coverage are not current employment. Someone who retires at 64, elects 18 months of COBRA, and assumes their Part B clock starts when COBRA ends has misread the rule, and the penalty follows them for life.

If you are covered by a spouse's plan through their active employment, the special enrolment period does apply. The distinction is who is working, not whose name is on the card.

An illustration of the income effect

Consider a hypothetical couple, both 61, retiring with $1.4m across a traditional IRA, a brokerage account and a Roth IRA, spending $85,000 a year.

	Draw entirely from the IRA	Blend IRA, brokerage basis and Roth
Approximate MAGI	About $92,000	About $58,000
Position against the 400% threshold	Likely above for a two-person household	Likely below
Premium tax credit	None	Available, sized by the gap between the benchmark plan and the applicable percentage of income

These figures are illustrative and depend entirely on the poverty-level tables for the year, household size, state, age and the benchmark plan where you live. They are not a quote and not advice about your own position. Thresholds and subsidy rules change, and this area is under active legislative discussion; verify the current numbers before acting.

The point is the shape of the answer, not the numbers. Two households with identical spending can face very different premiums depending on which accounts the spending comes from, and that is a decision made years in advance by how the accounts were funded in the first place.

Frequently asked questions

Is COBRA or a marketplace plan cheaper?

It depends on your income. If your MAGI puts you within subsidy range, the marketplace is usually far cheaper, sometimes dramatically so. If you are above the threshold, COBRA is often competitive and comes with a network you already know and a deductible you have partly met. Price both before electing, and remember the 60-day election window gives you time to do so.

Can I keep my HSA after I retire early?

Yes. The account is yours and the balance stays invested and available for qualified medical expenses indefinitely. You simply cannot make new contributions unless you have qualifying high-deductible coverage, and you must stop contributing once Medicare begins.

Does taking Social Security early affect my ACA subsidy?

Yes. The full amount of Social Security benefits, including any portion not subject to income tax, counts toward modified AGI for premium tax credit purposes. That makes claiming early a double decision in the pre-65 years: it reduces the lifetime benefit and it can reduce or eliminate the subsidy at the same time.

What if my income turns out different from what I estimated?

The premium tax credit is advanced during the year based on your estimate and reconciled on your tax return. If your actual income is higher, you may repay some or all of it; if lower, you may receive more. Report income changes to the marketplace during the year rather than waiting for the reconciliation, and be conservative with estimates that sit close to the threshold.

This article is general education, not personal financial, tax or insurance advice. Premium tax credit rules, poverty-level figures, Medicare premiums and penalties change, and the enhanced-subsidy question remains subject to legislation. Verify the current position with healthcare.gov, your state exchange, the IRS and Medicare, and discuss your own circumstances with a qualified adviser before acting.