Affordable Care Act: 401(k) withdrawals count as income

I am 57 and retired so I am allowed to withdraw from my 401k without penalty. Will any withdrawals be counted as income when calculating my costs or subsidies with regard to ACA?

Kicking Back in Michigan

 Dear Kicking Back in Michigan,

First, thank you for teaching me something new.  I did not realize that a person could withdraw from their 401(k) before age 59 and a half.  So, assuming that you were separated from service during or after the calendar year when you turned 55, then you are ready to start rolling in the retirement dough.

When you take a withdrawal from your 401(k), it will be recognized as income and taxed at your current rate.  So it does become part of your Modified Adjusted Gross Income (MAGI for the IRS hipsters) which is used to calculate your subsidies for your health insurance.  Here is Healthcare.gov’s definition of MAGI.

Everyone should be careful about estimating income for the ACA subsidies.  If you estimate your income low and you get more subsidies than you should have, you will have to pay it back when you file your taxes.  For most people, estimating their income a bit higher than they expect is a better strategy.  By estimating high, you are more likely to get a bit back at tax time.

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Linda Riddell

About Linda Riddell

A published author and health policy analyst with 25 years’ experience, Linda Riddell's goal is to alleviate the widespread ailment of not knowing what your health plan can do for you.