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Bridge the Medicare Gap: Paying for Health Care from 62–65 Without Torching Your IRA

Kerri Foley

November 20, 2025

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Retiring before the age of 65 marks a significant personal and financial achievement. However, this milestone also initiates a critical and often underestimated challenge: navigating the health insurance “gap” between the cessation of employer-sponsored coverage and the commencement of Medicare eligibility.

This period, typically spanning from age 62 to 65, represents a high-stakes financial hurdle that, if managed without a deliberate strategy, can inflict substantial and lasting damage on a carefully constructed retirement plan. 

The decisions made during these few years can have repercussions that echo for decades, affecting the longevity and stability of one’s entire retirement portfolio.   

Your Coverage Options—A Head-to-Head Analysis

Navigating the health insurance landscape without an employer’s guidance requires a detailed understanding of the available options. Each path carries distinct financial implications, coverage limitations, and strategic considerations.

This section provides a granular, comparative analysis of the primary insurance vehicles for the early retiree, focusing on the quantitative and qualitative factors that drive an optimal decision.

The Default Trap: Deconstructing COBRA Continuation Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) offers a seemingly straightforward path: the ability to continue the exact same health insurance plan from a former employer.

However, for the early retiree, this option is often a financially unsustainable and strategically flawed choice, best described as a temporary bridge rather than a long-term solution.

Mechanics and Duration

COBRA allows eligible employees and their dependents to maintain their group health coverage for a limited time following a qualifying event, such as voluntary or involuntary job loss. The key limitation for an early retiree is its duration.

Federal COBRA law generally provides for a maximum of 18 months of continuation coverage. For an individual retiring at age 62, this 18-month period is insufficient to bridge the 36-month gap to Medicare eligibility at age 65, leaving a significant coverage shortfall.   

The Financial Reality—Unmasking the True Cost

The primary drawback of COBRA is its staggering cost, which often comes as a shock to newly retired individuals. The affordability of employer-sponsored insurance is largely due to the employer’s contribution, which covered an average of $7,034 annually for individual plans and $17,393 for family plans in 2023. Under COBRA, this subsidy vanishes entirely.

The retiree becomes responsible for 100% of the total premium—both their former employee share and the employer’s share—plus a federally permitted 2% administrative fee. This shift frequently results in a 400% or greater increase in the individual’s monthly out-of-pocket cost for the same plan.   

A review of 2025 premium data reveals the substantial financial burden:

General Ranges: National averages for COBRA coverage are projected to be between $400 and $700 per month for an individual and $2,000 to $3,000 per month for a family. Some comprehensive family plans can exceed $4,000 per month.   

Specific Plan Examples: Data from various providers for 2025 illustrates these costs. For the City of Phoenix, a single individual on a Blue Cross Blue Shield PPO plan would pay $853.43 per month. For California’s CalPERS system, a single individual on a Kaiser Permanente plan would face a monthly premium of $1,135.16.   

Geographic Disparities: National averages mask extreme regional variations. The average monthly premium in rural Idaho is the nation’s lowest at $307, while Vermont is the highest at $1,275—a more than fourfold difference for equivalent coverage.   

Strategic Use Cases (And When to Avoid It)

Despite its high cost and limited duration, COBRA can serve a tactical purpose in very specific, narrow scenarios. Its primary advantage is providing seamless continuity of care with the same network of doctors and hospitals. Therefore, it may be a viable option for:

Bridging a Very Short Gap: For an individual retiring at age 64 and a half, the 18-month coverage window is more than sufficient to reach Medicare, making COBRA a simple, albeit expensive, solution for a few months.

Preserving a Met Deductible: If an individual retires late in a calendar year after having already met their plan’s annual deductible or out-of-pocket maximum, electing COBRA for the remaining months of the year can be highly cost-effective.

This allows them to receive care for the rest of the year with minimal out-of-pocket costs, which would be reset to zero if they switched to a new ACA plan mid-year.   

Outside of these niche applications, relying on COBRA as the primary strategy for bridging the 62-65 gap is a financial trap. It is both prohibitively expensive for most retirees and expires before it can fully close the gap to Medicare.   

The Strategic Engine: The Affordable Care Act (ACA) Marketplace

For the majority of early retirees, the Health Insurance Marketplace, created by the Affordable Care Act (ACA), represents the most powerful and strategically important tool for securing affordable health coverage. Its system of income-based subsidies is the central lever that allows retirees to control their healthcare costs.

Accessing Coverage

Losing job-based health coverage due to retirement is considered a “qualifying life event.” This triggers a Special Enrollment Period (SEP), which allows an individual to enroll in an ACA Marketplace plan outside of the standard annual Open Enrollment Period (typically November 1 to January 15). 

The SEP generally provides a 60-day window before and after the loss of coverage to select and enroll in a new plan.   

The Subsidy Engine—Your Most Powerful Cost-Control Lever

The affordability of ACA plans for early retirees hinges on two types of subsidies, both of which are determined by the household’s Modified Adjusted Gross Income (MAGI). This direct link between income and cost is what makes the “income engineering” strategies discussed in Part II so critical.

Premium Tax Credits (PTCs): These are the primary subsidies that directly reduce the monthly premium of a Marketplace plan. The amount of the credit is calculated on a sliding scale; the lower the MAGI, the higher the subsidy. 

For many early retirees who can strategically manage their income, these credits can lower the cost of a comprehensive health plan to a surprisingly small amount.   

Cost-Sharing Reductions (CSRs): These are additional subsidies available only to individuals who select a “Silver” tier plan and have a MAGI below a certain threshold (typically 250% of the Federal Poverty Level). CSRs reduce out-of-pocket costs by lowering deductibles, copayments, and coinsurance, making the plan more valuable when care is needed.   

The Looming Threat: The Post-2025 Subsidy Cliff

A critical risk factor that must be incorporated into any long-term plan is the scheduled expiration of enhanced ACA subsidies. The American Rescue Plan Act of 2021, later extended by the Inflation Reduction Act, significantly increased the generosity of PTCs and removed the “subsidy cliff” for those earning over 400% of the Federal Poverty Level.

These enhancements are set to expire at the end of 2025 unless Congress acts to extend them again.   

Analysis by KFF and reporting in The Washington Post quantify the potential impact:

A 60-year-old couple with an annual income of $85,000 could see their monthly premium payments increase by an average of $1,507 in 2026.   

This translates to a potential annual premium increase of over $18,000 to $22,600 for this demographic if the enhanced subsidies are not extended.   

This legislative uncertainty underscores the paramount importance of developing a robust income management strategy. A plan that can effectively lower MAGI will not only maximize subsidies under the current law but will also provide a crucial buffer against the financial shock of a potential subsidy reduction in 2026 and beyond.

Alternative Pathways: A Comparative Review

While COBRA and the ACA Marketplace are the most common options, several other pathways exist. These alternatives range from highly practical to high-risk and should be evaluated based on an individual’s specific circumstances, risk tolerance, and financial situation.

Spousal Plans: If one spouse continues to work and has access to an employer-sponsored plan, adding the retiring spouse is often the simplest and most cost-effective solution.

This path provides continuity and is typically more affordable than unsubsidized individual coverage. However, it is essential to conduct a cost-benefit analysis, comparing the premium increase for adding a spouse against the potential cost of a heavily subsidized ACA plan.   

Private (Off-Exchange) Insurance: It is possible to purchase health insurance directly from an insurer or through a broker, outside of the government-run Marketplace. While this may offer a wider variety of plan options, these “off-exchange” plans are not eligible for the Premium Tax Credits (PTCs) discussed earlier.

Without subsidies, these plans are often prohibitively expensive for early retirees and are generally not a competitive option.   

“Barista FIRE”: Part-Time Work with Benefits: A growing strategy within the Financial Independence, Retire Early (FIRE) community involves securing part-time employment specifically for the purpose of gaining access to health benefits.

This “Barista FIRE” approach can be a viable way to obtain affordable, employer-subsidized coverage. Several national companies are known for offering health insurance to part-time employees who meet certain hourly work requirements, including Starbucks, Costco, Lowe’s, and UPS.   

Short-Term Health Plans: These plans are designed as temporary stopgaps and are characterized by low premiums. However, this lower cost comes with significant trade-offs.

Short-term plans are not regulated by the ACA, meaning they typically provide less comprehensive coverage, may impose lifetime or annual limits, and, most importantly, can deny coverage or exclude benefits for pre-existing conditions.

For these reasons, they are a high-risk option and generally unsuitable for retirees who need reliable, comprehensive coverage.   

Health Sharing Ministries: These are not health insurance. They are faith-based organizations in which members make monthly contributions to a shared pool of funds used to pay for one another’s medical bills.

While monthly costs can be lower than traditional insurance, these ministries come with significant caveats. They are not legally obligated to pay claims, often have strict lifestyle and faith requirements, and typically do not cover pre-existing conditions for a waiting period or at all. 

As one expert notes, they can be used as a high-risk hedge, with the member prepared to switch to an ACA plan if a serious condition develops, but they do not offer the security of a regulated insurance contract. 

Table 1: Comparative Analysis of Pre-Medicare Insurance Options

The Funding Playbook—How to Pay for Premiums While Protecting Your IRA

Securing the right coverage is only half the battle; paying for it without jeopardizing long-term financial security is the critical second step. This section outlines a strategic playbook for funding healthcare costs during the 62-65 gap, with the explicit goal of preserving tax-deferred retirement assets like traditional IRAs and 401(k)s.

The core of this strategy lies in leveraging tax-advantaged accounts and meticulously managing income to minimize costs.

The Triple-Threat Funding Tool: Your Health Savings Account (HSA)

The Health Savings Account (HSA) is arguably the most powerful financial tool available for managing healthcare costs in the United States.

Its unique structure offers an unparalleled combination of tax benefits that can be strategically deployed by the early retiree to cover out-of-pocket medical expenses, thereby freeing up other funds for premium payments.

The Unrivaled Power of the Triple-Tax Advantage

The power of the HSA stems from its unique triple-tax advantage, a feature no other retirement or investment account can claim:

Tax-Deductible Contributions: Money contributed to an HSA is either made on a pre-tax basis through payroll deductions or is tax-deductible if contributed directly, reducing current taxable income.

Tax-Free Growth: The funds within an HSA can be invested and are allowed to grow completely tax-free.

Tax-Free Withdrawals: Withdrawals are 100% tax-free at the federal level when used for qualified medical expenses.

This combination allows individuals to pay for healthcare with dollars that have never been and never will be taxed, making it the most efficient way to cover medical costs.

Rules of Engagement for 2025-2026

To effectively use an HSA, one must adhere to the specific rules and limits set by the IRS, which are adjusted annually for inflation.

Contribution Limits: For 2025, the maximum contribution is $4,300 for an individual with self-only coverage and $8,550 for family coverage. These limits are projected to increase in 2026 to $4,400 and $8,750, respectively.

Catch-Up Contribution: A crucial provision for those nearing retirement allows individuals aged 55 and older to contribute an additional $1,000 per year. If both spouses are over 55, they can each contribute this catch-up amount, but they must do so in separate HSA accounts.

HDHP Eligibility: To be eligible to contribute to an HSA, an individual must be enrolled in a qualifying High-Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage ($3,300 for family) and a maximum out-of-pocket limit of $8,300 ($16,600 for family).

Medicare Disqualification: It is critical to understand that once an individual enrolls in any part of Medicare (Part A, B, etc.), they are no longer eligible to make contributions to an HSA.

Contributions must cease six months prior to Medicare enrollment to avoid potential tax penalties. However, the existing funds in the account can still be used tax-free for qualified medical expenses throughout retirement.

Table 3: 2025-2026 Health Savings Account (HSA) Quick Reference Guide

The Premium Payment Rule—A Critical Distinction

A common point of confusion surrounding HSAs is whether the funds can be used to pay for health insurance premiums. The IRS rules are precise and create a critical distinction for early retirees:

Permitted Use for Premiums: HSA funds can be used on a tax-free basis to pay for COBRA continuation coverage premiums. They can also be used to pay for health insurance premiums while an individual is receiving federal or state unemployment benefits.

Prohibited Use for Premiums: HSA funds generally cannot be used to pay for standard health insurance premiums, including those for ACA Marketplace plans or private off-exchange plans. Using HSA funds for these premiums would be considered a non-qualified distribution, subject to income tax and a 20% penalty if under age 65.

Strategic Application in the Gap Years

Given these rules, the optimal strategy for an early retiree with an ACA plan is to create a two-pronged funding system. The HSA should be reserved exclusively for paying all qualified out-of-pocket medical expenses—deductibles, copayments, coinsurance, dental, and vision care—on a tax-free basis.

This preserves cash from other sources (such as a taxable brokerage account) to be used for the monthly ACA plan premiums. This division of labor ensures that every dollar spent on direct medical care is done with maximum tax efficiency, thereby reducing the total cash flow needed from other investment accounts.

Mastering Your MAGI: The Key to Affordable ACA Coverage

The single most important factor determining the cost of an ACA Marketplace plan is Modified Adjusted Gross Income (MAGI). For the early retiree, understanding and strategically managing MAGI is not just a tax-saving exercise; it is the primary mechanism for controlling healthcare costs.

By intentionally structuring how they generate income, retirees can “engineer” a lower MAGI, unlocking substantial premium subsidies and dramatically reducing their insurance expenses.

Deconstructing MAGI for the Early Retiree

For the purposes of calculating ACA subsidies, MAGI starts with Adjusted Gross Income (AGI) from a tax return and adds back certain deductions. For most early retirees, the key is understanding which sources of cash flow are included in this calculation and which are not.

What’s INCLUDED in MAGI: These are the income sources that increase MAGI and therefore reduce potential ACA subsidies.

• Withdrawals from traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement accounts.
• Pension and annuity payments.
• Wages from any part-time employment.
• The taxable portion of Social Security benefits.
• Realized capital gains from the sale of assets in a taxable brokerage account.

What’s EXCLUDED from MAGI: These are the sources of cash flow that are “invisible” to the ACA subsidy calculation, making them the preferred funding sources for early retirees.

• Qualified distributions from Roth IRAs and Roth 401(k)s.
• The return of principal (cost basis) from the sale of assets in a taxable brokerage account (only the gain is included in MAGI).
• Loans from a life insurance policy.
• Funds from a savings or checking account.
• Withdrawals from an HSA used for qualified medical expenses.

This distinction is the foundation of effective income planning. A retiree could have a high cash flow of $100,000 for living expenses, but if that cash is sourced from a Roth IRA and the return of principal from a brokerage account, their MAGI could be close to zero, qualifying them for maximum ACA subsidies.

The “Income Engineering” Strategy

The proactive management of MAGI involves funding retirement expenses by drawing from different accounts in a specific, strategic sequence. This allows the retiree to meet their spending needs while keeping their official income low for subsidy calculation purposes.

Step 1: Project Annual Cash Needs: Determine the total after-tax cash required for the year, including all living expenses and the estimated full cost of the desired ACA plan premium.

Step 2: Sequence Withdrawals for Optimal MAGI: Fund these cash needs by liquidating assets in the following order of priority:

First: Taxable Brokerage Account. Sell assets, strategically realizing long-term capital gains to stay within low tax brackets (as detailed in section 2.3). The bulk of the withdrawal will be the return of principal, which does not count toward MAGI.

Second: Roth IRA/401(k). Take qualified distributions, which are entirely tax-free and do not add to MAGI.

Third: Cash Savings. Use funds from savings, checking, or money market accounts.

Last Resort: Traditional IRA/401(k). Withdrawals from these accounts should be avoided or used only in small, precise amounts to “top up” income to a specific MAGI target, if necessary. Large withdrawals will quickly push a retiree out of subsidy eligibility.

This disciplined withdrawal sequence is the key to decoupling actual spending from reportable income, thereby maximizing eligibility for ACA premium tax credits and dramatically lowering the net cost of health insurance.

Table 2: The Impact of Income Source on MAGI and ACA Subsidies

Funding from Taxable Assets: A Surgical Approach to Capital Gains

For many early retirees, the taxable brokerage account is the primary engine for funding expenses while keeping MAGI low. However, this requires a surgical approach to managing the capital gains that are realized upon selling assets.

Long-Term vs. Short-Term Gains

The tax treatment of capital gains is determined by the holding period of the asset.

Long-Term Capital Gains: Profit from the sale of an asset held for more than one year. These gains are taxed at preferential rates of 0%, 15%, or 20%, depending on the individual’s total taxable income.

Short-Term Capital Gains: Profit from the sale of an asset held for one year or less. These gains are taxed at the individual’s ordinary income tax rates, which are significantly higher and far more damaging to a MAGI-sensitive strategy.

For the early retiree, the clear mandate is to only realize long-term capital gains whenever possible.

The 0% Capital Gains Bracket

One of the most powerful and underutilized provisions in the tax code for retirees is the 0% long-term capital gains tax bracket. For the 2024 tax year, married couples filing jointly with a total taxable income of up to $94,050 pay a 0% federal tax rate on their long-term capital gains.

An early retiree with no wage income can strategically “fill up” this bracket by realizing just enough long-term capital gains from their brokerage account to cover their expenses. For example, a couple needing $80,000 for living expenses could realize $80,000 in long-term gains, which would constitute their entire taxable income.

This would result in a $0 federal income tax liability on those gains, and the $80,000 would become their MAGI for ACA subsidy calculations—an amount that would still qualify them for significant subsidies.

Strategic Tax-Loss Harvesting

Tax-loss harvesting is a complementary strategy that involves selling investments at a loss to offset capital gains realized from selling profitable investments. Capital losses must first be used to offset capital gains of the same type (long-term losses against long-term gains).

If there are still net capital losses remaining, up to $3,000 per year can be used to offset ordinary income, which directly reduces MAGI. Any losses beyond that can be carried forward to future years. This technique can be used near the end of the year to fine-tune the final MAGI figure, ensuring maximum ACA subsidy eligibility.

Building Your Bridge—A Synthesized Action Plan

With a thorough understanding of the available coverage options and the strategic funding playbook, the final step is to synthesize this knowledge into a cohesive, personalized action plan. This section provides a decision-making framework and a year-by-year checklist to guide the early retiree through the process of building a secure bridge to Medicare.

The Decision Framework: Designing Your Custom Strategy

A successful plan is not one-size-fits-all; it must be tailored to an individual’s unique health, financial, and personal circumstances. This five-step framework provides a structured process for creating that custom strategy.

Step 1: Assess Your Health Profile. The first step is a realistic evaluation of current and anticipated medical needs. Consider chronic conditions, prescription drug requirements, and preferred doctors and hospitals.

This assessment will determine the necessary level of coverage. An individual in excellent health might opt for a lower-premium, high-deductible (HDHP) Bronze or Silver plan to minimize costs, while someone with chronic conditions may find a higher-premium Gold or Platinum plan to be more cost-effective due to lower out-of-pocket expenses.

Step 2: Map Your Financial Assets. Create a comprehensive inventory of all financial resources, categorizing them into three distinct “buckets”:

1. Tax-Deferred: Traditional IRAs, 401(k)s, 403(b)s, pensions.
2. Tax-Free: Roth IRAs, Roth 401(k)s, HSAs.
3. Taxable: Brokerage accounts, mutual funds, cash, CDs.This map is essential for implementing the strategic withdrawal sequence outlined in Part II.

Year-by-Year Checklist for the 62-65 Transition

This timeline breaks down the planning and execution process into manageable steps, ensuring that critical deadlines and strategic actions are not missed.

Age 61 (The Planning Year)

Finalize Roth Conversions: If applicable, complete any planned Roth conversions to bolster the MAGI-free funding bucket before wage income ceases.

Maximize Final HSA Contributions: Ensure the maximum possible contribution, including the $1,000 catch-up, is made to the HSA while still eligible.

Develop the Strategy: Use the five-step decision framework (3.1) to create the initial, detailed plan for coverage and funding.

Gather Preliminary Data: Obtain a COBRA premium quote from the HR department and use the ACA Marketplace’s window shopping tools to get preliminary estimates of plan costs and subsidies based on projected retirement income.

Age 62 (The Execution Year)

Enroll in Coverage: Upon retirement, the 60-day Special Enrollment Period is triggered. Use this window to formally apply for and select the chosen ACA Marketplace plan.

Implement Funding Strategy: Begin funding living expenses according to the “income engineering” withdrawal sequence established in the plan.

Activate HSA for Out-of-Pocket Costs: Start using the HSA to pay for all qualified medical, dental, and vision expenses tax-free.

Age 63-64 (The Maintenance Years)

Annual Plan Review: During each year’s Open Enrollment Period (Nov 1 – Jan 15), re-evaluate the ACA plan. Check for changes in premiums, provider networks, and drug formularies, and switch plans if a better option is available.

Annual MAGI Review: At the end of each calendar year, review the income generated and perform any necessary tax-loss harvesting to ensure the final MAGI aligns with the target for maximizing subsidies.

Monitor Legislative Landscape: Stay informed about potential changes to the ACA, particularly the status of the enhanced subsidies set to expire after 2025. Be prepared to adjust the budget and strategy if these subsidies are reduced or eliminated.

Age 64 and 9 months (The Medicare Transition)

Begin Medicare Enrollment: The Initial Enrollment Period for Medicare begins three months before the 65th birthday month. Use this time to enroll in Medicare Part A (typically premium-free) and Part B.

Evaluate Supplemental Coverage: Research and select supplemental coverage. This involves choosing between Original Medicare paired with a Part D (prescription drug) plan and a Medigap policy, or an all-in-one Medicare Advantage (Part C) plan

Coordinate Coverage End Dates: Plan to cancel the ACA Marketplace plan so that its coverage ends precisely when Medicare coverage begins. This prevents paying for overlapping coverage and avoids potential complications with Medicare enrollment.

Conclusion: Securing Your Health and Wealth on the Path to Medicare

Successfully bridging the 62-65 healthcare gap is a defining challenge of early retirement. The analysis presented in this report demonstrates that this period, while fraught with financial risk, is manageable through diligent and proactive planning.

The key to navigating these years without compromising a lifetime of savings is to shift one’s mindset from simply “paying the bill” to strategically architecting the financial circumstances that minimize the bill itself.

This involves a sophisticated, integrated approach that treats insurance selection, income generation, and tax planning not as separate activities, but as interconnected components of a single, unified strategy.

The core principles for success are clear. First, leverage the power of the ACA Marketplace and its income-based subsidies by meticulously managing Modified Adjusted Gross Income. Second, prioritize funding sources in a deliberate sequence that protects tax-deferred accounts, drawing first from taxable assets and MAGI-free Roth accounts.