Retiring Before 65: How Your Income Strategy Can Affect Your Covered California Costs
For a lot of Californians, retiring before 65 opens up a stretch of life that feels like a genuine gift: unhurried mornings, time for family, space for the things there was never quite room for during a full-time career. It is a chapter worth enjoying fully, on your own terms.
One decision shapes that chapter more than people expect: how you fund it, and specifically, which accounts you draw the income from. If you are retiring before Medicare begins at 65, you are likely getting health coverage through Covered California, and the income you report can directly affect what that coverage costs you each month.
Understanding the Number That Matters
Covered California ties financial help to your household income, measured against the federal poverty level (FPL). For 2026 coverage, a two-person household with income up to $84,600 (400% of FPL) may qualify for a premium tax credit. A single filer's threshold sits lower, at $62,600.
Here is something worth knowing as you plan: The temporary federal rules that softened this threshold in recent years have expired. Previously, income just over 400% of FPL simply meant paying a somewhat higher share toward premiums. That cushion is gone.
Now, crossing the line means losing the premium tax credit altogether, and any subsidy received in error may need to be repaid in full, with no cap on the amount. It is a year where precision in estimating income carries real weight.
Not All Income Counts the Same Way
This is where your choice of accounts comes in. The income that determines Covered California eligibility, known as modified adjusted gross income (MAGI), treats different sources differently:
Social Security is a common surprise. Even the portion that is not taxed on a regular return still counts toward this calculation, so nearly all of the benefit is included.
Withdrawals from a traditional IRA or 401(k) count in full, since they are taxable income.
Qualified withdrawals from a Roth IRA do not count at all. Because that money was already taxed when it was contributed or converted, pulling from a Roth account can supplement income without moving the needle on MAGI.
Consider a couple whose income includes Social Security and withdrawals from savings. If the taxable portion of their Social Security is $30,000 and they want to withdraw an additional $20,000 for living expenses, pulling that $20,000 from a Roth IRA keeps their MAGI close to $30,000, plus any non-taxable Social Security added back in. Pulling the same $20,000 from a traditional IRA could push their MAGI to $50,000 or higher.
These figures are hypothetical and are not meant to represent any actual household, but they illustrate how the same spending need can produce very different results depending on where the money comes from.
Where a Pension Changes the Picture
A pension can be one of retirement's great comforts: income that shows up every month, no market required. But for this particular strategy, a pension does not flex the way a portfolio withdrawal does. There is no option to take less of it in a given year to stay under the threshold.
For a couple whose combined pension and Social Security already sits close to or above the $84,600 mark, there may be little room left to work with. The Roth-versus-traditional decision carries far less weight when the baseline income is already high and fixed.
This is not a reason to see a pension as a drawback (a reliable income stream is worth a great deal), but it is a reason to look at the whole picture together rather than lean on any single strategy in isolation.
Bringing It Together
Every household's cash flow needs, tax situation, and account mix are different, so this isn't a one-size-fits-all formula. But in general, retirees trying to stay under the Covered California threshold might consider drawing from sources in roughly this order:
Cash, savings, or taxable brokerage assets first. Withdrawing principal, or the basis portion of an investment sale, does not add to MAGI.
Roth IRA withdrawals next. Qualified distributions are tax-free and do not move MAGI at all, which makes Roth accounts the most flexible tool for filling an income gap.
Delayed Social Security where possible. Once benefits start, nearly the full amount counts toward MAGI, so waiting preserves headroom under the threshold and can increase the eventual benefit.
Traditional IRA or 401(k) withdrawals last, and only in the amount needed. Every dollar here counts fully toward MAGI, so this is the lever to use most sparingly when the goal is to stay under $84,600.
Pension income as a fixed starting point, not a lever. Since it cannot be deferred or reduced, it should be treated as the baseline the other four items are planned around.
This order can shift based on required minimum distributions (RMDs), an existing Roth conversion strategy, or broader tax bracket management, which is exactly why it is worth reviewing against your full picture rather than any single account in isolation.
If you are approaching this transition and want to work through what it could look like for your own situation, we would welcome the conversation. We are a fee-only, fiduciary Registered Investment Advisor serving clients in California, Utah, and nationwide. You can schedule a complimentary consultation here.
This material was written in collaboration with artificial intelligence (Claude) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is an independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Daniel Andersen, CFP®, a member of NAPFA, the country's leading professional association of fee-only financial advisors.