Capital Gains Harvesting vs. ACA Subsidies: Our New HSA Strategy
- Gin
- Jul 31
- 7 min read
The end of October marks a big milestone in our early retirement—the expiration of our COBRA coverage.
COBRA can be a great healthcare option in early retirement, but it only lasts up to 18 months. After that, you’re on your own.
So I started shopping for insurance on the ACA Health Insurance Marketplace recently—the logical next step. And that’s when I realized there was a major flaw in our early retirement plan.
We knew buying insurance on the ACA Marketplace could get pricey, but we also knew that ACA subsidies in the form of premium tax credits could bring premiums down. So I started plugging in numbers to see what we’d actually pay.
And the quotes that appeared on the screen were much, much higher than I expected, especially for two healthy 51-year-olds.
The reason for the sticker shock?
It had to do with our tax strategy.
The very strategy that was helping us pay almost no federal taxes was also preventing us from qualifying for thousands of dollars in health insurance subsidies.
THE TAX STRATEGY THAT CREATED THE PROBLEM
Because we have about five years of living expenses in cash, we don't have to sell investments for income right away. Instead, we've been using that flexibility to reduce future taxes through a strategy called capital gains harvesting.
Capital gains harvesting involves selling stocks at a profit and immediately buying back the same stock. This resets my cost basis so that when I eventually sell the stock for good, I owe less in taxes.
In fact, I can even owe no federal tax on those long-term capital gains thanks to the 0% long-term capital gains tax bracket.
I currently use the 0% bracket to harvest as much capital gains as I can while paying no federal taxes today. And I’ll use the tax bracket to avoid paying taxes again when I resell the stocks in the future.
With this strategy, our Adjusted Gross Income (AGI) for 2026 will be close to $130,000. But our federal tax liability will be zero!
Not bad, right? Except that although capital gains harvesting is great for taxes, it can be terrible for ACA subsidies.
The reason is that subsidies are based on income. The lower your income, the more premium tax credits you qualify for. Specifically, the government uses something called your Modified Adjusted Gross Income (MAGI).
And here’s where we screwed up.
We weren't making a common beginner mistake. We knew Marketplace subsidies depended on income.
What we misunderstood was what counts as income.
We assumed that because we no longer collected a paycheck, our income would naturally be low.
We were wrong.
MAGI doesn’t just count earned income. It also counts capital gains from selling stocks.
It doesn't matter that we're living off our savings instead of spending the money from those stock sales. In the IRS’s eyes, we have too much income.
Our current capital gains harvesting strategy would force us to pay full price for Marketplace health insurance.
WHY MAGI MATTERS MORE THAN I EXPECTED
Eligibility for ACA premium tax credits is determined by how your MAGI compares to the Federal Poverty Level (FPL). Although things could change in the future, currently you qualify for tax credits if MAGI falls between 100% and 400% of the FPL.
In our case, a $130,000 MAGI is far above the 400% maximum threshold. And the savings we’d lose are pretty significant.
Scenario | MAGI | Monthly Health Plan Premium |
Full capital gains harvesting | $130,000 | $1,340 |
Lower MAGI at 400% FPL | $84,600 | $700 (after $640 subsidy) |
That’s $7,680 in subsidies for the year! That’s huge.
A lower MAGI could cut our health insurance costs by almost half. A MAGI even slightly above that threshold puts us at risk of having to pay full price.
This is why a $1 reduction in MAGI can sometimes produce far more than $1 of health insurance savings.
Luckily, there is a tool available—one that could lower our MAGI while offering several other tax advantages: a Health Savings Account (HSA).
THE FEATURE WE HAD OVERLOOKED: HSA CONTRIBUTIONS REDUCE MAGI
A Health Savings Account is a special type of medical savings account that offers some incredible advantages.
Any money contributed to the account reduces AGI, which in turn reduces MAGI, helping us to qualify for ACA subsidies.
Contributions reduce taxable income just like contributions to a traditional IRA or 401(k).
Money in the account can be invested just like a 401(k) and grows tax-free.
Withdrawals for qualified medical expenses are tax-free.
Unused funds roll over each year.
After age 65, money can be withdrawn penalty-free for any purpose, even non-medical ones.
For us to qualify to open an HSA, we just need an HSA-eligible High-Deductible Health Plan (HDHP).
An HDHP makes sense for my wife and me because we’re both very healthy. We rarely visit the doctor, except for routine preventive care. And we can afford to pay the higher deductible before insurance kicks in if we have a medical emergency.
HDHPs have lower monthly premiums than other health plans to begin with. And with a low enough MAGI, they’ll be even lower still.
THE NEW STRATEGY WE’RE CONSIDERING
We still love our capital gains harvesting strategy, but we now have a choice to make.
Option A: Keep harvesting aggressively
Maximize the 0% LTCG bracket.
Get no ACA subsidy.
Pay much higher health insurance premiums.
Option B: Harvest somewhat less
Contribute to an HSA.
Keep MAGI just under the subsidy threshold.
Pay lower premiums.
Still harvest a meaningful amount of gains.
Option A lets us reap tax benefits in the long term, but will hurt us in the short-term. A lot.
With Option B, if we contribute the maximum amount to an HSA, we could have a MAGI of about $93,000 and still qualify for subsidies. On the flip side, we’d have to give up about $40,000 in capital gains harvesting.
OUR LIKELY NEXT STEP
We currently pay about $750 a month for COBRA coverage. It’s a far cry from what we used to pay when we were employed, but we’ve gotten used to it. And we’d like to not have to pay much more than that going forward.
I’d understand having to pay a lot if we were old and sick. But we’re healthy and relatively young. Granted, early fifties might be considered the wrong side of the hill, but we’re still at the higher part of the hill. Surely, we deserve some breaks for that!
After COBRA expires in October, we’ll likely switch to short-term insurance for the final two months. It’s too late to adjust our MAGI at this point, so it doesn’t make sense for us to purchase ACA health insurance.
Short-term insurance won’t cover routine preventive care, but we’ve already completed our annual exams. We just need something to cover the big emergencies.
For 2027, we’ll probably choose an HSA-eligible HDHP. A Health Savings Account sounds like the right choice for us.
We’ll have to intentionally harvest fewer capital gains, but if we can keep premiums to about the same, then the trade-off isn’t bad. And I like that any unused money in the account rolls over, can be invested, and eventually withdrawn for any reason.
It’ll be interesting to see in a year if this ends up being the right choice.
It might be time for a new spreadsheet.
QUESTIONS WE HAD AFTER RESEARCHING HSAS
What is the difference between an HSA and an FSA?
Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) share some similarities, but have some big differences. Contributions to either account reduce your taxable income and can be used for medical expenses. For the most part, this is where similarities end.
FSAs are only offered through your employer, and contributions are taken directly out of your paycheck. FSA funds can’t be invested, and you lose any unused funds at the end of the year. Also, if you leave your employer, kiss any money left in the account goodbye.
HSAs are not offered exclusively through employers. HSA funds can be invested, and any unused funds roll over. After age 65, you can withdraw the money for any reason, even non-medical reasons.
Can you use an HSA after you retire?
Yes. Unlike an FSA, employment is not a requirement to open an HSA.
Can HSA contributions reduce ACA MAGI?
Yes. Depending on the subsidy rules in effect, reducing your MAGI can significantly increase the premium tax credits you're eligible to receive. That means each dollar contributed to an HSA can sometimes be worth far more than the tax deduction alone.
Do you need a High-Deductible Health Plan to contribute to an HSA?
Yes. Not only must you have a High-Deductible Health Plan (HDHP), it must be an HSA-qualified HDHP. Some HDHPs are not qualified for an HSA.
What happens to an HSA if you don't have medical expenses?
The money stays there, can be invested, and can continue growing. Unlike an FSA’s use-it-or-lose-it rule, any unused money just rolls over to the following year.
WHY THIS CHANGED HOW I THINK ABOUT EARLY RETIREMENT
I used to think minimizing taxes to stretch our money further was going to be most important in early retirement. I wasn’t expecting just how high health insurance costs could get if paying full price. Or how low they could be if we qualified for subsidies.
Now I realize the goal is to minimize the combination of taxes and health insurance costs.
Sometimes paying a little more tax, harvesting a little fewer gains, or contributing to an HSA can leave you with more money overall.
That's a lesson I wish I'd understood on day one.
See you at the finish line!
Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.
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