Key Takeaways
- Most owners report I bond interest only when they cash the bond or it matures at 30 years, so the interest stays out of the income behind ACA premium tax credits until then.
- A Treasury bill fund’s payouts are ordinary dividends, so they count toward that income in every year they’re paid.
- For 2027 Marketplace coverage, a couple loses the whole credit above 400% of the poverty line, or $86,560, and there’s no longer a cap on paying back advance credits.
- Early retirees can cash their I bonds a little at a time in years with room under the line, or wait until Medicare starts.
If you plan to retire before 65 and use ACA premium tax credits until Medicare, I have some good news about your cash. Money in I bonds can earn interest for decades without showing up in the income the credit is based on.
That matters more than ever this year. The enhanced credits that lifted the 400% income cap expired after 2025. Open enrollment for 2027 coverage is underway now, and it runs through Jan. 15.
One couple, 40 and 41, described exactly this problem in a post on Reddit’s r/personalfinance this week. They’re 4.5 years from retiring early and are putting about $5,000 a month into a Treasury bill ETF. Now they’re thinking about moving $20,000 a year of that into I bonds, $10,000 for each of them. Their goal, in their words: “The plan is to stay under 400% FPL the first few years while we do Roth conversions.”
They asked two things: whether the fund’s earnings count toward that income (they guessed not), and whether I bond interest gets added in the year they sell. They have the I bonds right and the fund backward.
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I bond interest can wait up to 30 years
Under IRS rules, most I bond owners report the interest only when they cash the bond or it matures, whichever comes first. I bonds mature after 30 years. You can choose to report the interest every year instead, but you generally don’t have to. The interest is also exempt from state and local tax.
The premium tax credit is based on household income, which starts from your modified AGI: the AGI on your return plus certain untaxed income, such as tax-exempt interest and the untaxed part of Social Security. I bond interest you haven’t reported yet isn’t in your AGI, so it isn’t in that income either.
The timing works well for this couple. Bonds they buy now won’t mature until they’re about 70. That’s well after 65, when Medicare takes over from their Marketplace coverage.
The fund pays its share every year
A fund that holds Treasury bills pays its income out as dividends, and the IRS treats those as ordinary income for the year you receive them. So the fund’s payouts go on the tax return every year and count toward the income behind the credit. They’re there before a single Roth conversion.
Let’s say the fund pays them $5,000 in a year. That’s $5,000 less room for Roth conversions before they reach the line.
The line is a cliff
For 2027 coverage, the credit uses HHS’s poverty guidelines published in January 2026. For a household of two, that’s $21,640. Let’s say it’s just the two of them. Four times $21,640 puts their 400% line at $86,560.
Below that line, the credit shrinks gradually as income rises. Above it, the credit is gone entirely. And for tax years after 2025, there’s no cap on paying back advance credits that turn out to be too high.
Here’s how that plays out. Say that in a retirement year they do Roth conversions that bring their income to $80,000, leaving $6,560 of room. If they cash enough I bonds to report $6,000 of interest, they’re at $86,000 and keep the credit.
If they cash bonds carrying $30,000 of interest that year instead, they’re at $110,000, $23,440 over the line. They’d get no credit for the year and would pay back every dollar of advance credit when they file. That’s an expensive way to collect a few years of interest.
Cash them in small amounts, or wait for Medicare
Fortunately, the deferral is flexible. The couple can cash bonds a few thousand dollars of interest at a time in years with room under the line. They could also leave the bonds alone until Medicare starts, when the Marketplace line no longer applies. After that, Medicare’s own income-based surcharge, which is set from the tax return two years earlier, is the line to watch.
The shelter covers only part of their cash. At $20,000 a year for 4.5 years, the I bonds come to roughly $90,000 out of the roughly $270,000 they’ll put aside. The rest stays in the fund, and its payouts still take up room under the line every year. Still, the rule works the same for anyone retiring before 65, whether at 45 or 61.
Frankly, I’d do what they’re considering. Splitting the cash means the fund’s payouts take up less room under the line, and the I bond interest can wait in the background until a year when it fits.
Of course, Congress could still change the line. The House passed a three-year extension of the enhanced credits in January, but the Senate hasn’t. HHS’s next guidelines, due early next year, will set the dollar line for 2028 coverage.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
