Early Retirement Option

[Shaun5052]

I am a married with no children 40 y/o career firefighter in NJ. I am eligible for a 65k yearly pension with medical (co-share approx 10k) at 49.

Recently NJ passed a law which could allow me to retire at 44 on a 50k yearly pension but with no medical cover. 

If i choose this route our primary income would be the 50k pension, 457b withdrawls (currently 110k), savings (currently 35k), & proceeds from sale of our primary house (estimated 70k-120k). Aside from the 68k mortgage we are debt free- cars paid off & no Credit Card debt.

We would sell the house 2 years prior to retirement & make our paidoff condo our primary residence redirecting mortgage payments to maxout 457b & increase savings. Our condo taxes,hoa,utilities cost $800/ month.

The sticking point is the no medical option. Can i afford our out of pocket medical coverage for 21 years (me) & 25 years (wife) until medicare? The plan is to live off the 50k pension & savings along with here & there side hustle work and only use the 457b funds to cover medical insurance costs. If i can afford medical with pension & savings i will continue to grow 457b.

If i use 457b soley for medical insurance costs can i avert paying taxes (NJ/Federal) on the withdraw? 457 is not subject to 10% penalty. 

Sorry for the long story to get to the question but wanted to give a clear picture.

[VEpling2]

No.  Retirement distributions are taxable as income on your New Jersey and your federal tax returns.  The exceptions for using the withdrawal from certain retirement accounts for medical expenses apply to the penalties for early withdrawals.  In every case, if you contribute to a tax deferred retirement account your distributions from that account must be included in your taxable income.  Some states have exceptions to taxing retirement distributions, but New Jersey is not one of those states.

[Shaun5052]

@VEpling2 Not knowing what the standard deduction will be in the future... if i only use the 457b dollar for dollar for private medical insurance costs wouldnt i be able to deduct the medical costs from my taxable income? Making it a tax free distribution in essence?

Also when trying to purchase private insurance on the marketplace exchange my income would be 50k yearly pension but the 457b funds for the medical would actually increase my taxable income giving me less of a subsidy correct?

[VEpling2]

That is a bit of a gamble.  As you said, we don't know what will happen with the standard deduction.  Even without that though, the medical deduction is not a dollar for dollar deduction.  Unless further changes are made to the tax code the medical deduction is subject to an income limitation.  Medical expenses must first be reduced by 7.5% of your adjusted gross income.  The percentage was 10% at one time.  This means that if you have $50,000 in adjusted gross income the first $3,750 (50,000 x 7.5%) of your medical expenses are not deductible.  If you spend $12,000 in insurance premiums your deduction would only be $8,250.

To compound this we go back to the overall standard deduction vs itemized deduction issue.  Since you are living in a paid off condo you will have no mortgage interest.  Under the 2021 standard deduction amount ($25,100) you would need $13,250 (25100-8250) in property taxes, state taxes, charitable contributions, and other allowable itemized deductions before you could deduct any of your medical expenses.