ACA and Annuities

[mrftexas]

I know a lot of people here try to control their income for ACA subsidy purposes. Here is my situation:

Wife and I both retired - no W-2 income. One dependent at home for another 5 years.

Last year's MAGI was $95000,so based on that, I would not qualify for any ACA subsidy. If I could reduce it by ~$12000 or so, I would qualify and my Bronze plan would have a $0 premium (it would be $2100/mo otherwise). So, it makes sense to try to get my income down $12000 to avoid paying $25000 in premiums.

With no W-2 income, shielding income using an IRA is not an option. None of the ACA plans where I live (Texas) are HSA eligible, so that is out. I do have capital loss carryover, so I can get the $3000 reduction from that.

One option is to take some of my fixed income investment money and park it in a savings account that essentially will earn nothing.

Another option I'm considering is to take that money and put it into a multi-year guaranteed annuity (say, 5 years) to defer the income. I've never thought about annuities before (fees,etc), but even if they are not as good of an investment as what I currently have, something is at least better than nothing.

Any other thoughts here?

 

[Spock]

are you sure a 12K reduction in income (to 83K) will result in 0 ACA premium?
I didn't run your numbers, but the premium starts reducing starting a little above the minimum income threshold. At 83,120 for a family of 3 the subsidy is 0.

 

[RunningBum]

What's the source of that $95K of income? If it's not tax-efficient, can you move it to more tax efficient investments like index funds? I had a fund that was throwing too much in divs and CG distributions, so I sold it in 2017, took a large capital gain and threw away a small subsidy in 2017. This set me up better for 2018 and hopefully beyond, and my subsidy is a lot larger this year.

It sounds like you have a lot of fixed income investments that generates a lot (most?) of your income. Would it work to move them to index funds where they would grow without generating too much in current taxes, rather than earning very little in savings?

I don't know how the annuity would work for reported income. Seems like it might be a good option. I'm assuming you don't need all of that income to live on.

I understand when people don't want to give too many specifics on their wealth and income, but it's hard to recommend anything without having that info.

 

[mrftexas]

Thanks for the replies. Where I live, there is only one ACA insurer, and the second lowest cost silver plan is very expensive, so the subsidy to get that down to 9.5 (or whatever) percent of income completely covers the premium for a Bronze Plan.

I should have been clearer. The majority of my income, roughly 65%, is from dividends/capital gains distribution from index mutual funds (Vanguard); the balance is largely from bond funds, with a bit from CDs.

If I take about 40% or so of the bond fund money and can defer the income, then I'll be under the ACA 3-member household subsidy cliff. Hence, the thought around the MYGA. I'd love to find a better solution, but the MAGI definition for ACA doesn't leave many choices.

 

[pb4uski]

You might talk with Vanguard and see if they have equity funds that you could exchange into that have low dividend distributions so you can better manage your MAGI... or redeploy into som low/no dividend ETFs or something like Berkshire Hathaway.

Or a MYGA wouldn't be bad either... I'm guessing that Vanguard may have access to some good ones.

 

[UtahSkier]

There is no magic, but there are optimizations to be had. Obviously, you need to reduce dividends.

1. Shift all mutual funds into ETFs. This is what I do and results in lower distributions for the same exposure.

2. Rather than annuities, consider Berkshire. It does not pay a dividend. This way, you can harvest capital gains as needed for cash.

3. Bond funds in a taxable account will always be problematic. Move those funds into your tax advantaged account as much as possible.

 

[sengsational]

Vanguard offers variable annuities that wrap their mutual funds in an insurance product. Gains there don't affect taxes when they happen, but there are some down-sides:


1) The gains must come out first
2) No favorable capital gains treatment
3) Addition 20 basis points on top of fund expense ratio


I don't think this is the best option for you, but depending on your disposition, it might be a reasonable choice. You never have to "annuitize". In other words, you can just pull money out as needed, paying taxes on the distributions until you've pulled out all of the gains. Then you have tax-free access to the basis. Or, of course, you could annuitize, but it's not required.

 

[ShokWaveRider]

Fixed Deferred Annuities (MYGA) will do the trick.

https://www.immediateannuities.com/deferred-annuities/

 

[walkinwood]

Are all your IRA investments in bonds? If not, that's where bonds belong for tax efficiency.


Annuities have a cost as does keeping your money in a non-interest bearing account. Will your ACA subsidy cover this cost?

 

[RunningBum]

In the first post the OP said it would be a $25,000 savings on premiums by reducing income $12,000, so clearly the subsidy would cover the loss of income.

 

[mrftexas]

IRA/401K are 100% income producing (primarily bond funds). Because most of our savings are in after-tax accounts, we still have fixed income investments in taxable accounts (to get to our target asset allocation). Of course, the stock funds also throw off dividends.

If I take ~$400K of those after-tax fixed income investments and put the money into one or more MYGAs (say, 3 year duration - about the shortest term I can get - earning ~3%), then that will reduce MAGI by $12K/year. Who knows what will happen to the ACA or healthcare in 3 years. In 3 years, if I need to, I can just do a 1035 transfer and continue to defer the accumulated earnings. I am confident I won't need the principal during the 3 years (there are steep surrender charges), and the only other risk is the insurance company goes belly up. Plan on sticking with highly rated companies (Comdex of >90) to minimize the risk.

It's not the most glamorous return, but it sure beats parking money in something that earns nothing just to reduce MAGI.