ACA and Tax Strategies

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MikeinMD

Confused about dryer sheets
Joined
Feb 2, 2012
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Glenelg
Hi,

I don't believe I have posted in a quite a while but I was wondering if anyone has advice for maintaining ACA subsidies while taking money out of tax deferred accounts? Maintaining ACA subsidies is great but it does limit your ability to withdrawal funds from traditional IRAs or 401Ks without going over the ACA income limit. I would like to take more funds out now at a lower income tax rate instead of waiting until I'm 65 and probably be in a much higher tax bracket. Any advice would be appreciated.

Thanks,
Mike
 
Mike, try the search function. There have been a few threads about this topic. They will be helpful. The best strategy I have found is the deduction for contributions to an HSA. The 2018 contribution limit for couples over 55 is $7,900 (I think?). Your MAGI is reduced by the amount of your contribution.
 
I take out of post tax accounts to offset the taxes. For 3 years managed to keep income at just a tick above the poverty level for the max subsidies.
 
You can take the low road (MAGI low) and maximize ACA or high road (MAGI high) and maximize Roth conversions/tIRA withdrawals.

You need a supercomputer to find out which is best.
 
What Flintnational said. Plus you could sell equities in which you have capital losses to reduce your income by a max of -$3000.
I have not been able to find anything else that you can do to offset your AGI for ACA subsidies.

If you are still working, you could contribute to a tax-deductible IRA, but that would beat the point of your post :) I think that's allowed, but haven't looked into it in detail because I am ER'd.
 
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ShokWaveRider said:
I take out of post tax accounts to offset the taxes. For 3 years managed to keep income at just a tick above the poverty level for the max subsidies.
Click to expand...

This is the best way to reduce magi and still have enough money to live. You also need to watch what you invest in as some funds give off excessive income and that is not good for the ACA. I also have kept my income just above the poverty level for maximum subsidies and cost sharing. You need to build up a post tax account if you are still working. If you are retired, it is difficult to build up a post tax account without taking it out of a deferred account.
 
Look at whether the subsidy is worthwhile for your situation. If you can convert at 12% now to avoid 25% later, figure out if you can convert enough at a 13% tax rate benefit to save more than whatever subsidy you can get. I've found some years it's better to forego the subsidy to be able to convert more, while in years like this one it's a lot better to take the subsidy, though I still take my income to the 400% cliff.

I think most of the MAGI reduction strategies have been posted, but if you really need to pull back from just over the cliff, you could take an early withdrawal of a CD. The penalty is subtracted from your income on line 30 of 1040. You would definitely want to do the math to make sure the interest lost in the penalty is worthwhile, and that there is no other way.

Also, be very careful not to overpay your state income tax. Any refund goes on line 10, so it's added to your MAGI for the next year if you had itemized deductions the year you over paid. That deduction reduces your taxable income, but it doesn't reduce MAGI for the year of the overpayment.
 
Like others, I take out of the ROTH.... I make sure my income is below the 250% so I can get lowered copays and deductibles.... this is a big win for me... I will worry about the tax hit later in life, but for now the ACA credit and lower cost is not worth me converting today...


I am going to wait until 70 to take SS, so I will have those years to do as much conversion as I want...
 
We moved a few years before retiring and took out a mortgage on the new place even though we could have paid cash, esp. with the sale of the old place. We invested the cash in our taxable accounts, so we have much greater flexibility to control income for ACA purposes. This wasn't the main intent, just a fortunate byproduct of a preference to invest money instead of tying it up in a house.

Well before I retired, I started building up taxable assets since I wanted to "do something different" at some point, some sort of escape from the corporate rat race, well before traditional retirement age or even 59.5 yo. Never did find a better w*rk gig, so I just FIRE'd as soon as I could. Taxable assets are a key part of the plan to bridge to 59.5 yo.

So taxable accounts were expensive from a tax standpoint, esp. in later higher income years, but then it is well worth the freedom and flexibility now.
 
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FreeBear said:
We moved a few years before retiring and took out a mortgage on the new place even though we could have paid cash, esp. with the sale of the old place. We invested the cash in our taxable accounts, so we have much greater flexibility to control income for ACA purposes. This wasn't the main intent, just a fortunate byproduct of a preference to invest money instead of tying it up in a house.

Well before I retired, I started building up taxable assets since I wanted to "do something different" at some point, some sort of escape from the corporate rat race, well before traditional retirement age or even 59.5 yo. Never did find a better w*rk gig, so I just FIRE'd as soon as I could. Taxable assets are a key part of the plan to bridge to 59.5 yo.

So taxable accounts were expensive from a tax standpoint, esp. in later higher income years, but then it is well worth the freedom and flexibility now.
Click to expand...

The mortgage thing is a great idea to establish a taxable investment account near retirement to control income for the ACA. Something that simple could save many retirees a ton of money.

Thanks for sharing that thought!!
 
VanWinkle said:
This is the best way to reduce magi and still have enough money to live. You also need to watch what you invest in as some funds give off excessive income and that is not good for the ACA. I also have kept my income just above the poverty level for maximum subsidies and cost sharing. You need to build up a post tax account if you are still working. If you are retired, it is difficult to build up a post tax account without taking it out of a deferred account.
Click to expand...

Exactly, we saved 60% of our nest egg in Post tax knowing that we did not want to get too much of a tax burden in our retirement years. It is coming in handy now. 40% is in an Ira for me and a 427b for DW, evenly split.
 
ShokWaveRider said:
Exactly, we saved 60% of our nest egg in Post tax knowing that we did not want to get too much of a tax burden in our retirement years. It is coming in handy now. 40% is in an Ira for me and a 427b for DW, evenly split.
Click to expand...

You could be my brudder from another mudder:)
 
VanWinkle said:
You could be my brudder from another mudder:)
Click to expand...

Kewl, so you agree this strategy absolutely makes/made perfect sense.

For some reason when I was in my mid 30's, this dawned on me, who knows where I got it from. Then after that we put all our bonus' into post tax accounts (or towards our mortgage, same diff.). Mortgage was paid off quite quickly, and then 25 years later.......... here we are.

Currently we are all in 3% CDs or Fixes income. As we do not need any more for our current lifestyle, that we enjoy. People will go on about inflation till they are blue in the face, but I tracked our "Personal" inflation, and it has basically been pretty flat for the last 9 - 10 years (Give or take 1.5%). That may change, but for now is working out fine.

I sleep very well.
 
Thanks for the advice, lots to think about. I do have a HSA but probably should not have paid off the house, would have more after tax funds. I think I will increase my income to the max ACA and withdrawal more traditional IRA or Roth conversion.
 
If you are self-employed, I think the SEP IRA Contributions can also reduce your MAGI. They might offer a bigger deduction that an existing traditional IRA.
 
May not be the best alternative - withdrawls from a home equity loan if you are getting near the ACA magi cliff:eek:
 
golfnut said:
May not be the best alternative - withdrawls from a home equity loan if you are getting near the ACA magi cliff:eek:
Click to expand...

The difference in the cost of mortgage interest and the expense of hitting the ACA cliff is substantial. The math would suggest the mortgage interest is the best deal.
 
FiveDriver said:
I'm not sure what you mean golfnut -- can you expand on that thought please ??
Click to expand...
You draw from your HEL to fund your current living expenses (or whatever shortfall is). This helps some people over the hump until they can get to 65 and get Medicare.
 
Let's say in the month of December you are getting real close to ACA magi cliff, you could withdraw from your hsa, This withdrawal would not be considered part of your magi.
 
If we take SS at 62 ($31,000 yr.), we have nontaxable cash to cover living expenses until 65. We are 60 now. DH has in home LLC that gives us the income to keep ACA with subsidies, but avoid medicaid. I know FIRE members scoff at cash, but it will take the worry out of income to keep ACA. We will not touch investments until 65.

This does not apply to us, but can Gov. look into assets for medicaid?
 
flintnational said:
The best strategy I have found is the deduction for contributions to an HSA. The 2018 contribution limit for couples over 55 is $7,900 (I think?). Your MAGI is reduced by the amount of your contribution.
Click to expand...

The only problem with HSA plans in the ACA exchange is that you won't get them as an option with Silver CSRs in my experience (income below 250% FPL). So you have to trade spending more money (potentially) on higher deductibles in exchange for the tax writeoff, and also lose out on valuable CSRs.

Of course if you can't reduce MAGI enough without HSAs to get CSR'd plans you're stuck with HDHPs anyway.
 
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Riddle me this one.

DW and I have a GREAT ACA Plan for 2018. I am 64, DW is 59. For 2019 I will be eligible for Medicare January 1st, DW will be 60 then.

How will MAGI be calculated for DW for the ACA? Anyone Else in a Similar Situation?

1) Do we still file as Married filing Joint, if so, is DW MAGI 50% of our combined MAGI?
2) Will I have to do some fancy dancing with income?
 
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