Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
ACA cliff question - please check my math
Old 01-11-2020, 02:22 PM   #1
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
ACA cliff question - please check my math

We've now been retired for four years and because of the ACA cliff are able to withdraw significantly less than we had planned.

I'm considering doing a large one-time sale from Vanguard to put us back in line with our planned spending while also enabling us to do some traveling which was part of our retirement plans. After this one year withdrawal we would be able to go back to the lowered withdrawals which is well below the cliff.

Before I do it I would like to verify that I have the math right. I'm going to use real numbers so there is no confusion:

2020 Planned Income (before considering the large withdrawal)
Pension - 12k/year
Dividends - $13k/year
Withdrawals from Vanguard - ~$50k ($25k of which is LTCG)
Planned MAGI for 2019 - $50k
2020 Fed Income Tax - ~1k
No state taxes

2020 Adjusted Scenario (one time withdrawal)
Pension - $12k/year
Dividends - $13k/year
Withdrawal from Vanguard - $140k ($90k LTCG)
MAGI - $115k
Federal Tax - $11k
Penalty for going over the ACA cliff - ~$20k??

Gross cash in 2020 with adjusted plan - $165k ($140k Vanguard + pension + dividends)
Net after penalty and taxes -$134k

Are there any gotchas that I'm not seeing?

Thanks for you help!
__________________

__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-11-2020, 02:44 PM   #2
Thinks s/he gets paid by the post
Rianne's Avatar
 
Join Date: Aug 2017
Location: Champaign
Posts: 2,449
Not sure what you're asking. What is your ACA benefit for 2019? What were your 2019 premiums? Our 2020 ACA monthly premiums are less than they were was for 2019, and our estimated MAGI is ~same. On ACA website you'll pay the full price for whatever plan you choose. All depends on your zip code.

I'm guessing you entered the 2019 income for 2020 and now want to change that. Go into site and change your income estimate.
__________________

__________________
"If you want to go fast, go alone. If you want to go far, go together.
Rianne is offline   Reply With Quote
Old 01-11-2020, 04:51 PM   #3
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Iím asking if there is any big gotcha that Iím not aware of as I consider doing a large withdrawal.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Old 01-11-2020, 05:00 PM   #4
Thinks s/he gets paid by the post
ivinsfan's Avatar
 
Join Date: Feb 2007
Posts: 4,572
You mean besides the fact getting 90 to spend will cost you 30k..makes that travel pretty expensive...
ivinsfan is offline   Reply With Quote
Old 01-11-2020, 05:04 PM   #5
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Administrator please close this thread. Thank you.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Old 01-11-2020, 05:14 PM   #6
Administrator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: lumpen slums of cyberspace
Posts: 30,583
Letís leave it open for now. There might be more responses that are helpful to the OP and other members.
MichaelB is offline   Reply With Quote
Old 01-11-2020, 06:02 PM   #7
Thinks s/he gets paid by the post
ivinsfan's Avatar
 
Join Date: Feb 2007
Posts: 4,572
Op sorry if my comment was the one that bothered you. You say you are just considering a large withdrawal. That lead me to think you aren't certain. The 20k is certainly a big factor in the decision. Percentage wise it's pretty punitive. Do you have an HSA...what about the creative use of zero interest CC to finance some travel. How about any Roth income.
ivinsfan is offline   Reply With Quote
Old 01-11-2020, 06:26 PM   #8
Recycles dryer sheets
Dean56's Avatar
 
Join Date: Aug 2018
Posts: 63
Quote:
Originally Posted by ivinsfan View Post
Op sorry if my comment was the one that bothered you. You say you are just considering a large withdrawal. That lead me to think you aren't certain. The 20k is certainly a big factor in the decision. Percentage wise it's pretty punitive. Do you have an HSA...what about the creative use of zero interest CC to finance some travel. How about any Roth income.

ivinsfan: I thought your comment was right on point. Many retirees never think about the tax implications.


I have a good friend that retired 4 years ago. Upon retirement he decided to payoff his mortgage, so he took a big withdrawal from his 401k account (never thinking about the tax hit). He was quite surprised when he did he taxes later that year. He owed Uncle Sam a bunch of $$$.
Dean56 is offline   Reply With Quote
Old 01-11-2020, 06:29 PM   #9
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,311
Quote:
Originally Posted by Dean56 View Post
ivinsfan: I thought your comment was right on point. Many retirees never think about the tax implications.
Agreed in the general case. But I think the OP has made it clear that she understands the tax implications. I think the idea is to load up on LTCG one year, just surrender the ACA subsidy in a big way for that one year, and make it likely that they will not accidentally go "over the cliff" in future years since they can live off of some after-tax income that won't hit the MAGI in the future.

I mean, the extra taxes here are basically about one year's ACA subsidy, so if it prevents one or more potential "accidents" by going over the cliff in the years to come, it's a reasonable idea. But so too is wondering if there might be a more tax-efficient way to help keep them on the right side of the cliff in the years to come.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 01-11-2020, 06:48 PM   #10
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 3,934
I'm going to try to read between the lines here a bit. I'll give my guesses/assumptions, and then answer your question assuming my assumptions are correct.

I'm guessing:

1. You are on an ACA policy and qualify for premium tax credits for 2020 using the base case scenario. You are receiving advanced premium tax credits (APTC) which are being paid to your health insurer so you're paying a subsidized premium to your health insurer.
2. For the potential Vanguard sale, you've properly calculated your basis in both scenarios and have calculated your LTCG correctly by taking the proceeds minus the basis.
3. You've stuck all of this info into some tax program which is telling you that the tax in the base case is $1K and the tax in the second case is $11K.
4. You're using your 2019 numbers on your marketplace 1095 form as a guess for 2020.

Let me know if any of the above is wrong.

Answers:

Very literally speaking, there is no penalty for going over the cliff. However, if your income is over 400% FPL this year, then you will need to repay any advance premium tax credit that you received for this year.

The easiest way to figure out this number is to find out from your paperwork or your insurer or your marketplace what your monthly advanced premium tax credit is for 2020 and multiply that by 12. This method assumes that your ACA tax situation remains constant throughout this year (you don't have a baby, or move, or anything like that).

Separate from the premium tax credit repayment, the additional capital gains raises your regular income, and so you'll have additional income tax due to that.

If guesses 3 and 4 are correct and you've put your numbers into a tax program, including the numbers from your 2019 1095 form, and the difference in the output between the two answers is $1K vs. $11K, then that should include both the effects of the ACA APTC repayment and the increased income taxes due to the higher income. This would mean that your ACA penalty is not $20K, but is somewhere less than $10K ($11K - $1K). I say less than, because some of that $10K difference is probably due to the additional income taxes just from having more income, and not due to any ACA effects.

If you are able to print out the tax returns for those two scenarios from the tax program, just look at the numbers on lines 26 or 29 of the Form 8962 in each scenario. The difference between those sets of numbers is your "ACA penalty" if I'm understanding what you mean.

If you have no state taxes, then the only other thing I think about is if you have kids in college who you expect to receive financial aid for the 2022-2023 tax year based on your FAFSA, then the additional income will probably reduce the amount of aid awarded.

As @ivinsfan mentions, the other thing to think about is if you're open to exploring other ways of addressing your financial goals. I don't remember how old you are, or if you have retirement accounts, or any of that, so it would be hard to hazard a guess there. I'm guessing that's not your main goal in this thread though.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is online now   Reply With Quote
Old 01-11-2020, 07:36 PM   #11
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Thank you for the detailed responses. I'm 58 and hubby is 54. I've been retired for 4 years today (just realized that!).

I'm fully aware of the tax implications but not as much on the ACA penalty side which is why I started this thread. I wanted to make sure there wasn't something I didn't know about which would make the scenario less attractive.

It's not a $30k hit for a net gain of $90k. I know my setup was long so it's easy to miss detail. We would have $165k in "total inflow" with a combined tax/penalty hit of $30k worst case.

This cash "padding" should prevent us from accidentally going over the cliff until I start Medicare while also getting closer to our Firecalc "total spend" number.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Old 01-11-2020, 07:38 PM   #12
Thinks s/he gets paid by the post
zinger1457's Avatar
 
Join Date: Jul 2007
Posts: 2,269
Quote:
Originally Posted by Lisa99 View Post
2020 Adjusted Scenario (one time withdrawal)
Pension - $12k/year
Dividends - $13k/year
Withdrawal from Vanguard - $140k ($90k LTCG)
MAGI - $115k
Federal Tax - $11k
Penalty for going over the ACA cliff - ~$20k??

I think you are way off (too high) in calculating your Federal Tax in the adjusted scenario. The LTCG's ($90K) does count towards your MAGI for ACA but it's not taxed like regular income, if married filing jointly the first $80K of LTCG's are taxed at 0%.
zinger1457 is offline   Reply With Quote
Old 01-11-2020, 07:40 PM   #13
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Quote:
Originally Posted by zinger1457 View Post
I think you are way off in calculating your Federal Tax in the adjusted scenario. The LTCG's ($90K) does count towards your MAGI for ACA but it's not taxed like regular income, if married filing jointly the first $80K of LTCG's are taxed at 0%.
Thank you. This is the kind of information that I'm looking for.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Old 01-11-2020, 07:53 PM   #14
Thinks s/he gets paid by the post
ivinsfan's Avatar
 
Join Date: Feb 2007
Posts: 4,572
Quote:
Originally Posted by Lisa99 View Post
Thank you for the detailed responses. I'm 58 and hubby is 54. I've been retired for 4 years today (just realized that!).

I'm fully aware of the tax implications but not as much on the ACA penalty side which is why I started this thread. I wanted to make sure there wasn't something I didn't know about which would make the scenario less attractive.

It's not a $30k hit for a net gain of $90k. I know my setup was long so it's easy to miss detail. We would have $165k in "total inflow" with a combined tax/penalty hit of $30k worst case.

This cash "padding" should prevent us from accidentally going over the cliff until I start Medicare while also getting closer to our Firecalc "total spend" number.
I guess I'm confused by the word penalty, you really meant reduced or no subsidy, is that right. So you take out what you need for several years of travel at one time, pay the taxes and for that year pay 100 percent of your health care. The next years under the cliff again and ACA subsidy. If you know the exact cost of your insurance you should have your answer. 20k seems high for a couple your age.
ivinsfan is offline   Reply With Quote
Old 01-11-2020, 07:55 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 9,003
By "the ACA penalty", do you mean the loss of subsidy if you go over the cliff? This is highly individualized, because it depends on cost of insurance in your area and the cost of the 2nd lowest silver plan. For 2019, my subsidy as a single was about $9500. For 2020, it would be about $6700. I suppose we could check that number if you tell us what county/state you are in, since you've already given us ages, but it's just easier if you do it.

In my experience, if you're going to go over the cliff, don't do it by a little bit. Use it as an opportunity to position yourself better for the subsidy in other years. Just watch out for the extra tax on investments (NIIT) if you go over $250 taxable income with investment income.
RunningBum is offline   Reply With Quote
Old 01-11-2020, 07:56 PM   #16
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Quote:
Originally Posted by ivinsfan View Post
If you know the exact cost of your insurance you should have your answer. 20k seems high for a couple your age.
In our Florida county we have one carrier option. The cheapest bronze HSA catastrophic plan is $1292/month with a $12k deductible.

I'm considering changing our current plan so am working to determine if there will be a penalty for underestimating income in addition to the new premium cost.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Old 01-11-2020, 07:58 PM   #17
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Our subsidy is ~$1300/month. We are in Sumter County Florida.
__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Old 01-11-2020, 08:03 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 9,003
Just notify them if you decide to take more income that will put you over the cliff. They will stop the subsidy, and you'll have to pay the rest back at tax time, but there shouldn't be a penalty.

I don't know who "them" is, but if I were to go over the subsidy limit I'd look on healthcare.gov for who to contact.
RunningBum is offline   Reply With Quote
Old 01-11-2020, 08:03 PM   #19
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,311
Quote:
Originally Posted by Lisa99 View Post
Our subsidy is ~$1300/month. We are in Sumter County Florida.
Since Florida has no state income tax, that makes the idea of taking a one-year tax hit to stay on the right side of the "cliff" a few years sound better, especially since you would be taking LTCG, taxed at a lower rate, to help provide income in the next few years to keep MAGI low enough while maintaining a decent standard of living.

If this would likely make the difference between accidentally going "over the cliff" a couple of times and not at all, it is making more sense to me. Especially if this does not kick you too far into the 22% bracket.

And there is no penalty for understating your income beyond repaying the subsidies you are no longer entitled to, when you file your 2020 taxes in early 2021.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
ziggy29 is offline   Reply With Quote
Old 01-11-2020, 08:07 PM   #20
Thinks s/he gets paid by the post
Lisa99's Avatar
 
Join Date: Aug 2010
Location: The Villages
Posts: 1,363
Quote:
Originally Posted by RunningBum View Post
Just notify them if you decide to take more income that will put you over the cliff. They will stop the subsidy, and you'll have to pay the rest back at tax time, but there shouldn't be a penalty.

I don't know who "them" is, but if I were to go over the subsidy limit I'd look on healthcare.gov for who to contact.
So I'll be able to keep the same HI policy just with no subsidy? If that's the case then it's an easy answer to pull out the money now and notify the Healthcare Marketplace of the additional income.
__________________

__________________
Learning how to be still, to really be still and let life happen - that stillness becomes a radiance -
Morgan Freeman
Lisa99 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 2 (0 members and 2 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
College Math is Fuzzy Math RenoJay FIRE and Money 72 11-10-2019 05:23 PM
Yet another taking SS early question- sanity check on my math supernova72 FIRE and Money 25 07-07-2016 12:42 PM
ACA tax credit cliff Finance Dave FIRE and Money 57 01-07-2015 09:31 PM
Looking for a sense check on my math.. sebvad Hi, I am... 8 11-04-2013 02:58 PM

» Quick Links

 
All times are GMT -6. The time now is 12:12 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.