ACA tax credit cliff

[Which Roger]

There was a long thread not too long ago regarding how to manage income to stay off the cliff, but I can't seem to find it. Can someone else provide a link?

[tuixiu]

I've been trying to do the math on advantages of income low for subsidies vs. Roth conversions at various tiers for some time now. Too many unknowns to get anything concrete but definitely leaning towards the bird in the hand of subsidies.

[pb4uski]

It is complicated. I had to build a complex model of my retirement that has a rough tax calculation built into it to see that by emphasizing Roth conversions between ER at 56 and age 70 that I would spend much less time in the 25% bracket once SS and RMDs begin and that the tax savings between 25% and 15% were much more than the value of the subsidies. The other contributing factor is that in our case bronze level health insurance is relatively reasonable (~$721/month).

Besides, not only do I think I save money by doing it this way but I can also avoid any guilt that I might have had about "taking advantage" of poorly designed subsidies that were intended for people who can't afford to pay for their health insurance. I also don't need to do the subsidy application/reconciliation dance which makes things simple.

[Fermion]

Quote:

Originally Posted by pb4uski Besides, not only do I think I save money by doing it this way but I can also avoid any guilt that I might have had about "taking advantage" of poorly designed subsidies that were intended for people who can't afford to pay for their health insurance. I also don't need to do the subsidy application/reconciliation dance which makes things simple.

If you think you are saving money by not taking subsidies but instead doing conversions to avoid taxes in the future then you should feel guilty because you are taking money away from people who can't afford to pay for their health insurance (because all of the money is really just in one big pot for the government no matter how it seems to be divided).

If you really want to feel good about yourself, you should take the subsidies and then pay more tax in the future on your IRA withdrawals.

[samclem]

Quote:

Originally Posted by pb4uski It is complicated. I had to build a complex model of my retirement that has a rough tax calculation built into it to see that by emphasizing Roth conversions between ER at 56 and age 70 that I would spend much less time in the 25% bracket once SS and RMDs begin and that the tax savings between 25% and 15% were much more than the value of the subsidies.

Others doing this "what-if" exercise should do a sensitivity analysis of sorts and look at the ramifications of excursions from the assumed investment return rate. Assuming the ACA subsidies are taken and opportunities for a ROTH conversion are reduced, then--
-- If investment returns are worse than expected:
--- Less time/zero time in the 25% bracket, and it happens later in life.
--- Having the extra $$ in the portfolio (from taking the subsidies and spending less on health insurance, leaving money to grow) could be a very welcome cushion.
-- If investment returns are better than expected:
-- More time in the 25% bracket (so paying higher absolute dollar amount in taxes), but the portfolio must be so much larger than originally predicted that overall withdrawals are still higher than if the original return rate had materialized. You're "winning the game", have an improved likelihood that your nest egg will see you to the end of your life, and the fact that you opted for the ACA subsidies early on and it eventually proved to be the less-than-optimum approach from a tax perspective makes no material difference to you whatsoever.

This way of thinking only applies to those who don't have significant needs to leave money behind.

IMO, guilt about qualifying for the subsidies is misplaced. It's not charity, its just a tax law and the money comes from general revenues. Not taking the subsidy would be just like sending an "extra" check to the Treasury for their use. In fact, some people are using the subsidy payments as a measure of merit for the ACA, so taking the subsidy helps them show that the program is "working."

Quote:

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” - Judge Learned Hand

[pb4uski]

Quote:

Originally Posted by Fermion If you think you are saving money by not taking subsidies but instead doing conversions to avoid taxes in the future then you should feel guilty because you are taking money away from people who can't afford to pay for their health insurance (because all of the money is really just in one big pot for the government no matter how it seems to be divided). If you really want to feel good about yourself, you should take the subsidies and then pay more tax in the future on your IRA withdrawals.

Yeah... right. I would not feel good about that at all, I would feel stupid at paying more tax than I am legally required to. Have you ever heard of Learned Hand? If I want to feel good I would increase my contributions rather than purposefully pay more taxes... besides, that would be much more efficient.

Learn to read before you write. I never said that I felt guilt about taking money away from people who can't afford to pay for health insurance. You are foolish if you think that anything that I do will in any way affect what they receive.

What I said was that I would avoid any guilt in taking advantage of the "loophole" that allows people who have substantial assets and can afford to pay their premiums to get subsidies when the intent of the subsidies is to help people who can't afford their health insurance premiums. That said, I have no trouble with anyone who structures their finances to gain those benefits as to me it is the same as structuring your finances to reduce your tax burden... again, see Learned Hand.

[pb4uski]

Quote:

Originally Posted by samclem Others doing this "what-if" exercise should do a sensitivity analysis of sorts and look at the ramifications of excursions from the assumed investment return rate. .....

Agreed. I use a very conservative rate of return (5.5% nominal, 2.5% real) and figure if it is a benefit at that low a rate then it would be a higher benefit at a higher rate of return.

[Fermion]

Quote:

Originally Posted by pb4uski Yeah... right. I would not feel good about that at all, I would feel stupid at paying more tax than I am legally required to. Have you ever heard of Learned Hand? Learn to read before you write. I never said that I felt guilt about taking money away from people who can't afford to pay for health insurance. You are foolish if you think that anything that I do will in any way affect what they receive. What I said was that I would avoid any guilt in taking advantage of the "loophole" that allows people who have substantial assets and can afford to pay their premiums to get subsidies when the intent of the subsidies is to help people who can't afford their health insurance premiums. That said, I have no trouble with anyone who structures their finances to gain those benefits as to me it is the same as structuring your finances to reduce your tax burden... again, see Learned Hand.

I read perfectly. Where do you think the subsidies come from? A magical money tree? Everything comes from the government which funds itself through taxes. If you take advantage of the IRA to Roth conversion "loophole" in order to pay lower taxes I do not see that as being any different than taking advantage of the subsidy loophole to pay a lower insurance premium. I guess you could make a claim that the Roth conversion isn't a loophole because it was intended for people with high assets and the subsidy was not intended for people with high assets.

In the end, the government will get more money from me even though I take the subsidy than it will get from you because you avoid taxes with the Roth conversion. Net result is I am paying more for those poor people than you are, even though I am participating in the subsidy they receive.

[daylatedollarshort]

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Originally Posted by pb4uski You are foolish if you think that anything that I do will in any way affect what they receive.

The ACA subsidies are technically tax credits, and work like energy or college tax credits. They do not take money away from any specific group, just like Roth conversions do not take money directly away from any specific group of people.

[pb4uski]

If you (Ferminion) want to voluntarily pay more taxes and it makes you feel good that is fine, but you are wrong to condemn those who prefer not to do as you do.

I'm actually paying more tax today by forgoing the subsidies since I am accelerating income that I would keep deferred if I was getting subsidies and that current tax revenue helps. The tax savings are not for 11-15 years out (I'm 59) and are not even in the government budget horizon at this point so your thinking that what I am doing has any affect on today's subsidies is a bit silly even if there were a gazillion of me out there doing it.

[ArkTinkerer]

Quote:

Originally Posted by Fermion I read perfectly. Where do you think the subsidies come from? A magical money tree? Everything comes from the government which funds itself through taxes. If you take advantage of the IRA to Roth conversion "loophole" in order to pay lower taxes I do not see that as being any different than taking advantage of the subsidy loophole to pay a lower insurance premium. I guess you could make a claim that the Roth conversion isn't a loophole because it was intended for people with high assets and the subsidy was not intended for people with high assets. In the end, the government will get more money from me even though I take the subsidy than it will get from you because you avoid taxes with the Roth conversion. Net result is I am paying more for those poor people than you are, even though I am participating in the subsidy they receive.

If you really want to help the poor, you will take advantage of every possible tax break, loophole, legal means you can. Then take your savings and find an efficient charity to work with directly. Paying the middle man is bad business and bad charity.

[Fermion]

I think you misunderstood me. I am all for paying as low a tax rate as legally possible and for taking every subsidy and tax break I can.

What I was trying to respond, poorly I guess, is to your statement:

"not only do I think I save money by doing it this way but I can also avoid any guilt that I might have had about "taking advantage" of poorly designed subsidies that were intended for people who can't afford to pay for their health insurance."


I was befuddled why you might feel any guilt at all if you took subsidies when you are making the statement that you save money (which means less money available to the government) by doing a different method (Roth conversions).

Obviously you can do whatever you want, but if you feel guilty about taking subsidies and not guilty about taking even more money by doing Roth conversions to avoid future higher taxes then it just seems mixed up.

For me, I hope to take the subsidies AND do as much as I can to reduce my future taxes. Guilt doesn't factor into things.

[pb4uski]

Perhaps I can clarify then.

I save money by doing Roth conversions to the top of the 15% tax bracket because I pay 15% or less now on my conversions rather than the 25% that I expect to pay (based on current tax rates) if I only converted up to 399% FPL to get the subsidy but had much higher RMDs after age 70. The 10% difference in tax exceeds the value of the subsidy.

I actually would not have had much guilt if I had chosen the subsidies since it would have been something that I would have been legally entitled to under the rules Congress made, but just a twinge of guilt knowing that I'm not the person that they intended subsidies to go to.

[Fermion]

Ok fair enough. I don't know Congress's mind well enough to figure out if they intended early retirees to get a subsidy or not. I do not know if they really intended on well to do people avoiding large taxes on RMD in later years by converting to Roth while in lower brackets. It is possible in both cases we are doing things not really intended by Congress. They could have made their intentions clear by wording the law to allow subsidies to only go where they wanted them to go.

I don't know if Congress intended for the back door Roth to exist, or for people to be able to contribute to a 401K and a after tax 401K, then immediately roll the after tax into a Roth with no penalty or tax.

Trying to know the mind of Congress is like trying to know the mind of God. All we can do is follow their commandments as they have written them. They say thou shalt qualify for a subsidy if thy income is below $x so I am going to follow what they say.

[pb4uski]

You are a strange one.

I think is it safe to say that they did not have wealthy early retirees who can well afford to pay for their own health insurance in mind when they designed the subsidy, but rather, low and middle income people who had trouble paying high health insurance premiums.

But you're right, I don't really know for sure. My bad.

[NW-Bound]

Quote:

Originally Posted by Fermion ... Trying to know the mind of Congress is like trying to know the mind of God. All we can do is follow their commandments as they have written them. They say thou shalt qualify for a subsidy if thy income is below $x so I am going to follow what they say.

Well, they say "thou shalt qualify for a subsidy". They did not say "thou shalt have to apply".

What to do, what to do? So I do a bit of both for 2015. I convert some money to Roth, and my income is still lower than 400%FPL, so I get a bit of subsidy.

Is that OK with anyone here?

No? I don't care anyway as I always do it my way, but just ask for the heck of it.

[Refresher]

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Originally Posted by Finance Dave Am I studying this correctly? It appears that if a couple (family of 2) makes $62,919 they get the subsidy/credit, yet a family of 2 that makes $62,921 does not? The cost differences are huge and I can't believe they'd set up a program such that making just a few dollars more makes that much of a difference. The $62,920 threshold is 4x the FPL for a family of two if you're wondering...at least for 2014 I believe. DW and I are in our mid '50s and semi-fired...will fully fire in 12-24 months. First let's assume we spend $75,000/year. We have steady passive income of $35,000/year from rental properties, which means we need another $40,000 to live on. We plan to draw this down from our IRAs. However, drawing down $40k/year would put us over the threshold above and force us into the unsubsidized category, dramatically increasing our premiums EVERY year. For those of us with MAGI near that threshold (which we are), would it then be wise to keep IRA withdrawals such that you stay below the threshold in most years, and then once in awhile take a huge withdrawal so that you can then rely on that money in the next few years to fund living expenses? For example, Year 1 - $35k rental income + $170k IRA withdrawal - $75k living expenses = $130k left in the bank ...we'd pay unsubsidized premiums for that year. Year 2 - $35k rental income + $40k from bank account (not counted as income) - $75k = $90k left in the bank...we'd pay much lower, subsidized premiums. Year 3 - Same as year 2, $50k left in bank, pay lower, subsidized premiums. Year 4 - Same as year 3, $10k left in bank, pay lower, subsidized premiums. Year 5, $35k rental income + $170k IRA withdrawal - $75k living expenses = $70k left in bank. etc. It seems this strategy would save a ton of money for us. Thoughts? Note: Yes, I realize there will be a higher marginal tax bracket hit in the years we take huge amounts out of the IRA...and I'd have to do the math but I still think we'd come out ahead.

The subsidies may not be around forever why not go for the subsidy year one.
How about renovating one of the rentals to bring the annual income down from 35k so added to the IRA 40k you are below the subsidy limit.
Or buy a fixer upper that reduces your rental income.
With borrowed money of course

[Refresher]

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Originally Posted by foxfirev5 Yep, you're spot on. I'm actually ticked off that I don't have more in taxable, Roth, mattress etc. Right now I'm planning and managing like heck to suck funds out of the 401k when I turn 59 1/2 and ER. I am convinced that the company will terminate retiree medical as they have "generously" been kicking into the retiree medical savings account suddenly. When this first came out I wrote to my senator - Debbie Stabyounow and what I received in response was a complete blowoff. Even if you're in the sweet spot for subsidies, the deductibles and max out of pocket would kill the average couple. Work extra hard make another 5-7k and you are no further ahead. This is largely ignored by this forum since we are by large a group of well heeled individuals who have the ability to manipulate the system.

Any chance your company has a Roth 401K?
Or would they allow you to transfer 401k funds to a IRA and then do a Roth conversion.
It would increase your tax the year you do it but may be beneficial long term.