ACA vs Roth conversion

[tofer]

I’m 52 and about to retire. As I will be living off already-taxed savings for a while, my income will be very low and I could qualify for full ACA subsidies (assuming it is still around). But after some analysis, I decided (much to my surprise) it’s not worth it! The alternative is to do Roth conversion with some of my IRA funds, thereby realizing more income and disqualifying myself from the ACA subsidies. But the long term tax advantages of saving in a Roth turn out to be better in the long run vs. the immediate healthcare savings for a few years on ACA. Surprising. Thoughts?

 

[RunningBum]

Depends on how large your subsidy is. Younger people like yourself tend to have lower premiums, thus less of a subsidy, so it's not too surprising the Roth wins out for you. It's not a straightforward calculation. I'd evaluate this every year. It could make sense to be very aggressive with conversions in your early retirement years, and switch to the ACA subsidy later, if it still exists. 0% LTCGs is another opportunity.

 

[Dtail]

How large is your subsidy?
I reviewed this concept to some extent and just didn't want to pass up the 11k yearly savings on the ACA.
Will spend down some of the TIRA in addition with some spending until 65 y.o and more aggressive spend down from 66- 70 y.o. Not enough in taxable to have large Roth conversions.
That's the plan currently, who knows later on.

 

[candrew]

If you live in a state that expanded Medicaid and your MAGI is too low, you won't qualify for an ACA marketplace plan and will instead be directed into your state's Medicaid program.

 

[MichaelB]

Depends on how large your subsidy is. Younger people like yourself tend to have lower premiums, thus less of a subsidy, so it's not too surprising the Roth wins out for you. It's not a straightforward calculation. I'd evaluate this every year. It could make sense to be very aggressive with conversions in your early retirement years, and switch to the ACA subsidy later, if it still exists. 0% LTCGs is another opportunity.

This makes sense. ACA is an annual process, so this can (and most likely should) be revisited every year. It makes sense to look at alternating options - one year ROTH, the next ACA.

 

[Finance Dave]

That's surprising to me. I'm 57 and our subsidy is over $10,000/year. Are you saying your tax savings are more than that annually on doing Roth conversions? Every person's situation is different, but my plan is to withdraw from IRAs only up to where we can keep MAGI below 4x FPL.

 

[RunningBum]

Factors that favor the subsidy for me are that I don't know how long it will last, I was able to make a significant dent in conversions before the subsidy came into play and when they were much smaller, and I should have 5 years after the subsidy is over but before I have to take RMDs (and probably before I start taking SS). So I think I can fully convert my tIRA and take subsidies.

 

[RunningBum]

While I agree that it makes sense to check it every year as rates and subsidy change by year, the comments seem to focus on the only half of the equation.

I'm not seeing that at all. Some people are surprised, based on their own subsidy amounts, and most are asking how large of a subsidy they are foregoing. It's hard to see how you can make up the loss of a $10K subsidy. A smaller one, yes. As I said, it's a complex calculation.

 

[4legsgood]

I go with the bird in hand, ACA subsidy. When I've played with numbers around my income and at my age, I get about 10% back in subsidy for any reduction of income.

 

[pb4uski]

I’m 52 and about to retire. As I will be living off already-taxed savings for a while, my income will be very low and I could qualify for full ACA subsidies (assuming it is still around). But after some analysis, I decided (much to my surprise) it’s not worth it! The alternative is to do Roth conversion with some of my IRA funds, thereby realizing more income and disqualifying myself from the ACA subsidies. But the long term tax advantages of saving in a Roth turn out to be better in the long run vs. the immediate healthcare savings for a few years on ACA. Surprising. Thoughts?

Not suprising to me at all.... exact same thing happened to .

Our state is one of a few that prohibit age rating.... so if we keep our income low enough that the lowest cost bronze plan is more than 8.3% of our income we qualify to buy catastrophic coverage (which is only slightly worse than bronze plan coverage). The top of the 0% capital gains tax bracket is a lot less than the affordability hurdle so it has never been a problem.

If we managed our income for ACA subsidies we would pay $338/month for 2... the catastrophic coverage is $488/month for 2... so ACA would only save us $150/month or $1,800/year.

However, to get that $1,800, I would need to forgo $37,310 of Roth conversions ($78,750 top of 0% capital gains bracket + $24,400 standard deduction - $65,840 400% FPL) and the 10% in tax savings (12% now vs 22% later) which is $3,731. [2019 numbers].

So the $3,731 in tax savings exceeds the $1,800/year ACA savings.

 

[RunningBum]

This is not just a simple choice as as take subsidy of the a similar amount.

If the choice is 10k subsidy or pay full for insurance and convert to the top of the 24% bracket. Now all that conversion is tax free forever, not just one year. And what this is worth depends on the brackets you are in for the rest of your life. Done right it will cover you and your spouse's life time ... so still tax free after one spouse passes.

Yes, and the bolded question is a big factor, as well as the amount of the subsidy. If you're going to be in the 24% bracket in retirement, you don't get all that much benefit by converting to the top of 24%. And meanwhile, you had to come up with the full insurance amount out of pocket, which means you can't invest that amount, also for the rest of your life. Even if the gains are taxable, that's not a small deal.

I think your message is, don't just manage to get subsidies. I agree with that, it may not be the best course. I just don't think anyone here was saying that, as you claimed. Maybe in other threads. But don't chide us for doing it here, when nobody did.

 

[Z3Dreamer]

For me, ACA subsidies so greatly exceed the Roth conversion savings that it is ridiculous.

 

[SecondCor521]

Not suprising to me at all.... exact same thing happened to .

Our state is one of a few that prohibit age rating.... so if we keep our income low enough that the lowest cost bronze plan is more than 8.3% of our income we qualify to buy catastrophic coverage (which is only slightly worse than bronze plan coverage). The top of the 0% capital gains tax bracket is a lot less than the affordability hurdle so it has never been a problem.

If we managed our income for ACA subsidies we would pay $338/month for 2... the catastrophic coverage is $488/month for 2... so ACA would only save us $150/month or $1,800/year.

However, to get that $1,800, I would need to forgo $37,310 of Roth conversions ($78,750 top of 0% capital gains bracket + $24,400 standard deduction - $65,840 400% FPL) and the 10% in tax savings (12% now vs 22% later) which is $3,731. [2019 numbers].

So the $3,731 in tax savings exceeds the $1,800/year ACA savings.

It seems you must either have very expensive cheapest bronze ACA plans or you're managing to a very low income. I'm amazed.

 

[pb4uski]

It seems you must either have very expensive cheapest bronze ACA plans or you're managing to a very low income. I'm amazed.

Not at all.

Cheapest bronze plan is $852/mo for a couple... unsubsidized.... from what I hear from other posters that is quite reasonable for a bronze plan for a couple..... multiply by 12 to annualize and divide by 8.3%.... if we had $123k ($852*12/8.3%) of income we would be still qualify to buy catastrophic insurance. Since we manage our income to the top of the 0% capital gains tax bracket that is $103,150 in 2019 ($78,750 top of 0% capital gains tax bracket plus $24,400 standrd deduction).

The $338/month would be our cost of a bronze plan after ACA subsidies at 400% of FPL.

It works in our case since our state prohibits age rating... so the $488/month per couple is essentially based on a 20-30 year-old group and the $852/month for a couple is based on 31-64 year-old group.

 

[footenote]

That's surprising to me. I'm 57 and our subsidy is over $10,000/year. Are you saying your tax savings are more than that annually on doing Roth conversions? Every person's situation is different, but my plan is to withdraw from IRAs only up to where we can keep MAGI below 4x FPL.

Same at 61. I'll nibble at IRAs between now and Medicare age to keep receiving subsidies. Subsidy for me alone will be about $8,800 next year* which I can't beat with better returns at my age. Agree with the "check the math annually" advice.

*Estimated using 2019 subsidy calculator

 

[GTFan]

How large is your subsidy?
I reviewed this concept to some extent and just didn't want to pass up the 11k yearly savings on the ACA.

This. I'll take the $12k/yr. savings now, thanks, not to mention the huge OOP decrease for a CSR'd Silver plan if we need care. And that's comparing an ACA Silver to an unsubsidized Bronze, the diff would be more like $18k/yr. apples-to-apples. Without the CSR bennies.

It's a no brainer in most areas if you can keep income below 250% FPL, there's no way Roth conversions can make that up.

OP don't forget lower state taxes in the calc with ACA (if your state has income tax).

 

[bingybear]

I compare the subsidy vs what happens if one of us dies and the other is left filing single for the rest of their life. I have a relative that was widowed about a decade ago and has been doing that with RMDs that just grow. Last year her tax bracket was in the 35%. They prepared by using TIRA/401k. No roths.

Doing roth conversions up to the 12% will likely do little compared to the subsidy.

 

[SecondCor521]

Not at all.

Cheapest bronze plan is $852/mo for a couple... unsubsidized.... from what I hear from other posters that is quite reasonable for a bronze plan for a couple..... multiply by 12 to annualize and divide by 8.3%.... if we had $123k ($852*12/8.3%) of income we would be still qualify to buy catastrophic insurance. Since we manage our income to the top of the 0% capital gains tax bracket that is $103,150 in 2019 ($78,750 top of 0% capital gains tax bracket plus $24,400 standrd deduction).

The $338/month would be our cost of a bronze plan after ACA subsidies at 400% of FPL.

It works in our case since our state prohibits age rating... so the $488/month per couple is essentially based on a 20-30 year-old group and the $852/month for a couple is based on 31-64 year-old group.

Thanks for the explanation! Cheap is relative, I guess. My situation earlier this year was a family of 3 on ACA Silver with CSR87 for low $2xx. Cheapest bronze for 2 (one went off to college last month) is high $5xx.

It's a no brainer in most areas if you can keep income below 250% FPL, there's no way Roth conversions can make that up.

OP don't forget lower state taxes in the calc with ACA (if your state has income tax).

I dunno. You'd have to do pretty large conversions I think. Maybe if a person had a really large IRA and were willing to bust the ACA ceiling, the math could work. Rough math thinking: maybe paying 22% now on $40K at age 50 prevents $160K from being taxed at 35% later.

It probably is more likely to work for a person with a large tIRA (thus large torpedo) in their 50's (thus long time to compound in Roth instead of traditional) who's kids are off the payroll (thus low ACA subsidy). That may describe me in a few years.

I like the idea to monitor every year. Personally I'm still doing conversions to a certain point but still in ACA range.

 

[DAYDREAMER]

I've got a minor delema this year. Wife's retiree paid healthcare started this year in April, so we used ACA healthcare for Jan-March, saving us a total of $3000. Should we forgo the ACA savings, and do Roth conversion (Approximately $48k converted) to the top of the 12% bracket?

 

[RunningBum]

I've got a minor delema this year. Wife's retiree paid healthcare started this year in April, so we used ACA healthcare for Jan-March, saving us a total of $3000. Should we forgo the ACA savings, and do Roth conversion (Approximately $48k converted) to the top of the 12% bracket?

Hard to say without a more complete picture, but if you'd be paying 22% or more on that money once you start RMDs, it seems like a bigger savings to do the conversion instead. $3000 in hand today seems like a really nice thing to grab, but probably not when you look at the long term, where you might save $4800 or more in taxes later, and be able to compound any growth on that money tax free. Plus you may be avoiding or limiting an SS tax torpedo.

 

[TheRunningMan]

I don't think that there will be much of a difference for me (per my model), though I might be able to manage to some degree of subsidy. I think the tax spread, particularly in light of where rates may go in the future, is more compelling. I'm 54 and looking to eject in early 2022.

Thanks for the good post which made me review this again!

 

[pb4uski]

+1 It sounds like doing the $48k Roth conversion in 2019 and paying 12% vs doing it later or via RMDs and paying 22% or more.... assumes that you'll be in 22% bracket before RMDs once SS is online... so the $4,800 in savings would exceed the $3,000 ACA savings.

 

[brucethebroker]

For me, ACA subsidies so greatly exceed the Roth conversion savings that it is ridiculous.

+1. Plus, if you have a hobby business/PT self employed, the remaining premium may be deductible as a business expense.

 

[GTFan]

I dunno. You'd have to do pretty large conversions I think. Maybe if a person had a really large IRA and were willing to bust the ACA ceiling, the math could work. Rough math thinking: maybe paying 22% now on $40K at age 50 prevents $160K from being taxed at 35% later.

If you're getting $10k or more from ACA savings a year as I mentioned, I don't think Roth conversions can compare especially when you add in the extra state income tax hit. Doesn't matter how big the tIRA is because there's only so much you can convert tax-wise each year to try and make up for it. Don't forget that $10k or more saved might still be invested, so you have to factor in lost growth as well. Same for all those taxes you're paying on conversions.

I don't think $10k is at all unusual given the large disparity between subsidized and non-subsidized ACA plans (again, in most areas) now. But it's certainly not a straightforward calculation to make even with savings less than $10k.

 

[SecondCor521]

If you're getting $10k or more from ACA savings a year as I mentioned, I don't think Roth conversions can compare especially when you add in the extra state income tax hit. Doesn't matter how big the tIRA is because there's only so much you can convert tax-wise each year to try and make up for it. Don't forget that $10k or more saved might still be invested, so you have to factor in lost growth as well. Same for all those taxes you're paying on conversions.

I don't think $10k is at all unusual given the large disparity between subsidized and non-subsidized ACA plans (again, in most areas) now.

Right, I saw the $10K number. My savings are in that range, but I also have one kid left on my insurance. With just me, and if I change to catastrophic or bronze, the ACA subsidy would be less, I would think. Plus, my ACA clifftop is lower because my family size will shrink from 4 to 3 to 2 to 1, so it gets harder for me to have that low of an AGI.

I did think about state taxes, but it's also possible that the state taxes doing a conversion now could be lower than a tax-torpedo'ed RMD later (one pays state income taxes on RMDs I am fairly certain). Not in my state, I guess, because my state has a very low level to get to the top bracket.

I don't understand your comment about limits on conversions. There is no limit on conversions as long as you pay the income taxes. So if I have a $2M IRA I could convert $500K of it this year if I wanted to - may not make sense to, and I'd have to consider what brackets I'm converting into now, but I could. Remember that converting and paying taxes on, say, $40K now at 22% may compound inside Roths to $160K in two decades and avoid RMDs on $160K at 35%.

Really, everyone should do the math, and maybe I should stop spitballing scenarios. Personally I'm 50, getting ACA CSR87 and FAFSA benefits by just doing rather small Roth conversions. The math tells me I should do more, but I don't. So I'm already following your suggestion to not convert, even though in my case I'm not sure it's optimal.