RunningBum
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Jun 18, 2007
- Messages
- 13,236
I'm asking for a second look on my ACA subsidy strategy, to make sure I'm not missing anything.
For some background, I'm single, just turned 56, and have about 3/4 of my investment assets in a taxable account: 3% CDs maturing Dec 2018, and 3 Vanguard funds: Total Stock, Total International, and PRIMECAP. Roughly 7/32/41/20 split of those investments, which is not my total AA. I also have some in a tIRA that I am trying to convert to Roth over time, ideally before I start SS and a small pension.
In 2016 I found that I was able to manage income to take a smallish subsidy, so I did, getting the credit back when I filed taxes (not an important detail). Interest, divs and CGs took up most of the 400% FPL space, and I was able to make a small conversion. CGs were actually canceled by some cap loss harvesting, and I have a pretty good carryover to 2017. I figured I could milk this carryover for a few more years and get the subsidy for the foreseeable future, not being sure how long it will exist.
For 2017, the subsidy is a bit larger, $2076 for the year, so I applied to get it as a monthly reduction. Now I find out that one of my mutual funds (VG PRIMECAP) is throwing large CG distributions at the end of this year. I can still barely qualify for the subsidy for 2017, but I'll use up all of my capital loss carryover. This means I'm practically guaranteed to lose the subsidy in subsequent years if I make no changes, unless Primecap gives much smaller subsidies in those years. The uncertainty of this tax inefficient fund makes planning difficult.
In 2018 my subsidy at 400% FPL would be much larger, $8736, if I can get there.
Also, I tried the horserace conversion strategy this year, converted 2x a lot more than I know I can convert to stay under 400%, and one of them is up over 20%. The safer one is up about 2-3%. Combined they've appreciated about $5000. I had planned to recharacterize all of the loser, and much of the winner to get under 400% FPL. I'd be putting back about $4000 in gains, which is probably worth about $400-600 in tax savings if I could keep it in the Roth.
So, my thought is to give up the 2017 subsidy, and sell off Primecap in 2017. It would be a 6 figure LTCG, virtually all taxed at 15% It's been a great investment for me but maybe it wouldn't be the worst idea to take my profits since there's no guarantee it will continue to beat the market. I have a small amount in my Roth that I'd keep so I could buy more each year--it's a closed fund and existing holders can buy $25K more each year.
Since I'd be way over 400% FPL in 2017, I might as well keep all of the Roth conversion horserace winner, and maybe even convert to the top of the 25% since this might be the only year to convert a lot. From my calculations, if I moved it to index funds I'd qualify for the subsidy in 2018 by a thousand or so. So it'd be close, and there's a possibility of larger dividends or possibly even a CG distribution from one of those indices (has that happened before?).
I have had an HSA policy and will continue it in 2018, taking the max $4450 deduction next year including the over 55 catch up. If I find I'm just over to 400% FPL in 2018, I could cash in one or more of the CDs to deduct the early interest penalty. Canceling out $1500 interest is worth not losing $8000+ in subsidy if it comes to that.
I'm not seeing any other tricks to reduce MAGI unless I started a business and lost money on it. Not sure I really want to go to that effort. I don't have any kind of business in the works. I don't have any unrealized capital losses and as I said, the carryover will get used up in 2017. The only other reduction I see that could apply is if I paid some alimony to my ex-, but I don't want to go anywhere near that route.
There is one wildcard, I have a townhouse that my son lives in rent free. I own it outright. I don't see how I can turn that into a money loser if I took out a loan and charged him market or near-market rent, could I? There's also the complication that he may move out of the area, in which case I'd sell it and might be taking a small gain. I have the receipts from improvements I made when I bought it, plus there will be closing costs, but it's going to be close.
So the ultimate question is, should I take the ~$1500 bird in the hand this year (subsidy less returned Roth profit tax break), or give it up and go for $8000+ subsidy next year and give myself a chance at subsidies in future years, given there is a small chance I would miss the subsidy? I also don't want to predict how long the subsidies will last.
And is there a more tax efficient investment wrt to MAGI to make instead of adding to the index funds I have? The bond funds I have in my IRAs throw more income than the indices throw dividends. Tax free munis are added to MAGI so those don't help. I don't think I want to sabotage my investments and get poor returns since the lost opportunities would probably be more than the $8000 subsidy.
Maybe I'm making too big of a deal for $8000, but it could be more each year until I hit medicare age if subsidies continue.
Thanks to anyone who waded through all of this to comment. I just ask that you don't do a quick scan and make some suggestion like "get an HSA plan," which I'm already doing.
For some background, I'm single, just turned 56, and have about 3/4 of my investment assets in a taxable account: 3% CDs maturing Dec 2018, and 3 Vanguard funds: Total Stock, Total International, and PRIMECAP. Roughly 7/32/41/20 split of those investments, which is not my total AA. I also have some in a tIRA that I am trying to convert to Roth over time, ideally before I start SS and a small pension.
In 2016 I found that I was able to manage income to take a smallish subsidy, so I did, getting the credit back when I filed taxes (not an important detail). Interest, divs and CGs took up most of the 400% FPL space, and I was able to make a small conversion. CGs were actually canceled by some cap loss harvesting, and I have a pretty good carryover to 2017. I figured I could milk this carryover for a few more years and get the subsidy for the foreseeable future, not being sure how long it will exist.
For 2017, the subsidy is a bit larger, $2076 for the year, so I applied to get it as a monthly reduction. Now I find out that one of my mutual funds (VG PRIMECAP) is throwing large CG distributions at the end of this year. I can still barely qualify for the subsidy for 2017, but I'll use up all of my capital loss carryover. This means I'm practically guaranteed to lose the subsidy in subsequent years if I make no changes, unless Primecap gives much smaller subsidies in those years. The uncertainty of this tax inefficient fund makes planning difficult.
In 2018 my subsidy at 400% FPL would be much larger, $8736, if I can get there.
Also, I tried the horserace conversion strategy this year, converted 2x a lot more than I know I can convert to stay under 400%, and one of them is up over 20%. The safer one is up about 2-3%. Combined they've appreciated about $5000. I had planned to recharacterize all of the loser, and much of the winner to get under 400% FPL. I'd be putting back about $4000 in gains, which is probably worth about $400-600 in tax savings if I could keep it in the Roth.
So, my thought is to give up the 2017 subsidy, and sell off Primecap in 2017. It would be a 6 figure LTCG, virtually all taxed at 15% It's been a great investment for me but maybe it wouldn't be the worst idea to take my profits since there's no guarantee it will continue to beat the market. I have a small amount in my Roth that I'd keep so I could buy more each year--it's a closed fund and existing holders can buy $25K more each year.
Since I'd be way over 400% FPL in 2017, I might as well keep all of the Roth conversion horserace winner, and maybe even convert to the top of the 25% since this might be the only year to convert a lot. From my calculations, if I moved it to index funds I'd qualify for the subsidy in 2018 by a thousand or so. So it'd be close, and there's a possibility of larger dividends or possibly even a CG distribution from one of those indices (has that happened before?).
I have had an HSA policy and will continue it in 2018, taking the max $4450 deduction next year including the over 55 catch up. If I find I'm just over to 400% FPL in 2018, I could cash in one or more of the CDs to deduct the early interest penalty. Canceling out $1500 interest is worth not losing $8000+ in subsidy if it comes to that.
I'm not seeing any other tricks to reduce MAGI unless I started a business and lost money on it. Not sure I really want to go to that effort. I don't have any kind of business in the works. I don't have any unrealized capital losses and as I said, the carryover will get used up in 2017. The only other reduction I see that could apply is if I paid some alimony to my ex-, but I don't want to go anywhere near that route.
There is one wildcard, I have a townhouse that my son lives in rent free. I own it outright. I don't see how I can turn that into a money loser if I took out a loan and charged him market or near-market rent, could I? There's also the complication that he may move out of the area, in which case I'd sell it and might be taking a small gain. I have the receipts from improvements I made when I bought it, plus there will be closing costs, but it's going to be close.
So the ultimate question is, should I take the ~$1500 bird in the hand this year (subsidy less returned Roth profit tax break), or give it up and go for $8000+ subsidy next year and give myself a chance at subsidies in future years, given there is a small chance I would miss the subsidy? I also don't want to predict how long the subsidies will last.
And is there a more tax efficient investment wrt to MAGI to make instead of adding to the index funds I have? The bond funds I have in my IRAs throw more income than the indices throw dividends. Tax free munis are added to MAGI so those don't help. I don't think I want to sabotage my investments and get poor returns since the lost opportunities would probably be more than the $8000 subsidy.
Maybe I'm making too big of a deal for $8000, but it could be more each year until I hit medicare age if subsidies continue.
Thanks to anyone who waded through all of this to comment. I just ask that you don't do a quick scan and make some suggestion like "get an HSA plan," which I'm already doing.