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Ira withdrawal vs obamacare
Old 07-19-2018, 12:30 PM   #1
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Ira withdrawal vs obamacare

Hi everyone, I'm new to the forum and hoping someone can point me in the right direction.

My wife and I are both 61 and have been able to qualify for premium assistance with Obamacare through Covered California.

My financial advisor had suggested that I consider taking early withdrawals from our IRA's because the new tax brackets are low now but I don't expect those rates to last long.

The delemna is if we take IRA withdrawals that will count as income when calculating our health insurance assistance.

I've been trying to come up with some formula for finding the sweet spot for taking IRA withdrawals without taking too much. This is turning out to be incredibly complicated.

Is there anyone that has figured this out or maybe lead me to a good advisor that can figure this out?

Thanks in advance for your help!
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Old 07-19-2018, 12:45 PM   #2
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Go to Healthcare.Gov and enter various income levels and see how that affects your premiums. Also, Kaiser Family Foundation Subsidy Calculator is very helpful. Good luck!
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Old 07-19-2018, 12:53 PM   #3
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In general the sweetest spot is having a Silver plan and keeping your MAGI under 150% of the poverty level.
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Old 07-19-2018, 01:42 PM   #4
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I tend to look at breakpoints or cliffs in the tax code and try to get under the significant ones to the degree that I can and still live the life I want to live and given the money I have to spend.

For cost sharing reductions (CSRs), the medium-sized breakpoints are at 150%, 200%, and 250% of the federal poverty level (FPL).

For advance premium tax credits, there are mild breakpoints at 133%, 150%, 200%, 250%, and 300% of FPL.

For me, there are signficant FAFSA-related breakpoints at $25K and $50K AGI.

For you, there may be breakpoints related to the taxability of Social Security benefits and the applicability of IRMAA premium adjustments. I don't know much about those as they don't affect me yet.

There are, of course, the tax brackets themselves.

Sometimes the various breakpoints line up in a way that reducing your income a little might make a larger difference in the resulting tax bill, or, conversely, you may realize that you can increase your income a lot in certain ranges without too much of an adverse effect. A relatively simple way to do this analysis is to figure out what the various breakpoints are for your situation expressed in dollar figures related to AGI. Then look at what your AGI might be, and see where it falls in relation to those breakpoints.

If you want to get complicated, you could build a spreadsheet that calculates your tax liability based on inputs, then vary those inputs and see what the actual tax effects are.

You could also use an online tax calculation program, but using those it is harder to see what's going on under the hood and understand why the differing inputs affect the output.
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Old 07-19-2018, 01:44 PM   #5
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For every dollar of income we lose about 15 cents of subsidy and pay the 12 cents in taxes for a net of 72 cents. Sine we do not want to pay 28% we are not doing IRA withdrawals.
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Old 07-19-2018, 01:47 PM   #6
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My sweet spot is low so I get cost sharing reduction...


IIRC my deductible is now $1500 instead of $6600... so even if I do not have any problems that helps out anyhow...


Plus, with 4 people on the policy I get good subsidy...



For a quick calculation just use 10% for a tax rate on having lower subsidy plus any more income tax you might owe.... I do not owe any income tax so I just us 10%...
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Old 07-19-2018, 02:18 PM   #7
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First of all, if you don't need IRA money for living expenses, you should be looking at conversions to a Roth rather than withdrawals. That way your money grows tax free after the conversion. For that alone, you should dump your financial advisor.

Beyond that, you are probably looking at a difference of 12% vs 15%, right? 3% difference? Compare that to your subsidy benefit.

There are many more moving pieces to this. If you don't convert your IRA now, what will that do to your SS taxation or tax brackets in general when you have MRDs? Suddenly you may be looking at 25% later (if tax rates go back up) compared to 12% now, plus more SS benefits being taxed.

It's not going to be a simple answer, even if tax laws don't change. For me, I can't get my income down below 250% to get CSRs, so I convert as close to 400% as I can, in hopes of getting my IRA fully converted by the time I take SS.
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Old 07-19-2018, 05:48 PM   #8
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I-ORP is probably your best resource, using the Extended version and doing multiple scenarios with ACA and without.

Unfortunately, I don't think the older version is available so you will have to do some of your own math to adjust tax rates, but it spits out data easily imported into a spreadsheet where your guess is as good as anyone on when/how much the tax rate is impacted.

It has a space for ACA credit and allows you to convert "up to" a specific tax bracket.
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Old 07-19-2018, 05:53 PM   #9
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Just a couple of out of the box suggestions:

1. Start a small business. (OK to lose money the first couple of years).
2. Biz deductions will help your MAGI, plus you can have a SEP, if necessary.
3. Continue to fund your IRA-I know, seems counter intuitive, but the deduction will also reduce your MAGI. The increase in premium credits and tax savings may make it very worthwhile.
4. Your business can pay the health insurance for your family-another deduction.
5. Check 1-4 with a CPA before implementing.

I have never run the numbers, but suspect that even borrowing on a HELOC (tax free) for cash flow might be smarter than IRA cashout if it keeps you under the MAGI limits. You can always pay the loan off later with IRA monies-say at age 65/Medicare. The tax credits are a very big deal....
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Old 07-19-2018, 06:00 PM   #10
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I would do this. Start with a pro form 2018 tax return based on your current situation.

Then add in a $10,000 IRA withdrawal or Roth conversion and calculate 1) the reduction in your subsidy and 2) the increase in your tax. The sum of these divided by $10,000 is your incremental cost of the withdrawal or conversion. If you don't mind "paying" that cost for the $10,000, then repeat the process another $10,000 ($20,000 total).... rinse and repeat until the incremental cost makes you puke... then stop.

So if for example for the first $10,000, if your subsidy declines $150/month and your taxes increase by $1,200, then your incremental cost is 30%.

Finally, compare that to your expected tax bracket once you are on Medicare.... if that ultimate rate is higher (than 30% in this example) then it makes sense to do it.

I suspect that you will find that there is a very high cost to the proposed withdrawals/conversions... in which case consider finding a smarter advisor.
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Old 07-19-2018, 07:25 PM   #11
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Originally Posted by RunningBum View Post
First of all, if you don't need IRA money for living expenses, you should be looking at conversions to a Roth rather than withdrawals. That way your money grows tax free after the conversion. For that alone, you should dump your financial advisor.

Beyond that, you are probably looking at a difference of 12% vs 15%, right? 3% difference? Compare that to your subsidy benefit.

There are many more moving pieces to this. If you don't convert your IRA now, what will that do to your SS taxation or tax brackets in general when you have MRDs? Suddenly you may be looking at 25% later (if tax rates go back up) compared to 12% now, plus more SS benefits being taxed.

It's not going to be a simple answer, even if tax laws don't change. For me, I can't get my income down below 250% to get CSRs, so I convert as close to 400% as I can, in hopes of getting my IRA fully converted by the time I take SS.

The problem is it is not just 12% vs 15%.... you lose subsidy with every dollar more of income... it is 9+%, so I round it to 10%... so you have to 'pay' 10% for less subsidy PLUS your 12% tax rate... so about 22% if you are paying taxes...


So unless you have the right kind of income where you owe no income tax the lowest tax rate is an effective 22%... nothing lower...
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Old 07-19-2018, 07:45 PM   #12
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The problem is it is not just 12% vs 15%.... you lose subsidy with every dollar more of income... it is 9+%, so I round it to 10%... so you have to 'pay' 10% for less subsidy PLUS your 12% tax rate... so about 22% if you are paying taxes...


So unless you have the right kind of income where you owe no income tax the lowest tax rate is an effective 22%... nothing lower...
As I said.... compare that to your subsidy benefit....

And you are going to pay tax on that IRA conversion or withdrawal eventually anyway... unless you die with it... Any advantage to delaying is offset by having to pay additional tax on the growth...

So it really is 12% vs. 15% or whatever your rate would be later when taking MRDs...versus the value of the subsidy...just as I said...

...

...
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Old 07-20-2018, 07:54 AM   #13
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For every dollar of income we lose about 15 cents of subsidy and pay the 12 cents in taxes for a net of 72 cents. Sine we do not want to pay 28% we are not doing IRA withdrawals.


28% is no longer a bracket. Eff w 2018 income, 22%, then 24%, then 32% (ouch)!
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Old 07-20-2018, 09:04 AM   #14
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Wow! There are great minds on this forum. Thanks all of you so much for your replies. It looks like I have some homework to do this afternoon.
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Old 07-20-2018, 09:51 AM   #15
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As I said.... compare that to your subsidy benefit....

And you are going to pay tax on that IRA conversion or withdrawal eventually anyway... unless you die with it... Any advantage to delaying is offset by having to pay additional tax on the growth...

So it really is 12% vs. 15% or whatever your rate would be later when taking MRDs...versus the value of the subsidy...just as I said...

...

...



No. If I wait until I start Medicare and do not lose my subsidy then it is what you say.... if I am currently losing both subsidy and paying that tax it is not..
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Old 07-20-2018, 11:51 AM   #16
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OK, I see how you are looking at it.

If you are converting now at 12%, you are also losing some of the subsidy at another ~10%, so effectively you have a 22% tax rate.

If you instead don't convert, in retirement, SS benefits might push you into the next bracket, which is 22% now, and might be 25% again in the future.

22% now vs. 25% later implies converting up to the top of the 12% tax bracket, IF that's your situation, though if you can stay under 250% it might be better to not convert and take CSRs now as well. But if you won't be pushed into the next bracket, 22% now vs. 15% later says not to do any conversions, and take as much subsidy as you can.
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Old 07-20-2018, 12:01 PM   #17
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The Patient Protection and Affordable Care Act, often shortened to the Affordable Care Act (ACA) was nicknamed by the Obama himself as Obamacare.

Proper name should be ACA not Obumercare.
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Old 07-20-2018, 12:12 PM   #18
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^^^ All true if you're picking nits.... it has been referred to on this forum as Obamacare or ACA for years... it's unlikely to change so get used to it.
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Old 07-20-2018, 12:17 PM   #19
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Except Obama didn't come up with that nickname, so it's not a nit, it's wrong.
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Old 07-20-2018, 12:30 PM   #20
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Except Obama didn't come up with that nickname, so it's not a nit, it's wrong.
Right he didn't name it. Other people called it that.
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