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Managing MAGI for ACA subsidies
Old 09-22-2018, 11:34 AM   #1
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Managing MAGI for ACA subsidies

Background: Planning to retire at end of 2019. Myself and DW will be 61. Essentially all retirement savings is in tax deferred accounts. Planning to start SS at 67. Non-COLA pensions will be about $25K per year. Expected annual expenses between retirement and age 65 are $100K per year, excluding healthcare.

So we have $75K ($100K expenses minus $25K pension) per year of income to provide for until we hit 65 and Medicare eligibility. 4 years * $75K/year = $300K


Options:
1. Withdraw funds from tax deferred accounts each year to cover expenses. This will put us above the MAGI limit for ACA subsidies so add $30K/year extra withdrawals for ACA insurance and deductible. Plus even more to cover taxes on the withdrawal.
2. Convert $150K from tax deferred accounts in both 2018 and 2019 to Roth IRAs. We can do this and stay in the 24% tax bracket. Full ACA subsidy (income is less than 2x poverty level) will then be available for the four years, which now shows a $0 premium, $0 deductible plan available. Taxes in the four years will only be on the pension which after the standard deduction is $100/year.


My metric is withdrawal rate of remaining savings at age 67 when we start SS.

Option 1 (No ACA subsidy): 4.3%
Option 2 (Full ACA subsidy): 3.8%


In summary it is best to pay a huge tax bill on Roth conversions before retirement, to get ACA subsidies after retirement, than to spread out the taxes, even at a lower tax rate and pay for health insurance.

This may have been obvious to some, but I had to do the math on my own personal situation to convince myself. I expect income taxes and health care expenses to both be higher in the future. This strategy seems to be correct if it holds true.

I realize I haven't provided enough information for anyone to check my math, but that's not the part I'm worried about. I want to make sure I haven't made a big error in assumptions that could completely change the picture.

Of course if the ACA rules get changed I might be screwed, but it doesn't seem that this will happen. I would put the $300K of Roth money in a CD ladder to eliminate investment risk over the four year period. I will have a HELOC to cover unexpected expenses without risking the ACA subsidy in this period.

Am I overlooking anything or making wrong assumptions anywhere? What are everyone's thoughts on this plan?
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Old 09-22-2018, 11:44 AM   #2
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Well, the cost of getting that $150k is clear... 24% or $36k check that you write to the feds... though one could argue that it is just accelerating payment if you will be in the 24% bracket once SS starts.

What is the value of subsidies? IOW, how much would you pay in health insurance under your plan vs not?

Also, there may be a sweet spot in between of just barely qualifying for subsidies, which would allow you to do up to $39k of tax-deferred withdrawals a year and still qualify for subsidies, allbeit lower subsidies.
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Old 09-22-2018, 11:54 AM   #3
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To be clear it is $150K for two years. So total "up-front" cost is $72K. The savings in health care expense is $30K per year for four years or $120K.

I looked at the middle ground case where I would withdraw from tax deferred accounts to stay just under the 4x poverty level cliff, but this was not as good as the 2x poverty full subsidy case because of the extra taxes I would also pay on the withdrawals combined with the somewhat higher health care costs.
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Old 09-22-2018, 12:02 PM   #4
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To be clear it is $150K for two years. So total "up-front" cost is $72K. The savings in health care expense is $30K per year for four years or $120K.

I looked at the middle ground case where I would withdraw from tax deferred accounts to stay just under the 4x poverty level cliff, but this was not as good as the 2x poverty full subsidy case because of the extra taxes I would also pay on the withdrawals combined with the somewhat higher health care costs.

Unless you have medical conditions that will require you to spend 100% of your deductible I would not factor that in the decision... you might not ever hit that...


I would look at the subsidy you get for premiums and a reasonable amount of costs vs the tax...



BTW, you can get the next income level up on the silver plan that you still pay copay and some deductible and get a good amount of the premiums paid... no reason to go to the lowest level IMO... and if you do not have much medical costs just barely get into subsidy and you might be better off...
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Old 09-22-2018, 12:02 PM   #5
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How much after tax money can you stash in the next 14 months.

How much equity do you have in your home..if you have a house payment how about a refi to lower your annual expenses...if its paid off how about a home equity loan in 2019 to lower the amount of taxable income you need to live on
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Old 09-22-2018, 12:49 PM   #6
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Hi,

This is a very good question. Me and My wife find ourselves in a similar situation.
Most all of our money is a tax deferred IRA's. I have made a baseline of 80k for expenses.

How to optimize withdrawals is still a mystery to me. Hopefully someone here will give us some options.


...
30 year draw down
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Old 09-22-2018, 12:57 PM   #7
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I'd be cautious about counting on the ACA subsidies to be there.
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Managing MAGI for ACA subsidies
Old 09-22-2018, 01:07 PM   #8
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Managing MAGI for ACA subsidies

That high of upfront tax is hard for me given the uncertainty of the future ACA costs.

We are using money from our home equity (2.95% fixed rate) and also plan to use Roth contributions (about 160k).
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Old 09-22-2018, 01:14 PM   #9
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How much after tax money can you stash in the next 14 months.

How much equity do you have in your home..if you have a house payment how about a refi to lower your annual expenses...if its paid off how about a home equity loan in 2019 to lower the amount of taxable income you need to live on
Good points. Yes saving after tax money the next 15 months is definitely in the plans. This will reduce any 2019 Roth conversions 1:1.

Mortgage will be zero by end of 2019. I thought about a HELOC bridge but haven't run the numbers on it. Also, It removes my buffer for unexpected expenses.
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Old 09-22-2018, 01:17 PM   #10
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I find a longer window makes this process easier. Do you have Roth amounts now that you can live on? Make sure and use up all your free tax brackets even if itís just 24k/yr
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Old 09-22-2018, 01:22 PM   #11
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Originally Posted by conversationalphrase View Post
To be clear it is $150K for two years. So total "up-front" cost is $72K. The savings in health care expense is $30K per year for four years or $120K.

I looked at the middle ground case where I would withdraw from tax deferred accounts to stay just under the 4x poverty level cliff, but this was not as good as the 2x poverty full subsidy case because of the extra taxes I would also pay on the withdrawals combined with the somewhat higher health care costs.
The key question then becomes what is included in the $30k of "savings".

Or put another way, what is the difference between health insurance, copays and deductibles based on your likely use of health insurrance with and without subsidies... as NWB observes, it would not necessarily be the full deductible and copays unless that is what you expect will happen.

The other thing that is intangible is to factor in whether subsidies will continue... I suspect that they will but you never know.
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Old 09-22-2018, 01:22 PM   #12
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Good points. Yes saving after tax money the next 15 months is definitely in the plans. This will reduce any 2019 Roth conversions 1:1.

Mortgage will be zero by end of 2019. I thought about a HELOC bridge but haven't run the numbers on it. Also, It removes my buffer for unexpected expenses.
Thus makes me wonder about your budget is it firm with some padding for one off expenses? With a paid off house I'd definitely think hard about a HELOC..
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Old 09-22-2018, 01:41 PM   #13
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The key question then becomes what is included in the $30k of "savings".

Or put another way, what is the difference between health insurance, copays and deductibles based on your likely use of health insurrance with and without subsidies... as NWB observes, it would not necessarily be the full deductible and copays unless that is what you expect will happen.

The other thing that is intangible is to factor in whether subsidies will continue... I suspect that they will but you never know.
Using:

https://www.healthcare.gov/lower-costs/

At 30K MAGI I see a $0 premium $0 deductible plan. Max out of pocket is $4700.

At 70K MAGI a mid range plan has a $2500 monthly premium and a $5000 deductible. Even if I had zero expense my annual cost would be $30K.

I will of course review when the 2019 prices are available.
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Old 09-22-2018, 01:47 PM   #14
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Using:

https://www.healthcare.gov/lower-costs/

At 30K MAGI I see a $0 premium $0 deductible plan. Max out of pocket is $4700.

At 70K MAGI a mid range plan has a $2500 monthly premium and a $5000 deductible. Even if I had zero expense my annual cost would be $30K.

I will of course review when the 2019 prices are available.
You understand the second number is so high because you are over the subsidy limit.What is your number with taxable income of around 59k..
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Old 09-22-2018, 06:50 PM   #15
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I find a longer window makes this process easier. Do you have Roth amounts now that you can live on? Make sure and use up all your free tax brackets even if itís just 24k/yr

+1 on this... I am using ROTH to carry me over at the end of the year after I have cap gains to the income level I want...


And it is important NOT to go over the max allowed or you lose all your subsidy...
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Old 09-22-2018, 09:54 PM   #16
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I'd be cautious about counting on the ACA subsidies to be there.
I would hope it lasts at least into 2020. Let's see what happens in the fall.
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Old 09-23-2018, 09:57 PM   #17
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Do you REALLY need 100k/year to live a satisfying life? Are there ways you could cut back a bit during the 4 year bridge period you need to get to Medicare -- maybe defer some optional spending like fancy vacations, home upgrades, etc? Maybe downsize to reduce housing costs, etc.? Seems like a really high tax hit to take for such a short period of time....
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Old 09-23-2018, 10:21 PM   #18
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Thus makes me wonder about your budget is it firm with some padding for one off expenses? With a paid off house I'd definitely think hard about a HELOC..
+1 You donít have to use it BUT itís there if you need it.
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Old 09-24-2018, 06:56 AM   #19
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Do you REALLY need 100k/year to live a satisfying life? Are there ways you could cut back a bit during the 4 year bridge period you need to get to Medicare -- maybe defer some optional spending like fancy vacations, home upgrades, etc? Maybe downsize to reduce housing costs, etc.? Seems like a really high tax hit to take for such a short period of time....
No. We have a large discretionary budget and plan to live well in retirement. If we have a solid plan that essentially assures long term financial needs are met (< 4% withdrawal rate) Why not?

Taxes are just another expense, like healthcare. Choosing to spend more in one expense area and less in another to achieve an overall lower total expense level seems to be a reasonable plan.
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Old 09-24-2018, 07:00 AM   #20
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Originally Posted by ivinsfan View Post
How much after tax money can you stash in the next 14 months.

How much equity do you have in your home..if you have a house payment how about a refi to lower your annual expenses...if its paid off how about a home equity loan in 2019 to lower the amount of taxable income you need to live on
+1 on the after tax money you can stash between now and retirement. That will reduce the draw on your tax sheltered accounts and reduce the taxes.
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