Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Obamacare means Roth conversions way more expensive
Old 06-28-2012, 11:41 AM   #1
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,221
Obamacare means Roth conversions way more expensive

Before OC: If you are in 15% bracket, and you do a Roth conversion, you pay 15% assuming you stay in the 15% bracket.
Now that OC is law, using an online subsidy calculator: You do the same conversion, still will pay 15%, PLUS the extra income will result in more expensive insurance, because a you will get a far less tax credit. For me, an extra $19K of a Roth conversion results in $5650 in extra taxes, a 30% tax.

Those doing Roth conversions may want to run their own numbers before doing conversions in 2014.
TJ
__________________

__________________
teejayevans is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 06-28-2012, 11:44 AM   #2
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Yes, that certainly can be true. Anything that registers as taxable income will reduce the subsidy which (for those buying their own insurance) effectively feels like a 15-16% tax on solidly middle class incomes. But if people are on Medicare, or if they get an employer-sponsored group plan, that doesn't apply.
__________________

__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-28-2012, 11:53 AM   #3
Recycles dryer sheets
tomz's Avatar
 
Join Date: Mar 2006
Posts: 251
I'm confused. Without Obamacare, you get no subsidy for health insurance. With Obamacare, you get a subsidy based on your income. Your point is that the subsidy will be reduced if you do a Roth conversion because your income will be higher? Show me the numbers with and without Obamacare including the cost of health insurance. I've been doing Roth conversions every year and would like to understand this better. Thanks
__________________
tomz is offline   Reply With Quote
Old 06-28-2012, 11:58 AM   #4
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by tomz View Post
I'm confused. Without Obamacare, you get no subsidy for health insurance. With Obamacare, you get a subsidy based on your income. Your point is that the subsidy will be reduced if you do a Roth conversion because your income will be higher? Show me the numbers with and without Obamacare including the cost of health insurance. I've been doing Roth conversions every year and would like to understand this better. Thanks
Do you buy your own insurance? If you have employer sponsored coverage this is a non-issue. If you do buy your own insurance, though, Roth conversions hit your taxable income, and your taxable income determines the size of the subsidy.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-28-2012, 12:03 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,439
Yes, that is the point. In looking at the incremental cost of doing a Roth conversion you'll need to consider the income tax that will be paid on the Roth conversion and the reduction in the subsidy for health care that you will get as a result of the Roth conversion and the sum of the two will be the economic cost of doing the Roth conversions.

I haven't played with the numbers yet but I suspect that it will significantly increase the economic cost of doing Roth conversions, perhaps even to a point where RMDs will be preferable to Roth conversions (except perhaps between when Medicare starts and RMDs start).

I'm dealing with a similar thing now because property taxes in my state have a complex income sensitivity adjustment which increases the economic cost of Roth conversions for me.
__________________
pb4uski is online now   Reply With Quote
Old 06-28-2012, 12:08 PM   #6
Recycles dryer sheets
tomz's Avatar
 
Join Date: Mar 2006
Posts: 251
OK. So a subsidy, that I don't currently get, will be less if I do a Roth conversion. The end result will be a subsidy that I don't currently get.
__________________
tomz is offline   Reply With Quote
Old 06-28-2012, 12:09 PM   #7
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,221
This is the online calculator I used:
Health Reform Subsidy Calculator - Kaiser Health Reform

TJ
__________________
teejayevans is offline   Reply With Quote
Old 06-28-2012, 12:13 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,439
Quote:
Originally Posted by tomz View Post
OK. So a subsidy, that I don't currently get, will be less if I do a Roth conversion. The end result will be a subsidy that I don't currently get.
But, if the subsidy effectively offsets increases in health insurance as a result of ignoring per-existing conditions then it will affect you.
__________________
pb4uski is online now   Reply With Quote
Old 06-28-2012, 01:17 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 2,424
Does anyone understand that calculator? There are 2 of us but I'll only need insurance for me. The only options are for a family of 4 or a single person.

If I use just my income it shows Medicaid. With our combined income I would pay 8.0%. Is that to cover both? Or just one person?

Anyone have a link to a more detailed calculator?
__________________
Married, both 62. DH retired June, 2010. I have a pleasant little part time job.
Sue J is online now   Reply With Quote
Old 06-28-2012, 01:23 PM   #10
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
I've been playing with that calculator and I just noticed something disturbing. I used the following assumptions: single adult, 2014 dollars, age 50, no employer coverage available, medium cost region.

I put in an income of $46,021 -- the subsidy shows up as $2,606.

I changed that to $46,022 -- the subsidy is *zero*. Earn an extra $1 and it costs you $2,606?

I hope that calculator isn't right because that would really be awful if that's accurate.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-28-2012, 01:26 PM   #11
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,115
Quote:
Originally Posted by ziggy29 View Post
I've been playing with that calculator and I just noticed something disturbing. I used the following assumptions: single adult, 2014 dollars, age 50, no employer coverage available, medium cost region.

I put in an income of $46,021 -- the subsidy shows up as $2,606.

I changed that to $46,022 -- the subsidy is *zero*. Earn an extra $1 and it costs you $2,606?

I hope that calculator isn't right because that would really be awful if that's accurate.
As I understand the law, that is accurate. It has been the subject of discussion here on other occasions, but I can't locate them at the moment.
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 06-28-2012, 01:27 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 2,424
And do we know if that's gross income or adjusted?
__________________
Married, both 62. DH retired June, 2010. I have a pleasant little part time job.
Sue J is online now   Reply With Quote
Old 06-28-2012, 01:28 PM   #13
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by REWahoo View Post
As I understand the law, that is accurate. It has been the subject of discussion here on other occasions, but I can't locate them at the moment.
Yeah, I knew the phaseout of the subsidy was (IMO) pretty punitive in solidly middle class income brackets. But I had no idea there was a "cliff" this steep.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 06-28-2012, 01:28 PM   #14
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,115
Found one previous thread: Health Care subsidies
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 06-28-2012, 02:06 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,439
Quote:
Originally Posted by ziggy29 View Post
I've been playing with that calculator and I just noticed something disturbing. I used the following assumptions: single adult, 2014 dollars, age 50, no employer coverage available, medium cost region.

I put in an income of $46,021 -- the subsidy shows up as $2,606.

I changed that to $46,022 -- the subsidy is *zero*. Earn an extra $1 and it costs you $2,606?

I hope that calculator isn't right because that would really be awful if that's accurate.
MegaCorp boss: Congratulations Joe - you had a good year last year so we are giving you a raise from $46k a year to $48k a year!!

Joe (who is in the know): Thanks, but no thanks.

Or the $1 could be an additional $1 of Roth conversion! Ouch!!!
__________________
pb4uski is online now   Reply With Quote
Old 06-28-2012, 02:18 PM   #16
Thinks s/he gets paid by the post
teejayevans's Avatar
 
Join Date: Sep 2006
Posts: 1,221
Quote:
Originally Posted by Sue J View Post
And do we know if that's gross income or adjusted?
Good question, also, in 2014 they will need to look at 2013 returns, actually, in Jan of 2014, they may need to go back to 2012. Not sure how this is all going to work.
TJ
Edit: I found a link that answers some of the questions:
http://www.heritage.org/research/rep...amaged-economy

the subsidy is available as an advance and income amount is looks like your taxable income after deductions, etc
when you do your 2014 taxes, the advance will be listed reducing your refund amount.
__________________
teejayevans is offline   Reply With Quote
Old 06-28-2012, 07:21 PM   #17
gone traveling
 
Join Date: Jun 2012
Location: Austin
Posts: 245
What I got from that calculator and tables was that if your income is 125% or less of poverty level, healthcare for you and your family is free.

[mod edit]
__________________
LakeTravis is offline   Reply With Quote
Old 06-28-2012, 07:42 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,439
If they look at 2013 returns, then I can do a Roth conversion in 2012 but will need to be careful in any 2013 Roth conversion to avoid inadvertently paying and exorbitant tax rate on the conversion amount.

I can't find anything that defines income for these purposes, but I am presuming Form 1040, line 22 (total income). Interestingly, this also includes capital gains. Might I want to convert my Vanguard mutual funds to Vanguard ETFs to avoid a late year taxable account capital gains distribution blowing up my careful tax planning?

My what a tangled web.
__________________
pb4uski is online now   Reply With Quote
Old 06-28-2012, 07:47 PM   #19
Full time employment: Posting here.
 
Join Date: May 2008
Posts: 589
Medicaid will kick in at 133% PL or lower. That also happens to be the point when food subsidies kick in for some states.

Medicaid would be free, but for someone on the borderline between Medicaid and a full subsidy on the health exchanges, it may be preferable to get that income above 133% PL with roth conversions to get on the health exchanges. While free sounds great, Medicaid will likely not be nearly as universally usable as a policy from the health exchanges. I'm sure there will be comparisons available in 2014.
__________________
plex is offline   Reply With Quote
Old 06-28-2012, 08:05 PM   #20
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Nov 2007
Posts: 7,528
OP, you are right. The phase out of the subsidy works out mathematically to be a 15 to 18% marginal tax rate on additional income. In other words, an extra $1000 in AGI will cost you $150-180 in foregone HI subsidy.

As far as is that a "tax" or merely a loss of a benefit - that is semantics. There will be a real cost for increasing your marginal income when you are between 133% and 400% of FPL.

In response to the Medicaid vs subsidized HI, I agree it may be worth while to pay the $1000 or so for the paid health insurance instead of getting medicaid. Depending on your circumstances of course. In this case, it may make sense to increase your income to 134% of FPL so you get the paid HI at a very low cost. One way to do it could be to convert to a Roth.
__________________

__________________
Retired in 2013 at age 33. Keeping busy reading, blogging, relaxing, gaming, and enjoying the outdoors with my wife and 3 kids (5, 11, and 12).
FUEGO is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 01:49 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.