Obamacare means Roth conversions way more expensive

[teejayevans]

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

[ziggy29]

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.

[tomz]

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

[ziggy29]

Quote:

Originally Posted by tomz 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.

[pb4uski]

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.

[tomz]

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.

[teejayevans]

This is the online calculator I used:
Health Reform Subsidy Calculator - Kaiser Health Reform

TJ

[pb4uski]

Quote:

Originally Posted by tomz 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.

[Sue J]

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?

[ziggy29]

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.

[REWahoo]

Quote:

Originally Posted by ziggy29 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.

[Sue J]

And do we know if that's gross income or adjusted?

[ziggy29]

Quote:

Originally Posted by REWahoo 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.

[REWahoo]

Found one previous thread: http://www.early-retirement.org/foru...ies-54396.html

[pb4uski]

Quote:

Originally Posted by ziggy29 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!!!

[teejayevans]

Quote:

Originally Posted by Sue J 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.

[LakeTravis]

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]

[pb4uski]

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.

[plex]

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.

[FUEGO]

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.