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Paying Taxes on Retirement Accounts or Health Insurance Subsidy?
Old 09-26-2018, 09:36 AM   #1
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Paying Taxes on Retirement Accounts or Health Insurance Subsidy?

I am 63 and am planning to retire before FRA at 66. At that point I will begin collecting social security. I have most of my assets (approx 1.5M) in tax deferred accounts (a 401K and 2 IRAs). My plan was to use the intervening year ( or possibly 2) to withdraw some assets from the tax advantaged accounts and pay the taxes while I had little or no income (since I retired) and prior to social security payments. Unfortunately, I did not consider the impact of health care insurance prior to becoming medicare eligible. If I do the withdrawals it will count as income and reduce or eliminate any healthcare insurance subsidy. If I do not do the withdrawals I can qualify for the subsidy. So is there any strategy for optimizing the trade-off between the income and the healthcare insurance subsidy or is this the typical stuck between a rock and a hard place scenario?
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Old 09-26-2018, 09:42 AM   #2
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I am 63 and am planning to retire before FRA at 66. At that point I will begin collecting social security. I have most of my assets (approx 1.5M) in tax deferred accounts (a 401K and 2 IRAs). My plan was to use the intervening year ( or possibly 2) to withdraw some assets from the tax advantaged accounts and pay the taxes while I had little or no income (since I retired) and prior to social security payments. Unfortunately, I did not consider the impact of health care insurance prior to becoming medicare eligible. If I do the withdrawals it will count as income and reduce or eliminate any healthcare insurance subsidy. If I do not do the withdrawals I can qualify for the subsidy. So is there any strategy for optimizing the trade-off between the income and the healthcare insurance subsidy or is this the typical stuck between a rock and a hard place scenario?
Depending on how long you will need Medical Insurance before Medicare, you can contribute to a taxable account in the year or two prior to retirement and use those funds to reduce your taxable income to under the ACA subsidy cliff(64000 for a married couple). You could also draw from a Roth IRA if absolutely needed to get subsidies. ACA insurance for DW and I at same age(63) is 2592.00 per month. It is worth trying to plan for subsidies!!

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Old 09-26-2018, 09:48 AM   #3
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Your situation is the worst I have seen...


You say you plan to start SS right away, so that means that will be taxable...


You have $1.5 mill in accounts that will need to start distributions from at 70ish... and those will be large and taxable..


The question is how much subsidy will you lose? What is the max income you can have before you lose 100% of subsidy?


Just a guess, but I would think that you would be better off having your taxable income as high as you can get and stay in the lowest tax bracket and forgo the subsidy... but someone would have to do the math to see if that is the best option... too many unknowns to do it yet...
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Old 09-26-2018, 09:52 AM   #4
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.....You say you plan to start SS right away, so that means that will be taxable...

I apologize if my original post was unclear. I will not take SS right away. I was planning to take it at FRA.
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Old 09-26-2018, 10:03 AM   #5
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Couple of ideas, neither great, since you have limited time to plan. You don't say just how quickly you plan to retire.

1) Take a lot of income in one year, forgoing the subsidy, and limit income the next, to take the subsidy.

2) Take a 2nd mortgage or HELOC, and pay back the minimal amount while using the rest for living expenses without taking income. I know people don't like carrying a mortgage into retirement, but that's a mental issue. What you're doing is leveraging your house to handle this situation.

3) As already mentioned, deplete your Roth and HSA as allowed. Again, this is getting money for expenses without having taxable income.
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Old 09-26-2018, 10:14 AM   #6
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When are you going to retire? You don't say when.. or how many months before you turn 65 are you going to retire......when is your birthday....

get together as much after tax money as you can between now and retiring....try to live mostly on that while you are 64...the calendar year you turn 65 take out more income..you won't get a whole year worth of subsidy for the year unless your birthday is in Dec..
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Old 09-26-2018, 10:21 AM   #7
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Originally Posted by almost_there View Post
I am 63 and am planning to retire before FRA at 66. At that point I will begin collecting social security. I have most of my assets (approx 1.5M) in tax deferred accounts (a 401K and 2 IRAs). My plan was to use the intervening year ( or possibly 2) to withdraw some assets from the tax advantaged accounts and pay the taxes while I had little or no income (since I retired) and prior to social security payments. Unfortunately, I did not consider the impact of health care insurance prior to becoming medicare eligible. If I do the withdrawals it will count as income and reduce or eliminate any healthcare insurance subsidy. If I do not do the withdrawals I can qualify for the subsidy. So is there any strategy for optimizing the trade-off between the income and the healthcare insurance subsidy or is this the typical stuck between a rock and a hard place scenario?
If you own a home with substantial home equity, before you stop working do a cash out mortgage refinancing to draw as much cash out of home equity as you can, then use that money for living expenses from when you retire to 65/Medicare. Your income will be low enough to qualify for substantial ACA subsidies for those years... in fact, you might be able to do some tIRA withdrawals or and still qualify for ACA subsidies.

Then, once you are on Medicare and no longer need ACA subsidies, you can opt to either continue making mortgage payments or use the taxable account to pay off the mortgage.
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Old 09-26-2018, 10:22 AM   #8
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I'm in the same boat. I have $1.5 million in taxable accounts and retired at 61. I've been limiting my income to qualify for the ACA subsidy. Since it amounts to $8760 a year, it's not a small amount. Because of that I have not done any Roth conversions. I also figure by not converting I leave the money in place to continue to grow as I don't have to pay taxes on it. I start Medicare next year and don't want to pay the higher premiums by having too much income. I don't have family to leave money to so if it's all gone by the time I'm gone, it's not important.

Looks like your options are to withdraw from a Roth account or as advised above, use the equity in your home for the next few years.
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Old 09-26-2018, 10:34 AM   #9
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We went with limiting MAGI for the subsidies. Next year they will be worth $25K to us.
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Old 09-26-2018, 11:12 AM   #10
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Check out the ideas on this thread; same subject but, a little further along than yours.

Managing MAGI for ACA subsidies
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Old 09-26-2018, 02:04 PM   #11
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Ah, had not considered the home equity. Only have 19k left on the mortgage but I did take out a 60k HELOC a while back that was to be an emergency fund. I have never used it. I also have about another 75k between a ROTH and some after tax savings. Taken together this just might be the ticket to get through the couple of years between retirement and medicare eligibility. I will also follow the thread that Huston55 mentioned with great interest. Thanks
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Old 09-26-2018, 02:54 PM   #12
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I could have written this post, almost to the age and dollar amounts. I am fortunate to have about $200K in a post-tax account to live on for the next 3 years. But it really sucks to be in such a good position in one sense (total assets) and yet see combined taxes from SS and RMDs after 70 to mean we will be paying probably at the 25% rate (which of course could be higher 8 years from now).



I know this is not a question, but it seems like many of us FIRE-ees are in this position.
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Old 09-26-2018, 04:19 PM   #13
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.....But it really sucks to be in such a good position in one sense (total assets) and yet see combined taxes from SS and RMDs after 70 to mean we will be paying probably at the 25% rate (which of course could be higher 8 years from now). ...
But... I'm guessing that your marginal tax rate was more than 25% when you deferred a lot of that income... probably 28% or even more... so you are still at least 3% ahead and saved some money in tax.

Also, if when you deferred that income you may have thought that your tax bracket in retirement would be a lot lower than 25%... then either you miscalculated or you ended up being much more financially successful that you expected to be.... another cause for celebration!
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Old 09-26-2018, 05:04 PM   #14
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But... I'm guessing that your marginal tax rate was more than 25% when you deferred a lot of that income... probably 28% or even more... so you are still at least 3% ahead and saved some money in tax.

Also, if when you deferred that income you may have thought that your tax bracket in retirement would be a lot lower than 25%... then either you miscalculated or you ended up being much more financially successful that you expected to be.... another cause for celebration!

You are correct in both of your suppositions... My only regret is that had I known, I would probably have put at least 3 or 4 years of IRA money into either more Roth (to the extent allowed) or else just in a non-retirement investment account.
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