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Roth IRA Distributions and PPACA Subsidies
Old 12-01-2012, 06:05 PM   #1
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Roth IRA Distributions and PPACA Subsidies

Since they don't count as taxable income, do Roth IRA distributions count towards the 400% of Federal Poverty Level income restriction for the PPACA subsidy?

If they do not, wouldn't it then be logical to live solely on Roth IRA distributions for the first 5.5 years of retirement (in order to get the full subsidy) and not touch any 401(k) or regular IRA assets until age 65 when you qualify for Medicare (thus making the PPACA subsidy irrelevant)?

Assuming, of course that you do not already have healthcare covered through a previous employer.
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Old 12-01-2012, 06:13 PM   #2
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Originally Posted by fossil_fuel View Post
Since they don't count as taxable income, do Roth IRA distributions count towards the 400% of Federal Poverty Level income restriction for the PPACA subsidy?

If they do not, wouldn't it then be logical to live solely on Roth IRA distributions for the first 5.5 years of retirement (in order to get the full subsidy) and not touch any 401(k) or regular IRA assets until age 65 when you qualify for Medicare (thus making the PPACA subsidy irrelevant)?

Assuming, of course that you do not already have healthcare covered through a previous employer.
Roth distributions don't count as income for PPACA calculations. The MAGI is adjusted gross income plus tax exempt muni interest plus excluded foreign earned income.
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Old 12-01-2012, 09:41 PM   #3
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Be careful... you'll need SOME taxable income to avoid falling below 134% of the FPL and getting kicked directly onto Medicaid without any subsidy available... unless you're OK with being on Medicaid. Based on the investigating I've done, a sweet-spot MAGI for a couple seems to be between $22,000 and $30,000 per year. While the subsidies decrease gradually with rising income, the copays don't. They jump in wide steps.

The lowest copays are $4033 per year for a couple. Above $30,000 the copays jump $2017 to $6055 per year. Above $46,000 they jump another $2917 to $8067 per year. There's a final jump of $3943 to $12,100 at $61,000 income.

John L.
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Old 12-01-2012, 09:51 PM   #4
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The MAGI is adjusted gross income plus tax exempt muni interest plus excluded foreign earned income.
Don't forget Social Security benefits are also part of the MAGI for determining eligibility of subsidies under the PPACA . The PPACA was amended to include these benefits to prevent some early retires from qualifying for Medicaid.

John L.
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Old 12-01-2012, 09:56 PM   #5
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While the subsidies decrease gradually with rising income, the copays don't. They jump in wide steps.
These kinds of sharp-edged brackets (or the one where the subsidies cut off sharply at 400% of the FPL) suggest it might be useful in some cases to take a chunk of taxable income in a single year and then live off that lump sum for a year or two and minimize taxable income while extracting subsidies as large as possible and paying much smaller co-pays. Also, postponing/accelerating high-cost medical procedures, when possible, to get them into the "low co-pay" years could be beneficial.

Somebody needs to come up with an optimizer calculator/web site/App for this stuff. Like iORP, but for PPACA (helping people to squeeze every possible dime out of it for which they can make themselves legally eligible). There's a lot of money to be gotten from this thing.
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Old 12-01-2012, 11:43 PM   #6
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Be careful... you'll need SOME taxable income to avoid falling below 134% of the FPL and getting kicked directly onto Medicaid without any subsidy available... unless you're OK with being on Medicaid. Based on the investigating I've done, a sweet-spot MAGI for a couple seems to be between $22,000 and $30,000 per year. While the subsidies decrease gradually with rising income, the copays don't. They jump in wide steps.

The lowest copays are $4033 per year for a couple. Above $30,000 the copays jump $2017 to $6055 per year. Above $46,000 they jump another $2917 to $8067 per year. There's a final jump of $3943 to $12,100 at $61,000 income.

John L.
Interesting. Seems it's important for an ER'd individual to hit age 59 1/2 with a mix of Roth IRA and traditional IRA/401k assets so you can generate the optimal MAGI for the subsidy. I'll probably look at rolling over my current 401(k) to a traditional instead of a Roth IRA in light of this.
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