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Old 07-05-2015, 02:05 PM   #21
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I have been at the top of the 15% bracket the last few years.... or just over, so the bottom is new to me...

The EITC needs less than $3,350 of investment income to qualify... I do not qualify...

The changes I see is mostly in the ACA subsidy.... I have to pay between 8% and 9% of MAGI, so if MAGI goes up my subsidy goes down... and if MAGI goes up, I am paying 15% more in taxes on that income...

So, 15% more in tax and 9% less subsidy credit is the hit that I am taking... so my true marginal tax rate is 23 to 25%.... (lose a few other small credits)....


I do not believe there is a 15% marginal change to final taxes anymore if you qualify for the ACA credit... but since I have not done all possibilities there is not way I can be sure...
I don't know why the that really skipped my mind. I don't yet see health insurance as a tax... not on the ACA yet, still on cobra. But I see what your are talking about. This will really be trade between roth conversions up to the top of the 15% bracket (no ACA sub with 2 adults), or limiting conversions (or eliminating them) to get an ACA sub. There still is a 15% bracket above the ACA sub for a family of 2 adults.
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Old 07-05-2015, 05:05 PM   #22
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If I do no Roth conversions then my health insurance costs ~$200/month after a $485/month credit. However, I can qualify to buy a cat policy for ~$425/month so I'm only spending an additional $225/month ($2,700/year) by ignoring ACA credits and the constraints associated with them.

In my case, it makes sense to look not at the subsidy, but the savings between the subsidized cost of health insurance and the cost of a cat poilcy. In my state, a cat policy is substantially (35-40%) less than a bronze policy.

But... later in life I spend little time in the 25% tax bracket with Roth conversions but without Roth conversions I spend many years in the 25% tax bracket. That extra 10% tax in those later years far exceeds the $2,700/year ACA benefit so for me, so Roth conversions are the way to go.

According to my projections. my age 71 RMDs are 3.5 times what they would be without Roth conversions and the extra 10% tax on the RMDs far exceeds the $2,700 a year of ACA tax credit benefit.

As always, YMMV.
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Old 07-05-2015, 05:10 PM   #23
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What is a cat policy? I google it and am only seeing references to pet insurance.
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Old 07-05-2015, 05:51 PM   #24
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What is a cat policy? I google it and am only seeing references to pet insurance.
I would think catastrophic...
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Old 07-05-2015, 06:44 PM   #25
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Yes, catastrophic health insurance policy. It has a $6,600 per person deductible vs $5,000 for a bronze plan but the bronze plan out-of-pocket max is $6,250 vs $6,600 for the cat policy. Similar preventative care benefits and the same network.

Since we are in good health and spend much less than the deductible most years, the benefits are not very different from our perspective. Both policies give us access to negotiated rates and insurance from the extreme cost of a significant health event or accident, which is principally why we purchase health insurance.
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Old 07-06-2015, 05:35 AM   #26
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Does a catastrophic plan count for Uncle Sam's minimum insurance requirements? Would the "Individual Mandate" apply?

From healthcare.gov it sounds like you must be under 30:
"Catastrophic coverage plans pay less than 60% of the total average cost of care on average. They’re available only to people who are under 30 years old or have a hardship exemption."
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Old 07-06-2015, 06:10 AM   #27
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How so? There are tables for various family situations at the site linked below, and it seems to indicate a sliding scale, though for single persons, the subsidies appear to reach 0 at an income of about $30K - which is lower than I thought. But, it's not a "cliff" as far as I can tell.
The subsidy cliff is a function of your Second Lowest Cost Silver Plan (SLCSP) premium as a percentage of your income. Once you reach your mid-50's, your SLCSP premium becomes a high enough percentage of your income that you hit the 400% FPL cutoff before the sliding scale "glide path" reaches zero subsidy.
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Old 07-06-2015, 07:44 AM   #28
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Does a catastrophic plan count for Uncle Sam's minimum insurance requirements? Would the "Individual Mandate" apply?

From healthcare.gov it sounds like you must be under 30:
"Catastrophic coverage plans pay less than 60% of the total average cost of care on average. They’re available only to people who are under 30 years old or have a hardship exemption."
Yes, it counts. No we are not under 30. There is an exception that if the lowest cost bronze plan available to you exceeds 8% of your income then you can buy a cat policy even if you are over 30.

I suspect that some of the 35-40% premium difference is that we are riding 30 and under coattails in the way the insures priced these cat policies.

Is catastrophic coverage a good alternative to a more costly bronze policy?
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Old 07-06-2015, 09:04 AM   #29
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So I looked up the numbers in my area...

Lowest cost unsubsidized bronze plan $284.50 per month in 2014.

$284.5 x 12 = $3,408
$3,408 /.08 = $42,600
So if my income is under $42,600 I can get an exemption and get a cat plan.

Catastrophic plans range from $157.85 to $279.72.

Interesting to know.
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Old 07-06-2015, 06:45 PM   #30
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The subsidy cliff is a function of your Second Lowest Cost Silver Plan (SLCSP) premium as a percentage of your income. Once you reach your mid-50's, your SLCSP premium becomes a high enough percentage of your income that you hit the 400% FPL cutoff before the sliding scale "glide path" reaches zero subsidy.

The thing that I hate is that BCBS offers two very low silver plans that are almost identical.... if they only offered one then subsidies would be much higher...
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Old 07-07-2015, 12:50 AM   #31
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A thread about the terrors of RMDs on another forum prompted me to ask the board for proposed Roth conversion strategies in view of my age and distribution of assets among taxable, tax-deferred, and tax-free (Roth) investments.

My data:

Age 55 (possibly retiring at age 56 about six months from now).
Taxable: $730K (551K equities; 185 non-equity - mostly cash, some bonds).
Tax-def: $360K
Tax-free: $115K
SS: $30K at age 70.

Assuming that I retire at 56, my income in the following year would be about $10K a year from dividends and cap gains. I also expect to wait until age 70 to draw SS.

Q: Based on the above, how much would you recommend converting from Tax deferred to Roth each year between age 56 and 70?

Additional Info:
Single; no dependents;
No pension.
Will want to qualify for ACA subsidies (expect to live in WA state).
Expenses running at $30K a year.
Income: Expect to draw from the $185K in non-equity investments in Taxable. May do some part time work (Uber or Lyft). Not counting on it, but I might make $10K or so a year.
Since MRD applies to your tax-deferred account, using this account first until age 70 could make sense. Which happens to be my exact goal as well. I'm 56, have a large IRA relative to taxable account (somewhat different from yours).

To deplete the tax deferred first, have you run the numbers doing a 72t (SEPP) withdrawal and postponing Roth conversions for the mandatory 5-1/2 years withdrawal period of SEPP? www.72t.net has a SEPP calculator, which I quickly ran for someone your age and balance and the income generated could be between $10k to $20 K over the next 5 years. You can assess at that time how much to convert to Roth.

Also agree with other posters, why would you want to delay SS past 62? Either way, I would touch your taxable account later.

My 2 cents.

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Old 07-07-2015, 07:08 AM   #32
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Since MRD applies to your tax-deferred account, using this account first until age 70 could make sense. Which happens to be my exact goal as well. I'm 56, have a large IRA relative to taxable account (somewhat different from yours).....
I disagree if by using this account first you mean using that money to live on.

I think it makes more sense in those early years... ER to 70, to use taxable accounts to live on and do Roth conversions to deplete tax-deferred amounts to reduce RMDs. That way, the money ends up in tax-free and grows.
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Old 07-07-2015, 07:44 AM   #33
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+1 pb4uski is presenting the usual winning strategy, live off after tax, Roth convert to income limit for bracket or ACA subsidy, I-orp will show you best scenario


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Old 07-07-2015, 08:46 AM   #34
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Q: Based on the above, how much would you recommend converting from Tax deferred to Roth each year between age 56 and 70?
I posted a similar question a few months back and Animorph attached a spreadsheet that he created that I expect to use when I RE.

Tax on Roth Conversions vs Tax on RMDs
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Old 07-08-2015, 06:58 PM   #35
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I disagree if by using this account first you mean using that money to live on.

I think it makes more sense in those early years... ER to 70, to use taxable accounts to live on and do Roth conversions to deplete tax-deferred amounts to reduce RMDs. That way, the money ends up in tax-free and grows.
So in thinking about this should you also place equities on taxable side and less risky, lower growth investments (e.g. bonds, CD, etc.) on tax-deferred IRA side to minimize growth there so account does not continue to grow potentially outpacing amount of annual ROTH conversions?
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Old 07-08-2015, 10:46 PM   #36
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Yes, but not principally for that reason.

Equities go into taxable because qualified dividends and LTCG are tax-preferenced (0% if in 15% tax bracket, 15% if in higher tax bracket before any ACA taxes). Also for international equities and foreign tax credit can typically be used if in taxable but is lost in tax-deferred or tax-free.

Investments that generate current income go into tax-deferred or tax-free.

Also see bogleheads webpage on tax efficient placement.
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Old 07-08-2015, 11:35 PM   #37
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Yes, but not principally for that reason.

Equities go into taxable because qualified dividends and LTCG are tax-preferenced (0% if in 15% tax bracket, 15% if in higher tax bracket before any ACA taxes). Also for international equities and foreign tax credit can typically be used if in taxable but is lost in tax-deferred or tax-free.

Investments that generate current income go into tax-deferred or tax-free.

Also see bogleheads webpage on tax efficient placement.
Thanks pb4uski for response. Yes I have read the wiki on the bogleheads website and understand the principal rationale for placement of equities on taxable end but was thinking this may be another good reason for such a move, especially for someone who may not be able to tax-efficiently do enough annual ROTH conversions in light of size of TIRA account and will still have an RMD problem. So at least basically stop growing the tax-deferred account and making the growing RMD problem worse.

In considering this move though, one thing that maybe I'm overthinking after such a run up in stocks and TIRA account value over the past 5 years is whether you see any value in waiting to make such an asset location change if one thought the stock market was potentially in a downdraft mode?

Rationale being that the value of the overall TIRA account value would then decrease (versus on the taxable end) thereby reducing the associated RMDs that would be taxed at 25% or 28% compared to the lower tax-preferenced benefits presently realized if losses realized in the taxable account and 15% tax bracket?
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Old 07-30-2015, 03:03 PM   #38
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I have a related question that I haven't been able to find a clear answer for.

I am 57 now. There is a 5 year waiting rule on Roth conversions from 401(k)s and tIRAs regarding the 10% penalty.

If I do a Roth conversion today, I understand that I will be liable for taxes on the conversion at ordinary rates. But...do I have to wait until I am 62 (57+5) to withdraw the funds from the Roth, or am I free of the penalty at age 59 1/2?
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Old 07-30-2015, 03:21 PM   #39
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see link

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Age 59 to 70.
Withdrawals from a Roth IRA you've had less than five years.
If you haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.
Withdrawals from a Roth IRA you've had more than five years.
If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.
Looks like you may be liable for taxes on earnings. I need to look this up more completely for my own planning.
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Old 07-30-2015, 04:04 PM   #40
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Looks like you may be liable for taxes on earnings. I need to look this up more completely for my own planning.

But you can withdraw the contributions at any time.... so as long as you do not take out as much as you put in you are good to go...
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