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Use ROTH to Gain ACA Subsidy??
Old 05-02-2016, 05:13 PM   #1
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Use ROTH to Gain ACA Subsidy??

I have read thru much about ROTH conversions to drive MAGI for the benefit of ACA subsidies and DW and I currently do this. What I did not see is if anyone draws $$ from Roth (non income event) to cover expenses from 59.5 to Medicare 65. I am 55 and DW is 58 this year. We have been working ON income plan to take us to 65 and what sources to use to be most efficient. We have been depleting or non qualified accounts to fund expenses and these accounts will deplete just after 59.5. In addition we have 2yr years expenses in cash cushion and with our normal annual WD this month will be back three years.
Our spending plan calls for $72K per year plus inflation of next 10years. Once we hit SS and start drawing income from a income annuity and SS at 65 67 or 70 we will be in the 25% tax bracket even with estimated RMD. So then from 59.5 till 65 do we take all $72K in taxable IRA which will put use at upper end of 15% tax bracket and forgo ACA Subsidy which is currently $9,732 (200% FPL LEVEL) AND IS 12.2% of $72k and likely more as we age? Or to we reduce our T IRA draw down thru say 200 FPL and draw from Roth keep the subsidy. OR somewhere in the middle. We have enough in Roths to fund this level and then a little left over. We are not concerned about taxes for any heirs on leftover T IRA. what are your thoughts?
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Old 05-02-2016, 09:45 PM   #2
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I would definitely manage it to keep subsidy
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Old 05-02-2016, 11:39 PM   #3
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If getting an ACA Subsidy is important for you, I would take out as much IRA money as possible, and then top it up with ROTH money.

I do wonder, is is possible to qualify for the subsidy in Year 1 with small IRA withdrawal + Roth withdrawal.
Then the year 2 max out your IRA withdrawal at say the 25% rate (approx $151,000) and pay for ACA.
(now you have extra $75,000 out of IRA)
Then Year 3 do the small IRA withdrawal, and some of the left over 75K
Then Year 4 do the small IRA withdrawal, remaining of left over 75K + Roth withdrawal.
Then repeat steps at Year 2,3,4.
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Old 05-03-2016, 07:03 AM   #4
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So then from 59.5 till 65 do we take all $72K in taxable IRA which will put use at upper end of 15% tax bracket and forgo ACA Subsidy which is currently $9,732 (200% FPL LEVEL) AND IS 12.2% of $72k and likely more as we age?
There are generous Silver Plan Cost Sharing Reductions (CSR) below 200% FPL. The CSR between 201%-250% FPL is not nearly as generous. This would also be a consideration for me but you may be healthier.
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Old 05-03-2016, 09:09 AM   #5
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There are generous Silver Plan Cost Sharing Reductions (CSR) below 200% FPL. The CSR between 201%-250% FPL is not nearly as generous. This would also be a consideration for me but you may be healthier.
Thanks!! No chronic illness so we went with bronze plan that is HSA compatible so we could get the $6550 plus $1,000 over 55 deduction so we can bring our MAGI down $7,750 allows more subsidy more Roth conversion now and if we stay on it will allow for more IRA WD in future. If we have planned surgery of health changes would go to silver.
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Old 05-03-2016, 09:15 AM   #6
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Originally Posted by Sunset View Post
If getting an ACA Subsidy is important for you, I would take out as much IRA money as possible, and then top it up with ROTH money.

I do wonder, is is possible to qualify for the subsidy in Year 1 with small IRA withdrawal + Roth withdrawal.
Then the year 2 max out your IRA withdrawal at say the 25% rate (approx $151,000) and pay for ACA.
(now you have extra $75,000 out of IRA)
Then Year 3 do the small IRA withdrawal, and some of the left over 75K
Then Year 4 do the small IRA withdrawal, remaining of left over 75K + Roth withdrawal.
Then repeat steps at Year 2,3,4.
Thanks for responding. Yes one could do as you suggest as long as one signs up thru the market place. May have to pay full load and settle up at tax return time as they do need verification of income at times if you want subsidy advanced monthly during the year. I would have to run the math to see if this plan works for our specific situation.
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Old 10-29-2017, 02:27 PM   #7
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I know this is an old thread, but with the greatly increased subsidies for 2018, it suddenly is a lot more important for me to stay under the 400% FPL. Dividends take me a pretty long way to 400%, so I don't have a lot of room for LTCGs from selling off any taxable investments. The dividends aren't enough for me to live on, so I need to come up with some cash from somewhere else.

My options seem to be to break at least one of the 5-yr PenFed CDs that matures in Dec 2018 (would cost 3%, or $1500 interest), or to pull a bit from my Roth. I only contributed a small amount starting in 2009, but I started doing conversions in 2010, so my understanding is that next year I could pull anything contributed any time, and anything converted in 2013 or earlier, right?

Trying to figure out if it's better to take from the Roth or break that CD. I get about the same return in my Roth, but all I lose on that 1500 in the Roth is that it's a tax free return, though it's forever. I am going to first tap whatever I can from my HSA since that's earning less.

If the subsidy system doesn't change, I've got 9 years left of this. Once all the CDs mature I'll be ok for a few years, but probably not all the way. I'll be pulling more from my Roth before I'm 65 for sure.

Odd times. I thought I wouldn't be touching the Roth for many years.
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Old 10-29-2017, 02:41 PM   #8
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Trying to figure out if it's better to take from the Roth or break that CD. I get about the same return in my Roth, but all I lose on that 1500 in the Roth is that it's a tax free return, though it's forever. I am going to first tap whatever I can from my HSA since that's earning less.
Since Roths are forever, it seems to me you could be giving up more than 3% by keeping the CD and withdrawing the Roth.

3% of principle is equivalent to a 15% tax rate applied to a 20% gain, discounted to present value. If the Roth funds are in equities, they might grow much more than 20% before you need to touch them.

Is the 3% penalty deductible or a capital loss?
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Old 10-29-2017, 02:48 PM   #9
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Since Roths are forever, it seems to me you could be giving up more than 3% by keeping the CD and withdrawing the Roth.

3% of principle is equivalent to a 15% tax rate applied to a 20% gain, discounted to present value. If the Roth funds are in equities, they might grow much more than 20% before you need to touch them.

Is the 3% penalty deductible or a capital loss?
That's a good way to look at it. I have mostly bonds in my Roth so it'll take awhile to get a 20% gain, but should eventually.

Penalties for breaking a CD are taken off on 1040 line 30, same area as where HSA deductions are taking, so that would have the small advantage of reducing MAGI. Basically my $1500 loss of interest would be reduced by $225.

I assume breaking a CD is all or nothing? Fortunately I bought three of them, so at most I should only have to break one. I'll probably wait and see just how much of it I'll actually need before next December. If it's only a fraction of the CD it's probably better taking from the Roth.
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Old 10-29-2017, 03:22 PM   #10
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I took a better look at VG distributions and other sources of cash I have. I can probably make it through the end of next year okay as long as nothing big happens. Then I'll be ok for a few more years after the CDs mature. Eventually I'll probably use up my LT carry over losses on Primecap annual CG distributions, and then I'll probably be screwed. If the subsidy system is still in pace, that's when I'd need it most since HI premiums are highest as you approach 65. I'll deal with that when I have to since I don't really see a good way to prepare now. Best I could do is sacrifice a year and sell the investments throwing a lot of dividends and CG distributions, but that would be a huge tax bill on holdings I'd rather not sell. And I'd hate to sacrifice the subsidy for one year to find it gone a year or two later.

So probably a lot of work for little reason, trying to figure out which Roth money can be tapped, what happens if I break a CD, and where else I can get cash from. Oh well, it's a nasty rainy day anyway.
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Old 10-29-2017, 03:34 PM   #11
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We recently broke one of those PenFed 3% CD. I had bought 3 small ones instead of a larger one because we figured we'd need it to buy a car, which is what we used it for.

The penalty was 365 days of interest. That will be deducted on page 1 of Fed 1040.

If you do this you can't just do it on their website. I called and asked how it's done and it has to be done in writing with signatures. We wrote a document, signed it and scanned it into email, sending it to a specific email address. It was processed quickly and the cash put into our share account to be transferred to our regular bank.
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Old 10-29-2017, 03:36 PM   #12
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We recently broke one of those PenFed 3% CD. I had bought 3 small ones instead of a larger one because we figured we'd need it to buy a car, which is what we used it for.

The penalty was 365 days of interest. That will be deducted on page 1 of Fed 1040.

If you do this you can't just do it on their website. I called and asked how it's done and it has to be done in writing with signatures. We wrote a document, signed it and scanned it into email, sending it to a specific email address. It was processed quickly and the cash put into our share account to be transferred to our regular bank.
Thanks, that was going to be the next thing to figure out. I didn't think I could just transfer it immediately like between savings and checking.
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Old 10-29-2017, 03:37 PM   #13
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I am 55 and DW is 58 this year.
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Thanks!! No chronic illness so we went with bronze plan that is HSA compatible so we could get the $6550 plus $1,000 over 55 deduction so we can bring our MAGI down $7,750 allows more subsidy more Roth conversion now and if we stay on it will allow for more IRA WD in future. If we have planned surgery of health changes would go to silver.
Is there any reason you did not do 2 catch up provisions? You could have contributed $8750. Catch up contributions have to go into an HSA in the name of the the one doing the catch up.
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