Withdrawal Strategies With Obamacare

[TromboneAl]

When our AGI is very low, we will receive large subsidies for our health care coverage. It seems that this alters the conventional tax-planning withdrawal strategies.

For example, since we are currently withdrawing from after-tax accounts, our AGI last year was only $22,000. Most of that came from a Roth conversion. As a result, our (California exchange) health insurance premiums will only be $29 instead of $946 per month, a saving of $11,000 per year.

By withdrawing first from Roth IRAs first instead of Traditional IRAs, for example, those savings could be maintained.

How do you think one should structure withdrawals in view of this new facet of tax planning? How does Medicare come into it? Do you think means testing may be added in the future?

 

[lemming]

never mind- I'll just link a list

http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf

 

[FANOFJESUS]

True but one day they will pull money market and get hit. They can delay but not stop the income. RMD will still get them later on.

 

[Gumby]

True but one day they will pull money market and get hit. They can delay but not stop the income. RMD will still get them later on.

But by the time you get to RMDs, you should be on Medicare anyway.

 

[FANOFJESUS]

That's true I did not think of that. Human nature says it will be hard for some to delay their income that long. But it is very interesting it will create a lot of planning. It looks like I will get free insurance because of my low income. It looks like if you are under $11,490 it will be free to you.

 

[Fermion]

The % of people who actually have enough savings to live on without working at an age earlier than about 60 is very small. Even if you said everyone on ER.org qualified, it would still be a drop in the bucket compared to the gen pop. Based on this, I would not expect means testing in the sense that they are going to establish a huge database of personal net worth of every individual in the USA. They already do means testing for ACA, it is just income based.

In other words, yet another reason to save early and retire early!

 

[W2R]

Rec7, is Missouri going to expand Medicaid? My beloved has a very low income too, for similar reasons. Louisiana is not going to expand Medicaid, though, so we think maybe he is not going to get any subsidies from anywhere?

Still, according to some PPACA plan prices released recently and cited in another thread, it looks like the full price of a PPACA gold plan here will be $600/month, instead of his present $950/month (the cost of a retiree gold plan from his former employer).

It's all way too complicated for me. I am so thankful that I do not have to deal with it myself, being on Medicare + FEHB.

 

[Theseus]

When our AGI is very low, we will receive large subsidies for our health care coverage. It seems that this alters the conventional tax-planning withdrawal strategies...

How do you think one should structure withdrawals in view of this new facet of tax planning? How does Medicare come into it? Do you think means testing may be added in the future?

I've been looking into this as of late also. It appears that being able to manage income sources would definitely enable one to take advantage of subsidies otherwise under(?) their reach. Which has me wondering if I should reduce contributions to tax-deferred accounts and stash cash from now until FIRE. Pricing HC from other sources is generally telling me to forget about the exchanges (unless able to reduce AGI), and get used to the "new normal" of HC costing 150% of what I had previously thought was a high estimate.

Using Kaiser Family Foundation data, the exchange silver plan max OOP looks to be a show stopper for me. With DW and myself both having our bouts of health issues in the last few years, the prospect of having our premium shoot through the 4x poverty level ceiling if we needed to pull cash out of a tax-deferred account to pay OOP costs does not appeal to me at all. Having had those health issues, the inability of insurance co dropping us is truly priceless, but it looks like obtaining it on our own post-FIRE / pre-Medicare would be the better financial decision. Employer offered retiree insurance may be an option for us, but the potential for that to vaporize post-FIRE doesn't appeal to me much either, I've seen it happen too close to home for comfort. As I understand it, exchange based insurance is not for those who are medicare eligible.

 

[explanade]

What about the unrealized dividends and capital gains distributions from your taxable accounts?

Even if you don't redeem a dime out of those taxable accounts, every year, you have to pay taxes for the dividends and cap gains distributions.

Those can certainly make your AGI or MAGI go above the limits, can't they?

 

[FANOFJESUS]

Rec7, is Missouri going to expand Medicaid? My beloved has a very low income too, for similar reasons. Louisiana is not going to expand Medicaid, though, so we think maybe he is not going to get any subsidies from anywhere?

Still, according to some PPACA plan prices released recently and cited in another thread, it looks like the full price of a PPACA gold plan here will be $600/month, instead of his present $950/month (the cost of a retiree gold plan from his former employer).

It's all way too complicated for me. I am so thankful that I do not have to deal with it myself, being on Medicare + FEHB.

From what I understand MO is not going to expand Medicaid. Here is a very helpful Calculator
Subsidy Calculator | The Henry J. Kaiser Family Foundation

P.S. it seems to have a bug in it under 12k but other than that it is great.

 

[daylatedollarshort]

Strategies we have thought of to avoid non-Roth retirement account draw downs until we reach Medicare age -

- Lower expenses in general
- Lower COL area
- Downsize / refinance house (free up non-taxable equity)
- Continue home business income / 401K contributions + business expenses as needed
- Loans for college if taxes / subsidy / financial aid grants savings greater than loan interest rate
- Bronze plan for insurance - significant subsidies even at 400% of poverty level, yet out of pocket maxes same as other plans. Unless we know in advance we will have more than $6K in medical expenses, usually we do not, this plan is the clear winner for us when you add in premium costs to the out of pocket max amounts for a real total out of pocket max.

I am not going to worry about RMDs. For us that is more than a decade away and tax laws will surely change by then. We may not even be living in the U.S. later in life so who knows what our tax situation will be then.

So we are going with the bird in the hand approach and take our tax savings / HI subsidies now.

Updated: I forgot to add to the above list -

- Home Equity Line of Credit

 

[W2R]

From what I understand MO is not going to expand Medicaid. Here is a very helpful Calculator
Subsidy Calculator | The Henry J. Kaiser Family Foundation

P.S. it seems to have a bug in it under 12k but other than that it is great.

THANK YOU!!! I will forward this link to him right away. This is very helpful.

 

[FANOFJESUS]

- Bronze plan for insurance - significant subsidies even at 400% of poverty level, yet out of pocket maxes same as other plans.

Thank You you have just answered one of my key questions I had about Obamacare.

 

[Fermion]

All it takes to make this work is a change in philosophy from putting your bonds in your tax deferred to putting your bonds in your taxable. With bonds paying about a stick of gum per $1000 anyway, the small tax you pay each year pales in comparison to the $5000 to $12000 you can get from ACA.

Say you sell your house for $400,000, stick that into a short term CD ladder earning 2%. You have another $300,000 in a taxable account invested in stocks with a dividend average of 2%. The remaining $800,000 is split between Roth and 401K/IRA and is heavily invested in stocks.

The $300,000 will give you $6,000 a year income toward your MAGI while the $400,000 in CDs will generate around $8,000 income toward your MAGI. You redeem $30,000 in CDs and you have a tax free income of $44,000 a year with a MAGI of $14,000. Perhaps you do a little conversion of the 401K/IRA money to Roth just to bump that MAGI up to 133% of FPL. Or you sell a bit of an index in your taxable account that has done particularly well and don't cash in as much of your CDs.

The hard part might be getting OVER the 133% FPL instead of staying under 400%.

 

[FANOFJESUS]

All it takes to make this work is a change in philosophy from putting your bonds in your tax deferred to putting your bonds in your taxable. With bonds paying about a stick of gum per $1000 anyway, the small tax you pay each year pales in comparison to the $5000 to $12000 you can get from ACA.

Say you sell your house for $400,000, stick that into a short term CD ladder earning 2%. You have another $300,000 in a taxable account invested in stocks with a dividend average of 2%. The remaining $800,000 is split between Roth and 401K/IRA and is heavily invested in stocks.

The $300,000 will give you $6,000 a year income toward your MAGI while the $400,000 in CDs will generate around $8,000 income toward your MAGI. You redeem $30,000 in CDs and you have a tax free income of $44,000 a year with a MAGI of $14,000. Perhaps you do a little conversion of the 401K/IRA money to Roth just to bump that MAGI up to 133% of FPL. Or you sell a bit of an index in your taxable account that has done particularly well.

The hard part might be getting OVER the 133% FPL instead of staying under 400%.

What would the MAGI be if you have left the bond in tax deferred? Just curious.

 

[Fermion]

What would the MAGI if you have left the bond in tax deferred?

The past few years the market index has been going up about 20%. This might make it hard to have a very low MAGI if your bonds are in your tax deferred and your stocks are in your taxable. You still need the $44,000 for living, but if you have to sell stocks to get it instead of redeeming CDs, you might have significant capital gains that push you up to a higher MAGI than you wanted.

For my relatively low income levels it probably doesn't matter, but if you needed $80,000 a year of income, then it might (for a family of 2).

As an example, I purchased 500 shares of SPY in my IRA two years ago for $110 a share. If that were in my taxable account and I needed $30,000 of it to meet my income needs, I would have a capital gain income from it of almost $11,000. Add that to the dividend and interest income and I would be at $25,000 MAGI.

But that is still pretty low. Maybe it doesn't matter for people with modest income needs.

 

[FANOFJESUS]

It can cause a problem in selling them if the bond market is up. This is what affects the MAGI. It looks like holding them would be about the same a regular bonds going by the link.
http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf
Looks like it is not wise to sell more than is needed.

 

[Fermion]

Another neat trick that might work (I haven't dug into this) is to do Roth conversions from your rolled over 401K/IRA for the first few years of ER while you draw down those full basis CDs in your taxable. During this time your Roth goes to the moon (hopefully) and after 5 years you can start taking out the Roth contributions (but not gains) with no penalty and no tax. I am not sure if they would count toward MAGI...you are just removing the contribution portion.

This would seem a better way than a 72T to access your high growth tax deferred portfolio while you keep low MAGI with your taxable account.

 

[scrabbler1]

Despite the recent stock market gains, using FIFO as I have always done I have a potential capital loss if I sell shares of my stock mutual fund. Being that I am near the top of the income to receive ACA subsidies, I can reduce my MAGI a bit by selling some shares at a loss, carefully avoiding any wash sales, and stay in the subsidy-eligible income range.

I will be watching carefully the mid-December mutual fund distributions which sometimes have unforeseen "spikes" so if I have to offset some of those gains with cap losses I will do so.

 

[Fermion]

I had a huge capital loss from some individual stock trading that went south (although had I just stayed in those stocks instead of switching to only index fund investing I would have eventually made nice gains). This year by doing some market timing (bad) I have reduced that capital loss to about $10,000 from a high of $40,000. I didn't want to go into ER and ACA with a $40,000 rollover loss and a low income. On the positive side, that market timing account is up 44% YTD and is now all safely in VT, SPY and VXUS. I am done with the timing and am ok with the $10,000 rollover loss as I should be able to use up at least $6,000 of it against ordinary income over the next 2 years.

 

[Moemg]

When our AGI is very low, we will receive large subsidies for our health care coverage. It seems that this alters the conventional tax-planning withdrawal strategies.

For example, since we are currently withdrawing from after-tax accounts, our AGI last year was only $22,000. Most of that came from a Roth conversion. As a result, our (California exchange) health insurance premiums will only be $29 instead of $946 per month, a saving of $11,000 per year.

What kind of coverage do you get for $29.00 & is it widely accepted ?

 

[haha]

What about the unrealized dividends and capital gains distributions from your taxable accounts?

Can you give an example of something that could be an "unrealized dividend".

Ha

 

[NoMoreJob]

What kind of coverage do you get for $29.00 & is it widely accepted ?

The coverage is the same, the difference between the $900+ and $29 is a federal tax credit.

 

[daylatedollarshort]

Thank You you have just answered one of my key questions I had about Obamacare.

I should clarify that the out of pocket maxes on the exchange charts are often lower than bronze for the silver through platinum plans, but for us not when we add back in the cost of the premiums as a component of the OOP max.

I think the bronze plan only becomes more expensive for us in a high medical expense year with more than one family member needing care, which for us is not normally the case. Plus we usually use alternative and traditional Asian medicine as much as possible, so we don't go to the doctor for most minor illnesses.

If we did start having high ongoing, multi-family member medical bills that we anticipated to last more than one year, then we would switch to a silver plan at the next open enrollment date.

 

[NoMoreJob]

Just FYI for those thinking about minimizing income....HSA contributions (to the limits allowed by law) DO reduce your ACA MAGI. I don't know about all exchanges but ours does include HSA qualified plans.