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WWYD? - Recognize LTCG vs Continued Management of MAGI?
Old 09-20-2019, 02:52 PM   #1
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WWYD? - Recognize LTCG vs Continued Management of MAGI?

Looking for input - WWYD

I'm in third year of FIRE, been managing my MAGI with pulling out cash from after tax money (equities), staying below 400% level. Keeps me in a good position for ACA and taxes paid.

With markets near an all time high, I've been looking at options. Part of me says just hold the course, but another part says recognize gains and park some cash in CD or other non-equity position. I have a big chunk of my retirement dollars parked in 401K and cash pension that's earning 4.5% minimum rate. I will manage those payouts over the next 13 years until I hit the 70.5 year old mark so I won't have to worry about RMD hit.

So below are options to consider. As there are some brighter minds than me here, I thought I'd float this and as What Would You Do (WWYD)?
Option #1 - Continue along the path I've been on, keeps me subsidized and can continue to manage this way for several more years. I'd continue to fit within the FPL 400% level, in a BRONZE plan. This is costing me about $5-6K a year in co-pays and out of pocket costs.

Option #2 - Essentially hit reset on large portion of portfolio (non-retirement funds). Recognize a sizable portion of my unrealized LTCG this year, bite the bullet on the Excess Advance Premium repayment. As the EAP would be a pretty significant hit (I estimate it's around $17K) I figure might as well push this to a sizable chunk, realize $150-200K in LTCG to ease the sting and make it worthwhile.

Perhaps I'm not looking at this right, or maybe I am, but by recognizing the hit this year I'd be able to "better" manage my MAGI, most likely to FPL 250% or lower and could then get into a lower priced SILVER plan that also has lower OOP and co-pays. I'll save on the OOP costs over the next few years, perhaps more than offsetting the EAP and tax hit.
I look at this EAP hit may be softened somewhat by the fact that I could get out of the market, re-evaluate and revised my investment strategy a bit differently for the short term to see how things play out politically, so if market dropped I'd have basically offset (trading taxes for losses in portfolio). I know, market can also go up - and that's why I continue to keep a good portion in equities.

Other things I've consider. Depending on how 2020 goes, who knows what tax rates may be or how LTCG. Even current administration may suddenly feel the need to tax LTCG as ordinary income. I have access to my 401K, no penalty for withdrawals due to Rule of 55 when I FIRE'd. So I'll take some distributions from that over the course of the next 8-12 years when I decide to take SS. But distribution levels will be managed to stay below the FPL 250% level (or lower).

Maybe there's something I'm not considering. So looking for input from brighter minds as to what may be best way to play this. So.... WWYD?
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Old 09-20-2019, 03:09 PM   #2
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I'm not a market timer. If you are, you can probably dismiss my thoughts.

Is your AA out of balance (heavy on equities)? If so, I'd probably get it back in balance. Do you have only large unrealized gains to pull from in taxable? I'd harvest losses first, then equities in IRAs, then low gainers in taxable before going after the high gainers, unless you have specific individual stocks or sector funds you want to divest yourself of.

Keep in mind that if you pass on holdings with high gains to heirs, they get a stepped up basis. The highest gainers are shares I'm most likely never to sell.

If your AA isn't out of balance, I'd probably hold on. Again, I don't try to time the market.

I had a situation a couple years ago where I had a high unrealized gain on a fund that tended to throw a lot of taxable distributions, and it was probably going to put me out of getting a subsidy within a few years. So I bit the bullet and sold it one year and gave up the subsidy that year, though it was way under your $17K. I moved some of that money in CDs with predictable returns to keep me under 400%, and laddered so that I wouldn't have to sell any more funds while under 65.

That silver plan with cost reduction sharing or whatever it's called is attractive especially if you tend to eat heavily into your deductible. It's complex, but I'd be trying to set up a spreadsheet to see just how well this would play out. Maybe go with average medical expenses, or run scenarios with low, average, and high expenses. If you have 10 years, maybe figure X years low, Y years average, Z years high.

I haven't heard any real noise about LTCGs being taxed as ordinary income so I wouldn't rush in for something that seems unlikely to happen. It could be a good tiebreaker factor though.
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Old 09-20-2019, 03:50 PM   #3
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One analyst I read recently said there have been no fewer than 218 all time highs in the S&P500 since 2013. Why would you think this time is any different?

Anyway, separate from market timing, your Option #2 also has to consider that you are probably giving up a bunch of 0% capital gains tax for the 15% capital gains tax bracket.
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Old 09-20-2019, 06:32 PM   #4
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Some of this would be for AA. But for fun, let's take the market timing out of the equation. Figure that I take profits for LTCG, pay taxes and then reinvest back in the market. I then have the same pot of money for funding my earlier FIRE years that I would use today, just now largely tax free, allowing my MAGI to be lower so access to Silver plan and very low OOP/CoPay. I'll end up paying tax on the money eventually, Lord allowing, so does it may sense to bunch now for one time pain and many years of gains.
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Old 09-20-2019, 06:43 PM   #5
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Originally Posted by USGrant1962 View Post
Anyway, separate from market timing, your Option #2 also has to consider that you are probably giving up a bunch of 0% capital gains tax for the 15% capital gains tax bracket.
That was my initial feeling as well, and what my mindset has been.

But after paying $5k for each of the past two years for medical expenses, OOP costs if I had a silver plan would have been largely avoided, I see there is $10k or so that I've paid. So started considering what options could be, if any.

Will the next years be lower, dunno. If same or higher then would I come out in the long run? We are relatively healthy, just that this year was procedure to check if there was an issue, there wasn't. Good that no problem, but still $$$ paid. If something major was to happen in next 8 years, deductible/OOP will be large. Yes, we can afford it, but is there an option to explore....

Seems to be more trading taxes now for saving medical OOP costs for next 8 years before we get to Medicare.
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Old 09-20-2019, 07:20 PM   #6
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So if you realize $150-200k of gains your tax cost at 15% is $22.5-30k, plus $17k lost ACA credit...so $39.5-47k, right?

Then in 2020 and beyond your annual savings are what? About $7k? So your payback is 6-8 years? How many years to Medicare?
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Old 09-20-2019, 09:21 PM   #7
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So if you realize $150-200k of gains your tax cost at 15% is $22.5-30k, plus $17k lost ACA credit...so $39.5-47k, right?

Then in 2020 and beyond your annual savings are what? About $7k? So your payback is 6-8 years? How many years to Medicare?
So I think you are seeing what I was thinking. Yep, tax cost is right. But what may also differ is even without going over the MAGI limit I'll still have to repay $2,600 this year (MAGI was higher than I had originally estimated), helped me to get into a better plan. This could be on ongoing hit. That would then be $21K over the next 8 years, reducing the initial difference to $18.5K-$26K. So this then turns into 3-4 year payback while I'm 8 years until Medicare.

By paying IRS it's cut now, I'd end up with a large pool of tax free income, I would then avoid paying any tax on ordinary income (figuring in the deductions), that would be $1K/yr. So that would then reduce that difference to $10.5-$18K.

And then one last step in my thought on this was "if" I was to have a significant medical expense in the next 8 years before Medicare, I would have to tap into the LTCG anyways and that would throw me over the MAGI limit sometime in the next 8 years. So it's then possible I'd repay $17k ACA credit plus pay some tax on that portion of LTCG sometime before getting in Medicare which would then totally offset the "tax cost and ACA repayment".

What offsets some of this is then the opportunity loss on investment of that initial $39.5K-$47K.

Who knows what will happen to taxes, ACA and other things between now and 8 years, but gotta run with what I know for now.

Go ahead, punch holes in my logic - seems there may be something I'm not considering.
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Old 09-21-2019, 01:13 PM   #8
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Originally Posted by RunningBum View Post
That silver plan with cost reduction sharing or whatever it's called is attractive especially if you tend to eat heavily into your deductible. It's complex, but I'd be trying to set up a spreadsheet to see just how well this would play out. Maybe go with average medical expenses, or run scenarios with low, average, and high expenses. If you have 10 years, maybe figure X years low, Y years average, Z years high.
Good idea, I've put my summarized assumptions into a spreadsheet.

Yr20192020202120222023202420252026 
Age5859606162636465Total
Cost         
+Tax 20,288         20,288
+EAP Repayment 14,400         14,400
+Opp Loss Invest  1,388 1,443 1,501 1,561 1,623 1,688 1,756 10,959
+Total Cost 34,688 1,388 1,443 1,501 1,561 1,623 1,688 1,756 45,646
          
Benefit         
-Reduced Medical Exp  5,000 5,250 5,513 5,788 6,078 6,381 6,700 40,710
-Tax Savings  1,000 1,000 1,000 1,000 1,000 1,000 1,000 7,000
-Total Benefit - 6,000 6,250 6,513 6,788 7,078 7,381 7,700 47,710
          
Net Benefit / (Cost) (34,688) 4,613 4,807 5,012 5,227 5,454 5,693 5,945 2,064

Assumptions:
1 - $150K additional LTCG realized this year
2 - 7 years until Medicare (birthday late in year, so 2026 is essentially full year of non-Medicare coverage)
3 - Tax, based on $150K additional LTCG this year
4 - EAP Repayment due to MAGI over limit (estimate)
5 - Opp Lost Invest is investment income loss on tax payment (4% return)
6 - Reduced Medical Exp, due to lower premiums, lower deductible/OOP (5% annual increase in medial expense)
7 - Reduce taxes by reducing ordinary income

So based on this there is a modest benefit, may be considered a push.

Realizing additional LTCG this year would more than likely avoid any future year of exceeding the MAGI limit (such as major medical issue).
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Old 09-21-2019, 03:20 PM   #9
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We took out a HELOC to use for expenses when we can't incur any additional taxable income for the year or lose ACA benefits. The HELOC interest is a lot less than the $25K a year we'd lose in ACA subsidies.
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Old 09-21-2019, 04:41 PM   #10
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We took out a HELOC to use for expenses when we can't incur any additional taxable income for the year or lose ACA benefits. The HELOC interest is a lot less than the $25K a year we'd lose in ACA subsidies.
Good idea and something to consider.
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