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ACA when one has no income and is living off of after tax cash reserves
Old 08-20-2013, 08:10 AM   #1
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ACA when one has no income and is living off of after tax cash reserves

Hello, everyone. I have been an infrequent poster and ardent admirer of this site since 2006.

My husband is getting ready to resign from his job in the medical field in January of 2014, so
we will be looking to purchase health insurance from the federal exchange. He is 60 and I
am 51. We are still supporting two children, 21 and 23, one of which is a student.

My question has to do with the various calculators I have found online. We are going to be
living off after tax cash reserves next year, and will avoid tapping our IRA for expenses during 2014.

The calculators ask for our income, which will most likely be $0.

The default message I receive with an input of $0 income is that we would be
eligible for our state's Medicaid plan. We would like to purchase health insurance under the new
plan, or, if necessary, use the Cobra option under his employer, though I suspect that will be
the more expensive option.

I have been reading the ACA threads on this site for some time now, and really appreciate MichaelB's
refereeing and dedication to facts, and apologize if this question has been covered.

Martha
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Old 08-20-2013, 08:19 AM   #2
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Won't you have some income from dividends, and capital gains if you have to sell any after tax savings at a profit? ACA is based on more than just earned income. You may also want to do a partial conversion of your traditional IRA to a Roth IRA up to the point where you would still keep the ACA subsidy or under the 15% tax bracket.
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Old 08-20-2013, 08:28 AM   #3
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Runningbum, some of our cash is in a regular "high yield" savings account in our local cu,
and the rest of what we will be using is in VG Energy Fund, which has a present capital
loss of around $2k right now.

Your suggestion that we convert some of the IRA to a ROTH is going to require some
research on my part, since we've never qualified to contribute to a ROTH and I am unfamiliar
with them.

I have been using Turbotax for many years, and could probably run a simulation, though
do I need to wait for the newest version due to the changes coming with the ACA?

Virtually all our retirement assets are in an IRA.

Martha
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Old 08-20-2013, 08:30 AM   #4
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Quote:
Originally Posted by RunningBum View Post
Won't you have some income from dividends, and capital gains if you have to sell any after tax savings at a profit? ACA is based on more than just earned income. You may also want to do a partial conversion of your traditional IRA to a Roth IRA up to the point where you would still keep the ACA subsidy or under the 15% tax bracket.
+1. You could manage the amount of income you report in this way, so you'd qualify for the subsidies. If this will be a recurring requirement, you might want to start taking 72T withdrawals from that IRA--those will be taxable, but not subject to any penalty. Just like converting some tIRA money to a ROTH IRA, taking these 72T distributions now may reduce your MRD's later and thereby help avoid pushing you into a higher bracket later.
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Old 08-20-2013, 08:34 AM   #5
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Originally Posted by Tandemlovers View Post
Virtually all our retirement assets are in an IRA.
Ah--okay. So 72t distributions from the IRAs and conversions to Roth IRAs are likely the best route to showing the higher income you need to qualify for the subsidies.
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Old 08-20-2013, 08:36 AM   #6
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SamClem, I thought 72t distributions were for those in their 50's as a bridge to age 59.5?
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Old 08-20-2013, 08:47 AM   #7
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SamClem, I thought 72t distributions were for those in their 50's as a bridge to age 59.5?
Tandemlovers,
You are 51, right?
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Old 08-20-2013, 08:53 AM   #8
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Quote:
Originally Posted by RunningBum View Post
Won't you have some income from dividends, and capital gains if you have to sell any after tax savings at a profit? ACA is based on more than just earned income. You may also want to do a partial conversion of your traditional IRA to a Roth IRA up to the point where you would still keep the ACA subsidy or under the 15% tax bracket.
+1

Take advantage of your low tax bracket in 2014. Even if you don't Roth convert, take some of your husband's IRA as a withdrawal to fill up the 10% or 15% tax bracket (along with any capital gains) as appropriate. You can reinvest it in a taxable account to keep the AA balanced.

You want to get the IRA money out at the lowest tax cost. It doesn't get any lower than with $0 of income. If you Roth convert you are saving it for later and it grows tax free. If you place it in a taxable account you can use it immediately and may have some small capital gains if you exceed the 15% tax bracket with income plus capital gains.

Consider what your normal IRA withdrawal will look like in terms of taxes in 2015 and beyond, and what your taxes will look like when IRA required minimum distributions (RMD's) hit at age 70. Anything you can get out in 2014 that improves on that (0% rate until you cover the standard deduction at the very least) is extra money for you.

If you end up with a substantial Roth you can use it to fill in part of your income later. It allows you to take an IRA distribution up to the top of a tax bracket and then fill in the rest of your needed income from the Roth. That might help you avoid a higher tax bracket later on, especially during RMD's.

All based on lowering your taxes, so you'll have to figure out what works best for you or consult your tax pro.
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Old 08-20-2013, 09:01 AM   #9
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Quote:
The calculators ask for our income, which will most likely be $0.
Boils down to "what is income?", and what the "calculators" consider to be income.

After being rejected for a Sears credit card account... I found out that zero income brings up a "NO" on the calcualtor.
They didn't bother to run a credit check...

Some general thoughts:
The $20 million on gold coins buried in the back yard is not "income".
The rollover growth in the $5 million portfolio is not "income".
The $25,000 in SS is, or maybe not income.
The money taken out of the IRA at the beginning of the year to put in the savings account, is not "income".

Depends on what the calculator algorithm is looking for, and these calculators are not the same.

For practical purposes, when the information is needed, I usually throw in an arbitrary $35,000 to $100,000... and figure if they want to to know more, they can check my credit rating.

BTW... my gold coins and the portfolio are imaginary.
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Old 08-20-2013, 09:04 AM   #10
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This is an excellent discussion and will be very useful to others.

One comment to all the above. How much income you need to avoid Medicaid and be eligible for a regular exchange policy with premium assistance depends on your state of residence. If the state has implement the Medicaid expansion you will need a minimum of 133% of the federal poverty level, below that and you will automatically be enrolled in Medicaid. If your state has not implemented the expansion you will need 100% of the FPL.
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Old 08-20-2013, 09:17 AM   #11
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SamClem
Yes, I am 51, but the bulk of our retirement savings, 95%, is in my husband's account.
My IRA amounts to around 100K.

Martha
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Old 08-20-2013, 09:23 AM   #12
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Quote:
Originally Posted by Tandemlovers View Post
SamClem
Yes, I am 51, but the bulk of our retirement savings, 95%, is in my husband's account.
My IRA amounts to around 100K.
Thanks--got it.
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Old 08-20-2013, 09:30 AM   #13
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For those curious about the actual IRC section for the tax credit for coverage under one of the new exchanges:
26 USC § 36B - Refundable credit for coverage under a qualified health plan | Title 26 - Internal Revenue Code | U.S. Code | LII / Legal Information Institute

Paragraph (d)(2) outlines what counts as income for these purposes.
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Old 08-20-2013, 09:38 AM   #14
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Husband will be 60, so no need to get involved with a 72t and it's required calculations. You can take as much or as little as you want from his accounts since he's past 59.5, or will be. If this puts you in a low tax bracket you could also consider a few years of doing Roth conversions before RMD kick in.
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Old 08-20-2013, 09:43 AM   #15
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Quote:
Originally Posted by imoldernu View Post
Boils down to "what is income?", and what the "calculators" consider to be income.
The IRS has a definition for income related to ACA, https://www.healthcare.gov/glossary/...s-income-magi/


Also you would be probably get Medicaid with no income but if your state is not expanding coverage then it may be different. You can still buy on the market place but no subsidy

https://www.healthcare.gov/what-if-m...ding-medicaid/
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Old 08-20-2013, 09:45 AM   #16
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Originally Posted by imoldernu View Post
...
The money taken out of the IRA at the beginning of the year to put in the savings account, is not "income"....
Unless the savings account is also within the IRA, I think this one is "income"?
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Old 08-20-2013, 09:48 AM   #17
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Originally Posted by MichaelB View Post
This is an excellent discussion and will be very useful to others.

One comment to all the above. How much income you need to avoid Medicaid and be eligible for a regular exchange policy with premium assistance depends on your state of residence. If the state has implement the Medicaid expansion you will need a minimum of 133% of the federal poverty level, below that and you will automatically be enrolled in Medicaid. If your state has not implemented the expansion you will need 100% of the FPL.
I'm trying to figure this out for my gf who lives with me and has only about $5k of income a year as a part time RN. She is currently on Cobra that expires in 8 more months. At that point if she goes into the exchange I believe her only option will be Medicaid as her income is below FPL. I was wondering if I claimed her as a dependent and filed my taxes as head of household if she would then be able to go into the exchanges based on my income. Have been scouring the internet for an answer to this question but so far have come up empty.

Anyone have any ideas?
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Old 08-20-2013, 09:48 AM   #18
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Quote:
Originally Posted by Tandemlovers View Post
Runningbum, some of our cash is in a regular "high yield" savings account in our local cu,
and the rest of what we will be using is in VG Energy Fund, which has a present capital
loss of around $2k right now.

Your suggestion that we convert some of the IRA to a ROTH is going to require some
research on my part, since we've never qualified to contribute to a ROTH and I am unfamiliar
with them.

I have been using Turbotax for many years, and could probably run a simulation, though
do I need to wait for the newest version due to the changes coming with the ACA?

Virtually all our retirement assets are in an IRA.

Martha
Distributions from an IRA are going to be considered income.

I've found fairmark.com to be a great source for learning about Roth IRAs and conversion from a tIRA. Guide to Roth IRA, 401k and 403b Retirement Accounts

I don't know where your IRA is now, but they should be able to help you set up a Roth IRA. I did this with Vanguard, and it is very easy to make partial conversions from my regular IRA to my Roth. It's basically just a transfer between accounts. At the end of the year they send me the tax forms for the conversion.

I think you can simulate this with last year's Turbo Tax. I don't have it handy right now, but you should be able to find which lines on the 1040 they are looking at to determine whether you will get Medicaid or if you qualify for a subsidy.

I set up a spreadsheet each year to determine how to do all of this. In your case, you'd want to add up any investment income and IRA distributions, and subtract your deductions and exemptions, and then see if there is still room under whatever tax bracket or subsidy you are shooting for to do a partial Roth conversion. Remember to account for the taxes you are paying on the conversion. Ideally you pay the tax from outside the conversion, but since you are mostly taking income from your IRA anyway it probably doesn't matter.
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Old 08-20-2013, 10:04 AM   #19
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Unless the savings account is also within the IRA, I think this one is "income"?
That was m thought as well......................
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Old 08-20-2013, 11:27 AM   #20
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From 26 USC 36B:

The term "household income" means, with respect to any taxpayer, an amount equal to the sum of;
(i) the modified adjusted gross income of the taxpayer, plus
(ii) the aggregate modified adjusted gross incomes of all other individuals who;
(I) were taken into account in determining the taxpayer's family size under paragraph (1), and
(II) were required to file a return of tax imposed by section 1 for the taxable year.
(B) Modified adjusted gross income
The term "modified adjusted gross income" means adjusted gross income increased by;
(i) any amount excluded from gross income under section 911,
(ii) any amount of interest received or accrued by the taxpayer during the taxable year which is exempt from tax, and
(iii) an amount equal to the portion of the taxpayer's social security benefits (as defined in section 86 (d)) which is not included in gross
income under section 86 for the taxable year.
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