Almost went over the Subsidy Cliff

[RunningBum]

I'd hope that anyone who has an HSA eligible policy makes a full HSA contribution because that's probably the best no-brainer move out there. But I suppose not everyone does so it's worth asking, but I rarely do because I just assume they've done that.

 

[MichaelB]

From the IRS, as long as the total contribution of both spouses is less than or equal to the earned income and meets the limit guidelines, spousal IRA is another option.
https://www.irs.gov/retirement-plan...yee/retirement-topics-ira-contribution-limits

Spousal IRAs

If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A.

 

[scrabbler1]

I have always been pretty close to the cliff, so the subsidy wasn't worth a whole lot if I went over it. The subsidy saved me about $200 total in 2014, and $450 in 2015 and 2016. But in 2017, I went over the cliff thanks to a large cap gains distribution at the end of the year, costing me about $850. In 2018 I went over the cliff again due to the same reason, costing me $1,850. If I go over again in 2019, it will cost me $2,700. That cliff is getting higher and higher each year. Yikes!

 

[RetiredAt55.5]

Is your HI HSA eligible? that might be a better option. Sometimes I think people near the cliff underestimate the value of an HSA to lower income. Particularly if you don't have earned income for an IRA. If you are going to be close to the cliff pick the HSA eligible option IMO..

Good thought, but no, my Marketplace plan is not HSA eligible - it actually has no deductibles. Instead of deductibles, it has higher copays ($40 for primary and $80 for specialists, $250 for MRI, $550 for ER visits, etc.) It's an HMO that's worked well for us (despite the annoyance of referrals), but it's not HSA eligible.

 

[Smitty700]

Also remember that you can contribute to an IRA to the extent you have earned income. If you're FIRE'd and living off of taxable investments and / or IRA distributions, IRAs are not an option.

 

[RetiredAt55.5]

Also remember that you can contribute to an IRA to the extent you have earned income. If you're FIRE'd and living off of taxable investments and / or IRA distributions, IRAs are not an option.

Yes, but as I mentioned in an earlier post, in my tax situation, since I also used American Opportunity Tax (education) credits for 2018, if I contribute to a traditional (deductible) IRA for TY 2018, it will lower my MAGI for ACA purposes, but it doesn't reduce my effective tax bill for 2018. So even though the traditional IRA is deductible, in my situation it's effectively not deductible. With the added penalty that when I withdraw from the IRA I'll owe taxes on the withdrawals (since the IRS assumes I got a tax break when I added $ to the IRA).

The crux of the problem is that 60% of the American Opportunity Tax credit is non-refundable, so it can lower your tax liability to $0 but will not give you any money back beyond that. In my case, it did take it to $0. But the traditional IRA tax credit is also non-refundable, so it doesn't benefit me since I'm already at $0. I've spent hours in Turbo Tax scratching my head why the results didn't change when I plugged in planned traditional IRA contributions. Only by looking at the corresponding forms directly did I figure out what was going on.

 

[doxiemama]

I went over the cliff while taking a selfie. Had put in a estimated 2018 MAGI of $30,000 based on expected return from a ~$200,000 portfolio but ended up with a 2018 MAGI of $226,000 due to a better stock market return on that portfolio.

Had to pay the entire $8500 subsidy back

Wow! I will gladly give back $8,500 for a $226,000 gain. For me it was 401% of federal poverty rate so it would have stung big time.

Thank you all for your pointers. I will do better next year, I mean I am not even going for a subsidy but I am going to fund my Traditional IRA and open a spousal for my husband and lower our overall taxable income while still building retirement savings. We are well under the salary limits so we can take the deductions and my part-time job does provide a 401 (k) style plan so I put 4% in that and they provide a 100% match plus they kick in another 5%. The hourly rate is low compared to my prior government job but for a part-time "retirement" job I am thrilled to get paid vacation, holidays, sick time and a little pension plan.

 

[SecondCor521]

@doxiemama, if your husband already has an existing traditional or Roth IRA you can make a spousal IRA contribution to it. No need to open a separate account.

 

[Rianne]

I'd hope that anyone who has an HSA eligible policy makes a full HSA contribution because that's probably the best no-brainer move out there. But I suppose not everyone does so it's worth asking, but I rarely do because I just assume they've done that.

^^^^^That saved us in 2018 and we'll do exactly that again this year.

 

[Smitty700]

@doxiemama, if your husband already has an existing traditional or Roth IRA you can make a spousal IRA contribution to it. No need to open a separate account.

Is this true? I think the spouse must have his or her own IRA for spousal contributions.

The IRS says at https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions:

If you file a joint return and have taxable compensation, you and your spouse can both contribute to your own separate IRAs.​

And the summary at https://www.investopedia.com/retirement/making-spousal-ira-contributions/ also says the "IRAs must be held separately".

 

[SecondCor521]

Is this true? I think the spouse must have his or her own IRA for spousal contributions.

The IRS says at https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-contributions:

If you file a joint return and have taxable compensation, you and your spouse can both contribute to your own separate IRAs.​

And the summary at https://www.investopedia.com/retirement/making-spousal-ira-contributions/ also says the "IRAs must be held separately".

What I wrote was accurate but ambiguous.

Husbands and wives must have their own IRAs, of course.

What I was trying to convey was that if the husband already had a traditional or Roth IRA and the couple wanted to make a contribution based on their combined income under the spousal IRA rules, then the couple could make that spousal IRA contribution to his existing IRA. There is no need for the husband to have a "traditional IRA" and a "spousal IRA". It seemed like @doxiemama might have been under the impression that she needed to open a "spousal IRA", but she does not.

And of course, there is a technicality that you may be referring to. Technically speaking, even with a spousal IRA contribution, *he* must contribute from *their* joint income to *his* IRA. But in practice, if she has access to his IRA account and they agree, she could do the actual paperwork of pushing the dollars from one of their jointly held banking accounts to his IRA and nobody would bat an eye.

 

[blueskyk]

We had a cliff diving scare ourselves this year. Our accountant called and said it look like we owe $21,000 due to going off the cliff ( we are both 64 this year). I watch this like a hawk and knew we shouldn’t have gone over. As it turns out a recent tax software update had not properly dealt with a Roth distribution and once this was resolved we were good.

But I must ask - do we really require a couple with an income of $75,000 a year to pay $22,000 a year for medical insurance?

Wait....uh, yes we do!

 

[Smitty700]

But I must ask - do we really require a couple with an income of $75,000 a year to pay $22,000 a year for medical insurance?

Wait....uh, yes we do!

It's a good thing it's the Affordable Care Act, otherwise it would be really expensive.

 

[gstillson]

We had a cliff diving scare ourselves this year. Our accountant called and said it look like we owe $21,000 due to going off the cliff ( we are both 64 this year). I watch this like a hawk and knew we shouldn’t have gone over. As it turns out a recent tax software update had not properly dealt with a Roth distribution and once this was resolved we were good.

But I must ask - do we really require a couple with an income of $75,000 a year to pay $22,000 a year for medical insurance?

Wait....uh, yes we do!

That would really bite if you lived in a high COL area and had to pay something like $2000 a month for rent on a 2bd apartment. Even before taxes and FICA, you would be left with $75,000 - $22,000 - $24,000 = $29,000 after just paying for house and health.

 

[hotwired]

Same here! My FA decided to sell a fund we'd held about 10 years resulting in about a 20K LTCG. LUCKILY that year was a small subsidy (7K). This year we nearly had to pay back $18,000!

 

[hotwired]

Hopefully they'll tweak it to be laddered. ONE cent over 80K for us and we pay 100%. One cent BELOW 80K and we get free health insurance, an $18,000 subsidy. I just don't get it.

 

[audreyh1]

We had a cliff diving scare ourselves this year. Our accountant called and said it look like we owe $21,000 due to going off the cliff ( we are both 64 this year). I watch this like a hawk and knew we shouldn’t have gone over. As it turns out a recent tax software update had not properly dealt with a Roth distribution and once this was resolved we were good.

Wow - you had to debug this for your accountant?

 

[blueskyk]

Wow - you had to debug this for your accountant?

I think my role was more along the lines of identifying the problem. I did wonder how many others might have been affected. This was in early Feb so the volume of returns wasn’t like it is in mid-April.

My Roth distribution was properly accounted but something about my DH’s Roth distribution just didn’t sit right with the software and it was counted as taxable income.

 

[bUU]

Thanks for steering them to that thread. But that said I do think Roth conversions are relevant to avoiding the "cliff" as they are one tool to manage MAGI into the future. If one is not getting an ACA subsidy this year but expect to in the future, then a Roth conversion *this year* is, in fact, a very relevant way to avoid going "over the cliff" in the future.

And if I understand correctly, any significant Roth conversion would pretty much preclude an ACA subsidy in the current year. I'm struggling to find a strategy and every time I think I'm getting close to understanding some additional wrench is thrown into the works.

 

[MichaelB]

And if I understand correctly, any significant Roth conversion would pretty much preclude an ACA subsidy in the current year. I'm struggling to find a strategy and every time I think I'm getting close to understanding some additional wrench is thrown into the works.

Pretty much everything you declare as income, along with a few other items, count as MAGI. This table is helpful. http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

 

[bUU]

Thanks. I think I'll be hard-pressed to find a tax advantage from Roth conversions or other tactics that can beat a $2800-$3300 subsidy.

Whether it is trying to stay within the 12% tax bracket or under 400% FPL, I still am mystified by how to deal with pre-Christmas (FSKAX, JAENX, VTSAX, VEMAX, VGHAX), and especially post-Christmas (FSKAX, AMAGX) dividends. How do those of you working to stay under 400% FPL manage that (other than selling those holdings and incurring CG on them all, which would pretty-much quash 400% FPL)?

 

[MichaelB]

Thanks. I think I'll be hard-pressed to find a tax advantage from Roth conversions or other tactics that can beat a $2800-$3300 subsidy.

Whether it is trying to stay within the 12% tax bracket or under 400% FPL, I still am mystified by how to deal with pre-Christmas (FSKAX, JAENX, VTSAX, VEMAX, VGHAX), and especially post-Christmas (FSKAX, AMAGX) dividends. How do those of you working to stay under 400% FPL manage that (other than selling those holdings and incurring CG on them all, which would pretty-much quash 400% FPL)?

The problem is not so much dividends as capital gains distributions of active funds. You can look at past dividend rates and project something similar for this year, and you’ll probably be close. You need to build a margin of safety in your MAGI calculation to accommodate CG distributions, which are unpredictable and almost always happen at the worst time.

Your options for reducing MAGI are maximizing income adjustments, such as HSA and traditional IRA contributions.

If your base case shows you will be always be close to the cutoff, you might consider selling all your active funds in one year, reinvesting in passive index funds which have no CG distributions, going over the limit that year, but ensuring you’ll be under the limit in subsequent years. Lots of spreadsheet what-if calculating here.

 

[RunningBum]

My strategy is to stay away from funds in my taxable account that have high dividend yields or unpredictable capital gains that would put me over 400%. I sold off one such fund and took the gains in a non-subsidy year and moved some of the money to index funds, and kept the rest in cash so I can make it to 65 without having to sell and incur capital gains. The cash generates income, but it's predictable and manageable. I'm not going to look up all of your funds to see if any of yours are like that.

The late December dividends are a pain but it's just a condensed time to take action. Not at all impossible and shouldn't be mystifying. Most funds give estimates in November, close enough that I can see if I'm going to make it. If I'm not, I see if there's anything I can do to better set myself up for next year. If I am, I start estimating how much of a conversion I can make. I don't have any dividends that pay post-Christmas, so I have the week between Christmas and New Year's to do the final calculations and execute whatever plans I had. That's no different than if I was to do it in May, it's just that I cannot put it off, so if I'm traveling I have my laptop with me and have to carve out some time to do it.

FSKAX paid it's last dividend on 12/14 last year, so it's not post-Christmas. Maybe get rid of the one that is after Christmas if it's too much to deal with.

You might just have too much in taxable to get the subsidy. ~$3000 isn't all that much of a subsidy to jump through a lot of hoops to get, IMO. Don't put money under your mattress to avoid $10K of income just to get $3K of subsidy.

 

[UtahSkier]

Thanks. I think I'll be hard-pressed to find a tax advantage from Roth conversions or other tactics that can beat a $2800-$3300 subsidy.

Whether it is trying to stay within the 12% tax bracket or under 400% FPL, I still am mystified by how to deal with pre-Christmas (FSKAX, JAENX, VTSAX, VEMAX, VGHAX), and especially post-Christmas (FSKAX, AMAGX) dividends. How do those of you working to stay under 400% FPL manage that (other than selling those holdings and incurring CG on them all, which would pretty-much quash 400% FPL)?

My subsidy is close to $18K. Managing my MAGI is job 1. My after tax portfolio Is all ETFs. Mostly vanguard. The distribution estimates are published around Dec 12. I plug those values into a spreadsheet.

Some of the dividends are paid before Christmas and I update the spreadsheet.

The day after Christmas, I make the necessary financial moves to realize my income.

I also start the tax filing process in early December.

My buffer is about $4K. In 2017, my buffer was $2K. A series of mistakes and misunderstandings nearly consumed that buffer.

One misunderstanding was foreign taxes. These are not included in the distribution amounts. I estimate these values based upon prior years. That amount is treated as income.

 

[scrabbler1]

I have always been pretty close to the upper MAGI limit to earn a subsidy. I have had room for a year-end cap gain distribution in the $11k-$13k range. I used up most of the buffer in 2014, 2015, and 2016, but in 2017 and 2018 I had year-end LTCGs of $22k and $31k, blowing up the buffer and throwing me over the cliff.


With the cliff costing me a lot more in 2019 (I already figured out roughly what is at stake his year) than in 2018 or 2017, I won't let this happen a third time. I'll have about 6 weeks to figure out a plan after the early November estimates come out. I will also be meeting with my (unpaid) Fido Account Executive next month to get his take on this.