Is Managing O-MAGI for ACA Worth the Trouble?

[InTheSticks]

I'm planning on managing my income for an ACA subsidy. Assuming things stay the same, our subsidy will be between 8k and 11k. Makes it worth it.

 

[truenorth418]

YMMV, of course, but looking at how the subsidy is determined on the income tax forms, I don't see how a there can be a steep cliff.

Scrabbler, I think one of the reasons for this observation is that New York State (which is where I live and I think where you live) does not have age rating, which leads to a much smoother (if not actually flat) disposition of subsidies across ages. If you play around with some of the ACA calculators, and compare the NY questions and results with those of other states, you should see the "cliff" impacting in other states.

 

[Free To Canoe]

Worth the trouble? Yes.


My scenario: DW and I have an ACA subsidy of about $11,000.
What we are trading off: About $26k of roth conversions are doable for us with no tax due. The roth provides an estimated tax savings of about 30% from the RMD tax torpedo (for us). Loss of this tax break is about $7,000.


a) we save about $4k apples to apples
b) a dollar now is worth much more now than when I am 70.5 years old
c) we could be dead by then


This conclusion also helps when I am deciding to "put back" some money in a traditional IRA at tax time to lower my income, increase the ACA subsidy and reap some savers credit.


We plan on doing this until medicare in a few years.

 

[sengsational]

Thanks, all, for reporting on if, in your case, it's worth the effort or not to try for the subsidy. The result is that some have a slam-dunk "for" and others not worth the trouble, and others that don't know. I'm probably somewhere between the slam-dunk and "I don't know" crowd.

If you are like me, then it would be interesting to know the scale of the savings over the lifetime of taxes (including ACA years and RMD years). Even if you are at the extremes (you already know it's worth the trouble or not), knowing the scale of the tax savings (or cost) might also be interesting.

So I'm going to conclude that if we had the ability to model both with, and without income management, within one's specific financial situation, the result would be of interest and would be directly actionable for those that are not on the extremes.

 

[ziggy29]

Depends on your situation. Normally I would say yes, because every dollar you can shelter with a 401K or an IRA not only saves you the marginal tax rate (for now), but if you are under 400% of FPL (or very close to it) every dollar of MAGI that doesn't hit your 1040 will save you close to 15 cents (on average) of lost ACA subsidy.

This was really important to me recently, being a federally recognized American Indian and thus allowed to enroll in *any* Exchange policy (even the cheapest Bronze) with no deductibles or copays if we kept our MAGI under 300% of FPL (as we did in 2014). I just let that policy lapse this month since I just got "promoted" in my part-time j*b which is now giving me good, subsidized health insurance for less than $100 a month compared to the $320 I was paying before. But yeah, if you are buying on the Exchange and you are in the position to "engineer" your MAGI to stay under some of the cliffs, it can matter a LOT.

 

[Texas Proud]

Worth the trouble? Yes.


My scenario: DW and I have an ACA subsidy of about $11,000.
What we are trading off: About $26k of roth conversions are doable for us with no tax due. The roth provides an estimated tax savings of about 30% from the RMD tax torpedo (for us). Loss of this tax break is about $7,000.


a) we save about $4k apples to apples
b) a dollar now is worth much more now than when I am 70.5 years old
c) we could be dead by then


This conclusion also helps when I am deciding to "put back" some money in a traditional IRA at tax time to lower my income, increase the ACA subsidy and reap some savers credit.


We plan on doing this until medicare in a few years.

Your last one about putting back in a regular IRA is important...

Last year it saved me big money... I had way too much cap gain and was losing too many benefits.... moved the contribution from ROTH to regular and saved 30%+....

I will be looking at what the difference will be this year... I might have to do the same move... I have not decided to wait until tax time to put money into an account so I do not have to reclassify it later...

 

[Spokane2303]

By controlling my O-MAGI I was able to qualify for VA Medical coverage. This has proven to be the best medical care I've ever received! I know there has been the occasional poor publicity about VA care in some regions; but, that is nothing compared to the inefficiency of traditional doctors and our fragmented healthcare system. The care I receive through the VA is coordinated, comprehensive, respectful and top quality. I see the same primary physician, who is excellent, and have been referred to specialists as needed. They even have volunteers who pick you up in their large parking lots in small electric carts and give you rides to the different clinics at my location!

I will still signup for Medicare at 65; however, I'll continue to use the VA as my primary care provider until 70, when my retirement savings RMD's will "income" me out of the system.

The VA no longer counts assets to qualify for coverage, only income as of May of this year. So this is a viable free-to-low cost option for military veterans.

Unfortunately the VA doesn't cover the DW. She is covered through traditional insurance heavily subsidized by the ACA. Compared to our previous COBRA costs, we've reduced our yearly health insurance and out-of-pocket medical expense by close to $20K a year! A major contributor to our early retirement decision.

"Semper Paratus"

 

[outabout]

I was thinking of a way to do the Roth conversion and not loose on the ACA side.

In January do the conversion, buy a metal ACA policy as well. Then in February report a drop in income to go into Medicaid. This way you only need to pay full price for one month and can convert as much as you want. This only works if you can get your income under Medicaid levels for the rest of the year.

Hi Jim:
I have been trying to figure out the difference between ACA and Medicaid in income requirement time frame. ACA is based on income of entire calendar year, but it sounds like you think that Medicaid is based on one's MONTHLY income? Otherwise, in your scenario, the January income would be counted towards yearly income and it would not help getting Medicaid.

If Medicaid is indeed month-to-month, then it sounds like this strategy can work anytime of the year?

 

[jim584672]

Hi Jim:
I have been trying to figure out the difference between ACA and Medicaid in income requirement time frame. ACA is based on income of entire calendar year, but it sounds like you think that Medicaid is based on one's MONTHLY income? Otherwise, in your scenario, the January income would be counted towards yearly income and it would not help getting Medicaid.

If Medicaid is indeed month-to-month, then it sounds like this strategy can work anytime of the year?

The APTC Marketplace is based on a calendar year starting in January. Medicaid is based on current monthly income. So it is possible to drop into Medicaid any time of the year by reporting the income change. The change will trigger a redetermination of eligibility.

The reason why I said do the conversion in January is because the Roth conversion does count for APTC purposes. So it will lower the subsidy for any months a person is in a Marketplace plan. Realistically reporting a drop in income on Feb 1st will get someone on Medicaid Mar 1st. So two months of full price insurance would be needed for this to work.

 

[outabout]

The APTC Marketplace is based on a calendar year starting in January. Medicaid is based on current monthly income. So it is possible to drop into Medicaid any time of the year by reporting the income change. The change will trigger a redetermination of eligibility.

The reason why I said do the conversion in January is because the Roth conversion does count for APTC purposes. So it will lower the subsidy for any months a person is in a Marketplace plan. Realistically reporting a drop in income on Feb 1st will get someone on Medicaid Mar 1st. So two months of full price insurance would be needed for this to work.

Thanks Jim. I found the following statement in Key Facts You Need to Know About Income Definitions for Marketplace and Medicaid Coverage | Beyond the Basics

Medicaid eligibility, however, is based on current monthly income. Some states allow current Medicaid beneficiaries to project their income for the rest of the calendar year; the state assesses eligibility based on the average monthly total. So, for example, if a family member has seasonal work that temporarily raises household income, that increase is effectively spread across all months of the year. States may also allow both applicants and beneficiaries to account for any reasonably predictable increases or decreases in income they anticipate over the year. These options help minimize coverage gaps that could result if beneficiaries had to recertify their income every month.

This makes sense. This would prevent a person from falling in and out of Medicaid due to seasonal/part time job (or lack of).

 

[jim584672]

Many states have 12 months of continuous eligibility for MAGI Medicaid. So if income goes up in a month it will not trigger a redetermination and bounce back to the Marketplace.

 

[Texas Proud]

I just did a quick estimate on what I would get back on subsidy...

I am a bit surprised on one of my findings....

First, I would get back just under $600 per month if my return is basically the same as last year taking out the items I know I will not have...

The strange thing (and I will have to look at it a bit more) is that if I move the ROTH contribution to a tIRA, I save an additional $125 per month....

I do not know if I should take the money and deal with IRA problems or not... the good news is that I only have about 30% in 401(k) or tIRA....

Any thoughts on this

 

[pb4uski]

I'm looking to make my age 70 tax torpedo smaller, not bigger.... but my tax-deferred is ~50% of the total, not 30%.

I never knew one could move Roth money to a tIRA. I assume that money is then treated similar to a non-deductible contribution and that money is not taxed when withdrawn.

 

[wmc1000]

I have been modeling scenarios for the period prior to medicare. For my wife and I, since we have after-tax savings to live on, we can draw just enough from tax advantaged accounts to get $1478 per month cost reduction and a MAX OOP of $1000 per year. That "management" saves us over 17K in premiums and A MINIMUM of $2500 per year in OOP costs. So, for us it is definitely worth it to save $20,000 that we would have to have spent out of retirement savings.

 

[Texas Proud]

I'm looking to make my age 70 tax torpedo smaller, not bigger.... but my tax-deferred is ~50% of the total, not 30%.

I never knew one could move Roth money to a tIRA. I assume that money is then treated similar to a non-deductible contribution and that money is not taxed when withdrawn.

I invested the money in the ROTH for the tax year.... I can ask that it be recharaterized as a tIRA contribution... they will move the contribution and any earnings it might have to the tIRA account... it them becomes deductible, which saves me tax dollars... or in this case gives me a greater subsidy....

I did this last year when my cap gains were large due to me selling some funds.... I was losing credits and deductions.... saved over 30% by moving it to the taxable account... we are talking about $12K.... so will not make the torpedo that much worse...

 

[Texas Proud]

Wow... doing what if opens up my eyes...

I just did another estimate as if I earned an additional $10K... taxes went up (really refund went down) by over $2500...


Did a quick look... and it makes a bit of sense... I have to pay additional taxes of 15%, but my ACA credit goes down by 9%.... plus I lose the little bit I had on savers credit...


SOOO, it seems that converting to ROTH is not a 15% question, but a 24% question... do you want to convert at 24%


Now I have to see what happens if I do a tIRA instead of ROTH... do I get back that 25%....

 

[jim584672]

And don't forget the state income tax as well (if applicable). At some point it becomes uneconomic to do a conversion. Whenever I look at this I get a headache.

 

[Texas Proud]

And don't forget the state income tax as well (if applicable). At some point it becomes uneconomic to do a conversion. Whenever I look at this I get a headache.

Lucky for me I do not have state taxes... but yes, for someone who does they have to look at that...


The point I am making is that people keep talking about conversion at 15% when in fact if they qualify for a subsidy the marginal tax rate is higher than that...

When I put in an additional $10K of income, my taxes went up an additional $2,173.... so almost a 22% marginal rate...

 

[sengsational]

That's a great reason for adding the ACA subsidies to i-orp; you can't really know the answer to if the bump to the "22% bracket" is worth it unless you model all years, including RMD years.