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Is Managing O-MAGI for ACA Worth the Trouble?
Old 06-11-2015, 08:55 AM   #1
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Is Managing O-MAGI for ACA Worth the Trouble?

It seems to be fairly common for early retirees to manage their income number so that they qualify for the premium tax credit associated with PPACA. But how much is it really worth, in dollars? Of course everyone's situation is different, and some benefit more than others. Is it possible that limiting Roth conversions to come under the cliff, for instance, will actually cost you MORE in taxes once you get to the RMD range?

Presuming the ACA will persist roughly in it's current form, staying squarely in the analytical area and strictly away from the moral area of if it's "right", can we answer what tax advantage (or disadvantage) is expected across one's lifetime?

I think we can, but only if we convince James

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Does avoiding the ACA subsidy tax cliff really save much? That's the question that I think is important to have answered. Currently, a cliff-on vs. cliff-off i-orp run isn't quite apples to apples because a cliff-on run has a significant reduction in taxes for model years below age 65 that is not credited in the model. For me, $11K for 9 years. For people who will work to age 65 or those who can't qualify for the ACA, this feature would be of no value. But for those of us with years of ACA in our future, it would allow us to see if we really should bother with cliff avoidance.
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Old 06-11-2015, 09:14 AM   #2
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It definitely makes sense to look at the whole picture. For someone right on the line, it may make sense to take the subsidy in some years, while doing more Roth conversions in other years. Kind of like stacking deductible expenses in one year so you can itemize one year and take the standard deduction the next.

The subsidy also is worth more the closer you get to 65. Your insurance premiums go up, but the amount you are expected to pay is the same, so the subsidy is larger the older you have. I would only get about $500/yr right now from the subsidy if I stayed just eligible. IF the subsidy stays, it makes sense to me in my early 50s to do heavier conversions now and try to take the subsidy in my 60s. I have doubts that the subsidies will still be going then, but I did my Roth conversions this year anyway.
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Old 06-11-2015, 09:32 AM   #3
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That's a very good question.

Last year, DH & I were able to manage our MAGI to easily qualify for a subsidy, which amounted to about $10,000 (DH was 63, I was 54).

But this year we have so many changes in our financial/life picture (paid off the mortgage late last year, bought a house last month, and once we finish moving, we'll put previous house on the market), we didn't take a subsidy credit this year, we're paying the full amount. If it turns out we qualify for a subsidy after all, it'll be a bonus.

I figure once the dust settles sometime this fall, I'll reassess where we are and then try to figure out if it would even be possible for us to remain under the cliff. If so, then I'll need to decide if it's worth it, or do Roth conversions instead.
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Old 06-11-2015, 09:35 AM   #4
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For DW and myself, the premium tax credit is about $9,600 for 2015. At this level, it's definitely worth jumping through a few hoops to avoid going over the cliff. I certainly don't want to be filling out my tax return next year and discover that our income went over the limit by $10 and I lost a $9,600 dollar credit.
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Old 06-11-2015, 09:44 AM   #5
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This may be a little complicated to answer because in addition to premium subsidies there are also cost sharing benefits. E.g. how much is it worth to limit your max OOP below the normal 6.3k/year?
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Old 06-11-2015, 09:53 AM   #6
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The subsidy also is worth more the closer you get to 65. Your insurance premiums go up, but the amount you are expected to pay is the same, so the subsidy is larger the older you have.
If you had an escalation rate, would that do it? The simplest model would just have inflation as the years went on, but it might not be too hard to have an additional percent due to increased policy cost due to age. Would a linear increase like that work?


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This may be a little complicated to answer because in addition to premium subsidies there are also cost sharing benefits. E.g. how much is it worth to limit your max OOP below the normal 6.3k/year?
If you added the PTC amount to an estimate of the cost sharing benefits per year, and put that in the model, wouldn't that do it? It might be asking too much to have i-orp help you decide if you go for the cost sharing plan or not.
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Old 06-11-2015, 09:55 AM   #7
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Our tax break is also about $9600 for the year. We're paying the full freight because a "feature" of the CoveredCA website is that you can't get pre-paid subsidy prices unless 100% of the family is on the same plan. My husband wanted a different plan. They were supposed to have this "feature" fixed by enrollment last year - but missed the deadline. Sooooo... we'll get it back at tax time.

My husband only has 1.5 years till medicare. We'll revisit the subsidy vs Roth conversions at that time. We'll also revisit when the kids go off the payroll... but that's several years away - since they're currently in middle school. (Well, one will be a high schooler in a few days.)
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Old 06-11-2015, 10:08 AM   #8
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If you added the PTC amount to an estimate of the cost sharing benefits per year, and put that in the model, wouldn't that do it? It might be asking too much to have i-orp help you decide if you go for the cost sharing plan or not.
That's probably what I'd do. But I don't have a good feel for the probability of hitting the max OOP in a given year. Is it 1 in 5? or 1 in 100? On the other hand, it would be easy to compute how much is saved on lower copays for chronic conditions / medications.

Also there might be some benefit in capping the max outlay in a given year, similar to how people reduce volatility in their portfolio at the expense of long term gains.
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Old 06-11-2015, 10:28 AM   #9
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I didn't manage O-MAGI directly, I just didn't spend a lot of money to start with and I setup income from dividends/interest to cover expense which was well below the cliff limits. It does get close sometimes when unexpected CG come in.

As a single it didn't seem like the ROTH conversion would do much. I'm in the 15% bracket and to stay there the income limit is $45K, If I convert much I bump up to the next bracket which is where I'd be at RMD time anyway. I can't make a dent in the 401k/IRA holdings and stay within the 15% bracket by age 70.

I was more concerned with being allowed to actually purchase HI as opposed to the subsidy.
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Old 06-11-2015, 10:29 AM   #10
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Originally Posted by sengsational View Post
If you had an escalation rate, would that do it? The simplest model would just have inflation as the years went on, but it might not be too hard to have an additional percent due to increased policy cost due to age. Would a linear increase like that work?




If you added the PTC amount to an estimate of the cost sharing benefits per year, and put that in the model, wouldn't that do it? It might be asking too much to have i-orp help you decide if you go for the cost sharing plan or not.
I think the ACA subsidy is badly flawed because of the cliff where if you make $1 too much, you forfeit 100s if not 1000s of dollars in subsidies. If they are going to modify it they should eliminate the cliff such that someone who barely qualifies only gets a minimal subsidy, and it increases, probably linearly, the less you make. Or something like that. But that's not the system we have, so you have to plan against the system in place.
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Old 06-11-2015, 10:32 AM   #11
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We stay under both the ACA and FAFSA / Cal Grant eligibility limits for college and it is well worth it.
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Old 06-11-2015, 11:36 AM   #12
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I corresponded with James last fall to get the cliff modeled. i looked at it from an ending assets basis and found the following.


The interesting result was that in my case the total ending assets are almost identical if you factor in the additional savings in receiving the subsidies. As such, I'm relatively indifferent as to managing to below $62K or doing Roth to the top of the 15% bracket. Based on this, I'm inclined to make the larger conversions to eliminate future higher tax as an individual in event either my wife or I assume room temperature at an early age.
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Old 06-11-2015, 01:05 PM   #13
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This is an interesting question, relevant to me - but there are so many moving pieces. You also must factor in the likelihood of tax rate increases by RMD time. I am hoping one of you smart people can figure out a formula and let us know.
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Old 06-11-2015, 01:08 PM   #14
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I will ask a question concerning cost sharing....

Maybe this should be in a different thread... if so, we can move it..

How does it work and how do you get it? Do you lose it if you do not sign up with a plan with the credits and later qualify for the credits?

Last year I had large cap gains and was not close to the magic number... this year I am planning on getting the credit... I did not sign up so I could get the credit monthly because you never know what might happen (I still work part time if they come up with a job for me)....

So, I might lose other benefits because of this
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Old 06-11-2015, 01:16 PM   #15
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I will ask a question concerning cost sharing....

Maybe this should be in a different thread... if so, we can move it..

How does it work and how do you get it? Do you lose it if you do not sign up with a plan with the credits and later qualify for the credits?

Last year I had large cap gains and was not close to the magic number... this year I am planning on getting the credit... I did not sign up so I could get the credit monthly because you never know what might happen (I still work part time if they come up with a job for me)....

So, I might lose other benefits because of this
Silver plan cost sharing is based on your estimate of income. Fortunately there is no re-capture if your estimate is wrong. Subsidies are reconciled at the end of the year, while cost sharing is not. You must sign up for a Silver plan to get cost sharing.

Silver plans with cost sharing -
100-150 FPL Actuarial value for cost sharing 94%
150-200 FPL Actuarial value for cost sharing 87%
200-250 FPL Actuarial value for cost sharing 73%
FPL = (Federal Poverty Level)
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Old 06-11-2015, 01:57 PM   #16
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I can think of about 10,000 good reasons.

Could it be a pain? Sure, but...for those of us who are RE'd, I'd consider it a 'temporary job' that pays $10Gs right to the bottom line (tax free) for the effort.
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Old 06-11-2015, 02:12 PM   #17
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I can think of about 10,000 good reasons.

Could it be a pain? Sure, but...for those of us who are RE'd, I'd consider it a 'temporary job' that pays $10Gs right to the bottom line (tax free) for the effort.
+1. I look at it as a part-time job, too. That and learning the credit card games. Tax free money, what is not to like?
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Old 06-11-2015, 02:28 PM   #18
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I'm not sure how big the cliff really is. Last year, I had some unexpectedly large cap gain distributions in mid-December which I knew would reduce my ACA subsidy. Already near the top limit for MAGI, my projected subsidy was only about $80 per month. With the extra CG income in December, the subsidy dropped to about $20 per month. So, even if I had exceeded the income limit by a few dollars, my annual subsidy would have dropped to zero from about $240, hardly a steep cliff. Therefore, I am not really worried about my MAGI barely going over the limit. 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.
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Old 06-11-2015, 02:30 PM   #19
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I'm not sure how big the cliff really is. Last year, I had some unexpectedly large cap gain distributions in mid-December which I knew would reduce my ACA subsidy. Already near the top limit for MAGI, my projected subsidy was only about $80 per month. With the extra CG income in December, the subsidy dropped to about $20 per month. So, even if I had exceeded the income limit by a few dollars, my annual subsidy would have dropped to zero from about $240, hardly a steep cliff. Therefore, I am not really worried about my MAGI barely going over the limit. 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.
It depends on age and family size. You may not have that steep of a cliff. I think it is one of those when to take SS or payoff the mortgage kinds of topics. There is not a single correct answer for every household.
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Old 06-11-2015, 03:36 PM   #20
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I am hoping one of you smart people can figure out a formula and let us know.
In cases like this, sometimes I like to split the difference. It's certainly not going to be optimal, but it will minimize my maximum regret!
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