Minimizing MAGI for PPACA

[daylatedollarshort]

Are you referring only to the fact that individual stocks don't have management fees?

Ha

Yes.

 

[brewer12345]

Hmm, I can't move some of my taxable accounts assets to retirement accounts, can I?

Actually, you can do so by using a portion of these assets to purchase a non-qualified variable annuity. Note that even if you go to very low cost providers (Vanguard, et al.) the fees are higher than index funds and there are a bunch of tax issues to ponder if you choose to do so.

 

[ziggy29]

When we pull the plug, DW will remain self-employed. To the extent you are a self employed, a solo 401k is a very useful tool to fiddle with your MAGI because you can toss 100% of your income into it up to the contribution limit for the year (17.5k, I believe).

We're looking at this one into the future. Right now my wife is considered an employee for tax purposes but my understanding is that once she becomes an ordained pastor, she would be considered self-employed for tax purposes (and would start receiving a gross-up on her pay to account for the self-employment taxes). Of course, as long as I'm [-]slacking[/-] not w*rking much at all, it's not like we'll have a lot of extra income to put into a solo 401K, and we'll still have a low MAGI anyway, probably less than $40K. So it may not be an issue for us but it's something I'm filing away for future possibilities.

 

[explanade]

Actually, you can do so by using a portion of these assets to purchase a non-qualified variable annuity. Note that even if you go to very low cost providers (Vanguard, et al.) the fees are higher than index funds and there are a bunch of tax issues to ponder if you choose to do so.

So you'd pay taxes to move from taxable accounts to a variable annuity?

Because you'd have to redeem shares?

Maybe you end up paying less taxes than if you sold later, paid cap gains, to be part of your withdrawals?

 

[early137]

So you'd pay taxes to move from taxable accounts to a variable annuity?

Because you'd have to redeem shares?

Maybe you end up paying less taxes than if you sold later, paid cap gains, to be part of your withdrawals?

I looked into this a bit as an option to lower magi for aca
I want to understand this option better
I think that you do have to redeem shares to move to the variable annuity
Then when you take money out of the annuity there is no favorable treatment for cap gains or dividends
Further there is an IRS penalty if you take money out of the annuity before I think a certain age (59.5)
Then even for vanguard about 0.3% additional expenses (my recollection could be a trifle more)

It would get your magi down.

 

[early137]

I am quitting the day job in January. DW will continue working. I expect she will gross between 25 and 30k and the business has 3 to 5k in expenses. I may generate soem additional income which I would ideally run through the proprietorship. That would give us maximum flexibility to fool with out MAGI for PPACA purposes, since we could then shelter all of the income if need be.

Brewer, just a word of caution. I was warned by a CPA that it is dangerous to use a business structure to qualify for aca.
This is not tax minimization but using a corporate structure to qualify for a federal aid program.
His view was it will attract audits and that having him deal with the audit would cost more than the subsidy.

Others view on this point appreciated just repeating what I was told.

 

[GrayHare]

A general strategy: 1) minimize regular income by shifting away from interest- and dividend-generating investments toward things like growth stocks, 2) periodically sell those stocks to refill the cash bucket, 3) live off the cash bucket the next year or more. Income will be lower while living off the cash bucket, thus easier to stay under 400% FPL those years. This strategy is similar to the bunching and shifting of income and deductions from one tax year into the next that some people do.

 

[daylatedollarshort]

Brewer, just a word of caution. I was warned by a CPA that it is dangerous to use a business structure to qualify for aca.
This is not tax minimization but using a corporate structure to qualify for a federal aid program.
His view was it will attract audits and that having him deal with the audit would cost more than the subsidy.

Others view on this point appreciated just repeating what I was told.

Brewer's wife had an established business in place before 2014. Should she shut it down and get a regular job to not attract an audit?

I think your CPA was talking about sham corporate structures, not profitable, established, ongoing businesses. The ACA was designed for people without employer sponsored group health insurance.

 

[brewer12345]

Brewer's wife had an established business in place before 2014. Should she shut it down and get a regular job to not attract an audit?

I think your CPA was talking about sham corporate structures, not profitable, established, ongoing businesses. The ACA was designed for people without employer sponsored group health insurance.

+1. I think your CPA was cautioning against a sham business structure, but that has always been an audit magnet. DW has been filing as a sole proprietor since 2003 and her business has never reported an operating loss, so I don't think we would be at any material risk.

 

[explanade]

A general strategy: 1) minimize regular income by shifting away from interest- and dividend-generating investments toward things like growth stocks, 2) periodically sell those stocks to refill the cash bucket, 3) live off the cash bucket the next year or more. Income will be lower while living off the cash bucket, thus easier to stay under 400% FPL those years. This strategy is similar to the bunching and shifting of income and deductions from one tax year into the next that some people do.

But that could raise your risk and affect your overall returns.

That might reduce your income from cap gains distributions and dividends and get you under the limit for receiving subsidies but you might "lose" more money on paper if the growth stocks and other investments which produce less dividends and cap gains distributions has inferior returns than your previous investments.


Part of the problem is that this is going to be the first year of the ACA. So there may not even be tax professionals whom you can consult about the tax and ACA implications of all this. At least not until about a year from now.

 

[brewer12345]

I looked into this a bit as an option to lower magi for aca
I want to understand this option better
I think that you do have to redeem shares to move to the variable annuity
Then when you take money out of the annuity there is no favorable treatment for cap gains or dividends
Further there is an IRS penalty if you take money out of the annuity before I think a certain age (59.5)
Then even for vanguard about 0.3% additional expenses (my recollection could be a trifle more)

It would get your magi down.

A good summary. Choosing to do this would require a lot of study and spreadsheeting, IMO.

 

[Bestwifeever]

...

I used the calculator, and it shows that my premiums would be around $4,300 after incorporating a Federal Assistance of $13,000 annually. That is about 375/month, quite manageable. And that is for a Silver plan.
....

Stupid question, but is the $4300 (or the full freight $17400) only for you or for you and your DW?

 

[GrayHare]

But that could raise your risk and affect your overall returns.
That might reduce your income from cap gains distributions and dividends and get you under the limit for receiving subsidies but you might "lose" more money on paper if the growth stocks and other investments which produce less dividends and cap gains distributions has inferior returns than your previous investments.

I agree the strategy would have to be used intelligently. Instead of $80k MAGI this year and $80k MAGI the next (giving $0 subsidy), an intelligent shift to $100k this year and $60k the next would qualify a couple for subsidy half the years. People who currently use a bucket approach can already choose when to refill the cash bucket.

 

[kaneohe]

http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf

MAGI under ACA

 

[pb4uski]

Why wouldn't a regular deferred annuity work just as well as a variable annuity? Or perhaps better? The inside buildup would not be taxable income and would reduce your MAGI if you bought it with taxable account funds that were previously generating taxable income that is included in O-MAGI. Cost would probably be lower than a VA.

If you could find one with a decent interest rate you could make it part of your fixed income allocation and it would have no interest rate risk.

 

[Coolius]

Stupid question, but is the $4300 (or the full freight $17400) only for you or for you and your DW?

Bestwifeever, the figures were for a family of 2, DW and myself.

There is an option on the calculator to enter any family size you want, including children.

 

[pb4uski]

On the last point, I meant a lot of ER folks are withdrawing their retirement assets, at an SWR, to pay their living expenses, are they not?

They may or may not be receiving a pension in ER, may or may not be receiving SS.

But ER means drawing on retirement assets, in either retirement or taxable accounts, to fund their living expenses in ER?

I know some people have income streams, such as rental property. But I thought most people fortunate to have FIREd had significant savings to pay for ER and withdrawals, which involves selling financial instruments, constituted some portion of their "retirement income"?

Or am I totally not getting what early-retirement.org is about?

I don't think you're getting my point. As an example, let's say I have no pension, no SS yet and $1m of taxable account savings that is invested in a balanced mutual fund that has a dividend yield of 2.3% and my WR is 4%.

While I withdraw $40k from the $1m for my living expenses, my income for O-MAGI purposes is only $23k ($1m * 2.3%). IOW, the $40k that I withdraw in this case is $23k of income and $17k of principal. So my O-MAGI is only $23k.

 

[brewer12345]

Why wouldn't a regular deferred annuity work just as well as a variable annuity? Or perhaps better? The inside buildup would not be taxable income and would reduce your MAGI if you bought it with taxable account funds that were previously generating taxable income that is included in O-MAGI. Cost would probably be lower than a VA.

If you could find one with a decent interest rate you could make it part of your fixed income allocation and it would have no interest rate risk.

It would be the same as a VA as far as MAGI effects.

 

[explanade]

I don't think you're getting my point. As an example, let's say I have no pension, no SS yet and $1m of taxable account savings that is invested in a balanced mutual fund that has a dividend yield of 2.3% and my WR is 4%.

While I withdraw $40k from the $1m for my living expenses, my income for O-MAGI purposes is only $23k ($1m * 2.3%). IOW, the $40k that I withdraw in this case is $23k of income and $17k of principal. So my O-MAGI is only $23k.

Hmm, that is how they determine how much of your withdrawal is principal and how much is dividends? Actually I've never redeemed any funds, just exchanged to another fund, so I've not had a true fund redemption tax event.

Of course it gets complicated when you have multiple funds and other investments, all having different yields. And you get cap gains distributions that you have been reinvesting.

If I have DRIP going, could it really be said that I withdrew some dividends when I redeemed/sold shares for the withdrawal?

 

[pb4uski]

There would be capital gains on any sale of shares used to fund withdrawals and those capital gains would be income as well (in additions to dividends). That can be managed in a number of ways, by selection of what purchase lots are sold.

My point is that the entire amount withdrawn would not be income - only dividends received (whether in cash or even if reinvested) and any capital gains, but in most cases it will be much less than the amount withdrawn.

In my case, my dividends are only about ~25% of my withdrawal and cap gains ~15% of my withdrawal, so the income will only be ~40% of my annual withdrawal. I could probably make it even lower by selecting the right purchase lots in calculating my capital gain.

 

[explanade]

I thought they used an averaged cost basis, rather than some kind of FIFO set up.

Especially if big purchases were made years ago, it's kind of hard to dig up those transactions, compared to looking at the periodic DRIP-related purchases of shares.

 

[explanade]

One other quick question. Does Vanguard or whatever institution break down the dividend vs. principal in the documents they send to you and the IRS of the redemption transaction(s)?

Or is it completely at the discretion of the person filing the tax return how to apportion the proceeds of the redemption into principal, dividends and cap gains?

 

[pb4uski]

One other quick question. Does Vanguard or whatever institution break down the dividend vs. principal in the documents they send to you and the IRS of the redemption transaction(s)?

Or is it completely at the discretion of the person filing the tax return how to apportion the proceeds of the redemption into principal, dividends and cap gains?

Vanguard and others will provide information on sale proceeds, basis and gains to both the taxpayer and the IRS. However, on Vanguard (and others) you can elect average cost or specific identification (specify purchase lots when you sell to manage your gain/loss).

Beyond this simple explanation, it starts getting complicated.

 

[Bestwifeever]

Bestwifeever, the figures were for a family of 2, DW and myself.

There is an option on the calculator to enter any family size you want, including children.

Thanks--I wasn't sure but was sure hoping it wasn't that much right off the get go per person.

 

[MichaelB]

Thanks--I wasn't sure but was sure hoping it wasn't that much right off the get go per person.

One segment we haven't seen yet are plans with national coverage. I'm expecting to see them in that price range. That is, for a 60 year old couple, around $1500 - $1800 per month for a high deductible (bronze) plan.