Reducing Income to Qualify

[Hdhead]

I'm new here been reading but not sure about my situation. I'm retired age 63, wife working (for health insurance) age 61. She wants to retire. We have pension, dividend and 401k income of about 90k. Can I simply reduce my 401k distribution (currently 56k) to get our MAGI below 63k? Will the government question or look into my assets? Thanks for any advice.

 

[Gerard3]

You could reduce your 401k distribution down to as much as $0, if you'd like, since you don't need to take any mandatory distributions until the year after you are 70.5.


I don't know why that would necessarily cause the government to look into your assets, since it's not assets that matter but MAGI. You're not doing anything wrong with reducing your 401k distribution at your current age.

 

[SecondCor521]

If you're asking about how to qualify for ACA tax credits and/or cost sharing reductions, those are based on three things: (1) Your MAGI, (2) your tax household size, and (3) your zip code.

You can always look at your prior year tax returns or fill out a pro forma tax return for 2016 or 2017 to see what your MAGI was or will be. For my state, I can go to my local ACA exchange website, put in my MAGI, and my age and my kids' age, and it will tell me what my ACA subsidies will be.

As you know, for most people their MAGI is just their AGI, which is just the number on the bottom of page 1 of your 1040.

Reducing your 401k distribution should reduce your AGI; whether you can do so depends on the rules of your 401k. Check with your 401k administrator to see if you can reduce your distribution.

Whether reducing your 401k is enough to lower your MAGI to qualify for subsidies depends on your other income and deductions.

ACA subsidies max out at 400% of the Federal Poverty Level. The FPL depends on where you live and your family size. Read here for more details:

https://thefinancebuff.com/federal-poverty-levels-for-obamacare.html

For ACA subsidies, the government currently does not question or look into your assets. They will look into and question you about your taxable income and your household tax size.

Your household tax size is basically the total number of exemptions you claim on the first few lines of your 1040 - line 5 I think it is.

I'd suggest looking at your state exchange website and starting to read about how things work and see what plans are available there. Whether it is affordable to you depends on which state you live in, your age(s), and your income level. Although I am philosophically opposed to the ACA, there are some positives about it in my opinion, and it has let me purchase affordable insurance for my family and in my particular situation. Others have not been as fortunate, so you just need to see how things shake out for you.

Good luck!

 

[Hdhead]

Thanks to both for your input. Don't have any restrictions on limiting 401k distribution so this appears to be a no brainer if I want to get the subsidy. Cool!

 

[aida2003]

SecondCor521: even though I don't need to buy a plan on the exchange yet, I frequently read what other people go through to obtain health insurance. Your explanation should be very helpful to OP. It became a little bit clearer to me too.
However, I have one question after reading an article on your provided link.
Does one need to look at 2016 or 2017 column in his article if you're shopping for insurance that you'll use starting on 1/1/17? I got lost on his 'one year lag'.
Let's say it's a family of 2. In order to qualify for a premium subsidy, the 1st step is to get their MAGI to no more than $16,020 x 4=$64,080 (or should it be $15,930 x 4 from the 2016 column?). Did I get this correctly?

If so, if FIRE'd people keep it under 400% FPL, not only do they get a premium subsidy but also stay in 0%-15% tax bracket, right?
OTOH, reading how much premiums increased for some people, it seems that to pay the subsidized premiums + LBYM daily expenses might push people into above 400% FPL area in certain areas of the country.

Is there income testing once 65/Medicare age hits you?

Thank you

 

[ikubak]

If so, if FIRE'd people keep it under 400% FPL, not only do they get a premium subsidy but also stay in 0%-15% tax bracket, right?

Each person's situation is different depending on size of household, MAGI and location, but based on my situation, I can keep my MAGI at $28K or less and get my silver plan subsidized 100%. By holding the line on MAGI, deductibles and OOP are lower too. This has taken some planning but I think I can hold out at $28K of MAGI or less for 10 years until medicare eligible.

 

[SecondCor521]

@aida2003, the one year lag is confusing. For coverage starting 1/1/2017, people should use the 2016 FPL guidelines. However, the site that I linked to helpfully adjusts for this one year lag in the tables.

An example will probably help. I live in Idaho and my tax household size is 3. For coverage for next year (which starts open enrollment next week on 11/1), that is, for coverage starting 1/1/17, my federal poverty level number is $20,160.

Whenever you see numbers about 138% of FPL, or 400% of FPL, or anything like that, all you do is take your initial federal poverty level and multiply. So in my case, for next year, 400% of FPL is 400% & $20,160 = $80,640.

For your example, with a tax household of 2 for next year, it would indeed be the first number: $16,020 * 400% = $64,080.

As ikubak points out, ACA subsidies and tax brackets are related because of AGI, so it depends on one's circumstances, but yes, in general people who are receiving ACA subsidies are also very likely to be in a low tax bracket.

And you are correct; depending on the COL where you are, and the cost of health insurance, and your lifestyle, it may not be possible to stay below 400% FPL. In my case, I live in a relatively LCOL and am frugal, so my living expenses, all in, are actually in the neighborhood of 150% FPL.

I don't know anything about age 65 or Medicare. I'm only 47, so I have a while to learn about all that stuff.

Finally, you may want to read up on CSR - Cost Sharing Reductions - which are another aspect of the ACA which can be helpful to low AGI people. For me, I buy a Silver Plan that, with CSR, ends up being more like a gold plan.

 

[ikubak]

Is there income testing once 65/Medicare age hits you?

As I understand it, there is no means testing for part A but there are higher rates for high income seniors for parts B and D.

 

[Beldar]

@aida2003, the one year lag is confusing. For coverage starting 1/1/2017, people should use the 2016 FPL guidelines. However, the site that I linked to helpfully adjusts for this one year lag in the tables.

An example will probably help. ..... For me, I buy a Silver Plan that, with CSR, ends up being more like a gold plan.

Thank you for your helpful posts.

We are going off COBRA on 1/1/17 and will be able to manage our MAGI to take advantage of maximum subsidy / CSR. The new premium appears to be half of what the COBRA premium is (no surprise there). Unfortunately, there is only one provider in our area this year and it is an HMO. For us, that's incentive to be healthy.

_B

 

[aida2003]

@SecondCor521 and others: Thank you. Examples were really helpful to grasp ACA related formulas better.

If it's not hard, can you provide a link where I can read about CSR - Cost Sharing Reductions. I googled it but I don't know which link the most comprehensible explanation to gain good understanding. Is it true that CSR works best with Silver plans?
I guess, a family has to weigh whether to 'gamble' and pay higher premiums and get more affordable CSR (if you know you'll frequent doc offices and/or hospital) or choose a (bronze?) plan with much lower premiums and higher CSR (if you're quite healthy ER's who hardly ever needs to see a doc; preventive is covered anyway). Is that it?

The biggest thing is the state and what it offers on its ACA exchange, right? I'll wait for FUEGO's article on his blog about NC.

 

[MichaelB]

@SecondCor521 and others: Thank you. Examples were really helpful to grasp ACA related formulas better.

If it's not hard, can you provide a link where I can read about CSR - Cost Sharing Reductions. I googled it but I don't know which link the most comprehensible explanation to gain good understanding. Is it true that CSR works best with Silver plans?
I guess, a family has to weigh whether to 'gamble' and pay higher premiums and get more affordable CSR (if you know you'll frequent doc offices and/or hospital) or choose a (bronze?) plan with much lower premiums and higher CSR (if you're quite healthy ER's who hardly ever needs to see a doc; preventive is covered anyway). Is that it?

The biggest thing is the state and what it offers on its ACA exchange, right? I'll wait for FUEGO's article on his blog about NC.

Here's a link to a CRS brief that includes a sectionon cost sharing http://www.fas.org/sgp/crs/misc/R41137.pdf (beginning page 14). Basically, if your income is less than 250% of the FPL, in addition to subsidy for premiums you also get help with the deductible and co-pays. However, you must use the designated silver policy.

 

[broadway]

If it's not hard, can you provide a link where I can read about CSR - Cost Sharing Reductions.

Patient Cost-Sharing in Marketplace Plans, 2016 | The Henry J. Kaiser Family Foundation

 

[SecondCor521]

CSR is *only* available on Silver level plans.

 

[MichaelB]

Here's another link, to a recent KFF page that gives a simple yet comprehensive explanation of cost sharing and how it works. Explaining Health Care Reform: Questions About Health Insurance Subsidies | The Henry J. Kaiser Family Foundation

 

[aida2003]

Wonderful. Thank you guys for sharing. Now any newbie can familiarize with this cute stuff. I read this just for fun (for foreseeable future anyway).

 

[FIREmenow]

WOW!

Maybe this is an old link (it is from 2015) already here somewhere, but I found this REALLY interesting, comparing ACA and Fed a tax and looking for the "holes".

Obamacare Optimization vs Tax Minimization - Go Curry Cracker!Go Curry Cracker!

 

[Sue J]

WOW!

Maybe this is an old link (it is from 2015) already here somewhere, but I found this REALLY interesting, comparing ACA and Fed a tax and looking for the "holes".

Obamacare Optimization vs Tax Minimization - Go Curry Cracker!Go Curry Cracker!

Very interesting! I knew from just playing with calculations that increases in income cost us around 15-16% in ACA subsidy. Plus the 15% Federal tax convinced me to use a Traditional IRA this year instead of a Roth.

I hope they update the charts. The color coded graphs are excellent.

Thanks for posting this.

 

[homestead]

WOW!

Maybe this is an old link (it is from 2015) already here somewhere, but I found this REALLY interesting, comparing ACA and Fed a tax and looking for the "holes".

Obamacare Optimization vs Tax Minimization - Go Curry Cracker!Go Curry Cracker!

But for the ACA, there is no preferential tax treatment. There is no standard deduction, no personal exemptions.

Qualified Dividends and Long Term Capital Gains no longer see a generous 0% tax rate, and will be partially taxed at 9.5% & 15%.

Saw these statements in that article, Are these statements really true?

 

[RetireAge50]

WOW!

Maybe this is an old link (it is from 2015) already here somewhere, but I found this REALLY interesting, comparing ACA and Fed a tax and looking for the "holes".

Obamacare Optimization vs Tax Minimization - Go Curry Cracker!Go Curry Cracker!

Thanks for sharing the link. Good article and confirms how I think about it.

 

[FIREmenow]

Saw these statements in that article, Are these statements really true?

The article is from 2015. Things can certainly be different today. I know nothing about the author or his credibility - maybe others here do.

It is also "the internet" -- so nothing is actually "true". I suggest you use your own situation, your own numbers, you own judgement, and research.

I just thought the article was a novel and enlightening way to tie ACA subsidies and federal taxes together in a graphical format.

 

[joesxm3]

This may be a dumb question, but reading this thread made me want to double check.

I worked in 2016 until August and am on COBRA.

I plan to do ACA for 1/1/2017 to 12/3/12017.

When I calculate the MAGI for my subsidy tax deduction, that applies to the income I will earn during 2017, right? It is not based on the previous year's MAGI is it?

Thanks.

 

[NW-Bound]

The subsidy for 2017 will be based on 2017 future income, which you have to estimate. In the past, people got questioned if their projected income dropped too much from previous income, and had to provide some substantiation. "I quit work. Duh!".

I learned about the above from this forum, and do not know if the problem persists.

 

[Senator]

We have pension, dividend and 401k income of about 90k. Can I simply reduce my 401k distribution (currently 56k) to get our MAGI below 63k? Will the government question or look into my assets? Thanks for any advice.

Yes you can reduce your 401K distributions to $0. You can donate any dividends or pensions to Charity to further reduce your income.

There are many additional ways to even further reduce your income if you want to get more creative. Take out more every few years, and $0 most years. Start a business to get write-offs.

The question should be, what do you want your remaining years to be like, and if you do not enjoy your assets, who will?

Live the life you want, within your means, and do not worry about taxes. It's fine to make temporary adjustments to avoid taxes, but if you are constantly worried about making too much, you should have retired sooner. If you are just going to let your money grow, and not spend it, is that your idea of the ultimate lifestyle?

 

[MichaelB]

Yes you can reduce your 401K distributions to $0. You can donate any dividends or pensions to Charity to further reduce your income.

Just a technical point - deductions do not reduce MAGI or AGI. Only adjustments to income, such as IRA or HSA contributions, lower gross income.

 

[RunningBum]

Just a technical point - deductions do not reduce MAGI or AGI. Only adjustments to income, such as IRA or HSA contributions, lower gross income.

That's not just a technical point, that's a real impactful point. There's a lot less you can do to reduce MAGI for the ACA subsidy than you can do to reduce taxable income for lower income taxes.