ACA tax credit cliff

[Finance Dave]

Am I studying this correctly?

It appears that if a couple (family of 2) makes $62,919 they get the subsidy/credit, yet a family of 2 that makes $62,921 does not? The cost differences are huge and I can't believe they'd set up a program such that making just a few dollars more makes that much of a difference. The $62,920 threshold is 4x the FPL for a family of two if you're wondering...at least for 2014 I believe.

DW and I are in our mid '50s and semi-fired...will fully fire in 12-24 months.

First let's assume we spend $75,000/year. We have steady passive income of $35,000/year from rental properties, which means we need another $40,000 to live on. We plan to draw this down from our IRAs. However, drawing down $40k/year would put us over the threshold above and force us into the unsubsidized category, dramatically increasing our premiums EVERY year.

For those of us with MAGI near that threshold (which we are), would it then be wise to keep IRA withdrawals such that you stay below the threshold in most years, and then once in awhile take a huge withdrawal so that you can then rely on that money in the next few years to fund living expenses?

For example,

Year 1 - $35k rental income + $170k IRA withdrawal - $75k living expenses = $130k left in the bank ...we'd pay unsubsidized premiums for that year.

Year 2 - $35k rental income + $40k from bank account (not counted as income) - $75k = $90k left in the bank...we'd pay much lower, subsidized premiums.

Year 3 - Same as year 2, $50k left in bank, pay lower, subsidized premiums.

Year 4 - Same as year 3, $10k left in bank, pay lower, subsidized premiums.

Year 5, $35k rental income + $170k IRA withdrawal - $75k living expenses = $70k left in bank.

etc.

It seems this strategy would save a ton of money for us. Thoughts?

Note: Yes, I realize there will be a higher marginal tax bracket hit in the years we take huge amounts out of the IRA...and I'd have to do the math but I still think we'd come out ahead.

 

[foxfirev5]

Yep, you're spot on. I'm actually ticked off that I don't have more in taxable, Roth, mattress etc. Right now I'm planning and managing like heck to suck funds out of the 401k when I turn 59 1/2 and ER.

I am convinced that the company will terminate retiree medical as they have "generously" been kicking into the retiree medical savings account suddenly.

When this first came out I wrote to my senator - Debbie Stabyounow and what I received in response was a complete blowoff. Even if you're in the sweet spot for subsidies, the deductibles and max out of pocket would kill the average couple. Work extra hard make another 5-7k and you are no further ahead. This is largely ignored by this forum since we are by large a group of well heeled individuals who have the ability to manipulate the system.

 

[marko]

Am I studying this correctly?

It appears that if a couple (family of 2) makes $62,919 they get the subsidy/credit, yet a family of 2 that makes $62,921 does not? The cost differences are huge and I can't believe they'd set up a program such that making just a few dollars more makes that much of a difference.
.

Yep. That's how it's set up. Even one buck over the limit and you're out ten grand or so. This past year's higher than expected Cap Gains might send quite a few members here scrambling.

 

[bingybear]

Am I studying this correctly?

The $62,920 threshold is 4x the FPL for a family of two if you're wondering...at least for 2014 I believe.

For those of us with MAGI near that threshold (which we are), would it then be wise to keep IRA withdrawals such that you stay below the threshold in most years, and then once in awhile take a huge withdrawal so that you can then rely on that money in the next few years to fund living expenses?

There are many ways to play the math and you will likely need to do that for your specific case. But yes there is a nice cliff. If all you have is rental income and IRAs, then you have less to work with. If you had after tax investments too, you could use some of that to cover part of you expenses. Note dividends (even qualified) and capital gains that are not offset by capital losses will increase taxable income. Tax free interest (muni bonds) also adds to the income. Funding an HSA or IRA will reduce income.

I have also looked at doing IRA->roth conversions (this does not help the cliff) to see how much long term savings I could get from this conversion. It was kind of a wash with the premium tax credit.

Personally I'm RE this year and can't pull IRA money without penalty (without doing a 72T)... thus I'll be doing systematic withdraws from my taxable accounts. I just have to be careful on the generation of dividends and capital gains.

It has been said... don't let the tax tail wag the investment dog... but it may pay to consider it.

 

[pb4uski]

Dave, you got it right. I'm afraid that a lot of people will get caught up in this cliff and get a nasty surprise as a result of an unanticipated holiday bonus or overtime.

I think there might be some constraints on how much you have to pay back in such situation but I haven't studied that part in detail.

Not a bad idea, but a woefully poor design - perhaps they should have read it before they passed it.

 

[pb4uski]

Looks like the repayment caps don't apply if one is over 400% FPL.

See Table 2 in http://www.cbpp.org/files/QA-on-Premium-Credits.pdf

 

[samclem]

This is largely ignored by this forum since we are by large a group of well heeled individuals who have the ability to manipulate the system.

We talked about the ACA subsidy cliff quite a bit.

Am I studying this correctly?

Yep. The cliff is ridiculous and will probably result in productivity reductions, at least at the margins (who will risk working more just to end up thousands of dollars poorer for it?) And, the chances of this getting fixed now are very low.

For those of us with MAGI near that threshold (which we are), would it then be wise to keep IRA withdrawals such that you stay below the threshold in most years, and then once in awhile take a huge withdrawal so that you can then rely on that money in the next few years to fund living expenses?
. . .
It seems this strategy would save a ton of money for us. Thoughts?

Remember that if you don't withdraw at least your RMD every year that you pay another penalty. So, try to at least withdraw that much.

Another work-around idea: For your rental income, induce your tenants to pay rent early or late so that it hits your books during the "no ACA subsidy" year. Maybe some people would be willing/able to accelerate a few months rent for a 5% discount, and almost everyone would like a "just pay us later" offer that lets them slide a month or two's payments into the next year. Obviously, this would be for reliable tenants only.

 

[bingybear]

We talked about the ACA subsidy cliff quite a bit.

Remember that if you don't withdraw at least your RMD every year that you pay another penalty. So, try to at least withdraw that much.

don't understand RMD with reference to ACA. ACA is not available when you can be on medicare... And RMD happens after medicare has started.

to the comments about getting caught at the end of the year owing for the HC subsidy ... For me, I'm just paying full freight, and will get a bigger refund... maybe. I really can't predict my income with just starting ER in february

 

[samclem]

. . .And RMD happens after medicare has started.

True for most people, but those who begin withdrawals from their IRA early using the 72t rules still have RMDs to consider even though the don't yet qualify for Medicare.

 

[ERhoosier]

Yep, you're spot on.

When this first came out I wrote to my senator - Debbie Stabyounow and what I received in response was a complete blowoff. ......

I have family in MI and they got similar responses from their legislators. DS is not alone in her blind support of the ACA and apparent ignorance of some of its specific provisions.
But for now at least, these huge ACA cliffs are indeed law. And many taxpayers with MAGI near that 'magical" 400% FPL will scrambling to try to avoid owing $thousands in subsidy paybacks. With the roll out of the new IRS Forms 1095A's and 8962's (HI premium subsidy and reconciliation forms), many experts are anticipating a confusing and frustrating tax season

Obamacare tax surprise looming - Jan. 2, 2015

How Obamacare subsidies could impact your tax refund - CBS News

Although the IRS makes it sound almost simple

Tax Facts about the Affordable Care Act for Individuals and Families

 

[meierlde]

don't understand RMD with reference to ACA. ACA is not available when you can be on medicare... And RMD happens after medicare has started.

to the comments about getting caught at the end of the year owing for the HC subsidy ... For me, I'm just paying full freight, and will get a bigger refund... maybe. I really can't predict my income with just starting ER in february

While not as big a cliff the means testing of part B medicare means that the premiums go up by up to $840 a year if you exceed the caps of the premium ranges (base is 104.90 above 214k/428 k its 335 a month )

 

[sheehs1]

Yep you are reading it correctly. Poorly designed as one would logically assume a sliding scale based on income. Nope. Someone making a dollar over has to pay the same as someone making $100,000 over.
Wrote many letters to my senators and placed many phone calls, as I could not believe it was designed this way. Gotta let em know what you think whether it does any good or
not, right? Be that as it may, it is the current law.
There is no way I can "arrange" things/income that would result in any subsidy. I suppose it could be worse.

 

[fh2000]

don't understand RMD with reference to ACA. ACA is not available when you can be on medicare... And RMD happens after medicare has started.

to the comments about getting caught at the end of the year owing for the HC subsidy ... For me, I'm just paying full freight, and will get a bigger refund... maybe. I really can't predict my income with just starting ER in february

Is there a downside of paying first, then receiving refund next year? Other than you lose some very tiny amount of interest?

 

[scrabbler1]

Yep. That's how it's set up. Even one buck over the limit and you're out ten grand or so. This past year's higher than expected Cap Gains might send quite a few members here scrambling.

I wasn't scrambling but I did get nervous. Already close to the ACA subsidy cliff, I received some dividend and cap gain distributions in December which were a little larger than expected. It left me just $2,000 under the MAGI limit which will reduce my ACA subsidy (it wasn't that big to begin with) but not eliminate it. I did make a rare rebalancing move last February by taking a capital loss in my stock fund (I bought those shares back in the late 1990s when they were worth even more than now) which gave me a little more breathing room. Glad I did.

 

[MRG]

Is there a downside of paying first, then receiving refund next year? Other than you lose some very tiny amount of interest?

No loss for subsidies. But cost sharing I don't think you can get that back.

Sent from my SAMSUNG-SGH-I337 using Early Retirement Forum mobile app

 

[2B]

The ACA passed by bypassing some of the normal practices in passing legislation although I think we can all agree that even following the normal legislative practices doesn't guarantee good legislation. Unfortunately, the ACA has become a political touchstone that has been reduced to ultra-partisanship. The ones that voted for it are afraid to bring up things that they believe should be fixed and the ones that rode the ACA to the recent victory won't say what's good about it. That's reality and I won't hazard a guess as to what will really happen.

The facts are that there is one cliff to not qualify for Medicaid. Personally, I wouldn't want to be on it if I had an alternative. In the states that have not expanded Medicaid you also won't qualify for ACA subsidies if you would have qualified for Medicaid had your state expanded coverage. The second cliff is what's been discussed here about the upper income limit. I don't think the 2015 income levels have been published but I certainly could be wrong.

There have been many threads about balancing account withdrawals to fall into the sweet spot of income. It's financially very beneficial. I won't qualify for 2015 because of a large SERP payment following retirement but it is an option for 2016. To make this work someone has to have enough income (pensions, 401k/IRA withdrawals, interest, dividends, part-time income) to get over the Medicaid hump. Then there needs to be enough after-tax money (including Roth) to live on to stay under the upper limit. This is not limited to the "well-heeled" but to those that have diverse assets that can adequately plan.

 

[InTheSticks]

Am I studying this correctly?

It appears that if a couple (family of 2) makes $62,919 they get the subsidy/credit, yet a family of 2 that makes $62,921 does not? The cost differences are huge and I can't believe they'd set up a program such that making just a few dollars more makes that much of a difference. The $62,920 threshold is 4x the FPL for a family of two if you're wondering...at least for 2014 I believe.

DW and I are in our mid '50s and semi-fired...will fully fire in 12-24 months.

First let's assume we spend $75,000/year. We have steady passive income of $35,000/year from rental properties, which means we need another $40,000 to live on. We plan to draw this down from our IRAs. However, drawing down $40k/year would put us over the threshold above and force us into the unsubsidized category, dramatically increasing our premiums EVERY year.

For those of us with MAGI near that threshold (which we are), would it then be wise to keep IRA withdrawals such that you stay below the threshold in most years, and then once in awhile take a huge withdrawal so that you can then rely on that money in the next few years to fund living expenses?

For example,

Year 1 - $35k rental income + $170k IRA withdrawal - $75k living expenses = $130k left in the bank ...we'd pay unsubsidized premiums for that year.

Year 2 - $35k rental income + $40k from bank account (not counted as income) - $75k = $90k left in the bank...we'd pay much lower, subsidized premiums.

Year 3 - Same as year 2, $50k left in bank, pay lower, subsidized premiums.

Year 4 - Same as year 3, $10k left in bank, pay lower, subsidized premiums.

Year 5, $35k rental income + $170k IRA withdrawal - $75k living expenses = $70k left in bank.

etc.

It seems this strategy would save a ton of money for us. Thoughts?

Note: Yes, I realize there will be a higher marginal tax bracket hit in the years we take huge amounts out of the IRA...and I'd have to do the math but I still think we'd come out ahead.

Finance Dave, this is very similar to our situation. We have rental income of about the same amount, although I would not call it steady. It can very from 40k to 50k/year. Our expenses are also about 75k.

I am working and plan on retiring in March of 2016 at the age of 57. My wife will be 62 at the time.

Since I'll be working part of 2016, this income plus the rental income will push my 2016 income very close to 60k and the cliff. I am thinking of pulling the difference out of my wife's IRA this year and banking it.

Fortunately, we will only have to play this game for 3 years. When my wife turns 65 and goes on Medicare, the subsidies get so low, it's not worth worrying about.

My thoughts on your plan would be to pull 110k out of your 401k on year one and 20k out on years 2, 3 and 4.

 

[pb4uski]

I'll mention this only because at one time I was strongly considering managing our income to get subsidies. As I looked at it more, the cost of higher taxes later in life once SS and RMDs started because we would be unable to optimize Roth conversions to qualify for subsidies far exceeded the value of the Obamacare subsidies, especially after we were able to get access to catastrophic health insurance because of the affordability exemption.

That may not be true for other parts of the country as our catastrophic health insurance rates are quite a bit less than bronze plan rates so YMMV.

 

[Finance Dave]

There are many ways to play the math and you will likely need to do that for your specific case. But yes there is a nice cliff. If all you have is rental income and IRAs, then you have less to work with. If you had after tax investments too, you could use some of that to cover part of you expenses. Note dividends (even qualified) and capital gains that are not offset by capital losses will increase taxable income. Tax free interest (muni bonds) also adds to the income. Funding an HSA or IRA will reduce income.

I have also looked at doing IRA->roth conversions (this does not help the cliff) to see how much long term savings I could get from this conversion. It was kind of a wash with the premium tax credit.

Personally I'm RE this year and can't pull IRA money without penalty (without doing a 72T)... thus I'll be doing systematic withdraws from my taxable accounts. I just have to be careful on the generation of dividends and capital gains.

It has been said... don't let the tax tail wag the investment dog... but it may pay to consider it.

Thanks. Yes I do have after tax accounts...but I was trying to simplify the situation. We have about 50% of our funds in TIRAs, 20% in Roths, 15% in real estate (all our rentals are paid for...we own 4 of them worth a combined $380k), and about 15% in general savings accounts and after tax mutual fund accounts.

I can use those other funds to "work around the edges" as needed.

 

[Finance Dave]

We talked about the ACA subsidy cliff quite a bit.

Yep. The cliff is ridiculous and will probably result in productivity reductions, at least at the margins (who will risk working more just to end up thousands of dollars poorer for it?) And, the chances of this getting fixed now are very low.


Remember that if you don't withdraw at least your RMD every year that you pay another penalty. So, try to at least withdraw that much.

Another work-around idea: For your rental income, induce your tenants to pay rent early or late so that it hits your books during the "no ACA subsidy" year. Maybe some people would be willing/able to accelerate a few months rent for a 5% discount, and almost everyone would like a "just pay us later" offer that lets them slide a month or two's payments into the next year. Obviously, this would be for reliable tenants only.

We are 53 and 57, so RMDs are a long way off lol.

 

[Finance Dave]

Thanks everyone for your replies...I'll do a deep dive on some analysis to find an optimal solution now that I know I'm understanding things correctly.

I left out some facts only to simplify things...

I'm 53 and DW is 57. We are both still employed. I'm a self-employed home inspector working part time...I gross about $55k/year but get zero benefits. DW is a corporate finance exec and makes nearly double what I do...so we're obviously over the limit today but it doesn't matter because we get health care through her employer at very good rates.

However, we both want to get out of the rat race....I'm partly there already as I only work 3.5 days/week. DW plans to get out sometime in Q3 or Q4 of 2015...we are noodling on exact timing.

At the time she leaves, we'll need to buy health insurance...and we'll want to get it in place before she separates from her company. This is why I'm going through all this now...trying to plan the transition.

I will continue working PT for another 2-3 years...but my income will go down as I plan to work less and less each year.

Fortunately we still have lots of flexibility. If we see this will be too expensive from a premium standpoint, DW could just work a few months longer...it makes a big difference given her salary. Or, I could remain working PT for 4-5 years if needed. Or, DW could get a lower-stress position at one of the few companies that offers healthcare to PT employees.

Top 11 Companies Offering Health Care Benefits and Other Perks to Part-Time Workers - ABC News

I am grateful that we are in a position that we can even consider this at our ages....lots of planning and deferred gratification are going to be worth it! We have 6 vacations planned for 2015!!! (some of them only weekend jaunts)

 

[Senator]

Get a divorce, for financial reasons.

If one of you are lower income, that one may qualify for a 100% subsidy. The other would pay the same as now. Plus, there are a bunch of other programs out there to help, none of which are asset based. One can work, the other retire and be a low income person. Or one take all the gains, the other only enough for subsidies and low tax brackets.

You may be able have one take advantage of Earned Income Tax Credit, lower property taxes or refunds, free bus fare, etc.

It may or not make sense in your situation, but likely would result in a lower cost of living.

 

[jebmke]

However, we both want to get out of the rat race....I'm partly there already as I only work 3.5 days/week. DW plans to get out sometime in Q3 or Q4 of 2015...we are noodling on exact timing.

At the time she leaves, we'll need to buy health insurance...and we'll want to get it in place before she separates from her company. This is why I'm going through all this now...trying to plan the transition.

By then perhaps the court cases will have been ruled on and we will know if subsidies even survive.

 

[bingybear]

Dave, work the numbers. We are both 53 with assets divided 1%/44%/55% roth/IRA/taxable... We think we can work it so that we many be able to roll a little IRA->Roth and still be up on the cliff if we watch it. I think our spending may be a bit lower than yours.

 

[rodi]

FinanceDave -

I have an inherited IRA that has RMDs. It's funding some of the retirement between now and when I turn 59.5... so it all counts as income, when withdrawn, from an ACA standpoint.

I took the tax hit this past year to a) pay off my mortgage, b) pre-position money for planned spending in the next few years. My RMDs are less than what I plan on actually spending - but I now have money in taxable accounts to use without impacting ACA MAGI in 2015-2017.... This way I can still do some of the big ticket one time items (new roof/solar panels & big vacation) and not worry about the subsidy cliff.

For health insurance I used COBRA between when I retired in June and Jan 1st. Now I'm on plans through covered CA.