ACA Cliff vs $435,000 Withdrawal Now

[FZBob]

I’m 60, and retired in 2015 (in large part due to this forum – Thank You!). Wife retired in 2017. Son started college this fall. Cobra expires in a month, at the end of 2018. The next 5 years will be very expensive, as expected. Fortunately, we are financially independent.

For our family of three, California Covered quotes $3 per month if our income is $81,781 or less, and $1782 per month if our income is $81,782. EPO Bronze plan. (Who puts a step function into a system like this? Am I missing something?)

Our expenses are much higher than $81K, but I am considering withdrawing the additional required income (and paying the additional marginal tax) in 2018, in order to stay under the ACA cliff for 5 years until Medicare kicks in.

Question – Can I withdraw $435,000 from my 401K accounts in the next month, transfer it to a taxable mutual fund, and pay 2018 taxes on it, in order to stay under the ACA Cliff from 2019 to 2024? Are there any pitfalls? Am I missing something?

Would there be any advantage to taking out a HELOC instead? Leave the big tax bill for later?

 

[catotx]

Your plan will work if ACA does not change.

The $435k withdrawal will push you into a high tax bracket. I would hesitate to do such a move because your taxes are due immediately in 2019, and it is not clear if you would be able to reap the benefits from 2019 to 2024 (because legislation can change).

 

[Dtail]

Have you calculated the taxes due on the withdrawal vs. the ACA subsidy savings?

 

[walkinwood]

Do the math. What will your taxes be on the $435K + whatever other income you've already earned in 2018. Use turbotax.


Where will you park this money? How much possible appreciation are you giving up?


Will the interest/dividends on this money + your other taxable account mutual fund distributions push you over the ACA limit in coming years? (That's been my problem)


You can definitely do what you're planning on doing, but you've got to work out the details. Then, like CatoTX says - things may change. 5 years is a long time.


Don't know about the HELOC - will you save anything after paying interest on that?



Good luck.

 

[zinger1457]

Without digging too deep into the number it looks like you'll be paying more in taxes on that $435K withdrawal then what your ACA premiums will be for the next 5 years. Seems like you're paying Uncle Sam up front for the subsidy you hope will be available.

 

[mh]

Without digging too deep into the number it looks like you'll be paying more in taxes on that $435K withdrawal then what your ACA premiums will be for the next 5 years. Seems like you're paying Uncle Sam up front for the subsidy you hope will be available.

That was my general feeling also. As suggested, you need to work it out in turbo tax or something similar what the hit will be.
As already mentioned It’s not at all clear you’ll come out ahead.

 

[pb4uski]

Without digging too deep into the number it looks like you'll be paying more in taxes on that $435K withdrawal then what your ACA premiums will be for the next 5 years. Seems like you're paying Uncle Sam up front for the subsidy you hope will be available.

+1 Because not only do you have to take out the $435k, you also have to take out what you need to pay the tax... so that'll make it taking out over $600k and paying $150k+ in tax to save get $107k in subsidies.

Very bad idea, but the feds and state of California would love for you to do it.

 

[tb001]

What about an every other yr strategy? I haven’t run the numbers but this is on my to do list to investigate.

 

[Texas Proud]

I think you are not analyzing this correctly....


How much income will you make each year on your portfolio and taxable withdrawals? IOW, if your income has a chance to go over the $82K level then doing this is a waste of time...


If you will be under, then the question is where is that income coming from? Most of my current income is divis, interest and cap gain distributions... I then supplement that with cap gains on selling MFs... this gives me extra cash as my gain is in the 50% or so range... so if I need $20K I sell $20K but am only taxed on $10K....


I then take out money from my ROTH that is not considered income for the ACA credit...


My expenses are much higher than the $40K that shows up on my tax return...


BTW, I did a bit of what you did my last year of working and now regret it... I paid way up in taxes that I could have avoided if I knew what I know now... and knew that I would take money from ROTH... before I retired that was the last place I had planned to take money, but now it is a good source of money so I can save in taxes and get a good ACA credit...

 

[RunningBum]

Comparing the full tax on $435K vs. the subsidy is not a valid comparison. It's the tax cost of $435K now less what you'd pay spreading it out over RMDs over the years, vs the subsidy.

I ran a very simple taxcaster with $435K for married with no other income and it tells me $95K in federal taxes. It would be higher if you already have a lot of income this is going on top of. I'd guess a lot of it will be in 32% and 35%, so lets call it 1/3, or $145K. But you need to figure out what the extra tax on $435K really is.

Spread out later, you might pay 12%? Maybe more combined with SS, but at 12% that's $52K, so they are only paying $43K-93K more to save $107K in subsidies. On the low end, it's a good deal, but with the more realistic high end, it's only slightly in your favor, and you run the risk of subsidies going away. But the future tax cost could easily be more than $52K combined with SS.

Do you have any other sources to tap? I have a lot in taxable, and if I sell the specified shares that have not appreciated much, I can get all I need with very little income.

Roths and HSAs are another way to tap funds without generating any income.

If there are no other sources, I might look at a combination of a large, but not huge, withdrawal and a HELOC.

 

[gstillson]

I would take out a loan and use the subsidy saved to make the payments, setting aside that amount of money in the 401K put into a government bond there with the same duration as the loan.

This way you reap the subsidy now and there is zero risk that you can't repay the loan in 5 years or whatever using the 401K money.

At the very least take out a loan on the difference between your expenses and the cliff cutoff. IE, if you need $110k to live and the cliff is at $81k, take out a loan for $29k. I imagine the payments on the loan would be much less then the $1700 a month you save on the subsidy.

 

[ivinsfan]

It's curious that you say you are an avid reader here, have been retired since 2015, are on your last 30 days of COBRA and yet don't seem to have even the most basic grasp of how to control your HI costs starting in 30 days.


You've had years to think about and plan for this and yet seem completely uniformed. This things are leading me to think you might be pulling our legs..hope not.

If I'm wrong my bad,yet you have not responded to the questions of posters who are willing to try and answer your questions.

 

[pb4uski]

Comparing the full tax on $435K vs. the subsidy is not a valid comparison. It's the tax cost of $435K now less what you'd pay spreading it out over RMDs over the years, vs the subsidy.

I ran a very simple taxcaster with $435K for married with no other income and it tells me $95K in federal taxes. It would be higher if you already have a lot of income this is going on top of. I'd guess a lot of it will be in 32% and 35%, so lets call it 1/3, or $145K. But you need to figure out what the extra tax on $435K really is.

Spread out later, you might pay 12%? Maybe more combined with SS, but at 12% that's $52K, so they are only paying $43K-93K more to save $107K in subsidies. On the low end, it's a good deal, but with the more realistic high end, it's only slightly in your favor, and you run the risk of subsidies going away. But the future tax cost could easily be more than $52K combined with SS.

Do you have any other sources to tap? I have a lot in taxable, and if I sell the specified shares that have not appreciated much, I can get all I need with very little income.

Roths and HSAs are another way to tap funds without generating any income.

If there are no other sources, I might look at a combination of a large, but not huge, withdrawal and a HELOC.

I think you are underestimating the cost.

You also need to factor in where the money for the federal and state income taxes will come from. I show that the OP would need to withdraw $585k to net $435k... and that ignores state income taxes and any other income. Factor those last two things in and it would likely be $650-700k or more to net $435... which is a "cost" of $215-265k less what taxes on RMDs might be.

I still think it is a very bad idea.

 

[pb4uski]

The OP might consider refining the idea to take out now only the excess of what they spend over the cliff.. they would still get good subsidies but not total and could take withdrawals for the cliff less any other income they have.

 

[RunningBum]

I think you are underestimating the cost.

You also need to factor in where the money for the federal and state income taxes will come from. I show that the OP would need to withdraw $585k to net $435k... and that ignores state income taxes and any other income. Factor those last two things in and it would likely be $650-700k or more to net $435... which is a "cost" of $215-265k less what taxes on RMDs might be.

I still think it is a very bad idea.

OK, I didn't account for extra withdrawal to pay taxes. Let's use your $585K withdrawal to net $435K, so $150K in fed taxes. If you waited and withdrew that $585K over time later at 12%, that's $70K. So it's costing you $80K extra in federal taxes to take it all at once.

In California it looks like 11% to make the big withdrawal now vs 9% typical rate later. Maybe 8%. So it's going to cost an extra 2-3% tax to take a large withdrawal now vs. later. That's another $12-18K. $92-98K extra cost to possibly save $107K.

It's true you have to pay more taxes up front rather than deferring them, but the more the 401K grows in deferment, the more taxes that will be paid on them so I think that's a wash.

A good idea? Debatable. A very bad idea? The numbers aren't showing that. I probably wouldn't take the risk, with only a small amount of gain to show, but I wouldn't toss the idea out immediately.

The OP really hasn't opened up all of his numbers to show what his income really will be this year, and in the future under both scenarios, and if there are other options for raising cash. That would give more insight.

The OP also doesn't say how much more than $81K their expenses are. They have to limit income to $81K, expenses are some unknown number X, so the extra money they need to find is ($X-$81K)*5, not $81K*5. Unless X is $162K, I don't even know why we are talking about $435K. I'm not going to spend any more time with calcs on that number.

Depending on how large $X is, the HELOC option taken as needed might be better. Trying to reduce $X is another idea.

 

[RunningBum]

The OP might consider refining the idea to take out now only the excess of what they spend over the cliff.. they would still get good subsidies but not total and could take withdrawals for the cliff less any other income they have.

Yes, we've arrived at the same page.

 

[Dtail]

It's curious that you say you are an avid reader here, have been retired since 2015, are on your last 30 days of COBRA and yet don't seem to have even the most basic grasp of how to control your HI costs starting in 30 days.


You've had years to think about and plan for this and yet seem completely uniformed. This things are leading me to think you might be pulling our legs..hope not.

If I'm wrong my bad,yet you have not responded to the questions of posters who are willing to try and answer your questions.

Don't think any leg pulling, but it would be nice to see a response by the OP.
When one starts a thread looking for advice, I would think they would be all over the responses.

 

[FZBob]

I just woke up to 15 replies! Thanks, most appreciated!!!

My main motivation in posting was to do a sanity check, and see if I was missing any arcane or big picture items. Things like ( - Made up example!) "If your income one year is $500K, and the next 5 years less than $80k, you trigger a means test..." ( - Made up example - I suck at examples...)

As far as the numbers, let me clarify and expand just a bit. The money would be withdrawn from my 401K accounts, and immediately transferred to parallel identical taxable accounts. (with maybe a bit of consolidation...). I would then pay tax on the withdrawal. That tax would amount to ~$135K of the $435K (per my accountant.) The marginal tax increase over withdrawing yearly would be ballpark ~$15K for the whole 5 years. The savings on ACA APPEARS to be ~100K over 5 years.

The alternative I'm comparing to would be for me to take out ~ $82K per year IN ADDITION to the $81,781, or about $160K per year. (it varies by year. I would save about $3K per year on the marginal tax, and spend about $20K on ACA...

So basically I'm betting that for a ~$15-20K delta in tax one time, I save ~$100K (based on the current laws...)

 

[FZBob]

Will the interest/dividends on this money + your other taxable account mutual fund distributions push you over the ACA limit in coming years? (That's been my problem)

Yup, I'm factoring this in. I will also plan on a $5K safety margin.

I believe that if necessary, I can reduce my "Income" by funding my and Wife's IRA for the given year. A bit of a buffer if my income is unexpectedly high...

 

[FZBob]

Don't think any leg pulling, but it would be nice to see a response by the OP.
When one starts a thread looking for advice, I would think they would be all over the responses.

Uh - Sorry. I'm retired! I no longer get up early...

 

[Dtail]

Uh - Sorry. I'm retired! I no longer get up early...

Gotcha - still a somewhat early riser leftover from work habits.

 

[Independent]

For our family of three, California Covered quotes $3 per month if our income is $81,781 or less, and $1782 per month if our income is $81,782.

This looks strange to me. I'm too old for ACA, so probably I just haven't kept up. But the original idea was that if your income was below 4x the poverty level, your premium would be capped as a percent of your income. And that percent can be as high as 9%.

I can believe $81,781 as 4x the poverty level for a family of three.

But, I would expect a premium of, for example, 0.9 x $80,000 / 12 = $600 if the family income is $80,000.

 

[FZBob]

This looks strange to me. I'm too old for ACA, so probably I just haven't kept up. But the original idea was that if your income was below 4x the poverty level, your premium would be capped as a percent of your income. And that percent can be as high as 9%.

I can believe $81,781 as 4x the poverty level for a family of three.

But, I would expect a premium of, for example, 0.9 x $80,000 / 12 = $600 if the family income is $80,000.

I absolutely agree! Seems crazy to me! (I saw the same thing 18 months ago...)

If you want to have some fun, please help me to see if my results are reproducible... Go to the Covered California website -

https://www.healthforcalifornia.com/

Go to "get free quote now", punch in a family of 3 with birthdays of '58, '60, and 2000, and try incomes of $81,781 and $81,782. Zip Code 95127. I'm looking at the Bronze EPO plan (Anthem).

I just ran it again, and it is now $3 per month vs $1811 per month! As a former engineer, I'm just amazed that anyone would set up a system like this with a step function. I feel really bad for the people who make just over the limit.

 

[sengsational]

Bob, You'd be the rare bird that had zero funds except for tax-deferred 401k. I'm one of those, actually. My strategy starting off was to spend after-tax money for expenses and maximize Roth conversions up to the next tax bracket. A few years later, my after-tax balance went to zero and now I pull 401k up to, but not over, the ACA cliff, and subsidize my spending using a bit of Roth funds. If I didn't have Roth, I might consider a HELOC because, like you, I'd need to withdraw $50K to get $20K more to spend on non-healthcare stuff. Have you seen what i-orp suggests you do? It allows you to model PPACA (you can turn income limiting "on" and then "off" and see what it shows).

 

[RunningBum]

This looks strange to me. I'm too old for ACA, so probably I just haven't kept up. But the original idea was that if your income was below 4x the poverty level, your premium would be capped as a percent of your income. And that percent can be as high as 9%.

I can believe $81,781 as 4x the poverty level for a family of three.

But, I would expect a premium of, for example, 0.9 x $80,000 / 12 = $600 if the family income is $80,000.

That 9% (9.86% actually) is your capped cost for the 2nd lowest silver plan available to you. You can purchase a cheaper policy and pay less.

https://www.healthinsurance.org/obamacare/will-you-receive-an-obamacare-premium-subsidy/#silver