Managing MAGI for ACA subsidies

Background: Planning to retire at end of 2019. Myself and DW will be 61. Essentially all retirement savings is in tax deferred accounts. Planning to start SS at 67. Non-COLA pensions will be about $25K per year. Expected annual expenses between retirement and age 65 are $100K per year, excluding healthcare.

So we have $75K ($100K expenses minus $25K pension) per year of income to provide for until we hit 65 and Medicare eligibility. 4 years * $75K/year = $300K


Options:
1. Withdraw funds from tax deferred accounts each year to cover expenses. This will put us above the MAGI limit for ACA subsidies so add $30K/year extra withdrawals for ACA insurance and deductible. Plus even more to cover taxes on the withdrawal.
2. Convert $150K from tax deferred accounts in both 2018 and 2019 to Roth IRAs. We can do this and stay in the 24% tax bracket. Full ACA subsidy (income is less than 2x poverty level) will then be available for the four years, which now shows a $0 premium, $0 deductible plan available. Taxes in the four years will only be on the pension which after the standard deduction is $100/year.


My metric is withdrawal rate of remaining savings at age 67 when we start SS.

Option 1 (No ACA subsidy): 4.3%
Option 2 (Full ACA subsidy): 3.8%


In summary it is best to pay a huge tax bill on Roth conversions before retirement, to get ACA subsidies after retirement, than to spread out the taxes, even at a lower tax rate and pay for health insurance.

This may have been obvious to some, but I had to do the math on my own personal situation to convince myself. I expect income taxes and health care expenses to both be higher in the future. This strategy seems to be correct if it holds true.

I realize I haven't provided enough information for anyone to check my math, but that's not the part I'm worried about. I want to make sure I haven't made a big error in assumptions that could completely change the picture.

Of course if the ACA rules get changed I might be screwed, but it doesn't seem that this will happen. I would put the $300K of Roth money in a CD ladder to eliminate investment risk over the four year period. I will have a HELOC to cover unexpected expenses without risking the ACA subsidy in this period.

Am I overlooking anything or making wrong assumptions anywhere? What are everyone's thoughts on this plan?

Well, the cost of getting that $150k is clear... 24% or $36k check that you write to the feds... though one could argue that it is just accelerating payment if you will be in the 24% bracket once SS starts.

What is the value of subsidies? IOW, how much would you pay in health insurance under your plan vs not?

Also, there may be a sweet spot in between of just barely qualifying for subsidies, which would allow you to do up to $39k of tax-deferred withdrawals a year and still qualify for subsidies, allbeit lower subsidies.

To be clear it is $150K for two years. So total "up-front" cost is $72K. The savings in health care expense is $30K per year for four years or $120K.

I looked at the middle ground case where I would withdraw from tax deferred accounts to stay just under the 4x poverty level cliff, but this was not as good as the 2x poverty full subsidy case because of the extra taxes I would also pay on the withdrawals combined with the somewhat higher health care costs.

conversationalphrase said:

To be clear it is $150K for two years. So total "up-front" cost is $72K. The savings in health care expense is $30K per year for four years or $120K.

I looked at the middle ground case where I would withdraw from tax deferred accounts to stay just under the 4x poverty level cliff, but this was not as good as the 2x poverty full subsidy case because of the extra taxes I would also pay on the withdrawals combined with the somewhat higher health care costs.

Click to expand...

Unless you have medical conditions that will require you to spend 100% of your deductible I would not factor that in the decision... you might not ever hit that...


I would look at the subsidy you get for premiums and a reasonable amount of costs vs the tax...



BTW, you can get the next income level up on the silver plan that you still pay copay and some deductible and get a good amount of the premiums paid... no reason to go to the lowest level IMO... and if you do not have much medical costs just barely get into subsidy and you might be better off...

How much after tax money can you stash in the next 14 months.

How much equity do you have in your home..if you have a house payment how about a refi to lower your annual expenses...if its paid off how about a home equity loan in 2019 to lower the amount of taxable income you need to live on

Hi,

This is a very good question. Me and My wife find ourselves in a similar situation.
Most all of our money is a tax deferred IRA's. I have made a baseline of 80k for expenses.

How to optimize withdrawals is still a mystery to me. Hopefully someone here will give us some options.


...
30 year draw down

I'd be cautious about counting on the ACA subsidies to be there.

That high of upfront tax is hard for me given the uncertainty of the future ACA costs.

We are using money from our home equity (2.95% fixed rate) and also plan to use Roth contributions (about 160k).

ivinsfan said:

How much after tax money can you stash in the next 14 months.

How much equity do you have in your home..if you have a house payment how about a refi to lower your annual expenses...if its paid off how about a home equity loan in 2019 to lower the amount of taxable income you need to live on

Click to expand...

Good points. Yes saving after tax money the next 15 months is definitely in the plans. This will reduce any 2019 Roth conversions 1:1.

Mortgage will be zero by end of 2019. I thought about a HELOC bridge but haven't run the numbers on it. Also, It removes my buffer for unexpected expenses.

I find a longer window makes this process easier. Do you have Roth amounts now that you can live on? Make sure and use up all your free tax brackets even if it’s just 24k/yr

conversationalphrase said:

To be clear it is $150K for two years. So total "up-front" cost is $72K. The savings in health care expense is $30K per year for four years or $120K.

I looked at the middle ground case where I would withdraw from tax deferred accounts to stay just under the 4x poverty level cliff, but this was not as good as the 2x poverty full subsidy case because of the extra taxes I would also pay on the withdrawals combined with the somewhat higher health care costs.

Click to expand...

The key question then becomes what is included in the $30k of "savings".

Or put another way, what is the difference between health insurance, copays and deductibles based on your likely use of health insurrance with and without subsidies... as NWB observes, it would not necessarily be the full deductible and copays unless that is what you expect will happen.

The other thing that is intangible is to factor in whether subsidies will continue... I suspect that they will but you never know.

conversationalphrase said:

Good points. Yes saving after tax money the next 15 months is definitely in the plans. This will reduce any 2019 Roth conversions 1:1.

Mortgage will be zero by end of 2019. I thought about a HELOC bridge but haven't run the numbers on it. Also, It removes my buffer for unexpected expenses.

Click to expand...

Thus makes me wonder about your budget is it firm with some padding for one off expenses? With a paid off house I'd definitely think hard about a HELOC..

pb4uski said:

The key question then becomes what is included in the $30k of "savings".

Or put another way, what is the difference between health insurance, copays and deductibles based on your likely use of health insurrance with and without subsidies... as NWB observes, it would not necessarily be the full deductible and copays unless that is what you expect will happen.

The other thing that is intangible is to factor in whether subsidies will continue... I suspect that they will but you never know.

Click to expand...

Using:

https://www.healthcare.gov/lower-costs/

At 30K MAGI I see a $0 premium $0 deductible plan. Max out of pocket is $4700.

At 70K MAGI a mid range plan has a $2500 monthly premium and a $5000 deductible. Even if I had zero expense my annual cost would be $30K.

I will of course review when the 2019 prices are available.

conversationalphrase said:

Using:

https://www.healthcare.gov/lower-costs/

At 30K MAGI I see a $0 premium $0 deductible plan. Max out of pocket is $4700.

At 70K MAGI a mid range plan has a $2500 monthly premium and a $5000 deductible. Even if I had zero expense my annual cost would be $30K.

I will of course review when the 2019 prices are available.

Click to expand...

You understand the second number is so high because you are over the subsidy limit.What is your number with taxable income of around 59k..

pj.mask said:

I find a longer window makes this process easier. Do you have Roth amounts now that you can live on? Make sure and use up all your free tax brackets even if it’s just 24k/yr

Click to expand...

+1 on this... I am using ROTH to carry me over at the end of the year after I have cap gains to the income level I want...


And it is important NOT to go over the max allowed or you lose all your subsidy...

travelover said:

I'd be cautious about counting on the ACA subsidies to be there.

Click to expand...

I would hope it lasts at least into 2020. Let's see what happens in the fall.

Do you REALLY need 100k/year to live a satisfying life? Are there ways you could cut back a bit during the 4 year bridge period you need to get to Medicare -- maybe defer some optional spending like fancy vacations, home upgrades, etc? Maybe downsize to reduce housing costs, etc.? Seems like a really high tax hit to take for such a short period of time....

ivinsfan said:

Thus makes me wonder about your budget is it firm with some padding for one off expenses? With a paid off house I'd definitely think hard about a HELOC..

Click to expand...

+1 You don’t have to use it BUT it’s there if you need it.

lhamo said:

Do you REALLY need 100k/year to live a satisfying life? Are there ways you could cut back a bit during the 4 year bridge period you need to get to Medicare -- maybe defer some optional spending like fancy vacations, home upgrades, etc? Maybe downsize to reduce housing costs, etc.? Seems like a really high tax hit to take for such a short period of time....

Click to expand...

No. We have a large discretionary budget and plan to live well in retirement. If we have a solid plan that essentially assures long term financial needs are met (< 4% withdrawal rate) Why not?

Taxes are just another expense, like healthcare. Choosing to spend more in one expense area and less in another to achieve an overall lower total expense level seems to be a reasonable plan.

ivinsfan said:

How much after tax money can you stash in the next 14 months.

How much equity do you have in your home..if you have a house payment how about a refi to lower your annual expenses...if its paid off how about a home equity loan in 2019 to lower the amount of taxable income you need to live on

Click to expand...

+1 on the after tax money you can stash between now and retirement. That will reduce the draw on your tax sheltered accounts and reduce the taxes.

conversationalphrase said:

No. We have a large discretionary budget and plan to live well in retirement. If we have a solid plan that essentially assures long term financial needs are met (< 4% withdrawal rate) Why not?

Taxes are just another expense, like healthcare. Choosing to spend more in one expense area and less in another to achieve an overall lower total expense level seems to be a reasonable plan.

Click to expand...

True enough but I am curious that virtually all your savings is in deferred tax accounts and that's going to cost you dearly...this health insurance issue didn't pop up overnight.

ivinsfan said:

True enough but I am curious that virtually all your savings is in deferred tax accounts and that's going to cost you dearly...this health insurance issue didn't pop up overnight.

Click to expand...

True, but this would have never been practical before the 2018 tax cuts. 24% up to $315K is a big change.

conversationalphrase said:

True, but this would have never been practical before the 2018 tax cuts. 24% up to $315K is a big change.

Click to expand...

You missed my point, which is you make real decent money, had enough to fund retirements accounts and spent the rest of it. The fact you have no after tax funds is a red flag, for me anyway....maybe you spent the money paying off your house which in retrospect is going to be a mistake for ACA income. ACA planning is long term not something you just start fussing about 12 months before you pull the plug.


And at some point you no longer had a house payment which should start to accrue in after tax funds. BTW don't think I'm judging or picking on you, this info might very well help someone in your position going forward. In fact if I was you I'd seriously consider another year working strictly to fund after tax account and get ACA subsidies.

Too much $ in IRAs

I am in a similar position, and I cannot see any way out (I am 62). When Roths first came out, our FA told us we were not eligible, as we made too much money then. When the rules changed, we should have started making Roth contributions every year (we did for the last 4 or 5 I worked).

The dilemma is that to get ACA subsidies you have to keep your income down. There is no way I can convert even $10K and not be way over. Our expenses are around $60K per year, including my soon-to-expire COBRA coverage. I have been thinking about getting some non-professional job just for health care coverage until I turn 65. I *could* also put 100% of the money I earn away as after-tax $.

This bums me out, because when you add in the extra things I can afford to do now that I am retired, it (e.g. a $10K per year cruise) gets even worse.

I know this is mostly a whine, and no one should feel sorry for me, but it feels good to share as I know many people in this forum may be in similar situations. One never knows if someone’s idea will help.

Thanks,

Bood

BoodaGazelle said:

I am in a similar position, and I cannot see any way out (I am 62). When Roths first came out, our FA told us we were not eligible, as we made too much money then. When the rules changed, we should have started making Roth contributions every year (we did for the last 4 or 5 I worked).

The dilemma is that to get ACA subsidies you have to keep your income down. There is no way I can convert even $10K and not be way over. Our expenses are around $60K per year, including my soon-to-expire COBRA coverage. I have been thinking about getting some non-professional job just for health care coverage until I turn 65. I *could* also put 100% of the money I earn away as after-tax $. Bood

Click to expand...

While not being exactly the same as you, we are in a similar boat. DW is only 60, I am on Medicare in January 2019. We still have to buy her HC. I am forever trying to think of ways to reduce our income to get MAX subsidies. The only saving grace is we do have 10+ years of expenses in Non Taxable funds (Cash or Cash Equivalents), BUT the return on those funds pushes up MAGI. I want to defer the returns to we can get DW the MAX subsidy. To do that we have to limit our MAGI to ~$20k or so. That means we have to find some way of deferring the income on the return of those funds for 2 - 5 years depending on the ACA's viability going forward. If we defer the income for 5 years and the ACA goes away (Completely) in 2, we will have to wait 5 years to get our money (Annuity MYGA).

I guess in some circles it is a good problem to have, but I cannot for the life of me give up that subsidy while it still exists. I could take SS and simply buy DW HC and it would not change our Standard of living one bit, but I cannot seem to get myself to do it. If she claimed SS @ 62 then that should also cover her health care costs.