Aca question

[COZICAN]

If i were to pull 350K from my 401K; pay my taxes and ladder five CD's over the next five years with the remainder would the CD's be considered MAGI income upon maturity? I know the 350K would be my MAGI for the year I withdrew it.

Coz

 

[Crabby Mike]

The way you describe it, I think only the interest on the CD's would be income, but each year as they're paid, not all at the end.

 

[Retiree_Having_Fun]

The interest on the cd's would be income (and taxable in the year you received the interest) and part of your magi. The original principal would not since you would have paid the taxes when you did your original withdrawal. Why pull it all out at once, why not use up the larger standard deduction and lower brackets of the next 5 years?

If you take out the $350k, you will be taxed (assume married?) after your 24000 standard deduction you will be taxed 32% on the amount over 315K. If you did this over 5 years, your tax rate might be around 10%.

 

[Aerides]

Why pull it all out at once, why not use up the larger standard deduction and lower brackets of the next 5 years?

Because of the ACA premium income cliff - taking it all at once means he only has a non-subsidized year once, then presumably managed under $64k income the next 4 while using the CD's to cover expenses. Whereas if he took $70k per year, he'd not qualify for a subsidy for any of those years. But the tax rate on the $350k at once will be much higher than taking 70k at once, so there's more math there too.

Of course, this means you're gambling that the income replacement of the ACA subsidies is equal to or greater than the income that $350k would make in a normal market if it remained fully invested.

 

[ivinsfan]

Is this a serious question? It doesn't make any sense...maybe you are just trying to stir the pot. Why on earth would you even consider this?

 

[COZICAN]

Why consider it? i'll turn 58.5 and can go on cobra for that year. That same year I'll pull 350K from 401K, pay taxes and ladder 5 CDs over my years 59.5-65. my MAGI will be 350K for that 1st year while im on cobra and magi will be interest only from the CD's on years 59.5-65 keeping me below the ACA cliff. I can withdrar other income from ira's etc to get above the FPL for those years. It makes sense to me but usually things that make sense to me have a flaw.

 

[Fedup]

Just the year you pull out the money from IRA.

 

[ivinsfan]

Why consider it? i'll turn 58.5 and can go on cobra for that year. That same year I'll pull 350K from 401K, pay taxes and ladder 5 CDs over my years 59.5-65. my MAGI will be 350K for that 1st year while im on cobra and magi will be interest only from the CD's on years 59.5-65 keeping me below the ACA cliff. I can withdrar other income from ira's etc to get above the FPL for those years. It makes sense to me but usually things that make sense to me have a flaw.

So you are going to pay the increased taxes on 350K hoping that ACA rules stay the same for the next 6 years? Here are some other ideas. .get a home equity loan for some living expenses, cut your budget a little.

I'm curious are you like a few posters around here who basically want to pay nothing for their health care..? Seeing as you mention the FPL that seems a likely assumption....

 

[COZICAN]

Yes, I have plenty of assets and yes, I would very much like to pay as close to zero for an ACA plan as I can. I will pay close to the same taxes over that 6 year period rather I pull it all out at once or not. And yes I do expect the ACA rules to stay the same or improve in my favor with Medicare for All in those 6 years. Now what seems to be your problem?

 

[SecondCor521]

It would probably be more efficient tax-wise to do some combination of realizing income in the COBRA year and realizing income the subsequent five or six years.

So for example, realize $250K worth of income in the COBRA year, buy five $50K CD's in ladder formation, and realize $20K worth of income (by additional 401(k) withdrawals) each of those subsequent five years.

Evening out the withdrawals helps you in two ways. First, it minimizes your exposure to the higher tax brackets - those $20K withdrawals will probably be taxed more lightly (and later in time) than the $100K would be if it were part of an initial $350K withdrawal.

Second, in order to qualify for ACA tax benefits, your AGI generally needs to be above 100% or 138% of the FPL, depending on the state you live in. Your FPL in turn depends on your tax family size which is generally the total number of exemptions you can claim on your taxes (line 6c of 1040 IIRC). Realizing that $20K of income helps you generate the AGI you need to be on ACA instead of Medicaid or full-freight insurance.

If it were me, I would figure out what AGI I was aiming for (personally I aim for 199% FPL) in those five years, subtract the interest I'd get on the CD's from that number, and then target that amount for the five smaller 401(k) withdrawals. Once you know that amount, you can figure out what your annual shortfall is to your budget (presumably $70K), multiply that by 5, and then use that for the initial large COBRA year withdrawal.

Good luck.

 

[ivinsfan]

Yes, I have plenty of assets and yes, I would very much like to pay as close to zero for an ACA plan as I can. I will pay close to the same taxes over that 6 year period rather I pull it all out at once or not. And yes I do expect the ACA rules to stay the same or improve in my favor with Medicare for All in those 6 years. Now what seems to be your problem?

I'm curious about the tax numbers it seems the higher brackets will eat up a lot of the potential savings, you'll be out of the market, and interest rates are set to be rising. It has the potential to cost you a lot of money and you aren't sure the rules will be in place for six years. It just seems like a lot to gamble but it's your money.

I don't have a problem but am pointing out trying to get free insurance might cost you a lot of money.

 

[COZICAN]

It would probably be more efficient tax-wise to do some combination of realizing income in the COBRA year and realizing income the subsequent five or six years.

So for example, realize $250K worth of income in the COBRA year, buy five $50K CD's in ladder formation, and realize $20K worth of income (by additional 401(k) withdrawals) each of those subsequent five years.

Evening out the withdrawals helps you in two ways. First, it minimizes your exposure to the higher tax brackets - those $20K withdrawals will probably be taxed more lightly (and later in time) than the $100K would be if it were part of an initial $350K withdrawal.

Second, in order to qualify for ACA tax benefits, your AGI generally needs to be above 100% or 138% of the FPL, depending on the state you live in. Your FPL in turn depends on your tax family size which is generally the total number of exemptions you can claim on your taxes (line 6c of 1040 IIRC). Realizing that $20K of income helps you generate the AGI you need to be on ACA instead of Medicaid or full-freight insurance.

If it were me, I would figure out what AGI I was aiming for (personally I aim for 199% FPL) in those five years, subtract the interest I'd get on the CD's from that number, and then target that amount for the five smaller 401(k) withdrawals. Once you know that amount, you can figure out what your annual shortfall is to your budget (presumably $70K), multiply that by 5, and then use that for the initial large COBRA year withdrawal.

Good luck.

Thanks for the reply. I'm really not trying to get "free" insurance but a subsidy would be nice. I'm trying to keep my MAGI in the 36K range and supplement it with laddered CD's. Your response gives me some new math to work with, thank you!

Coz

 

[ShokWaveRider]

OR buy some 3 - 5 years MYGAs and defer the Tax on the $350k CD interest until you are 65.

 

[COZICAN]

I'm curious about the tax numbers it seems the higher brackets will eat up a lot of the potential savings, you'll be out of the market, and interest rates are set to be rising. It has the potential to cost you a lot of money and you aren't sure the rules will be in place for six years. It just seems like a lot to gamble but it's your money.

I don't have a problem but am pointing out trying to get free insurance might cost you a lot of money.

I'm 57, DW 56. We have no children and really no other family when our 3 remaining parents are gone. A near zero end game at 90 is fine by me. With CD rates pushing 4% at 5 years a 5 year ladder would get us to near max SS and medicare leaving us with well over .75mm to last us to the end. We may not have the multi mm like some of you but we own a nice fairly new home that we are happy in and live well on $4K a month here in Oklahoma considering our lifestyle (harleys, pool, sun etc). We have a bit over 1m now and zero debt, decent health and low expenses. I think we're doing fine. I just hate my job, want out but have to have HC. It's pretty high here with out a subsidy. Thanks you for your input.

Coz

 

[Dtail]

Thanks for the reply. I'm really not trying to get "free" insurance but a subsidy would be nice. I'm trying to keep my MAGI in the 36K range and supplement it with laddered CD's. Your response gives me some new math to work with, thank you!

Coz

Hey Coz, relax I am with you. Have you calculated the subsidy at the different FPL levels?

The bottom line is there are very few folks who would pass on the ability to manage income for ACA purposes if they could.
This option is certainly not available to everyone depending on investment source of income and secondarily the effect based on the state they live in.

Does anyone say I can pay $200 monthly, but that's nor fair, so I will pay $900 monthly?

 

[COZICAN]

Hey Coz, relax I am with you. Have you calculated the subsidy at the different FPL levels?

The bottom line is there are very few folks who would pass on the ability to manage income for ACA purposes if they could.
This option is certainly not available to everyone depending on investment source of income and secondarily the effect based on the state they live in.

Does anyone say I can pay $200 monthly, but that's nor fair, so I will pay $900 monthly?

Agreed. I have played with the subsidies at all levels. It really is not that easy to manage MAGI when I'm accustomed to making six figures. Luckily I have managed investing well and set aside a certain amount of cash. I just don't want to make a mistake that will eliminate me or cost me too much. It seems it would be easy to do.

Coz

 

[VanWinkle]

I'm 57, DW 56. We have no children and really no other family when our 3 remaining parents are gone. A near zero end game at 90 is fine by me. With CD rates pushing 4% at 5 years a 5 year ladder would get us to near max SS and medicare leaving us with well over .75mm to last us to the end. We may not have the multi mm like some of you but we own a nice fairly new home that we are happy in and live well on $4K a month here in Oklahoma considering our lifestyle (harleys, pool, sun etc). We have a bit over 1m now and zero debt, decent health and low expenses. I think we're doing fine. I just hate my job, want out but have to have HC. It's pretty high here with out a subsidy. Thanks you for your input.

Coz

You will need to keep your MAGI under about 64000 per year to get subsidies. As long as your health stays good, premium subsidies will be enough to help you. If you or DW have a health problem, you may want to get your MAGI down to 32000 or less for maximum premium and cost subsidies. No reason I can see to take a one time 350,000 withdrawal due to the tax hit. You can take 50-60,000 per year instead and remain in the 12% brkt with effective rate below that.

I am well versed on the "tax law" they call the ACA, so maximizing results from any tax law is a positive for the ability to retire early.

Remember to read up on "MAGI" to know what is included.

Good luck to you,

VW

 

[pb4uski]

Assuming ACA stays the same, what is the value of subsidies that first year? Multiply that by 5.

How much are the taxes on that $350k withdrawal? How much would the taxes be each year on a $70k withdrawal? Multiply that by 5.

Calculate the difference.

That will get you to the advantage or disadvantage if everything stays the same. How significant is the difference? Is the advantage worth the risk of thigs changing over the course of 5 years?

 

[COZICAN]

VW , pb , Thanks. Points well taken.

 

[Dtail]

I am sure you have this, but just in case.

http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

 

[simple girl]

You could consider selling your home and downsizing; take the profit tax-free (assuming you have lived there 2 of the past 5 years) and use that towards MAGI.

This would be a significant decision and lifestyle change, but something to consider.