After year end tax strategy

[Texas Proud]

OK... keeping with the ACA subsidy and the tax planning around it... I think that I have come up with a way to possibly fix a problem after the year is closed....

I am doing this calculation so I can sell in my taxable account at a zero tax rate and only cost me ACA subsidy... this allows me to refill my cash account.... or rebalance if I want....

Let me give you my thinking and throw darts at it....

First, you have to have some earned income... if not, it will not work...

Second, put max amount of money into a ROTH account during the year (let's say 2015)....

Now, if you get more income than you thought with year end distribution and you only find this out when filing out your tax return, you can recharaterize your ROTH to a tIRA and now reduce your income by a pretty good amount....


When I was doing my calculations, when I hit the cliff my marginal tax rate was over 36%.... so it would make sense to fix this year and worry about the other later on....


Thoughts

 

[pb4uski]

I think that works. If you use a Roth conversion rather than a Roth contribution you can do it without earned income and without a $ limitation... use your best estimate and then recharacterize as needed as you complete your tax return.

I did that last year in a different way.... slightly overshot my Roth conversion to the top of the 15% tax bracket and then recharacterized the excess... the TI on my tax return was $73,800....the same as the top of the 15% tax bracket.

 

[Texas Proud]

I think that works. If you use a Roth conversion rather than a Roth contribution you can do it without earned income and without a $ limitation... use your best estimate and then recharacterize as needed as you complete your tax return.

I did that last year in a different way.... slightly overshot my Roth conversion to the top of the 15% tax bracket and then recharacterized the excess... the TI on my tax return was $73,800....the same as the top of the 15% tax bracket.

So what you did was convert tIRA to ROTH.... and then converted PART of this back to tIRA during the first few months of the next tax year....


Can you choose how much to convert back


To me the difference is that you are paying income taxes on the conversion along with losing ACA subsidy with the conversion where you only lose ACA subsidy if you were contributing....

Right now I would rather keep as much ACA credit as I can...

 

[pb4uski]

So what you did was convert tIRA to ROTH.... and then converted PART of this back to tIRA during the first few months of the next tax year....


Can you choose how much to convert back


To me the difference is that you are paying income taxes on the conversion along with losing ACA subsidy with the conversion where you only lose ACA subsidy if you were contributing....

Right now I would rather keep as much ACA credit as I can...

Yes, exactly. I converted what I thought was the right amount from tIRA to Roth. As I finalized my return I determined that I had overconverted by a small amount, but.... the marginal tax rate on that small amount was going to be 30%! So I recharacterized the excess whihc in effect reverses a portion of the conversion but as if it happened in 2014 rather than when I actually did the recharaterization in 2015.

Yes, you can chose how much to recharacterize.

On the last part, I think it is the same because since I have no earned income I am converting and paying income taxes on the conversion and losing subsidy (if I was taking a subsidy) and in your case you are paying taxes on the earned income and losing subsidy. If I had earned income, I would do what you do and convert as needed.

ACA subsidies are not terribly attractive in our case since we can buy catastrophic coverage and the cost is ~63% of the cost of a bronze plan. I'm more focused on avoiding a long stay in the 25% bracket when I'm in my 70s... that 10% income tax rate difference is significant for us.