Alternatives to Conversion/Recharacterization

[nico08]

Hi. For the last couple of years, I needed to use the conversion/recharacterization strategy in order to reach an income level that exceeded 138 percent of the federal poverty guideline in order to be eligible for ACA health insurance coverage, and not fall into the Medicaid coverage pool. I live in an expanded Medicaid coverage state, New Jersey.

The dividends, interest and capital gains that I receive from my investments in a calendar year do not reach 138 percent of the poverty guideline. Dividends, interest and capital gains (almost all from mutual funds) are my only forms of income. So I would convert money from a pretax account to a post tax account in order to create a taxable event big enough to get me over the 138 percent hurdle. I would later, in the next calendar year, recharacterize the converted amount back down to a level just above the 138 percent threshold.

I understand that recharacterizations are being eliminated due to tax reform. I also understand that there is an outstanding unresolved issue as to whether a recharacterization can still be executed on a conversion that took place in 2017. While this is an important subject, it is not the issue of my concern here.

Aside from getting a JOB (yuck), are there any other other strategies or techniques that you can think of that would help me to achieve the goal of earning at least 138 percent of the federal poverty guideline as income, since my interest, dividends and capital gains do not get me to the 138 percent threshold?

Just as a point of reference, my capital gains and dividend totals for 2015 and 2016 were-

2016
Dividends 8261
Cap gains 4731
12992

2015
Dividends 12476
Cap gains 7438
19916

I am only 47, I have a small pension that would be considered taxable income (I believe) for federal tax purposes, but I am not eligible to receive that pension until I turn 60 and who knows what will happen between now and then? So this pension money wont get me over the 138 percent hurdle.

My financial and physical health thanks you for your insight.

 

[43210]

Easy peasy. Just convert the right amount in December.

 

[Done]

Easy peasy. Just convert the right amount in December.

+1. Conversions are still allowed, but not recharacterization.

You can also sell and optionally re-buy appreciated securities to harvest capital gains. This also has no “undo” (except harvesting capital losses without triggering wash rules) so you have to get the amount right.

 

[bingybear]

I don't shoot for that low, but I pull all dividend and capital gains and dividends and interest from my brokerages at the beginning of December. I determine the day that all taxable assets will distribute and get the values on those days. The brokerages won't post the dividends being distributed until the pay date or a little later, but I can use the information to calculate what I need to convert to be at my target. I'm always a little off because I don't model the non-zero basis of our IRAs.

easy to do

 

[pb4uski]

Why not just figure where you are in mid December and do a Roth conversion sufficient to get you where you need to be. Is it a problem if you are a little over?

 

[NW-Bound]

... I would convert money from a pretax account to a post tax account in order to create a taxable event big enough to get me over the 138 percent hurdle. I would later, in the next calendar year, recharacterize the converted amount back down to a level just above the 138 percent threshold....

Why does it have to be just above 138%? Are you afraid that you will run out of money in the pretax account if you keep having to convert from your age of 47 now till 65?

 

[nico08]

Hi. Thank you for your responses. I was away during the holiday. I will respond to some questions raised.

I want to keep it just above the 138% threshold in order to maximize the ACA tax credit/subsidy.

It is not a problem if I am a little over.

I understand that conversions are still available to me. One complicating factor is that I need to transfer money first from Hewitt, who manages my former 401k to Vanguard. Vanguard first makes the transferred money a traditional IRA and then converts it to a Roth IRA, thereby triggering the taxable income event. But it takes forever for the Hewitt (401k) transfer to Vanguard traditional IRA to take place. I have to start that process long before I can get a hold on what my end of year dividends, interest and capital gains will be in my taxable accounts. Herein lies my difficulty.

 

[RunningBum]

Why don't you move your Hewitt account over to the Vanguard tIRA? Or at least move more than what you'll want to convert earlier in the year, and than do the Vanguard conversion in late December.

 

[LOL!]

I was under the impression that one can do tax-gain harvesting and thus realize long-term capital gains and this would increase AGI, but not one's taxes if one was paying 0% LTCG tax.

Of course, one could run out of unrealized LT capital gains I suppose. Also one would need to be careful that the realized gains were LT and not short-term (unless one's deductions could soak up the STCG).

 

[pb4uski]

Why don't you move your Hewitt account over to the Vanguard tIRA? Or at least move more than what you'll want to convert earlier in the year, and than do the Vanguard conversion in late December.

+1 At least move a few years worth of conversions over to the Vanguard IRA and invest it in a Vanguard fund of your choice. Then do conversions as needed in 1 day. When the Vanguard IRA starts getting low, then replenish.