Getting closer and wondering

[Tetto]

With the Social Security COLA of 8.7% for 2023, the new maximum Social Security numbers are going up next year. For those claiming benefits at age 62, the maximum Social Security benefit per month should be about $2,570.


How did you arrive at $2900/month?

That was a seat of the pants calc after meeting with my accountant last weekend...i created a mysocial security account and looked at the real number, and your'recorrect- its just shy of 2500. Running Firecalq still has me at 100%, but now i'm reconsidering when i take SS. It cant hurt to wait a bit longer i guess, same for my DW- we can easily live off my salary, so its starting to make more sense to me. This is such a PIA process!

 

[Tetto]

I'm in a similar phase (under 65, utilized ACA). My recommendation:
1. Contribute the minimum to get the 401(k) match. But, have to balance current vs. future tax rates. That analysis may result in more than the minimum contribution in the 401(k).
2. Bank everything else you can-Roth 401(k), taxable brokerage, CDs, etc.
3. Max out HSA contributions if eligible. Consider switching to a qualifying plan if it makes sense for your medical care circumstances.
4. Delay household SS as long as one of you is employed. No need to feed to tax pig if not necessary.
5. Focus on managing the bridge from retirement to Medicare. If you have employer financial support, it's easier. If you're on your own, you want multiple sources of tax advantaged (no- to low- tax) assets to draw down to stay ACA qualified. HSA, Roth, after-tax accounts are the usual sources.
6. If your tax preference assets are close to what you need for the bridge years, expect to spend some/a lot of time optimizing your withdrawals to manage ACA income.

Short answer-bank as much as possible -now- in accounts that result in the lowest taxable income when you're done working and on ACA.

Good insight; if I dial back the 401K contributions and pour the extra into the online bank account (now 3.75%) I may be able to manage the ACA pretty easily if i retire at 62-63, by then wife will be 66. My DW is on my medical at megacorp.

 

[timeismine]

Someone may have already mentioned this-I did not read through all the comments.

My opinion is to go full-in on the Roth verses traditional IRA accounts for your last few years. Pay the taxes now verses taking a haircut on every withdraw from the traditional IRA while you bridge to Medicare.

This reduces your total income for the non-working Medicare bridge years, which helps keep you below ACA thresholds. In this way, your medical insurance could be $200 or less a month verses $1200 or more a month.

A caveat is higher income levels sometimes disqualify you for a ROTH. Might still be worth it to use a taxable account with conservative returns.

On SS, I was originally going to wait as long as possible. With the new COLA increases, my early amount is now at my projected full retirement amount used to calculate funding a long retirement. This extended the break-even point to age 82 (taking now verses waiting three more years), which I'll be happy to reach and worry about money. Slowing the burn rate on the 401K became more important for me. Just my opinion, something to think about.

 

[Tetto]

Someone may have already mentioned this-I did not read through all the comments.

My opinion is to go full-in on the Roth verses traditional IRA accounts for your last few years. Pay the taxes now verses taking a haircut on every withdraw from the traditional IRA while you bridge to Medicare.

This reduces your total income for the non-working Medicare bridge years, which helps keep you below ACA thresholds. In this way, your medical insurance could be $200 or less a month verses $1200 or more a month.

A caveat is higher income levels sometimes disqualify you for a ROTH. Might still be worth it to use a taxable account with conservative returns.

On SS, I was originally going to wait as long as possible. With the new COLA increases, my early amount is now at my projected full retirement amount used to calculate funding a long retirement. This extended the break-even point to age 82 (taking now verses waiting three more years), which I'll be happy to reach and worry about money. Slowing the burn rate on the 401K became more important for me. Just my opinion, something to think about.

Thanks for the advice. I’ve come to the conclusion also about packing the cash away and am doing that. Gotta wrap my mind around ACA and showing little to no income to bridge the gap to 65. Oy vey.

 

[Bullwinkle]

Correct me if I'm wrong, but you can pull up to about 80k LTCG per year without incurring any taxes, yes? I know it's not taxed like normal income, but is it considered normal income for the purposes of ACA? In fact it looks like it is! https://www.healthcare.gov/income-and-household-information/income/

So even if most of that 401k is LTCG and does not incur income taxes, I assume it will reduce the ACA subsidy just as if it were income. While ROTH would do no such thing. I suppose cash won't either, but it's only because it won't really have capital gains. Same for the types of investments that reset their cost basis. I suppose you can try to reset some cost basis by buying and selling but of course now you're paying taxes on that, and whether that does or doesn't offset savings with ACA is a bit of a calculation.

I suppose this is part of the calculation that people who do ROTH conversions are doing, but my impression was most of them are post-retirement and using up the rest of the tax-free 80k LTCG, which if ACA just counts it like normal income, doesn't really apply.

 

[COcheesehead]

Correct me if I'm wrong, but you can pull up to about 80k LTCG per year without incurring any taxes, yes? I know it's not taxed like normal income, but is it considered normal income for the purposes of ACA? In fact it looks like it is! https://www.healthcare.gov/income-and-household-information/income/

So even if most of that 401k is LTCG and does not incur income taxes, I assume it will reduce the ACA subsidy just as if it were income. While ROTH would do no such thing. I suppose cash won't either, but it's only because it won't really have capital gains. Same for the types of investments that reset their cost basis. I suppose you can try to reset some cost basis by buying and selling but of course now you're paying taxes on that, and whether that does or doesn't offset savings with ACA is a bit of a calculation.

I suppose this is part of the calculation that people who do ROTH conversions are doing, but my impression was most of them are post-retirement and using up the rest of the tax-free 80k LTCG, which if ACA just counts it like normal income, doesn't really apply.

Any funds pulled from a 401k are taxed as income. LTCG do not apply.

 

[Bullwinkle]

Any funds pulled from a 401k are taxed as income. LTCG do not apply.

Oh right I always forget that! Yes you are correct. But what about non 401k plain old taxable? Guess it doesn't apply to the OP who doesn't have much of that, but... well uh I do... is my reading accurate that ACA would also consider all of that income too?

 

[COcheesehead]

Oh right I always forget that! Yes you are correct. But what about non 401k plain old taxable? Guess it doesn't apply to the OP who doesn't have much of that, but... well uh I do... is my reading accurate that ACA would also consider all of that income too?

Yes, in a taxable account a couple can incur up to $89,250 in LTCG at 0%.
Cap gains are considered income for ACA.

 

[Bullwinkle]

Yes, in a taxable account a couple can incur up to $89,250 in LTCG at 0%.
Cap gains are considered income for ACA.

Got it, it is as I feared. Well, not actually feared, simply something I hadn't taken into account. People with LTCG income are not considered in need of subsidy, and that's fair enough. Thanks for the verification!

 

[Time2]

Yes, in a taxable account a couple can incur up to $89,250 in LTCG at 0%.
Cap gains are considered income for ACA.

Just a little clarification, for 2022, I see the $0 tax rate ends at $83,350 of taxable income. This is after the standard deduction. So if you are MFJ, that would add an additional $25,900, for a total of $109,250. So you can have $109,250 of LTCGs and pay $0 tax.

 

[COcheesehead]

Just a little clarification, for 2022, I see the $0 tax rate ends at $83,350 of taxable income. This is after the standard deduction. So if you are MFJ, that would add an additional $25,900, for a total of $109,250. So you can have $109,250 of LTCGs and pay $0 tax.

It increases in 2023 to $89,250

 

[Time2]

It increases in 2023 to $89,250

OK 2023, $89,250 + $27,700 = $116,950. Also an additional $1,800 for being over 65. So, you can have a $118,750 of LTCGs (AND only that income) and pay $0 tax.

 

[timeismine]

Thanks for this information. Completely forgot about LTCG being treated differently-will use this in a different situation, if not with this one. Thanks!