How do you plan your MAGI for ACA, Medicare,etc.?

[ziggy29]

You wrote that you are a few years out from retirement....let's hope that the ACA subsidy is still around then and that preparing for "the cliff" is still an issue!

Here is my real-life experience: Our income the last few years has been specifically managed to avoid the cliff. Yet, I don't think the tail wags the dog. It's just that our income "naturally" will fall close to the cliff threshold and, like you wrote, I too don't want to feel stupid for earning $1 too much and losing out on it.

Well, the way ACA subsidies work, there **is** some tail wagging the dog.

That isn't true for the income tax, because it is graduated and the brackets are *marginal*, not retroactively applied to the entire income. In other words, with the income tax, if you make $X+1 instead of $X pre-tax, you will never wind up with less *after* tax. That last dollar may be taxed at a higher rate, but all the previous dollars are still taxed at their previous, lower rate.

But the cliffs in the ACA do not work that way. That creates a situation where a MAGI of $X+1 could *cost* you hundreds, if not thousands, or dollars a year in lost subsidy.

So yes, for ACA subsidy purposes, the tail should wag the dog, at least within reason (i.e. you won't turn down a "take it or leave it" $20K windfall because you lose a $5K subsidy). But you might want to pass on a smaller amount of income which results in an even larger loss of subsidy, and take whatever steps you reasonably can to get on the "right" side of the nearest cliff.

 

[Janet from FIRE Planet]

interesting conversation

.

 

[S103462]

My wife and I just finished our 5th year using ACA Marketplace coverage. During our working years, we not only contributed to our company's 401(k), we also saved quite a bit in the after tax savings plan that the company offered. (They didn't offer a Roth 401(k).) We also had investments outside of work -- stocks, bonds, mutual funds, etc....

We retired in 2010, and paid for expensive retiree coverage until the Marketplace came along. Starting in 2014 we were able to obtain significantly subsidized Marketplace Silver plans by accessing those after-tax funds, as well as the capital gains from our investments, while keeping our MAGI below the various FPL thresholds. We were able to keep our subsidized premiums fairly low - $299/mo in 2014.....$85/mo in 2017, $108/mo in 2018. In those 5 years, we saved over $29K in premiums over what we would've paid if we had used our company's retiree medical plan; we saved over $63K in premiums over what we would've paid if we had used unsubsidized Marketplace insurance. We haven't calculated what our savings were due to the Cost Sharing Reductions of the Silver plans (i.e., subsidized co-pays, co-insurance, and deductibles).

(Note that keeping the MAGI below those FPL thresholds simply means doing what it takes to tax-efficiently withdraw from your investments/savings. It doesn't mean that you have to live poor; your 1040 Form simply has to look like you're living poor.)

We're now approaching Medicare eligibility and have left Marketplace insurance behind us, no longer having to worry about keeping our MAGI extremely low. At the same time, we're careful to stay well within the Medicare thresholds so as not to become subject to the IRMAA fees.

Here are a few articles that we came across over the years that you may find helpful in your efforts to access subsidized coverage:

https://money.usnews.com/money/blog...he-obamacare-trick-early-retirees-should-know

https://www.forbes.com/sites/caroly...lth-insurance-through-obamacare/#323df7ca1f53

https://www.cnbc.com/2016/01/27/theyre-millionaires-and-they-get-obamacare-subsidies.html

 

[GTFan]

You wrote that you are a few years out from retirement....let's hope that the ACA subsidy is still around then and that preparing for "the cliff" is still an issue!

Here is my real-life experience: Our income the last few years has been specifically managed to avoid the cliff. Our income "naturally" will fall close to the cliff threshold and, like you wrote, I too don't want to feel stupid for earning $1 too much and losing out on it.

Here's my methodology: a couple of times a year, I monitor our YTD income and this helps me decide if I want to take some losses or not. It helps, in that it keeps me conservative.

My SO is a substitute teacher and can pick when she wants to work, so we can limit our income too.

Twice now, though, I have miscalculated and we have gone over the cliff. What saved us? Contributing to an IRA. When you are doing your taxes for the year, you can "play with" your IRA contribution level to see if you can get your MAGI down enough. Works like a charm.

Yeah that's what we do to keep MAGI down since my wife works PT, but an important thing to note here is that IRAs can only offset earned income. If you get the bulk from interest, cap gains, divs, pension etc. you'll have to find another way (e.g. HSAs, tax loss harvesting) to reduce it.

And of course you're just pushing income taxes down the road and possibly increasing the size of your tax torpedo if you don't do Roth conversions later. My plan for RMDs in future is to offset as much as I can with QCDs.

 

[DelMarGirl]

This is the second year on the ACA for DW and me. She has re-occurring treatment for cancer and is in costly care for the last 3 years. I have used my taxable account, small pension, and dividends to keep my taxable income below 30,000 per year to get maximum premium and cost subsidies. We have 150 ded and 2600 OOP maximum for her. I am delaying SS and any IRA withdrawals other than a small conversion just to stay out of Medicaid.

This has work well for 2 years. I will hit Medicare in Nov 2019, and DW will get Medicare in June 2020.

The coverage has been as good as any coverage I had through employment.

VW

Why do you want to stay out of Medicaid?

 

[VanWinkle]

Why do you want to stay out of Medicaid?

It is an unknown for us, and we have heard of reduced choice when on Medicaid. We can achieve the desired results on the ACA without having to test Medicaid.

 

[Dtail]

It is an unknown for us, and we have heard of reduced choice when on Medicaid. We can achieve the desired results on the ACA without having to test Medicaid.

+1
In FLA, just about all doctors accept the regular ACA plans, but much less choice with medicaid.

 

[Samuel61]

Yeah that's what we do to keep MAGI down since my wife works PT, but an important thing to note here is that IRAs can only offset earned income. If you get the bulk from interest, cap gains, divs, pension etc. you'll have to find another way (e.g. HSAs, tax loss harvesting) to reduce it.

And of course you're just pushing income taxes down the road and possibly increasing the size of your tax torpedo if you don't do Roth conversions later. My plan for RMDs in future is to offset as much as I can with QCDs.

You're right about the IRAs only offsetting earned income but there is one nuance there: if one person works, *both* can still take the IRA deduction. In my case, my SO earns about 20K as a substitute teacher and we can deduct up to 13K in an Trad IRA to avoid the cliff.

Also, in my case, I don't think an HSA would work, as, IIRC, it's only for the high deductible plans---please correct me if I'm mistaken!

And, yes, we use tax loss harvesting too. It only works to cancel out $3000 in income, though.

We are fortunate to be able to use the ACA help and I am very thankful to have just enough (but not TOO much) income to use the subsidy.

I'm intrigued by the idea of using IRA conversions. I guess your plan is to wait until Medicare kicks in?? If not, doesn't the conversion itself possibly push you over the ACA cliff (if you convert too much)?

 

[PaddyMac]

2018 tax year was the first year we managed to get our income under the 400% poverty level (at one point TaxAct clocked in at 399.5% under the cliff!). I just filed taxes, and was worth more than $10,000 back in a tax credit/redund.

Being semi-retired, we still have some earned income. I tax-deferred as much as I could into our 401k, max'd the HSA, and the new S199A business tax deduction helped too. Not sure we can do it again, but it's certainly worth aiming for.

Curious that no one has mentioned being self-employed, which adds another complicated wrinkle in that there are "circular calculations" that occur in trying to get under the cliff. In 2018, we paid full pop for our premiums on the exchange, and started off claiming these as a self-employed health insurance deduction (SEHID) on the 1040. This reduced our MAGI enough to qualify for a subsidy. But when we claimed the subsidy, TaxAct popped up another screen that said we had to adjust our SEHID by the amount of the subsidy - which then put our MAGI over the cliff. Aargh!!! So I started adding to our 401k in $100 increments until I fell under the cliff again. But changing the 401k tax deferred amount ALSO "adjusts" the SEHID we could claim, which put us back over the cliff. It took another day of very careful balancing to get us to 390% of the poverty level. (Every time I opened TaxAct I was holding my breath for it say that I had to "adjust" something again, and watch that tax refund disappear!)

Next I carefully figured out our total maximum 401k contributions (salary deferral and catchup can be limited by lower income). Then I sold a ton of Vanguard Wellington (which kicked off a lot of cap gains last year) and moved it to both tax deferred 401k and Roth 401k for 2018.

Not sure if we can get the subsidy this year, but if not, I will aim for every other year and sell a lot of our brokerage account in December to live off next year. We also have an HSA and Roth IRAs to "top off" income if need be; plus, in 2020 I can get access to my Roth 401k.

One thing that surprised me is how much more room we had of free cap gains (our taxable income fit into the 10% tax bracket), and yet we only barely made it under the cliff. So if we do have to do alternate years, we should be able to sell stocks without paying taxes on the cap gains if we play our cards right.

more links:
https://thefinancebuff.com/income-bunching-under-obamacare-premium-subsidy.html

"circular calculations" for self-employed: https://thefinancebuff.com/irs-guid...-obamacare-premium-subsidy-and-deduction.html

 

[GTFan]

And, yes, we use tax loss harvesting too. It only works to cancel out $3000 in income, though.

TLH can cancel all your other cap gains too (think MF distros), depending on how much you have.

And yeah we're not planning to Roth convert until Medicare kicks in (or the ACA dies/changes/etc.).

We've been successful keeping income below 200% FPL using strategies like these, the ACA Silver CSR bennies at that level are just too good to ignore.

 

[SecondCor521]

Then things suddenly changed. Shortly after retirement we inherited some dividend paying stocks and a couple of IRAs. We were required to convert the IRAs to annuities so as not to take a huge tax hit in one year by cashing them out.

Someone may have told you that, but it might not have been an accurate statement. Inherited IRAs, provided you meet some basic requirements, can be drained via RMDs based on the recipient's age when they inherit. (Perhaps you didn't meet the requirements?)

As long as I'm here, my answers to the OP (may be some repeats, sorry):

Capital gains are taxed at lower rates than ordinary dividends. (Although qualified dividends may be taxed at the same rate?) The other thing is you have somewhat more control on when you realize income, rather than being subject to whatever dividends they decide to pay out (which can in turn, depend on things like the December 2018 downturn creating large fund outflows and thus large CG distributions).

I hold VTSAX in my taxable account. The dividends are less than what I spend, and are way below the ACA threshhold for me (I live in the lower 48 and have two dependents).

I paid off my mortgage a few years before I retired. I don't want to start that debate, but I mention it here because it gives me flexibility - since I don't have a mortgage payment, I don't have to generate the cash flow to pay the mortgage. Avoiding generating that cash flow generally allows me to avoid recognizing income from the IRS' point of view.

Generally I predict income of about 199% of FPL to get Silver CSR, and then figure out in December what I want my income to be based on my tax situation. I adjust my income upward with Roth conversions and/or realizing LTCG. I try to find the sweet spot where I use up my dependent tax credits (since they are non-refundable), generate the cash I need for next year, and keep me under the simplified needs test limit for FAFSA purposes. I also look at my total marginal bracket between federal, state, ACA, and FAFSA.

Since I don't have earned income nor do I currently have an HSA-compatible plan, I don't really have flexibility to lower my AGI after 12/31 each year. So I generally try to be very careful to calculate everything out in December and then sneak up on my AGI target from below, leaving what I consider enough room to spare in case something happens.

I will add that I've been retired about three years now and feel like I've mostly figure out how to play the IRS game as an early retiree. I did a lot of research ahead of time, but then as I go through tax season each year I learn a little more each time.

 

[gwraigty]

Someone may have told you that, but it might not have been an accurate statement. Inherited IRAs, provided you meet some basic requirements, can be drained via RMDs based on the recipient's age when they inherit. (Perhaps you didn't meet the requirements?)

Here's a handy-dandy guide for anyone who is in the need-to-know camp:

https://www.schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/inherited_ira/withdrawal_rules