Is anyone here purposely paying full ACA premiums so you can do Roth Conversions?

[ImaCheesehead]

I am struggling with this question.

DH retired 3 months ago and will go on Medicare. I will go on ACA for the next 5 years. At that point, his age 70, he will start SS. Since RMD’s start very shortly afterward we won’t have much time to do any conversations for him.

Since he is 5 years older than I, and in poorer health, we suspect I could be left dealing with the tax torpedo. That would point to doing Roth conversations now for his IRA but that would mean paying close to 10k in premiums and another 8k in taxes. Over 5 years that is a lot of cash out the door, we might have to sell mutual funds to cover it.

OTOH, we plan on going into a CCRC in 7-10 years and I heard that part of the payment to get in and maybe some of the monthly charges could be tax deductible so maybe we could reduce our IRA/401k balances that way?

His IRA/401 balances are currently about 1.6 mil, and mine is 600k. We have about 1.5 mil in brokerage/savings.

Would love to get anyones thoughts on this if you were in a similar position or even if you weren’t.

 

[RunningBum]

"Tax torpedo" sounds scary and awful, but you should run the numbers and actually see what you'd be paying in taxes at the various stages (now, when he starts SS, when he has to take RMDs, and various ages where you might be alone). The tax torpedo is a window of income where an increasing amount of SS becomes taxable, and that also pushes more qualified dividends into being taxed. Once through that window your tax rate settles back down. So it may not be as terrible as you are worried about. However, it is a real thing, as is the likelihood of just one of you being taxed for some number of years at the single filing rate, so the question is a good one.

Estimate your tax numbers by using a tax program or tax calculator and compare that to what you are giving up in lost ACA subsidy and conversions taxes now. It's not a simple estimation. I use current tax laws and figure that inflation, for the most part, handles future tax situations, but SS tax limits are not inflation indexed, and tax brackets are scheduled to revert back to higher rates in 2026. Plus as you convert at various levels that reduces ACA subsidies but also reduces future RMDs. There are many levers and as you push on one it affects others.

If you're not up to doing many iterations of tax runs and plugging results into spreadsheets while trying to decide on what rate of return your IRAs will grow over time, it's probably worth getting help from a tax CPA. My own feeling is, I should be able to figure out where I get a big benefit (if one exists) in doing conversions or taking subsidies. When the situation becomes more murky, there's probably less of a benefit, so maybe just pick one and not worry about squeezing the last percentage point of efficiency.

 

[pb4uski]

I would look at the combined cost of taxes and lost ACA premium subsidies on Roth conversions today in relation to Roth conversions vs the cost of taxes on RMDs if you don't do Roth conversions in relation to the RMDs.

In other words, consider lost ACA subsidies as a part of the cost of conversions.

 

[EastWest Gal]

I routinely sell funds to pay for expenses. That is the point of having the portfolio. I worked part time, as an independent contractor, from ages 55-60, and paid full ACA premiums. I retired 2 years ago and Cobra ended nearly a year ago. I was planning to do Roth conversions and sell from the portfolio every other year to keep premiums low in opposite years until Medicare age. It effectively cuts the cost of premiums by about a third when averaged over the years.

The American Rescue Plan legislation caps premiums at 8.5% of income. So this year and next I’ll be making Roth conversions and beefing up our cash position in hopes of staying under the ACA cliff. I won’t convert everything to a Roth by the time I need to take RMDs.

You may look at doing that the next two years, then every other year until your Medicare age.

The reason we have all accumulated our portfolios is to cover all expenses, including taxes and health care.

 

[Chuckanut]

II won’t convert everything to a Roth by the time I need to take RMDs.

Neither will I. But, half a loaf is better than none.

 

[RetiredHappy]

We don't do Roth conversion and I pay full freight to private individual off-exchange plan. I don't qualify for the 8.5% anyway because 8.5% of our income is more than double the 2nd lowest silver plan amount.

 

[N02L84ER]

With both of us on the ACA, our subsidy is currently over $1200/mo. We keep our ACA MAGI slightly under the 400% level but do small Roth conversions up to that level. In three years when one of us goes on Medicare, we expect the subsidy to drop to around $300/mo. We plan to run this type of calculator,

https://www.healthedeals.com/obamacare-calculator/
multiple times to verify the subsidy before deciding whether or not to go over the 400% level of income. We could easily live with an increase of $3600/yr in health insurance premiums. Giving up $14,400/yr in additional health insurance premiums does not make sense at this time. Luckily, we will only have 1 year where only one person is on an ACA plan. After the second person moves to Medicare, we plan to do much larger Roth conversions until we are both collecting SS.
Our suggestion is to check the health care website or the above calculator to determine just how large or small your subsidy will be using household income and only one person on an ACA plan.

 

[Dtail]

We don't do Roth conversion and I pay full freight to private individual off-exchange plan. I don't qualify for the 8.5% anyway because 8.5% of our income is more than double the 2nd lowest silver plan amount.

Part of the so called Fat Fire plan.

 

[Dtail]

Neither will I. But, half a loaf is better than none.

Same here, but less than half a loaf.

 

[SecondCor521]

The loss of ACA subsidies is just a phantom tax, as @pb4uski implies in his response upthread.

I'm considering paying full freight on my ACA plan for two years (2023 and 2024) so that I can do large Roth conversions (up to the top of 24% bracket). This seems to be the sweet spot because:

1. It'll be after my kids college is affected by FAFSA concerns.

2. It'll be before the 2026 tax rate sunset.

3. It'll be while I'm as young as I'll ever be again so my ACA premium subsidy is the least valuable (compared to other years when I'm older).

4. It'll be before IRMAA bites me.

5. Being early, it has the most impact on reducing my RMDs later.

6. Going up to the top of the 24% bracket means I get over the ACA subsidy hump and have a hopefully large flat plateau of lower taxes (as @RunningBum alludes to).

 

[ImaCheesehead]

Thanks for the replies.

Normally I think I am a person that can wait for the second marshmallow, but paying out all that extra now in exchange for the unknown possible future tax savings later is giving me anxiety. I don’t think I am going to be very good at doing the tax math but may give it a go. Does anyone know a source for a good online Tax CPA?

 

[RunningBum]

Normally I think I am a person that can wait for the second marshmallow, but paying out all that extra now in exchange for the unknown possible future tax savings later is giving me anxiety. I don’t think I am going to be very good at doing the tax math but may give it a go. Does anyone know a source for a good online Tax CPA?

Consider this. You can't eat any marshmallows until you pay the tax. You can't spend any money from your IRA until you pay the tax on it, so doing a conversion actually gives you more readily available money (with the caveat of the Roth 5 year rule).

I simply don't count the full balance of my tIRA in my "net worth". I reduce it by the estimated deferred tax liability. That way when I convert, it doesn't affect my net worth provided my estimate was correct. This makes total sense (to me, anyway) because I really didn't change my overall financial situation.

Yes, taxes have an unknown future, but do you really think they are going to be lower? Possible, but unlikely. I like locking into the known tax rate now rather than risk higher taxes in the future. Roth conversions actually reduce future uncertainty. Some people don't realize this, probably because converting is taking an action rather than doing nothing.

All that said, when you run your numbers you may find the best move is to do no conversions so you can maximize your ACA subsidy.

 

[Z3Dreamer]

I spend my days fine tuning multi-year spreadsheets. Tax, PTC, RMD, you name it.

 

[pb4uski]

Thanks for the replies.



Normally I think I am a person that can wait for the second marshmallow, but paying out all that extra now in exchange for the unknown possible future tax savings later is giving me anxiety. I don’t think I am going to be very good at doing the tax math but may give it a go. Does anyone know a source for a good online Tax CPA?

Do you do your own taxes in TT? If so, check out the What-If Worksheet and run some scenarios.

 

[kgtest]

I spend my days fine tuning multi-year spreadsheets. Tax, PTC, RMD, you name it.

I do the same, but multi-generational spreadsheets. Tune the ol man's and ma's...and then also factor in what my own impact would be since there will be a multi-generational wealth transfer. I was devastated when the 10 yr inherited RMD schedule came into play. Screwed my in terms of how much we now will pay to the IRS.

We will have a double-barrel tax torpedo, both DW and I are the youngest of our kin and our folks will leave us a LOT of $$$ but the only silver lining is her side is in Roth, I have been getting my ol man to aggressively roth convert.

IF and when we ER, we will be paying full ACA, and trying to do our own roth conversions. My newest/latest plan is to just hoard cash under the mattress.

 

[skyking1]

my retiree medical is about 13K a year for both of us and is coming off the top of my pension, so I didn't even consider what the OP is pondering.

 

[SecondCor521]

I do the same, but multi-generational spreadsheets. Tune the ol man's and ma's...and then also factor in what my own impact would be since there will be a multi-generational wealth transfer. I was devastated when the 10 yr inherited RMD schedule came into play. Screwed my in terms of how much we now will pay to the IRS.

We will have a double-barrel tax torpedo, both DW and I are the youngest of our kin and our folks will leave us a LOT of $$$ but the only silver lining is her side is in Roth, I have been getting my ol man to aggressively roth convert.

IF and when we ER, we will be paying full ACA, and trying to do our own roth conversions. My newest/latest plan is to just hoard cash under the mattress.

Do you have kids? Charitable interests?

 

[Exchme]

The economics for us show it's best to do Roth conversions and skip the subsidies. But Roth conversion economics are very individualized, depending on your goals, ages, health, investment return assumptions, tax laws, etc. so I would do as others have suggested and get a professional to do some calculations.

 

[FlaGator]

No, but every year I evaluate managing income down for ACA subsidies vs. the immediate spending opportunity and long-term estate implications of conversions and step up in basis for taxable holdings.

So far, I've stayed with lower income for the subsidies. Full price HI premiums for my brood has been over $20K/year recently and will be nearly $30K for a HD plan in 2022. It's been hard to sacrifice the near-term hit in favor of modest upside 10-30 years down the road. Particularly given I may not be around to see the benefit.

Another factor is I still have kids under 21, so the opportunity to take off for travel or other frivolities isn't there.

I have done small-ish conversions within the 0-12% bracket because I can. Every little bit helps.

 

[RetiredHappy]

Part of the so called Fat Fire plan.

You would know best.

 

[Ready-4-ER-at-14]

We chose to bite the bullet and covert a huge amount from ira to Roth last year so will pay max rate for Medicare in 2022. I forget what the tax rate was but was in the 30s 35 or 37 I think.

My logic was if we got 7% a year that would not be taxed we would break even in 7 years (minus inflation). Probable that one of us might be in a single tax deduction eventually is high as me male is a bit older than spouse. That tax bite with only one deduction catches many unaware because of required minimum deductions (RMD) at 72 i think now.

Anyhow we got lucky and made almost all of the tax bite back the first year in the Roths.

Now we have mostly fixed income ladders in iras that go out long enough to let us choose when to turn on the larger of the social securities which will trigger a spousal benefit increase.. thinking full retirement age but will decide each year on that if to wait another or not. IE old age insurance aspect if formal care is needed at some time.

We converted the older of us fully first then worked on younger. This way we are in max cost just one year when one of us will only be in it 9-10 months..

This year we may convert the very last of the likely to appreciate stuff (stocks mutual) to up one or two bands from smallest medicare band cost. Have tax program ordered and will fine tune conversion amount before dec 20th or so.

 

[Romer]

I am retiring in January and will be on Vacation until mid April. I plan on switching to Cobra then. I am going to make sure I have the cash I expect to need in 2023 by end of Dec 2022 so I can have low taxable income and max out on subsidies. I plan on doing a small conversion in 2022 and will play with the subsidy and tax cost of doing subsidies up to the 12% in 2023. 2024 and 2025 I may do conversions up to 22% because I believe that is the same limit that impacts Medicare which I will start in 2026

My message is its a balance and you have to play with the numbers to find a sweet spot for you

On a side note I was talking to a friend who was all freaked out about RMDs. In discussing it his RMDs would pay the same tax rate as conversions (after 2026) and he wasn't assuming the money he didn't need went back to his savings. Once he flowed this back to his savings, his stress went away It is easy to miss a detail here and there

 

[trirod]

I have the same quandary. I calculated that the effective marginal tax rate implied by my ACA subsidies is a little over 13% (it changes based on income level, but that’s where it is now). So say I’m in the 12% federal tax bracket, and I pay 4.25% to my state, that gives an effective tax rate of around 30% on Roth conversions.

Who knows what tax rates will be in the future, but if they stay the same as they are now, then I will likely be in the 24% federal tax bracket when I start taking RMD’s (state gives us a break on retirement income). So it doesn’t seem to make sense for me to pay 30% tax now to save 24% in the future. Am I missing anything? I know there could be IRMAA issues but the effective IRMAA marginal rate is only around 3 or 4% - much less than the 13% of the ACA subsidy.

 

[SecondCor521]

I have the same quandary. I calculated that the effective marginal tax rate implied by my ACA subsidies is a little over 13% (it changes based on income level, but that’s where it is now). So say I’m in the 12% federal tax bracket, and I pay 4.25% to my state, that gives an effective tax rate of around 30% on Roth conversions.

Who knows what tax rates will be in the future, but if they stay the same as they are now, then I will likely be in the 24% federal tax bracket when I start taking RMD’s (state gives us a break on retirement income). So it doesn’t seem to make sense for me to pay 30% tax now to save 24% in the future. Am I missing anything? I know there could be IRMAA issues but the effective IRMAA marginal rate is only around 3 or 4% - much less than the 13% of the ACA subsidy.

Two things you might be missing:

1. Some people consider that they might move from their current state to a state with no state income tax. In your case that might be a 4.25% savings.

2. You might recheck your IRMAA calculations. I calculate mine as (IRMAA tier rate - IRMAA base rate) * 12 months / taxable income. When I'm in the 24% bracket (late in life), my result of that calculation is about 11%.

Also, remember that the IRMAA rate cutoffs are a series of mini-cliffs - go $1 over the income threshold and you get to pay the entire higher premium. For example, a single person earning $87,999 would pay $148.50 a month for part B; a single person earning $88,001 would pay $220.20 a month. (I'm not sure if those numbers are 2021 or 2022; they're from my spreadsheet which I update rather lazily. But you get the idea I think.)

 

[GTFan]

I will take the massive savings on ACA premiums and OOP costs in exchange for a future tax benefit I might not be around to see, thanks. Also because I really think it's close to a wash in our case anyway.