Minimizing MAGI for PPACA

[early137]

One way to reduce your MAGI would be to purchase a Bronze plan through the exchange (60% actuarial benefit). The Bronze plan qualifies you for an HSA deduction (line 25 on the 1040) which I believe reduces your MAGI.

Bronze May Be the Most Precious Metal Under Obamacare | Hull Financial Planning

FYI I called the nevada state insurance exchange and they told me the state will offer no hsa qualified plans over their exchange. They said hsa plans must be pop and the nevada plans are HMO.

 

[brewer12345]

A golden opportunity for Roth conversions. Some detail starting to come out on Colorado plans and pricing, it doesn't look too bad. http://cdn.colorado.gov/cs/Satellit...goBlobs&blobwhere=1251875394675&ssbinary=true

The devil is in the details, but I am encouraged to see Kaiser in the middle for prices as they have a great record for care quality.

 

[daylatedollarshort]

I am quitting the day job in January. DW will continue working. I expect she will gross between 25 and 30k and the business has 3 to 5k in expenses. I may generate soem additional income which I would ideally run through the proprietorship. That would give us maximum flexibility to fool with out MAGI for PPACA purposes, since we could then shelter all of the income if need be.

I meant if you are a spousal co-owner for 2013, before you quit your day job, you may be able to shelter some more of the business income with hers and his profit sharing contributions, assuming you are already maxing out your 401K contribution portion already at work.

 

[brewer12345]

I meant if you are a spousal co-owner for 2013, before you quit your day job, you may be able to shelter some more of the business income with hers and his profit sharing contributions, assuming you are already maxing out your 401K contribution portion already at work.

Gotcha. DW's business will not net enough that it is an issue for 2013, but things are ramping up.

 

[rbmrtn]

Since we are talking about decreasing MAGI to obtain eligibility for PPACA tax credits, I am not clear how the strategy below would work.

It was my understanding that purchasing a Bronze plan will not make you eligible for the tax credits under PPACA--only Silver, Gold or Platinum plans will do that.

But maybe I'm missing something here.

I believe there are two types of subsidies, premiums and cost sharing. The premium subsidies can be applied to any plan. The cost sharing are available only on silver plans with income up to 250% FPL

http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8303.pdf

 

[Coolius]

Are Social Security benefits included in the MAGI?

And what about pension benefits? ( I have none, but others may find this info useful )

In my case, I have no earned income, being ER for 3 years now. Taxable interest and dividends is about 55% of gross income, the balance is from Social Security Benefits.

The total amount is less than $60K ( 400% of 2013 Federal Poverty Level for family of 2 ). Does this mean that I will get the full Fed premium assistance?


Coolius

 

[early137]

I believe there are two types of subsidies, premiums and cost sharing. The premium subsidies can be applied to any plan. The cost sharing are available only on silver plans with income up to 250% FPL

http://kaiserfamilyfoundation.files.wordpress.com/2013/01/8303.pdf

Excellent info thank you.
I am finally starting to understand this.

Perhaps some clear thinking person can help me think about the following decision

I have arranged my taxable investments of 1 million so that I am just at 200% of fpl
If I am under 200% I get actuarial value of 87% on the silver plan due to cost sharing
If over I get 73%
I am considering putting some money in a variable annuity to make sure I stay under 200%

Currently my wife and I are healthy so I estimate the cost sharing is only worth about $300 ($2000 expenditures times 14%)
If we were very sick the value of the cost sharing would be the max out of pocket x 14% so around $900

So if I am thinking about this right the cost sharing is not really worth all that much and the costs of the annuity outweighs the savings.
If we get sick and out health costs are hitting out of pocket then it would make more sense.

 

[early137]

Are Social Security benefits included in the MAGI?

And what about pension benefits? ( I have none, but others may find this info useful )

In my case, I have no earned income, being ER for 3 years now. Taxable interest and dividends is about 55% of gross income, the balance is from Social Security Benefits.

The total amount is less than $60K ( 400% of 2013 Federal Poverty Level for family of 2 ). Does this mean that I will get the full Fed premium assistance?

Coolius

The answer to the last question is no. Kaiser has a premium subsidy calculator you can use to see the effect of changing your agi

Be careful, if you are at 400% fpl 1 dollar more will mean no premium subsidy all
Hope this helps

 

[Htown Harry]

Are Social Security benefits included in the MAGI?

Yes.

So for 62-64 y.o.'s, deferring Social Security until eligible for Medicare (age 65) should be considered. Even though some Social Security income may be exempt from federal income tax, all Social Security income is included in MAGI.

 

[Htown Harry]

An idea, not fully thought through because I'm not very familiar with HRA's...

If you get laid off or quit, negotiate to have a chunk of your severance pay (or unused vacation, pro-rated bonuses or any other final check items that count as earned income) paid out as a contribution to a Health Reimbursement Account (HRA). HRAs allow early retirees to use the (usually notional) employer contribution to purchase health insurance from the exchange or to pay for other qualifying medical expenses.

This could be a two-fer: reducing 1040 income in the year of the layoff, plus reducing the need for any early retiree to take taxable IRA withdrawals to pay insurance premiums and other health costs.

 

[Coolius]

The answer to the last question is no. Kaiser has a premium subsidy calculator you can use to see the effect of changing your agi

Be careful, if you are at 400% fpl 1 dollar more will mean no premium subsidy all
Hope this helps

Early137, I am probably reading your reply incorrectly, as I was confused.

Perhaps I should put hard numbers to clarify my situation:

Estd 2014 income from ALL sources : $46,000

Of this amount, about $26K is dividends, bank interest and Bond interest. No earned income at all. The rest, $20K is Social Security.

We are a family of 2, myself ( 62 yrs ) and DW ( 59 yrs ).

Would we qualify for a Federal premium assistance? Or not?

I guess I'm confused, the Covered California brochure is pretty complex to decipher.

 

[pb4uski]

Early137, I am probably reading your reply incorrectly, as I was confused.

Perhaps I should put hard numbers to clarify my situation:

Estd 2014 income from ALL sources : $46,000

Of this amount, about $26K is dividends, bank interest and Bond interest. No earned income at all. The rest, $20K is Social Security.

We are a family of 2, myself ( 62 yrs ) and DW ( 59 yrs ).

Would we qualify for a Federal premium assistance? Or not?

I guess I'm confused, the Covered California brochure is pretty complex to decipher.

Assuming the $20k is all your SS, yes you would qualify. 400% FPL for a couple is ~$62k IIRC.

 

[rbmrtn]

Early137, I am probably reading your reply incorrectly, as I was confused.

Perhaps I should put hard numbers to clarify my situation:

Estd 2014 income from ALL sources : $46,000

Of this amount, about $26K is dividends, bank interest and Bond interest. No earned income at all. The rest, $20K is Social Security.

We are a family of 2, myself ( 62 yrs ) and DW ( 59 yrs ).

Would we qualify for a Federal premium assistance? Or not?

I guess I'm confused, the Covered California brochure is pretty complex to decipher.

Yes You have a MAGI of 46k

Subsidy Calculator | The Henry J. Kaiser Family Foundation[0][age]=62&adults[0][tobacco]=0&adults[1][age]=59&adults[1][tobacco]=0&child-count=0&child-tobacco=0

 

[explanade]

Unfortunately, I don't have that latitude since I don't have a business.

What I plan to do is to have my 2014 tax return all but prepared just prior to the end of 2014, including any December 2014 capital gains distributions and then do some Dec 31 trades to get me to where I want to be. I'll probably even go $500-$1,000 below target in case some surprise pops up i won't go over 400% FPL.

I am researching but I think there will be a way to withdraw excess HSA contributions and interest thereon if I happen to go over which would make it unnecessary to undershoot, but i may undershoot anyway so if my tax return is audited some oddball thing doesn't pop up and put me over 400% FPL and require that I return the subsidy.

Do you mean you would do trades to minimize the cap gains distributions?

In other words, sell stocks at a loss?

I get a lot of dividends and cap gains distributions from my taxable accounts, which hold the bulk of my savings (like at least 85%).

So last year, dividends and cap gains distributions (which I'm currently rolling into DRIP) added almost $70k to my AGI.

So if I didn't earn a dime from other sources, my MAGI may be already too high for ACA subsidies?

 

[Coolius]

Assuming the $20k is all your SS, yes you would qualify. 400% FPL for a couple is ~$62k IIRC.

pb4uski and rbmrtn, thanks for the replies.

I used the calculator, and it shows that my premiums would be around $4,300 after incorporating a Federal Assistance of $13,000 annually. That is about 375/month, quite manageable. And that is for a Silver plan.

DW and I will likely go for the Bronze plan, as we are both healthy with no obvious issues. Once Medicare kicks in, I presume these premiums no longer apply?

 

[pb4uski]

Do you mean you would do trades to minimize the cap gains distributions?

In other words, sell stocks at a loss?

I get a lot of dividends and cap gains distributions from my taxable accounts, which hold the bulk of my savings (like at least 85%).

So last year, dividends and cap gains distributions (which I'm currently rolling into DRIP) added almost $70k to my AGI.

So if I didn't earn a dime from other sources, my MAGI may be already too high for ACA subsidies?

No, I expect with my dividends and cap gain distributions that I will be below 400% FPL, so I will take some LTCG to bring me from wherever I am to just under 400% FPL. These LTCG will have 0% tax but will increase my basis since I will buy back the same stock the same day.

It looks like in your case you would want to do the opposite sicne you will be over 4005 FPL. You might be able to change your placement of investments to reduce your taxable investment income or if you have some unrealized losses, realize them to bring you below 400% FPL. You could also go with a HSA qualifying policy and make a HSA contribution and that would also reduce your O-MAGI - $8,250 for a couple over 50 IIRC.

 

[pb4uski]

...Once Medicare kicks in, I presume these premiums no longer apply?

Yes, that is my understanding.

 

[explanade]

No, I expect with my dividends and cap gain distributions that I will be below 400% FPL, so I will take some LTCG to bring me from wherever I am to just under 400% FPL. These LTCG will have 0% tax but will increase my basis since I will buy back the same stock the same day.

It looks like in your case you would want to do the opposite sicne you will be over 4005 FPL. You might be able to change your placement of investments to reduce your taxable investment income or if you have some unrealized losses, realize them to bring you below 400% FPL. You could also go with a HSA qualifying policy and make a HSA contribution and that would also reduce your O-MAGI - $8,250 for a couple over 50 IIRC.

Hmm, I can't move some of my taxable accounts assets to retirement accounts, can I?

If you retire, where would you have your HSA? I've only seen it with employers. Is it like IRA accounts, offered by various institutions, and you can invest what you've contributed to get some kind of return?

I thought the HSA annual contribution limit wasn't that much.


Actually I think we did a poll of which members would be trying to get subsidies by reducing their income (withdrawing less). But after all the dividends and cap gains distributions, plus what you would need for living expenses, staying under the limits for getting subsidies may be difficult for some people here.

 

[pb4uski]

Hmm, I can't move some of my taxable accounts assets to retirement accounts, can I?

If you retire, where would you have your HSA? I've only seen it with employers. Is it like IRA accounts, offered by various institutions, and you can invest what you've contributed to get some kind of return?

I thought the HSA annual contribution limit wasn't that much.


Actually I think we did a poll of which members would be trying to get subsidies by reducing their income (withdrawing less). But after all the dividends and cap gains distributions, plus what you would need for living expenses, staying under the limits for getting subsidies may be difficult for some people here.

An HSA contribution essentially moves taxable funds to a tax free account (similar to a Roth except it must be spent on qualifying health care expenses). I think the limit for us for 2013 will be $8,450 since we are both over 50.

I moved my HSA to a HSA I found through Vanguard after I retired and it is invested in Vanguard funds. The company's interface is quite klunky, but I don't use it much so it is not a big deal for me.

If you have too much income from your taxable investments, send it to me and I'll hold it for you until you can spend it down.

Since I'm drawing a combination of income and principal for living expenses, I don't get your comment there. Don't confuse withdrawals with income - they are totally different things.

 

[haha]

My grandfather used to just hold an assortment of individual dividend paying stocks with zero recurring expenses.

Could you explain what you mean? Are you referring only to the fact that individual stocks don't have management fees?

Ha

 

[Htown Harry]

There would be several potential strategies to explore if you receive (or expect to receive) an IRA in an inheritance from a non-spouse. (An IRA inherited from a spouse can roll over into your own IRA without an income or tax hit.)

Without going too far into the details, withdrawals by the beneficiary are required under the IRA rules. Withdrawn amounts are counted as line 16 income and add to the MAGI. There are many ifs, but the withdrawal options include:

• A lump sum withdrawal within a year+/- after the death of the original account holder. It might be advantageous to take all of the income hit in one year, to avoid income from withdrawals continuing over several years. A variation on this would be a decision to take the withdrawal in the tax year of the death instead of the following year.

• Required Minimum Distributions (RMDs). This is the method that defers full withdrawal for the longest possible time by using an actuarial table similar to the one used for age 70-1/2+ RMDs. It comes with the downside that there will be a MAGI-increasing distribution every year.

• Five-year withdrawal. I believe one can take $0 in distributions for several years, but all assets need to be fully distributed by the end of the fifth year after the year in which the original account holder died. One could take a lump sum distribution in a planned no-subsidy year a few years out

So here are some potential strategies:

Avoid inheriting an IRA If you know you will be an heir to an estate with several types of assets, encourage your benefactor to bequeath other types of assets to you. ("Dad, I know you want me and sis to get equal shares, but that doesn't mean every asset has to be split down the middle. I'd rather get the house than the IRA.")

Carefully plan your distributions types, sequence and amounts (As described above)

If taking RMDs, allocate assets to minimize surprise MAGI increases The RMD % applied to the IRA account value grows each year, which is unavoidable. But one could allocate slow-and-steady bonds, value stocks and dividend stocks to the inherited IRA account, instead of high-flying growth stocks likely to have big up years.


It's a complicated set of variables. A visit to a CPA would be on my to-do list if I was managing my income to the MAGI income ceiling and subsequently inherited an IRA.

 

[explanade]

An HSA contribution essentially moves taxable funds to a tax free account (similar to a Roth except it must be spent on qualifying health care expenses). I think the limit for us for 2013 will be $8,450 since we are both over 50.

I moved my HSA to a HSA I found through Vanguard after I retired and it is invested in Vanguard funds. The company's interface is quite klunky, but I don't use it much so it is not a big deal for me.

If you have too much income from your taxable investments, send it to me and I'll hold it for you until you can spend it down.

Since I'm drawing a combination of income and principal for living expenses, I don't get your comment there. Don't confuse withdrawals with income - they are totally different things.

On the last point, I meant a lot of ER folks are withdrawing their retirement assets, at an SWR, to pay their living expenses, are they not?

They may or may not be receiving a pension in ER, may or may not be receiving SS.

But ER means drawing on retirement assets, in either retirement or taxable accounts, to fund their living expenses in ER?

I know some people have income streams, such as rental property. But I thought most people fortunate to have FIREd had significant savings to pay for ER and withdrawals, which involves selling financial instruments, constituted some portion of their "retirement income"?

Or am I totally not getting what early-retirement.org is about?

 

[early137]

An HSA contribution essentially moves taxable funds to a tax free account (similar to a Roth except it must be spent on qualifying health care expenses). I think the limit for us for 2013 will be $8,450 since we are both over 50.

I moved my HSA to a HSA I found through Vanguard after I retired and it is invested in Vanguard funds. The company's interface is quite klunky, but I don't use it much so it is not a big deal for me.

If you have too much income from your taxable investments, send it to me and I'll hold it for you until you can spend it down.

Since I'm drawing a combination of income and principal for living expenses, I don't get your comment there. Don't confuse withdrawals with income - they are totally different things.

In nevada the state exchange does not offer an hsa qualified plan unfortunately. So using an hsa to reduce magi is state dependent

 

[early137]

Are Social Security benefits included in the MAGI?

And what about pension benefits? ( I have none, but others may find this info useful )

In my case, I have no earned income, being ER for 3 years now. Taxable interest and dividends is about 55% of gross income, the balance is from Social Security Benefits.

The total amount is less than $60K ( 400% of 2013 Federal Poverty Level for family of 2 ). Does this mean that I will get the full Fed premium assistance?

Coolius

No at $60 k you do not get full premium assistance
Yes as you know you do get some premium assistance.
Full premium assistance enables you to only pay $775 a year and occurs with magi
Of about $22000 a year. Below that you get Medicaid in states that expanded that program.

 

[early137]

There would be several potential strategies to explore if you receive (or expect to receive) an IRA in an inheritance from a non-spouse. (An IRA inherited from a spouse can roll over into your own IRA without an income or tax hit.)

Without going too far into the details, withdrawals by the beneficiary are required under the IRA rules. Withdrawn amounts are counted as line 16 income and add to the MAGI. There are many ifs, but the withdrawal options include:


[*]A lump sum withdrawal within a year+/- after the death of the original account holder. It might be advantageous to take all of the income hit in one year, to avoid income from withdrawals continuing over several years. A variation on this would be a decision to take the withdrawal in the tax year of the death instead of the following year.



[*]Required Minimum Distributions (RMDs). This is the method that defers full withdrawal for the longest possible time by using an actuarial table similar to the one used for age 70-1/2+ RMDs. It comes with the downside that there will be a MAGI-increasing distribution every year.



[*]Five-year withdrawal. I believe one can take $0 in distributions for several years, but all assets need to be fully distributed by the end of the fifth year after the year in which the original account holder died. One could take a lump sum distribution in a planned no-subsidy year a few years out

So here are some potential strategies:

Avoid inheriting an IRA If you know you will be an heir to an estate with several types of assets, encourage your benefactor to bequeath other types of assets to you. ("Dad, I know you want me and sis to get equal shares, but that doesn't mean every asset has to be split down the middle. I'd rather get the house than the IRA.")

Carefully plan your distributions types, sequence and amounts (As described above)

If taking RMDs, allocate assets to minimize surprise MAGI increases The RMD % applied to the IRA account value grows each year, which is unavoidable. But one could allocate slow-and-steady bonds, value stocks and dividend stocks to the inherited IRA account, instead of high-flying growth stocks likely to have big up years.

It's a complicated set of variables. A visit to a CPA would be on my to-do list if I was managing my income to the MAGI income ceiling and subsequently inherited an IRA.

Great point.