Minimizing MAGI for PPACA

[early137]

Why wouldn't a regular deferred annuity work just as well as a variable annuity? Or perhaps better? The inside buildup would not be taxable income and would reduce your MAGI if you bought it with taxable account funds that were previously generating taxable income that is included in O-MAGI. Cost would probably be lower than a VA.

If you could find one with a decent interest rate you could make it part of your fixed income allocation and it would have no interest rate risk.

Can you elaborate on why it would be better than the variable ?
I am very interested in learning more about this option.
As you say it would solve the magi issue.

The disadvantage are a lack of liquidity and the risk the insurance company will go belly up.
Also, if you compare the 7 year interest rate paid by the insurance company with a portfolio of high quality commercial bonds it looked quite low so there is something being lost there perhaps. Btw, comparing commercial bonds rather than treasury since you do have risk of insurer going broke

 

[brewer12345]

Can you elaborate on why it would be better than the variable ?
I am very interested in learning more about this option.
As you say it would solve the magi issue.

The disadvantage are a lack of liquidity and the risk the insurance company will go belly up.
Also, if you compare the 7 year interest rate paid by the insurance company with a portfolio of high quality commercial bonds it looked quite low so there is something being lost there perhaps. Btw, comparing commercial bonds rather than treasury since you do have risk of insurer going broke

Variable annuities are more complex and can be messier. In contrast, a straight SPDA (CD-type contract with a specified interest rate) is extremely simple and you know exactly what you are getting (a crappy yield). As for carrier risk, you can deal with that by being very selective as to who you buy from. Preference would be a large, highly rated (Aa3/AA- or better), mutual life insurer. There are perhaps a haf dozen that would fit the bill.

 

[pb4uski]

Can you elaborate on why it would be better than the variable ?....

I think it would be better because they are more straight-forward, that's it.

To me carrier risk is much lower than credit risk of a bond due to regulatory solvency regulations and in extreme cases, state guaranty funds backing the obligations.

That said, to me buying an annuity to reduce MAGI to get HI subsidies would be the last thing I would do - only after all other possibilities have been used.

 

[obgyn65]

But from a mathematical standpoint, deferred annuities make sense as all taxes are deferred for many years, correct? For example, I bought some annuities last year and I won't pay taxes on income for another 13 years. Therefore, isn't this a better way to reduce magi than sticking to CDs, munis, and some bond funds on which income I pay taxes every year?

That said, to me buying an annuity to reduce MAGI to get HI subsidies would be the last thing I would do - only after all other possibilities have been used.

 

[pb4uski]

While I concede that deferred annuities would accomplish an objective of deferring income to reduce O-MAGI, the downside is poor liquidity due to high surrender charges and low returns and a smidgen of more credit risk compared to FDIC insured CDs.

I don't see the tax deferral benefit attractive once considering these downsides, but if you throw in qualifying for Obamacare subsidies (vs. not) then it could tip the scale in their favor in some situations.

 

[MichaelB]

So, the objective when exchanging taxable funds for an annuity is to eliminate current income and shift it to future income, correct? In order to not upset an asset allocation, one would need to change from fixed income, not equities, into annuity. Ignoring capital gains, if current rates are 4%, a $5K reduction in current income requires moving $125k into annuities.

The benefit of this is clearer for a 60 year old couple at the edge of the cliff, 399% of the FPL. The saving is $10K, potentially times 5 (years). Below the cliff, a $5K reduction in income delivers $500 in additional savings. A younger person, age 40, benefits much less because the premium is already lower due to age. Not a lot of $ for such a big and permanent change in investment strategy.

Am I seeing this incorrectly?

 

[brewer12345]

So, the objective when exchanging taxable funds for an annuity is to eliminate current income and shift it to future income, correct? In order to not upset an asset allocation, one would need to change from fixed income, not equities, into annuity. Ignoring capital gains, if current rates are 4%, a $5K reduction in current income requires moving $125k into annuities.

The benefit of this is clearer for a 60 year old couple at the edge of the cliff, 399% of the FPL. The saving is $10K, potentially times 5 (years). Below the cliff, a $5K reduction in income delivers $500 in additional savings. A younger person, age 40, benefits much less because the premium is already lower due to age. Not a lot of $ for such a big and permanent change in investment strategy.

Am I seeing this incorrectly?

Sort of. One could buy an after tax variable annuity that held index funds from Vanguard if you did not want to change your allocation.

Other than that, I think this is mostly of interest for someone on the edge of the 400% FPL cliff, as you point out. I'd guess that all of this will change somewhat (FPL cliff, MAGI definition, etc.), so a younger person would not want to make a permanent step like buying an annuity.

 

[pb4uski]

Agreed that it probably only makes sense if you are otherwise only slightly over the cliff. Even if the returns from the annuity were lower than the alternative investment the juice of Obamacare subsidies would more than offset it. Also agree it makes no sense if you are otherwise below 400% FPL.

However you would need to be very careful that the transaction to raise cash to buy the annuity doesn't result in a capital gain that puts you over 400% FPL and unwind your carefully laid plan.

 

[brewer12345]

Agreed that it probably only makes sense if you are otherwise only slightly over the cliff. Even if the returns from the annuity were lower than the alternative investment the juice of Obamacare subsidies would more than offset it. Also agree it makes no sense if you are otherwise below 400% FPL.

However you would need to be very careful that the transaction to raise cash to buy the annuity doesn't result in a capital gain that puts you over 400% FPL and unwind your carefully laid plan.

If you were over the line anyway, incurring some cap gains probably would not make that much of a difference for one year.

 

[early137]

Variable annuities are more complex and can be messier. In contrast, a straight SPDA (CD-type contract with a specified interest rate) is extremely simple and you know exactly what you are getting (a crappy yield). As for carrier risk, you can deal with that by being very selective as to who you buy from. Preference would be a large, highly rated (Aa3/AA- or better), mutual life insurer. There are perhaps a haf dozen that would fit the bill.

Thank you very much

 

[early137]

I think it would be better because they are more straight-forward, that's it.

To me carrier risk is much lower than credit risk of a bond due to regulatory solvency regulations and in extreme cases, state guaranty funds backing the obligations.

That said, to me buying an annuity to reduce MAGI to get HI subsidies would be the last thing I would do - only after all other possibilities have been used.

Thank you
Yes I am not using annuity at this time but I am concerned that aca contains some triggers that will lower the subsidies if the program is too expensive..
May need to use annuity in the future.

 

[early137]

Agreed that it probably only makes sense if you are otherwise only slightly over the cliff. Even if the returns from the annuity were lower than the alternative investment the juice of Obamacare subsidies would more than offset it. Also agree it makes no sense if you are otherwise below 400% FPL.

However you would need to be very careful that the transaction to raise cash to buy the annuity doesn't result in a capital gain that puts you over 400% FPL and unwind your carefully laid plan.

I agree with the post.
However, some points that make me think I may use an annuity in the future in particular a deferred annuity

Pb4usk is correct that at the cliff $1 of income can cause a large increase in health care expenditures in fact under just the right conditions $1 can cost thousands in health care costs. However, this is due to the slope of the %income for insurance vs income curve. An article on the high slope at 400% fpl is here

http://www.obamacarecliff.com/

In the future the cutoff point and shape of the curve may very well shift. I read that aca has a clause where if it is costing too much of the gdp in a few years the cutoff shifts down and shape of the curve changes.

There are also cost sharing subsidies which kick in below 400% fpl. One is to lower your total out of pocket limit and another is to reduce the actuarial percentage of your medical costs you need to pay eg make your deductible lower. For someone who uses their insurance every year due to chronic conditions these are also factors.

I have 12 years to go to medicare and it is entirely possible I will have to forgo subsidies in some of those years and bunch capital gains, an inherited ira, or a transition into an annuity into that one year making up for it in future years. Thus I don't see the cap gains of moving to an annuity as a deal breaker.

The consensus is that the lousy interest rate aka expense and liquidity are big disadvantages and that is why I am not doing it - yet.

That is why this is an important thread to all of us we need to have tricks up our sleeve as aca evolves.

In that spirit here is another idea
Can you purchase a 10 year spider index future and put you us stock allocation of taxable money in that ?
If the market goes up in the next 10 years you will make money and in fact it is a proxy for s and p 500 mutual fund investment but pays out no dividends or cap gains until it expires at which time 65% of the gain is cap gains and 35% ordinary income ... I think

I haven't done this because the doesn't seem to be any such option at this time traded as a standard product.
There are leap options and super leaps but that only gets me 5 years out
http://ir.cboe.com/releasedetail.cfm?ReleaseID=652383


You can apparently do this with enough money probably as a swap but we are talking many millions.

Any ideas how to make this work?

 

[obgyn65]

Correct. One of the main advantages of using deferred annuities is that you are deferring taxes also, therefore decreasing MAGI. I have a couple of small deferred annuities only bought last year. So far so good.

So, the objective when exchanging taxable funds for an annuity is to eliminate current income and shift it to future income, correct?

 

[explanade]

But spending decreases with age so having more income later in life when you may not be as active ...

 

[whitestick]

But spending decreases with age so having more income later in life when you may not be as active ...

So far that's not been proven to be true. Or maybe I am living the good life too large. In any case, with the unexpected life changes, partner loss, new life style, and medical chronic conditions, On a prorated basis, I seem to be spending more rather then less, and it's really playing @#$*) with required MAGI. Which has had the unexpected affect of increasing the Medicare costs, and not sure what the ACA effect will be. Really blew up the spreadsheet used for planning for REFI. So far though, squeaking by, but waiting to see what inflation will do to mess things up.

 

[NoMoreJob]

So, the objective when exchanging taxable funds for an annuity is to eliminate current income and shift it to future income, correct? In order to not upset an asset allocation, one would need to change from fixed income, not equities, into annuity. Ignoring capital gains, if current rates are 4%, a $5K reduction in current income requires moving $125k into annuities.

The benefit of this is clearer for a 60 year old couple at the edge of the cliff, 399% of the FPL. The saving is $10K, potentially times 5 (years). Below the cliff, a $5K reduction in income delivers $500 in additional savings. A younger person, age 40, benefits much less because the premium is already lower due to age. Not a lot of $ for such a big and permanent change in investment strategy.

Am I seeing this incorrectly?

That the 60 year old couple may be able lump income to reduce the number of cliff years - maybe to one. The trade-off would be higher tax in the lump year(s).

 

[Theseus]

That the 60 year old couple may be able lump income to reduce the number of cliff years - maybe to one. The trade-off would be higher tax in the lump year(s).

Managing MAGI may well require trade-offs such as you describe. Instead of going over the cliff each year, just drive it over intentionally one time (won't be 60 years old forever, anyway) and maybe use an alternate insurance provider that year; but of course that is some major juggling to have it planned out in advance.

I've weighed employer sponsored plans in terms of premiums + max OOP for years so this is not too surprising, but it is obviously a very steep cliff!

 

[NoMoreJob]

Managing MAGI may well require trade-offs such as you describe. Instead of going over the cliff each year, just drive it over intentionally one time (won't be 60 years old forever, anyway) and maybe use an alternate insurance provider that year; but of course that is some major juggling to have it planned out in advance.

I've weighed employer sponsored plans in terms of premiums + max OOP for years so this is not too surprising, but it is obviously a very steep cliff!

Agreed. It gets even more difficult considering that things do change - which I think is likely with this law as time goes on.

 

[GLM]

Questions as I look at how we can minimize MAGI in years going forward .

DH left full time employ with mega corp earlier this year and is doing part time consulting. (He has formed an LLC ) We are looking at the individual 401k for maximum tax flexibility.

1) I need to find out if you can do the employee contribution to these 401ks after the end of the tax year but before you file . I know the employer portion can be done this way.

As a result our MAGI in 2013 will be a fraction of what it was in 2012 -the year they are tentatively using to qualify for subsidies . We plan to try and keep his MAGI below the magic 400% for subsidies, especially if we find insurance will be substantially more then it is now (We pay $512/ mo for a HD plan with preventive care covered. )

If we get an policy through the exchange and pay the full cost (To avoid the hassle of trying to convince the government we qualify for the subsidy up front. ) we will get a sizable tax credit when we file 2014 taxes in 2015.

2) Will this credit this then be added to our MAGI? If so are we talking 2014 or 2015 income ?

I would hate to have the tax subsidy disqualify us for the subsidy.!

3) Side query - anyone get into the Healthcare.gov website successfully to see their options ? We live in Georgia and it took me three days to successfully create and account and now I still can't make it work. The site shut down for work shortly after I got in, and I still can't get back in . (Variety of errors)

Thanks all

 

[pb4uski]

The credit would not be added to your O-MAGI.

 

[GLM]

So are you saying it would not increase our 2014 or 2015 income (the way say a state tax refund would ? )

 

[daylatedollarshort]

Questions as I look at how we can minimize MAGI in years going forward .

DH left full time employ with mega corp earlier this year and is doing part time consulting. (He has formed an LLC ) We are looking at the individual 401k for maximum tax flexibility.

1) I need to find out if you can do the employee contribution to these 401ks after the end of the tax year but before you file . I know the employer portion can be done this way.

We made our 401K contributions for 2013 yesterday. I think you just have to have the plan in place before the end of the tax calendar year, then until April 15th of the next year to make contributions, or later if you file an extension.

See for more info -

Solo 401(k) 2012 Deadlines and Tax-Savings Update: How You Can Cut Your Tax Bill by $10,000 - Forbes

These brochures from Consumer's Union explain pretty clearly the way the tax credit will work -

https://sites.google.com/a/consumer.org/tax-credit-brochure/

What really counts is your 2014 O-MAGI. That is what your premiums will be reconciled to when you do your 2014 taxes.

O-MAGI is explained here -

http://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf

 

[pb4uski]

So are you saying it would not increase our 2014 or 2015 income (the way say a state tax refund would ? )

While I haven't seen anything specific on your question, I don't think it will.

From what I know the credit is viewed as an offset to your health care costs rather than income and would be accounted for in the same tax return as the credit reconciliation is.

So for example, let's say you are a married couple and pay $12k for HI in 2014 and have $60k of O-MAGI but had not received any credits in 2014. Let's say your credit is $5k and your OOP costs are $3k.

I "think" that you will enter the $15k paid for HI and OOP on Schedule A and the tax software will reduce it for the $5k credit you will receive and also for 10% of your income and you'll get an itemized deduction for $4k [$15k paid - $5k subsidy - $6k (10% of $60k income)].

Or something like that anyway. Hopefully others will know if this is right or not.

 

[rbmrtn]

As a result our MAGI in 2013 will be a fraction of what it was in 2012 -the year they are tentatively using to qualify for subsidies . We plan to try and keep his MAGI below the magic 400% for subsidies, especially if we find insurance will be substantially more then it is now (We pay $512/ mo for a HD plan with preventive care covered. )


Thanks all

I believe they are using your estimated 2014 MAGI for subsidy qualification ( that is what they asking for on the forms )

 

[jflynn4]

Questions as I look at how we can minimize MAGI in years going forward . DH left full time employ with mega corp earlier this year and is doing part time consulting. (He has formed an LLC ) We are looking at the individual 401k for maximum tax flexibility. 1) I need to find out if you can do the employee contribution to these 401ks after the end of the tax year but before you file . I know the employer portion can be done this way. As a result our MAGI in 2013 will be a fraction of what it was in 2012 -the year they are tentatively using to qualify for subsidies . We plan to try and keep his MAGI below the magic 400% for subsidies, especially if we find insurance will be substantially more then it is now (We pay $512/ mo for a HD plan with preventive care covered. ) If we get an policy through the exchange and pay the full cost (To avoid the hassle of trying to convince the government we qualify for the subsidy up front. ) we will get a sizable tax credit when we file 2014 taxes in 2015. 2) Will this credit this then be added to our MAGI? If so are we talking 2014 or 2015 income ? I would hate to have the tax subsidy disqualify us for the subsidy.! 3) Side query - anyone get into the Healthcare.gov website successfully to see their options ? We live in Georgia and it took me three days to successfully create and account and now I still can't make it work. The site shut down for work shortly after I got in, and I still can't get back in . (Variety of errors) Thanks all

I'm assuming that Georgia will be substantially the same as Florida as far as the process. I was able to access the system yesterday evening and answered the questions. Today, I got an email telling me I had a message and to log in. (I was using Safari and getting nowhere,,,,changed to Chrome and was on the log in page in about 5 minutes ....). Was slow as could be but was told I had passed their "testing" and was able to go thru the rest of the process to enroll.

My MAGI is going to have to be managed between taxable and non taxable accounts but I estimated on the high end since, if you are under-subsidized, you'll receive a refund in 2015 when filing. My personal plan is to live out of non-taxable accounts until December at which time I'll reimburse myself the amount necessary to bring my MAGI to the magic number for the subsidy.

The only reference to 2012 (or 2013) that I recall was asking me whether or not my income would be substantially the same in 2014, to which I answered "no." Beyond that, they asked for permission to look at up to five years of returns (no problem).