Reducing income (MAGI) during early retirement

[indexfundfan]

The recent passage of the healthcare overhaul has prompted me to look closer at the issue of early retirement. There is a choice to work less and spend more time with family. Or even retire early and have the government subsidies your health care insurance by keeping income levels below 4x the poverty rate (see this Health Reform Subsidy Calculator).

The following is a list of items to reduce income:

• If you have kids, and you want to help to pay for their college, plan to have more of it funded by 529 accounts. If you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI.
• Pay off mortgage if possible to eliminate income requirement. Again, same thing as college funding, if you have to sell investments or draw down from tax-deferred accounts, that increases your MAGI. Without a mortgage, you have less need to realize capital gains or draw down from tax-deferred accounts.
• Derive income for ongoing expenses from tax exempt bonds (tax exempt income does not figure into MAGI).
• Use a short term tax exempt fund to hold non-immediate cash needs instead of a high yield savings account. Perhaps top up the checking account once or twice a month. This reduces the amount of interest payments reported in MAGI.
• Shift equity investments into lower yield equivalents, while still keeping the general composition of the portfolio reasonably unchanged. One potential candidate would be to invest in US LargeCap Growth instead of US LargeCap Blend. Does not work for US SmallCap (US SmallCap Growth has a poor historical record).
• Invest in rental property and use rental income to fund ongoing expenses (rental income is typically offset by property depreciation).
• Look into MLP investments that shield income for as long as the investment is not sold (you can control when to sell if necessary).
• Delay signing up social security.

 

[teejayevans]

Doesn't the govt use tax exempt funds for the MAGI requirement?
I seem to remember they are used for SS calculations. There is a
box on the 1040 form where you enter the tax exempt income.
TJ

 

[clifp]

Does it seem overly cynical on my part to assume that adjustments used to calculate income for purposes of medical subsidy, will be different than any other type of adjusted income, like those used for Social Security, student financial aid, Alternative Minimum Tax, and 1040 AGI?

 

[Nords]

Does it seem overly cynical on my part to assume that adjustments used to calculate income for purposes of medical subsidy, will be different than any other type of adjusted income, like those used for Social Security, student financial aid, Alternative Minimum Tax, and 1040 AGI?

Doesn't seem cynical to me, although we may have to add a few more seats for all the "reforms" jumping aboard the bandwagon...

 

[samclem]

• Invest in rental property and use rental income to fund ongoing expenses (rental income is typically offset by property depreciation)

As the present game continues, look for people (with fewer scruples) to begin looking for ways to get their income in undocumented form to remain below the government radar. Tenants don't send the IRS a Form 1099 telling them how much they paid their landlord. Also, tangible items (gold, gems, etc) don't notify the IRS how much they appreciated.