2017 goal: maximize ACA credits or Roth conversion?

[duckcalldan]

This question has been discussed many times but, as I am ERing in less than 2 months and starting ACA on March 1, it's a question I'd like to figure out. My wife (age 50) and I (53) with 2 daughters aged 19 and 16. Before the election, I thought I would convert enough of my 750K rollover IRA to stay under 400% FPL and get a HDHP with a HSA (we're all in good health presently). The $6750 HSA deduction would allow me to convert almost $40K to a Roth, pay very little federal tax (we'd get $3500 in child and college tuition tax credits in 2017) and still get a decent ACA subsidy.

Now it's looking like 2017 may be the last year for income-based ACA subsidies. So, since I still have 17 years until RMDs (and I won't likely need my Roth money; I'm setting it up for my heirs), I'm considering foregoing Roth conversion until 2018 and minimizing my income to get a Silver plan with cost sharing and much lower deductibles. One downside: I wouldn't be able to open a HSA.

I know there's much conjecture and, once Trump takes office, we'll have a better picture of what a ACA replacement looks like and if income-based subsidies will continue. But I have to apply for ACA no later than Feb 15 and I will have to estimate my 2017 income. So, if you were in my place, what would you do?

 

[zinger1457]

If it was me I would stick with your original plan of doing the Roth conversion with HSA, even if it may only be for one year. Not sure what the benefit would be of selecting the low deductible Silver plan if everyone's health is good and you don't plan on using it.

 

[RunningBum]

Tough call. How likely are you going to be able to get your IRA fully converted to Roth? How important is that, meaning, will you have a lot of pension or other income such that you really don't want RMDs?


Another factor, what if the ACA subsidy DOES stay around in more or less this form? As health insurance rates rise with age, that subsidy becomes more and more valuable.


Being single with enough income thrown from my after tax accounts that I can't come close to a silver plan, I don't know just how valuable that is. Lower deductible and out of pocket costs, right? Another uncertainty as to whether you'd even use it.


Too many unknowns to really give advice. I don't think there is a wrong answer, just that one will work out better for you, but you can't be sure which one it will be.

 

[Z3Dreamer]

To OP, just signed up for ACA today. I got me one of them Bronze HSA plans. Subsidies are much more valuable than Roth conversion savings so I will deplete my Roth's, if need be, to keep my OMAGI at a reasonable level while still being able to afford mid-range Cabernet. My effective date is the same as yours.

A new thought that has not been mentioned in this thread. Typically, when a tax law is changed, they grandfather those who were in place on the effective date of new legislation. Since my effective date is the same as yours, March 1st, I am in place as of 1/7. Not guaranteed but ....

 

[GTFan]

Now it's looking like 2017 may be the last year for income-based ACA subsidies.

Um, no way they're going to phase out by the end of this year. After 2018 I agree all bets are off, but we'll still have an exchange with subsidies next year. Might not be any insurers left but there will be a subsidized exchange.

But to your OP, my view has always been to take the $10k+ in subsidies that I'm given instead of maxing out Roth. Money today is far better to me than 15 or more years from now, and when RMDs hit we'll probably roll any excess to QCDs. We're keeping MAGI just below 150% FPL to get the best Silver policies too, so it's a no-brainer really - $36/mo. premiums for policies that have max $750 OOP per person.

And yeah, we're seriously LBYM. Cheap living area, everything paid for, almost free travel with rewards and promos. What's not to like?

 

[MichaelB]

Speculation on changes to ACA subsidies and tax credits is just that, speculation, and it inevitably leads to political discussions. When we have specific measures under consideration we can take that discussion up once again, in the meantime let's please stick to current law.

 

[sengsational]

That post sounds like I might have asked a few years ago. Maybe add one to each daughter's age, but otherwise, very close to what I was up against.

Considering the choice of HSA eligible policy vs silver with subsidies, make sure you do the math...you may find it's a "no brainer" to take the cheaper bronze HSA eligible. The PTC will be the same, so forget that for now. Just multiply the monthly premiums for the two and net out the difference. Now, with that difference, could you pay for a typical 9 months worth of typical doctor visits for the family? And this wouldn't count one "well visit" per person, which is covered completely. If that difference could easily cover your typical usage, you'd probably not get much mileage out of going with the silver with subsidies, because your usage would be too low to account for the difference in premium.

Also, you probably want to look at what your marginal tax rate is as you move toward 400% FPL. For me, there's no penalty up until around 200% FPL, but after that, I go into a 28% bracket. And that's before the cliff.

You don't need to be in a hurry to run your conversion. I would wait until December. Buy your tax software and plug in everything. Tinker with your conversion amount in the software. I found that to keep out of the 28% bracket, I had to keep line 63 just about zero, which was about 200% FPL for me (family of 3 now, since eldest daughter is on her own).

Consider using the health insurance offered to students at the university, by the way. When you buy an ACA policy, there's no "volume discount"; if you buy for 4 all together, the price is the same, to the penny, as if you bought 4 separately. And, as if you needed more variables, you do not need to put your whole family on the same policy...you can make separate "groups" and buy different policies for different people. None of that effects the PTC amount.

Depending on your state, if, when you're buying your ACA policy, you may be denied an ACA policy and instead be directed to Medicaid. I had to stay above 233% FPL to keep it from doing that. If you estimate your income a bit higher, it's no problem, you'll get it back when you do your taxes a year from now.

 

[wmc1000]

We elected to maximize ACA subsidy and cost sharing with a Silver Plan - For us that means keeping OMAGI for 2017 to a max of $24000 yielding a mo. premium for 2 at $73/mo. with max ded and OOP to $600 per person.

 

[duckcalldan]

Consider using the health insurance offered to students at the university, by the way. When you buy an ACA policy, there's no "volume discount"; if you buy for 4 all together, the price is the same, to the penny, as if you bought 4 separately. And, as if you needed more variables, you do not need to put your whole family on the same policy...you can make separate "groups" and buy different policies for different people. None of that effects the PTC amount.

Thanks for this genuinely helpful advice. My daughter's university doesn't offer health insurance. So she will be covered under ACA. She's only an hour away from us but with different hospitals that aren't covered under the plan I've picked. So would you recommend 2 policies: one for her and another for the three of us at home? And total premiums would be identical under this proposal?

Good point on the bronze HDHP with HSA being a much better value, even with cost sharing under a silver plan. Doubtful we'll spend enough this year to make the extra $400-$500/mo pay for itself.

 

[daylatedollarshort]

We went with getting the ACA subsidies. When we first ERed we had kids in college so it was a no brainer to stay under the state financial aid max income limits and ACA max income limits. Between the financial aid and subsidies it was quite a boost to our retirement savings, since we retired expecting to pay full freight for both.

 

[nun]

Going into ER almost 3 years ago now at age 52 my plan was to live off savings and some rental income and do ROTH conversions up to the 15% tax threshold until my pension started at 55. I applied for ACA before I had done the ROTH conversions and my income was below FPL so I ended up with a choice of Medicaid or a monthly $450 subsidy to pay for retiree health insurance from my employer; I chose the subsidy. I was also put on a fuel assistance program that paid most of my winter heating bills. I estimate it came to $7000/ year in subsidies. I ended up not doing the ROTH conversions........

 

[sengsational]

So would you recommend 2 policies: one for her and another for the three of us at home? And total premiums would be identical under this proposal?

One reason to get different policies would be if someone was expected to use a lot of services, while others were expected to use very few. But that doesn't sound like you and your healthy bunch. The other reason, which I never encountered, is to get the right in-network providers for a geographically dispersed family (i.e. daughter away at school). The first year (before I let them get the school's HI offering), there was great in-network coverage in the college town (the insurance company HQ is right there). So for the policy that's best for the three of you, I'd research the in-network providers in the college's zip code. Hopefully you'll have good coverage and be able to buy the same policy for everyone.

 

[pb4uski]

I would look at how much you would save in 2017 health insurance and medical costs compared to an estimate of what you would save in taxes.

Since you and your brood are healthy, then the savings would likely be the cost of a bronze plan and medical costs under your deductible over the cost of a subsidized silver plan and medical costs after cost sharing. The other side would be your ultimate tax rate times the Roth conversion amount over the 2017 marginal taxes on the Roth conversion.

We have a fairly unique situation and have access to reasonably priced health insurance so I long ago decided to prioritize Roth conversions over ACA subsidies.

Good luck.

 

[GTFan]

One reason to get different policies would be if someone was expected to use a lot of services, while others were expected to use very few.

That was a valid reason before they disaggregated family policies to have separate max OOPs for each member, but it's not now. It will not cost any more to have a family plan where only one person uses services since the separate OOP limit will apply to that person just like it does with separate plans.

It can actually be cheaper to get a family plan if more than two people are going to use a lot of services because of the family max OOP - it will be more expensive in that case to get separate plans since they all have separate max OOPs.

If everyone is under one roof there's no real reason not to get a family plan IMO, unless more than one person is self-employed and wants to deduct the net premiums. But even that can be done if handled correctly (it can be complex).

 

[sengsational]

I'm still convinced that in most cases I can visualize, the least expensive way would be to select a policy on a per-person basis, based on expected usage. If everyone is expected not to use many services, then each would need a bronze, and a family bronze would be the logical choice. But say you had one member who was expected to need regular care, and, as many times as they plan on going to the doctor, a silver with cost sharing would be best. The healthy ones, their best individual option would be bronze. So you get one on a silver, and the rest of the family on a bronze; there's no reason to pay silver prices for the other three people who are not expected to need services.

It is true that they outlawed the obscene technique where the insurance would not begin to pay until the family deductible was reached (which was normally twice the individual deductible).

There is one scenario where having a silver for the whole family together would be more economical, that is, if the one person in the family was going to blow through enough services to hit the annual family out of pocket max. In that case, yes, the high utilization individual would hit the max out of pocket, and for the rest of the year, the entire family would have "free" healthcare. If they're healthy, even the free healthcare might not be worth that much, but you can't get any better than free.

 

[RunningBum]

I think I just found another factor, foreign tax credit, while doing my 2016 taxes. I haven't finished them so I'm not 100% sure this is how it's going to work out, but it looks like it.


To limit MAGI, I only did a small Roth conversion, and harvested capital losses. Itemized deductions zero out the Roth conversion, and it looks like none of my dividends poke into being taxed, so it looks like I will have 0 tax for 2016. I paid $1100 in foreign taxes, which goes on line 48, and is totaled on line 55, but line 56 says not to enter less than 0 when subtracting those credits from my taxes due, so I lose this credit. The $1361 ACA credit comes later so I do get to get that back as a refund, but I really netted $261 by getting the ACA credit, and probably cost myself some more opportunity to take some more income at 0 or 10%, income which will probably be taxed at a higher rate when I start my pension and SS. It may turn out that getting the ACA subsidy was the wrong choice for me in 2016, since the subsidy wasn't all that large.


So many pieces to this puzzle. This has me thinking whether I should sell of my VG Total Intl fund, though that would net me a cap gain that would push me over the ACA subsidy income limit. I also don't want taxes to lead me into not being diversified as I want to be.

 

[pb4uski]

You could just convert a bit more... enough to use that $1,100 foreign tax credit so your tax after FTC is zero... but probably only another $3,666 or so additional.... but would be better than allowing the FTC to go worthless.

I long ago decided that more Roth conversions in this 10-15 year period from RE to SS exceeded the benefit of ACA credits in our circumstances.

 

[RunningBum]

Too late for 2016, right? Will rethink my strategy for 2017, though the subsidy amount is a lot more this year.

 

[pb4uski]

Yes, too late for 2016.

I generally convert more than I need to and then recharacterize any excess.

 

[Yarnstormer]

Does a roth conversion basically count as taxable income? You can do a little each year and it does not count towards your roth contribution limits?

I have work iras that I can roll over.

 

[zinger1457]

Does a roth conversion basically count as taxable income? You can do a little each year and it does not count towards your roth contribution limits?

I have work iras that I can roll over.

Yes the conversion is taxable income and there are no limits to how much you convert, as long as you're willing and able to pay the taxes on the amount. It's usually recommended that you pay the taxes out of your savings, not from the amount you're converting. Should also take a close look at what tax bracket that additional income may move you into if doing the conversion now versus what tax bracket you would likely be in when retired and withdrawing from your IRA.

 

[RunningBum]

Yes, too late for 2016.

I generally convert more than I need to and then recharacterize any excess.

I've heard you say that before, and figured I always knew how to get close and did recharacterize some excess in late December. But this certainly was a case where waiting until doing taxes would be a good thing. Recharacterization is just enough of a pain in the butt that I try to avoid it if I can, but maybe it's worth it.

 

[Yarnstormer]

Does it have to be done during the year in question? Or can you do it before taxes are due like contributions?

 

[RunningBum]

Does it have to be done during the year in question? Or can you do it before taxes are due like contributions?

It has to be done by Dec 31 for that year.

 

[SecondCor521]

It has to be done by Dec 31 for that year.

To be clear, conversions have to be done by December 31. Recharacterizations are by the due date of the return the following year, including extensions I believe. And then there are limits to reconversions, but I forget what those are...my tax life is complicated enough this year