401K Withdrawal and Healthcare Insurance

[B-Guy]

I did a search on Early Retirement and didn’t find an answer, and apologize if this has been discussed to death. If it has, please point me in the appropriate direction.

I’m in the middle of figuring out our 1st year in retirement, and I now realize I should have had some funds going into a Roth IRA as From my understanding if I use my 401K now it is considered income, where if I had funds in an IRA, it wouldn’t. So would we be better off withdrawing funds from our 401K “Income” this year as we are well above the level for healthcare savings. I have insurance with my previous employer until the end of this year. Should we withdrawal enough funds from our 401K this year to minimize our income for next year, for health insurance purposes?

 

[PaunchyPirate]

Absent any other facts, yes. I would do that. I had over 2 years of expenses sitting in savings accounts so that I could minimize my income for health insurance purposes.

 

[zinger1457]

Assuming you have a reasonable estimate of what your income needs to be in retirement to support your budget you can use one of the ACA subsidy calculators to determine what subsidy you'll get for that income. You can then play around with the calculator to determine the maximum income (MAGI) that will provide you with a subsidy you're comfortable with. That should give you a more accurate estimate how much needs to come from pre/after tax accounts. Probably want to limit your 401K withdrawal this year to only what's needed if you will be in a higher tax bracket compared to you're retirement years.

 

[Al in Ohio]

I did a search on Early Retirement and didn’t find an answer, and apologize if this has been discussed to death. If it has, please point me in the appropriate direction.



I’m in the middle of figuring out our 1st year in retirement, and I now realize I should have had some funds going into a Roth IRA as From my understanding if I use my 401K now it is considered income, where if I had funds in an IRA, it wouldn’t. So would we be better off withdrawing funds from our 401K “Income” this year as we are well above the level for healthcare savings. I have insurance with my previous employer until the end of this year. Should we withdrawal enough funds from our 401K this year to minimize our income for next year, for health insurance purposes?

That’s the biggest benefit of having a portion of IRA savings in a ROTH. You can be a millionaire, retire early, and use ROTH withdrawals in the years before Medicare to reduce annual income to levels that give you the maximum ACA healthcare subsidy. But you had to realize this year’s ahead of time.

 

[Exchme]

To put money in a Roth at any time requires that you have paid taxes on it. Had you done that when working, you would have paid taxes on the income in the tax bracket you were at then. Instead, you put money in your 401k and those contributions got subtracted from your taxable income, so it lowered your taxes during your working years. As long as the tax rate you pay when you take the money out of the 401k/IRA is lower than when you were working, you will have gotten a lifetime tax benefit doing it the way you did. You did not mess up.

In general, the plan for Roth Conversions is to level out your tax rate over your lifetimes. That tax rate usually corresponds to your tax bracket, but there are several benefit phase-outs (like ACA subsidies), tax phase-ins (like SS and capital gains) and income cliffs (IRMAA) that make it complicated. When considering Roth Conversions now, also recall that starting in the 2026 tax year, rates are scheduled to go up, plus one of you may outlive the other so there may be a lot of years of one of you filing single. Some folks also consider their heirs, thinking about whether they are likely in higher or lower brackets than themselves.

 

[qwerty3656]

there are several benefit phase-outs (like ACA subsidies), tax phase-ins (like SS and capital gains) and income cliffs (IRMAA) that make it complicated. When considering Roth Conversions now, also recall that starting in the 2026 tax year, rates are scheduled to go up, plus one of you may outlive the other so there may be a lot of years of one of you filing single. Some folks also consider their heirs, thinking about whether they are likely in higher or lower brackets than themselves.

This is so true. I'm walking a tight rope right now on managing my income.

 

[B-Guy]

To put money in a Roth at any time requires that you have paid taxes on it. Had you done that when working, you would have paid taxes on the income in the tax bracket you were at then. Instead, you put money in your 401k and those contributions got subtracted from your taxable income, so it lowered your taxes during your working years. As long as the tax rate you pay when you take the money out of the 401k/IRA is lower than when you were working, you will have gotten a lifetime tax benefit doing it the way you did. You did not mess up.

In general, the plan for Roth Conversions is to level out your tax rate over your lifetimes. That tax rate usually corresponds to your tax bracket, but there are several benefit phase-outs (like ACA subsidies), tax phase-ins (like SS and capital gains) and income cliffs (IRMAA) that make it complicated. When considering Roth Conversions now, also recall that starting in the 2026 tax year, rates are scheduled to go up, plus one of you may outlive the other so there may be a lot of years of one of you filing single. Some folks also consider their heirs, thinking about whether they are likely in higher or lower brackets than themselves.

You have a given me a lot to think about and research. I understand the tax differences between a 401K and a Roth IRA. I wish I had known 10 years ago what I know now. If I had I would have likely split the funding to include both.

Currently I’m 60 and my DW is 61, so there should be no early withdrawal penalties. We understand if we do a roll over, we will have to pay the tax on our 401K withdrawal. We both contributed 100% to our pre-tax 401K with currently no IRA’s. We will have less income this year then future years.

I have a fair understanding of what it takes to do a Roth conversion. Fidelity has options for us to do a roll over online.

From my understanding, the five-year Roth IRA rule, I can withdraw contributions, but not earnings. Are the earnings from the date of conversion?

Trying to weigh the advantage of rolling our 401K to a Roth IRA or leaving it as it is. I’m still on the fence…

 

[cat4ever]

From my understanding, the five-year Roth IRA rule, I can withdraw contributions, but not earnings. Are the earnings from the date of conversion?

Trying to weigh the advantage of rolling our 401K to a Roth IRA or leaving it as it is. I’m still on the fence…

If you are "rolling over" from a standard (non-ROTH) 401K to a Roth IRA, you aren't doing a roll-over, you are doing a conversion. The amount converted is not considered a contribution, so you still have to wait 5 years to touch that as amount as well, unless (I think) you are over 59 1/2.

 

[CRLLS]

T.....there are several benefit phase-outs (like ACA subsidies), tax phase-ins (like SS and capital gains) and income cliffs (IRMAA) that make it complicated. When considering Roth Conversions now, also recall that starting in the 2026 tax year, rates are scheduled to go up, plus one of you may outlive the other so there may be a lot of years of one of you filing single. Some folks also consider their heirs, thinking about whether they are likely in higher or lower brackets than themselves.

And then there are the things than cannot be planned. We did everything we should have WRT Roth conversions keeping a tight watch on those tax phase ins. Then Covid hit and the government felt they needed to give away money. We didn't qualify for 100% the 1st payment and none of the other 2. We did what we were told all along but never had the wherewithal to do Roth IRAs when they came out during our later working years. As a matter of fact when Roth 401k's came out, our HR person told us Roth IRAs had no value, so they were not going to offer it to us. I told him "Who are you that you can determine what is, or is not, to my personal financial benefit." Yeah, that went over really well.