ACA Cliff vs $435,000 Withdrawal Now

[24601NoMore]

I did a similar analysis, and came to the conclusion after a lot of heavy Excel spreadsheets that it made far more sense to maximize income, draw dividends from what I didn't spend, pay the taxes and go over the ACA "cliff" than to play games to keep AGI < 4X FPL and spend from savings to cover our expenses. We also have ~5 years to cover before DW gets to Medicare and SS. I'm further out with 10 or so years to go.

You really just need to model it all out, and see what works best over the long run.

The obvious downside is none of us know what the future holds wrt ACA or any other HC plans. It could all change tomorrow, at which point the best and most comprehensive, well thought out plans go splat. My own biggest concern is that the non-subsidized rates continue to increase at crazy levels every year, at which point my analysis is pretty much in the crapper.

ETA - we're starting COBRA Q1 next year(me Feb, DW April) so have 18 months covered. It's the remaining months (roughly 2 1/2 years for DW and 8 1/2 for me that could get dicey, depending on what happens with the "A"CA).

 

[pb4uski]

That 9% (9.86% actually) is your capped cost for the 2nd lowest silver plan available to you. You can purchase a cheaper policy and pay less.

https://www.healthinsurance.org/obamacare/will-you-receive-an-obamacare-premium-subsidy/#silver

So this means that the health insurance savings will be less than what the OP thinks... right?

 

[ivinsfan]

I just woke up to 15 replies! Thanks, most appreciated!!!

My main motivation in posting was to do a sanity check, and see if I was missing any arcane or big picture items. Things like ( - Made up example!) "If your income one year is $500K, and the next 5 years less than $80k, you trigger a means test..." ( - Made up example - I suck at examples...)

As far as the numbers, let me clarify and expand just a bit. The money would be withdrawn from my 401K accounts, and immediately transferred to parallel identical taxable accounts. (with maybe a bit of consolidation...). I would then pay tax on the withdrawal. That tax would amount to ~$135K of the $435K (per my accountant.) The marginal tax increase over withdrawing yearly would be ballpark ~$15K for the whole 5 years. The savings on ACA APPEARS to be ~100K over 5 years.

The alternative I'm comparing to would be for me to take out ~ $82K per year IN ADDITION to the $81,781, or about $160K per year. (it varies by year. I would save about $3K per year on the marginal tax, and spend about $20K on ACA...

So basically I'm betting that for a ~$15-20K delta in tax one time, I save ~$100K (based on the current laws...)

so you after tax savings would increase by 300K? So now it throws off more dividends and capital gains which means you need to worry about going over the cliff in taxable income? What about your state taxes?

 

[RunningBum]

So this means that the health insurance savings will be less than what the OP thinks... right?

No, you get the same subsidy no matter what the policy is, except you can't go below $0. OP apparently gets a $1779 subsidy. On a $1782 policy, they pay $3. If they got a policy that would cost $2379 without subsidy (perhaps that 2nd lowest silver policy), they would pay $600.

 

[pb4uski]

It seems that the OP is saying that if their income is below $81,782 that they will pay $0-$3/month but if their income is $81,872 then they'll pay $1,782 (or $1,811)/month.

I would have expected at $81,781 of income that they would be paying ~$672/month (9.86% * $81,871/12) and then at $81,782 once they go over the cliff that it would be the full price or $1,782 (or $1,811).

I can't understand how someone just a tick under 4x FPL woudl pay essentially nothing.

 

[ivinsfan]

It seems that the OP is saying that if their income is below $81,782 that they will pay $0-$3/month but if their income is $81,872 then they'll pay $1,782 (or $1,811)/month.

I would have expected at $81,781 of income that they would be paying ~$672/month (9.86% * $81,871/12) and then at $81,782 once they go over the cliff that it would be the full price or $1,782 (or $1,811).

I can't understand how someone just a tick under 4x FPL woudl pay essentially nothing.

It doesn't make sense but the second lowest Sliver plan must be really expensive..

OP I don't know if you noticed but Cali has some wanky rules about college kids living away from home getting subsides might want to check that out first.

 

[FZBob]

Bob, You'd be the rare bird that had zero funds except for tax-deferred 401k. I'm one of those, actually. My strategy starting off was to spend after-tax money for expenses and maximize Roth conversions up to the next tax bracket. A few years later, my after-tax balance went to zero and now I pull 401k up to, but not over, the ACA cliff, and subsidize my spending using a bit of Roth funds. If I didn't have Roth, I might consider a HELOC because, like you, I'd need to withdraw $50K to get $20K more to spend on non-healthcare stuff. Have you seen what i-orp suggests you do? It allows you to model PPACA (you can turn income limiting "on" and then "off" and see what it shows).

Yes, I do have some mutual funds which are neither 401K nor IRA. I deposited the principal long ago, so they are now about 1/3 basis and 2/3 capital gains. These could come close to covering that 300K "gap" over the next 5 years.

Questions:

- Would I be correct in assuming that FOR ACA CALCULATIONS, only the capital gains (on non-401K/IRA accounts) would be counted as income? For example, if I withdraw $100K, 66K is gains, 33K is basis, so ACA sees 66K income (and I pay Fed tax of 15% of 66K = 10K)

- Would I be correct in assuming that If I sold all the above (non-401K) funds next week, and bought back in the next day, that I would then pay all capital gains and state tax in the 2018 tax year, and could then use this money to cover the "gap" without increasing "income"? (Other than the gains over the next 5 years...)(I know, dumb question, just making sure...)

 

[RunningBum]

Yes, I do have some mutual funds which are neither 401K nor IRA. I deposited the principal long ago, so they are now about 1/3 basis and 2/3 capital gains. These could come close to covering that 300K "gap" over the next 5 years.

Questions:

- Would I be correct in assuming that FOR ACA CALCULATIONS, only the capital gains (on non-401K/IRA accounts) would be counted as income? For example, if I withdraw $100K, 66K is gains, 33K is basis, so ACA sees 66K income (and I pay Fed tax of 15% of 66K = 10K)

- Would I be correct in assuming that If I sold all the above (non-401K) funds next week, and bought back in the next day, that I would then pay all capital gains and state tax in the 2018 tax year, and could then use this money to cover the "gap" without increasing "income"? (Other than the gains over the next 5 years...)(I know, dumb question, just making sure...)

Yes to both.

Note that if those funds are paying any dividends, that is also considered income, even if you are reinvesting them. Reinvestment is just a one step process of getting dividends in cash and purchasing new shares.

 

[pb4uski]

Just to add, depending on your other sources of income, some of that $66k of LTCG may be at 0% rather than 15%.

For example, if MFJ and $80k of income before asset sale after $24k of standard deductions your taxable income would be $56k. The first $21.2k of LTCG would be 0% and the remaining $44.8k would be at 15% ($6.7k of tax on $66k LTCG in that case).

 

[FZBob]

It seems that the OP is saying that if their income is below $81,782 that they will pay $0-$3/month but if their income is $81,872 then they'll pay $1,782 (or $1,811)/month.

I would have expected at $81,781 of income that they would be paying ~$672/month (9.86% * $81,871/12) and then at $81,782 once they go over the cliff that it would be the full price or $1,782 (or $1,811).

I can't understand how someone just a tick under 4x FPL woudl pay essentially nothing.

I'm puzzled also, and I would not be shocked if I'm making some kind of stupid mistake, although I have some friends who are on it and say this is the case...

Here is the official website with the calculator -

https://www.healthforcalifornia.com/

I went to "get free quote now", entered a family of 3 with birthdays of '58, '60, and 2000, and entered incomes of $81,781 and $81,782. Zip Code 95127. I'm looking at the Bronze EPO plan (Anthem).

In either case, saving ~12K per year or ~20K per year is worth some effort...

 

[FZBob]

OP I don't know if you noticed but Cali has some wanky rules about college kids living away from home getting subsides might want to check that out first.

Thanks - That's just the kind of pitfall I'm worried about. Will investigate...

 

[zinger1457]

I'm puzzled also, and I would not be shocked if I'm making some kind of stupid mistake, although I have some friends who are on it and say this is the case...

I don't think it's all that unusual as long as you select one of the low cost Bronze plans. In my case as long as I'm $1 under the limit it covers over 90% of the cost of my Bronze HSA plan.

 

[FZBob]

Yes to both.

Note that if those funds are paying any dividends, that is also considered income, even if you are reinvesting them. Reinvestment is just a one step process of getting dividends in cash and purchasing new shares.

I was saving these funds for a rainy day, as they have sentimental value. My Dad set them up with $100 and a lecture when I got my first real job. (I just did the same for my son...) I have never taken anything out.

Of course, he also said "Don't Be Stupid", and it sounds like it might be the right time to use them...

 

[Independent]

I absolutely agree! Seems crazy to me! (I saw the same thing 18 months ago...)

If you want to have some fun, please help me to see if my results are reproducible... Go to the Covered California website -

https://www.healthforcalifornia.com/

Go to "get free quote now", punch in a family of 3 with birthdays of '58, '60, and 2000, and try incomes of $81,781 and $81,782. Zip Code 95127. I'm looking at the Bronze EPO plan (Anthem).

I just ran it again, and it is now $3 per month vs $1811 per month! As a former engineer, I'm just amazed that anyone would set up a system like this with a step function. I feel really bad for the people who make just over the limit.

Thanks. I didn't realize that bronze vs silver is that big a deal.

I ran your ages and got the second lowest silver as Kaiser. The second lowest bronze also happened to be Kaiser. My bronze premium came up as $1,751, I'm not going to worry about the small discrepancy.

........ bronze silver
81,781: ......3 ..... 762
81,782: 1,751 .. 2,452

The amount of discount isn't exactly the same, but close enough for my purposes. The bronze has a $12,600 deductible, the silver $5,000.

I understood the concept of managing income to stay under the 4x cliff, but I had never run sample numbers.

 

[RunningBum]

I was saving these funds for a rainy day, as they have sentimental value. My Dad set them up with $100 and a lecture when I got my first real job. (I just did the same for my son...) I have never taken anything out.

Of course, he also said "Don't Be Stupid", and it sounds like it might be the right time to use them...

What better use of those funds than to help you retire early!

 

[Texas Proud]

In one of your earlier posts you said you needed an additional $80K ish to pay the bills....


So, are you spending $160K plus a year?


That would be hard to make up unless you have a lot of ROTH sitting around...


Another mistake you are making is thinking that the insurance costs and credit will be the same for 5 years... it will not...


Mine had gone from $4K the first year to almost $20K for this year... not sure about next year since the site will not let me make a choice since DD is supposed to be on CHIPS from what they say...

 

[pb4uski]

I'm puzzled also, and I would not be shocked if I'm making some kind of stupid mistake, although I have some friends who are on it and say this is the case...

Here is the official website with the calculator -

https://www.healthforcalifornia.com/

I went to "get free quote now", entered a family of 3 with birthdays of '58, '60, and 2000, and entered incomes of $81,781 and $81,782. Zip Code 95127. I'm looking at the Bronze EPO plan (Anthem).

In either case, saving ~12K per year or ~20K per year is worth some effort...

I used healthsherpa and the numbers that you are getting seem to make sense...my results vary a bit.

Subsidy:

Second lowest cost silver plan = $2,523/mo (Kaiser silver 70 HMO

Max family income: $83,120 (at $83,121 subsidy is nil)
Family contribution: 9.86% or $683/mo

Subsidy: $1,840/mo

Plan OP will use: $1,811/mo

OP cost: $0 (subsidy exceeds premium)

Annual savings: $21,732

 

[RunningBum]

In one of your earlier posts you said you needed an additional $80K ish to pay the bills....


So, are you spending $160K plus a year?


That would be hard to make up unless you have a lot of ROTH sitting around...


Another mistake you are making is thinking that the insurance costs and credit will be the same for 5 years... it will not...


Mine had gone from $4K the first year to almost $20K for this year... not sure about next year since the site will not let me make a choice since DD is supposed to be on CHIPS from what they say...

Most people have found that as rates rise, subsidies rise as well. Actual price paid after subsidy does not change all that much.

 

[pb4uski]

I think what we may be seeing in these numbers is the impact of the 2017 decision to curtail paying for cost sharing reductions that caused an increase in silver plan premiums and in turn caused and increase in subsidies so may bronze plans become fully subsidized even up to 399% FPL.

https://www.kff.org/health-reform/i...le-care-acts-cost-sharing-reduction-payments/

 

[ncbill]

Borrowing via a HELOC to make up the difference sounds like the cheapest option.

Especially if that $160,000/year includes paying out-of-pocket for the kid's college which could instead be borrowed via "student" (really parent co-signed) loans if there's not enough equity to meet that need via a HELOC.

 

[sengsational]

I can't understand how someone just a tick under 4x FPL woudl pay essentially nothing.

That's actually very common in the last few years as the price of SLCSP's have gone up relative to bronze plans. I've been in that position...the subsidy is greater than the cost of my HDHP HSA bronze plan, so 3.99X FPL still pays for the entire bronze plan, $0 cost to me.

I was saving these funds for a rainy day, as they have sentimental value. My Dad set them up with $100 and a lecture when I got my first real job. (I just did the same for my son...) I have never taken anything out.

Of course, he also said "Don't Be Stupid", and it sounds like it might be the right time to use them...

Oh, absolutely! If you have after-tax money, spend it freely between now and age 65.



I'm not going to be of much use with the nuances of capital gains, but you can do that one year at a time. Just get out this year's tax software (before December ends) and pretend you sold various amounts of the after-tax capital gains stuff. Fiddle around to maximize without going over the cliff. I'd leave a safe margin, since the consequences of going over are huge. One thing about selling after-tax assets that have capital gains...those should come first because, as you mentioned, the non-gain portion doesn't edge you closer to the cliff, whereas pulling from 401k, every dollar edges you toward the cliff.


Then in December 2019, repeat the process, and keep repeating until you get to be 65. With the 2018 results from the tax software, you should be able to estimate whether your after tax balance plus annual infusions will carry you through to 65, and how much Roth or HELOC or whatever will be required.

 

[FZBob]

Update - Where I'm at right now.

When I started the thread, my plan and expectation was that I would spend about $22,744 per year for ACA. (Plus out of pocket ~7K). I was aware of the cliff, but it seemed too good to be true that I could take advantage of it. I gave it a 15% probability...

The good news - I'm not hearing of any legal or procedural showstoppers yet. I'm now up to 50% confidence of success!

My (Optimistic) plan now.

1. Spend the next few days re-tuning detailed spreadsheets.

2. Take $400K mutual funds (non 401K/IRA), sell it and buy back in next week (ish). Pay Capital Gains & State tax of ~66K in 2018 tax year. This leaves $233K free and clear. This should be enough to keep us below the cliff for the next 7 years, until both my wife and myself are on Medicare and my son makes it out of dental school (fingers crossed!). I'm setting $75K for the cliff instead of $81k, as a bit of buffer, and there should be $30K left over at the end. If I miss out on the last year or two of savings for my wife, it's not a big deal...

3. Turn off dividend re-investing on all my accounts. Spend dividends first...

4. Expect that there is a 50% chance this all goes away, and I have to pay. I would have put this higher, but the govt. is going to be so gridlocked investigating each other for the next 10 years that they probably won't get much done. Maybe a good thing...

5. Check on ACA California kids at College rules...

Most importantly - the sun just came out after a rainy week, so I'm off for a Mountain Bike Ride!

 

[sengsational]

That's a great plan in that it allows you to utilize the PTC, but I'm not sure I'd go exactly like that. If you have several years, there's no hurry to get enough spending cash right for all years until 65 right away. I'd need to fiddle with tax software to know, but you might consider selling enough for one year's worth of spending, and filling up to under the cliff with Roth conversions. But you're over 90% of the way there by getting the tax credit...the Roth conversion and subsequent presumed reduced RMD impact is small potatoes in comparison.