ACA Strategies...

[rayinpenn]

62 year old decides to retire early and wants to minimize his healthcare cost.
1) has millions in his 401k and IRA accounts
2) has over a million in taxable accounts
3) family of 4
4) doesn't take ssi
5) does not take any withdrawals from 401k or IRAs
6) only income is dividends and interest on taxable accounts totaling $40k
7) uses taxable account to fund retirement.

The way I understand it ACA will contribute $1,400 a month towards the families silver plan.

Edit:
Is my understanding correct? In summary the retiree needs to pay attention to AGI

 

[REWahoo]

Is there a question in there somewhere?

 

[Jackanory]

Think MAGI, not AGI, and you're on the right track.

 

[Fean]

62 year old decides to retire early and wants to minimize his healthcare cost.
1) has millions in his 401k and IRA accounts
2) has over a million in taxable accounts
3) family of 4
4) doesn't take ssi
5) does not take any withdrawals from 401k or IRAs
6) only income is dividends and interest on taxable accounts totaling $40k
7) uses taxable account to fund retirement.

The way I understand it ACA will contribute $1,400 a month towards the families silver plan.

Edit:
Is my understanding correct? In summary the retiree needs to pay attention to AGI

ACA subsidies vary quite a bit based on what state and county you live in. You should plug your hypothetical $40k income for a family of 4 into one of the ACA calculators to see an estimate of the subsidy.

You can find a popular ACA calculator here: Health Insurance Marketplace Calculator | The Henry J. Kaiser Family Foundation

Edit: I just plugged in a $40k MAGI for a family of 4 into the calculator. If this hypothetical family lived in my state and county, they would be eligible for a monthly subsidy of $508. That subsidy could be quite different for another part of the country.

 

[Texas Proud]

Edit... opps read it wrong...

 

[Tom52]

I can relate to your situation, I don't have "millions" in 401K/IRA but I also have approx. $40,000 in interest/dividend income from taxable accounts. My MAGI will be reduced by $7,650 HSA contribution as well. We are only a family of two but our 2016 ACA subsidy is approx. $1,235 per month. So, I would say your estimate of $1,400 monthly subsidy is in the ballpark.


The subsidy has everything to do with reported income from all sources, not how much money you have saved/invested.

 

[MRG]

Insurance costs vary based on state and county, subsidies are a constant(based on AGI and number in household).

From my experience your estimate sounds very generous. We have an AGI of ~28k with a family of 2, wife on Medicare so she gets nothing. My monthly subsidy is ~$450. YMWV

 

[gauss]

Family of 4 making 40,000/year is between 100% and 400% of Federal Poverty Level.

In all likely hood marketplace premium tax credits (PTC) will be available.

IRS instructions for form 8962 will walk you through the calculation of the refund credit that you would receive if you did not accept advanced premium tax credits (APTC) from the marketplace applied toward the insurance premiums.

Assets are not a factor in any of this. Only MAGI wrt form 8962 and the various other conditions (ie legally present etc).

-gauss

 

[gauss]

Insurance costs vary based on state and county, subsidies are a constant(based on AGI and number in household).

I do not believe this is correct as stated. Your premium tax credit is based upon your income , number in household and the cost of insurance specifically second lowest silver plan cost (SLSPC) available to you.

Note that offers of employer insurance as well as qualifying for Medicaid will disqualify individuals from PTC (ie subsidies)

-gauss
(AARP TaxAide Counselor & designated site ACA 'expert')

 

[MichaelB]

Expected contribution is the constant. The premiums vary by location and the subsidy is the difference between the two.

 

[rayinpenn]

You should plug your hypothetical $40k income for a family of 4 into one of the ACA calculators to see an estimate of the subsidy..

50k income...
cost silver plan: $276 subsidy was $1,283
64k income assume I take ssi ($40k dividends plus $24k ssi)
cost silver plan: $576 subsidy was around $1k

So to turn on roughly 2 grand a month in ssi cost me roughly $300 in subsidy. That Works.

 

[MichaelB]

I used your calculator: cost silver plan $276 subsidy was $1,283 but I upped the income to $50k

That's the way it works.

 

[rodi]

RayInPenn. There are a lot of discussions about this from before the exchanges were set up, but after PPACA passed.

I know for myself - I budget for paying the full premium with no tax credits BUT I gladly collect the tax credits that are legal under the law. Just the same way I collected the mortgage interest credits when I had a mortgage. Just the same way I collect the child tax credits for my two boys.

I'm forced to forgo the tax credits up front in the form of premium tax credits due to a quirk of the covered california website. (Healthcare.gov does not have this quirk). CoveredCA.com does not allow premium tax credit up front unless all family members are on the same insurance. DH chose to go on a different plan than the boys and I.... So... I'll get a nice tax refund and I'll use the money to fund mine and DH's HSAs for the year... lowering my MAGI for next year's filing.

 

[heeyy_joe]

I suggest you play enough with MAGI relative to ACA and silver plans where the out of pocket total in the plan is significantly reduced through cost sharing. When I do this I get a good silver plan but my total OOP is only $1400 instead of $5k. YMMV, void where prohibited.

 

[GTFan]

Yes, exactly. Managing MAGI to stay below 200% FPL is the sweet spot to get a good cost-shared Silver plan. In our case for 2016 MAGI should be below 150% for family of two (<$24k) so we have a Humana plan with a $500 deductible/$750 max OOP per person for $160 a month after subsidies (with very low copays for docs and drugs too). But we live frugally so don't need to spend a lot and get pushed into higher FPL brackets.

Other folks choose to max out Roth conversions in the 15% bracket to avoid the 401k/IRA tax torpedo down the road, forfeiting the subsidies. It's all about how healthy you are and whether you want to take money upfront (with ACA and no taxes) or pay less down the road (with little or no tax-deferred accounts left). For us even a basic Bronze plan is $7-800 a month now, but we're getting almost $900/mo. subsidy from Uncle for WAY better health insurance.

 

[sengsational]

Yes, exactly. Managing MAGI to stay below 200% FPL is the sweet spot to get a good cost-shared Silver plan.

The OP doesn't have this problem since he's teetering on 400%, but folks should know that, depending on what state you're in, this strategy can backfire and land you in a no man's land between ACA and Medicare.

 

[Major Tom]

depending on what state you're in, this strategy can backfire and land you in a no man's land between ACA and Medicare.

I think you mean Medicaid.

 

[gauss]

Yes, exactly. Managing MAGI to stay below 200% FPL is the sweet spot to get a good cost-shared Silver plan. In our case for 2016 MAGI should be below 150% for family of two (<$24k) so we have a Humana plan with a $500 deductible/$750 max OOP per person for $160 a month after subsidies (with very low copays for docs and drugs too). But we live frugally so don't need to spend a lot and get pushed into higher FPL brackets.

I believe the MAGI level that triggers the reduced cost sharing features of ACA is is 250% FPL -- when coupled with a Silver Plan.)

-gauss

 

[MichaelB]

Yes, exactly. Managing MAGI to stay below 200% FPL is the sweet spot to get a good cost-shared Silver plan. In our case for 2016 MAGI should be below 150% for family of two (<$24k) so we have a Humana plan with a $500 deductible/$750 max OOP per person for $160 a month after subsidies (with very low copays for docs and drugs too). But we live frugally so don't need to spend a lot and get pushed into higher FPL brackets.

I believe the MAGI level that triggers the reduced cost sharing features of ACA is is 250% FPL -- when coupled with a Silver Plan.)

-gauss

You're both right Cost sharing kicks in at 250% of the FPL but is more generous at 200%.

 

[gauss]

Thanks Michael!

Do you know offhand if it continues to get more generous, cost sharing reductions, as you go down from 200% towards 100%?

-gauss

 

[MichaelB]

Thanks Michael!

Do you know offhand if it continues to get more generous, cost sharing reductions, as you go down from 200% towards 100%?

-gauss

There are three brackets or clip levels. See this, starting page 14 http://www.fas.org/sgp/crs/misc/R41137.pdf
Some people with children have found that even when they qualify for cost sharing, their children are automatically enrolled in CHIP. Also, I recall some states enrolling people in Medicaid when they are close to the minimum.

 

[sengsational]

I think you mean Medicaid.

Yep, that's what I meant. In NC, hc.gov will drop you into Medicaid, then when you call the state, they tell you applications take 6 months to process and you must pass an asset test.

 

[pb4uski]

Ray,

I concluded that for us that the value of doing Roth conversions from when we ERed until my pension and SS start and the resulting lower taxes later in life were more valuable than the value of the ACA subsidies. For example, in 2015 I was able to convert about $70k and will pay $7k in tax.... 10%... but if I defer these conversions once my pension and SS start I'll be in the 25% tax bracket and paying 25%.... so I saved over $10.5k in tax this year.

OTOH, the catastrophic HDHP we have costs us about $5.5 in premiums last year so I figure that I come out $5k ahead by foregoing ACA subsidies in favor of Roth conversions.

What does help in our case is that since the lowest cost bronze plan exceeds 10% of our MAGI (including the Roth conversions) we are eligible to purchase catastrophic coverage and premiums are not age-rated in our state so the catastrophic coverage is quite affordable (about 57% of a bronze level premium) which makes ACA subsidies less valuable to us. Also, we are both pretty healthy (minimal health care costs over last 4 years) so our purpose of carrying health insurance is to protect our finances from an expensive health issue and gain access to negotiated rates for health care services.

I guess the point is not to overlook the tax torpedo associated with tax-deferred money in deciding to keep your income low to qualify for ACA subsidies.

 

[Texas Proud]

Ray,

I concluded that for us that the value of doing Roth conversions from when we ERed until my pension and SS start and the resulting lower taxes later in life were more valuable than the value of the ACA subsidies. For example, in 2015 I was able to convert about $70k and will pay $7k in tax.... 10%... but if I defer these conversions once my pension and SS start I'll be in the 25% tax bracket and paying 25%.... so I saved over $10.5k in tax this year.

OTOH, the catastrophic HDHP we have costs us about $5.5 in premiums last year so I figure that I come out $5k ahead by foregoing ACA subsidies in favor of Roth conversions.

What does help in our case is that since the lowest cost bronze plan exceeds 10% of our MAGI (including the Roth conversions) we are eligible to purchase catastrophic coverage and premiums are not age-rated in our state so the catastrophic coverage is quite affordable (about 57% of a bronze level premium) which makes ACA subsidies less valuable to us. Also, we are both pretty healthy (minimal health care costs over last 4 years) so our purpose of carrying health insurance is to protect our finances from an expensive health issue and gain access to negotiated rates for health care services.

I guess the point is not to overlook the tax torpedo associated with tax-deferred money in deciding to keep your income low to qualify for ACA subsidies.

Did you do the calculations with and without subsidy I ask because when I do it the marginal tax rate is 25% and that is starting at me owing ZERO in taxes....

Basically I will owe more in income taxes at 15% marginal and get about 10% less in subsidy.... I also lose a few other small credits....

 

[shotgunner]

62 year old decides to retire early and wants to minimize his healthcare cost.
1) has millions in his 401k and IRA accounts
2) has over a million in taxable accounts
3) family of 4
4) doesn't take ssi
5) does not take any withdrawals from 401k or IRAs
6) only income is dividends and interest on taxable accounts totaling $40k
7) uses taxable account to fund retirement.

The way I understand it ACA will contribute $1,400 a month towards the families silver plan.

Edit:
Is my understanding correct? In summary the retiree needs to pay attention to AGI

The only real strategy is to keep your income within the range of a subsidy, too little and you qualify for Medicaid instead, too much and you foot the entire bill of HI.

The income used for the ACA is MAGI which is all income including tax free interest. There are just two tax deductions that lower your income for ACA subsidy purposes, a contribution to an HSA and a contribution to an IRA.

You can model a potential tax credit aka subsidy on the Kaiser Foundation website. Location, income, number of people in family, age and whether you smoke are not are all factors in the calculation.

Health Insurance Marketplace Calculator | The Henry J. Kaiser Family Foundation