ACA Tax Credit vs Roth Conversion

[2Muchfun]

I am 55 and just retired. I expect to have $10K in MAGI in 2015 from dividends in my taxable account. I want to convert $500K from a tIRA to a Roth IRA before I turn 70 to avoid taking minimum distributions and pay taxes on the tIRA withdrawals. This is pretty easy so far. However, I am signing up for ACA and the lower my income that I declare (over $20K) the larger my tax credit is for the ACA health insurance premium. For every $10K increase that I report in MAGI, my annual cost in health insurance increases $1K. I feel like this is one of those exercises in school where you are told that, “There are 2 trains leave the station at the same time..." Some people are better at those exercises than I am.
Any thoughts on what is the best strategy?

 

[daylatedollarshort]

I don't know the best strategy, but I find it helpful to use the Fido Retirement Income Planner year by year cash flow detail and look at the taxes due column for every year into the future until the "end of plan" year.

 

[sengsational]

My plan is to target 250% FPL. So I am putting Roth conversions in low gear to manage PPACA subsidy. I figure that the subsidy is too good to be true, so won't last very long. After it ends, I'll start with the Roth conversions. Another idea would be to make every other year "big income" with conversions, but the next you minimize income and get the subsidy. There are a bunch of assumptions that are unknowable (including future tax rates and law changes) so there is no solid way to "optimize".

 

[Animorph]

In my specific case, I found it was worthwhile for me to Roth convert >$40k and lose a $2.5k tuition tax credit. Less than $40k wasn't worth it. So it is possible that a conversion could be preferred, but you have to convert quite a bit.

 

[skibum]

I think the ACA cliff at 400% of the poverty level is the make or break point (relative to top of 15% bracket), subsidies below the 400% level are not likely to outweigh benefits of conversion. There is another post indicating I-ORP was just updated to include effects of ACA subsidies and Roth conversions. Check out the other post and I-ORP. My results seem to differ from the OP, there are several factors to consider. For a family of 4 in CA, keeping MAGI below the 400% ACA limit with subsidy seems to be the sweet spot.

 

[MichaelB]

This is the thread referenced by skibum http://www.early-retirement.org/for...cliff-calculation-roth-conversions-74565.html

 

[Running_Man]

I am 55 and just retired. I expect to have $10K in MAGI in 2015 from dividends in my taxable account. I want to convert $500K from a tIRA to a Roth IRA before I turn 70 to avoid taking minimum distributions and pay taxes on the tIRA withdrawals. This is pretty easy so far. However, I am signing up for ACA and the lower my income that I declare (over $20K) the larger my tax credit is for the ACA health insurance premium. For every $10K increase that I report in MAGI, my annual cost in health insurance increases $1K. I feel like this is one of those exercises in school where you are told that, “There are 2 trains leave the station at the same time..." Some people are better at those exercises than I am.
Any thoughts on what is the best strategy?

Would not this be paying 10 Percent and then 15% taxes with a 10 percent loss of subsidy on top of whatever state taxes you have? Not knowing what the tax system and brakets will be in 15 years for saving 16K in mandatory withdrawls at age 70, would find it hard to believe you could overcome a 25 - 30% effective current tax loss for a future 25-30% tax break.

 

[pb4uski]

For us, the benefit of reducing our stay in the 25% tax bracket once RMDs start exceeds the benefit of the subsidy so we continue to do Roth conversions to the top of the 15% bracket. YMMV.

 

[woodguy00]

The point someone made earlier on the risk of being taxed as an individual if one spouse dies pushes me toward making the maximum conversions to the top of the 15% bracket and foregoing ACA subsidies.