Conversions to 250% or 400%?

[sengsational]

I'm certainly going to do a traditional to Roth conversion so that my income comes up to 250% of FPL (this example is with 3 dependents). The question comes with whether I should convert the next $30K (which would take me up closer to 400% of FPL). I would still be in the 15% bracket.

But converting the $30K would reduce the healthcare credit by about $2,900. So isn't converting this additional 30K costing me 25% (15% in taxes and another 10% in lost credits)?

I really don't know much about the tax torpedo with minimum distributions, but I'm confident that I'll be up against that.

Presuming the tax rates stay the same (yeah, big 'if'), does it make sense to hold-off on converting the extra $30K in order to get the bird in the hand tax credit?

 

[NW-Bound]

I see that your state does not have its own ACA Web site. Are you going to wait to see what SCOTUS decides on King v. Burwell? Your bird in hand might just fly away.

 

[bingybear]

your situation is likely quite different than mine... DW RE at the end of last year. I RE end of Feb.. but was paid in this year for mid Dec until end of feb and paid out for unused vacation puts our EI at about $38k. Now we still could contribute to IRAs to reduce EI and fund HSA. In my case it might be doable to get the subsidy, but would take some effort. This really depends on investment income (CG and Divys) for me. If you have little CG/Divys.. the torpedo may be relatively small. I decided to just forgo the subsidy and caught my COBRA. Better plan for less money than the ACA (without subsidy), but more expensive if you keep in the correct side of the cliff.

For me the conversion may be better than the subsidy.... I'm still not sure. You need to compare what your tax savings will be by Roth conversions vs the taxes taken at RMD times. You really need to estimate the max marginal rate at RMD time and figure you will likely have SS or other income too.

I can't really give advice without data... and better you run the details your self to sort out what is best.

 

[jim584672]

Based on the Silver cost sharing reductions up to 150% or up to 200% look much sweeter than 201%+.

Silver plans with cost sharing -
100-150% FPL Actuarial value 94%, max OOP $1000, deductable $0
150-200% FPL Actuarial value 87%, max OOP $2000, deductable $250
200-250% FPL Actuarial value 73%, max OOP $4000, deductable $1750
FPL = (Federal Poverty Level)

 

[bingybear]

Based on the Silver cost sharing reductions up to 150% or up to 200% look much sweeter than 201%+.

Silver plans with cost sharing -
100-150% FPL Actuarial value 94%, max OOP $1000, deductable $0
150-200% FPL Actuarial value 87%, max OOP $2000, deductable $250
200-250% FPL Actuarial value 73%, max OOP $4000, deductable $1750
FPL = (Federal Poverty Level)

Good point. I usually don't think about this part as I don't think I'll get to these levels unless I let the tail (subsidy) wag the dog (investments). I think this is another factor to add into the calculation with an estimate of likelihood of exceeding some level of deductable usage. For me I would likely convert more with the exception of years where I have to have my pacemaker changed out. One needs to consider their own expected medical usage. One should compare the expected benefit of conversions verse deductible help. Also I guess the emotional take... what if you had to pay the whole non-subsidized deductible, how would you handle hit? This really is not a one size fits all situation.

 

[jim584672]

By the time you factor in the loss of subsidy, loss of cost sharing, the conversions become uneconomic. I have been grappling with this problem myself.

 

[bingybear]

By the time you factor in the loss of subsidy, loss of cost sharing, the conversions become uneconomic. I have been grappling with this problem myself.

This really depends on the situation. If you typically have just a physical during the year, or an appointment or two in addition, the cost sharing is minimal. Take me with a pacemaker... typical year, physical and one other appointment with PCP, 1 visit with cardiologist, 2 visits to have the pacemaker checked, plus meds... $400 - $500 total after agreed upon rates. Cost sharing my pay little benefits. If someone has lots of typical med expenses, then cost sharing could be critical and a huge benefit.
Now in my mid 50's... say I have a couple 100k in TIRA, likely the Roth Conversions will not greatly reduce my taxes at RMD time. But if one assumes I have a 2 or 3 Mil in TIRAs... with growth between now and RMD time, the tax rate would be quite high especially since SS would be paying at that time too. In this case the conversions might make sense.
The OP did not provide enough information to provide enough information to provide informed responses to his situation. One can even blow past the subsidy cliff and be better off if the projected taxes are high enough at RMD time.
It is a very individual calculation based on detailed situation. I do admit it takes a lot to overcome crossing the cliff.

 

[photoguy]

I think one really needs to figure out what the RMD tax burden will be to determine whether it is advantageous to do the roth conversion.

For us, RMDs are so far away it's impossible to do any planning. Thus our strategy has been to take advantage of the subsidy that is available today. The only reason I can think of to prioritize the roth conversion in the absence of clear gains from minimizing RMD taxes is if one needs the money to bridge a gap (e.g. before accessing tax deferred accounts without penalty).

I also agree that the cost sharing reductions are much better at 200% than 250%. But you have to explicitly sign-up for the silver plan in the year before.

 

[Corporateburnout]

Based on the Silver cost sharing reductions up to 150% or up to 200% look much sweeter than 201%+.

Silver plans with cost sharing -
100-150% FPL Actuarial value 94%, max OOP $1000, deductable $0
150-200% FPL Actuarial value 87%, max OOP $2000, deductable $250
200-250% FPL Actuarial value 73%, max OOP $4000, deductable $1750
FPL = (Federal Poverty Level)

I know a recently retired couple in my state who at are at 240% of FPL and their silver plan through the exchange has a max OOP of $3000 and a deductible of 0. They receive $6800 of subsidy in 2014.

I have to believe that some states may contribute to the cost sharing.

 

[sengsational]

Thanks, all, for the replies and ideas.

Photoguy, I agree that doing the RMD simulation is what needs to happen, but there are so many moving parts that it is hard to do that. But I shall embark on that mission soon.

As to the silver, that's a juicy one for the right people in the right state. I'd be swept into medicade, and its not funded here. And I just don't want to join that crowd. And also, since in a normal year we have just a handful of doctor visits, it doesn't pay. Basically I am buying OOP max, so $5000 OOP max for $50/mo (with subsidy) is a good enough deal for me!

As bb mentioned, I didn't supply enough information to do the detailed RMD calculation. Almost all of my assets are in tIRA or 401(k). I wonder what the annual spend would be to break about even on Roth conversions. Obviously if my non-tax annual spend through the next 30 years was 30k, I would be nuts not to take the subsidy. But if that spend number was 100k, I would guess that getting as much converted now would dodge the torpedo, and be woth more than the extra subsidy between 250% and 400%.