How do you plan your MAGI for ACA, Medicare,etc.?

[aida2003]

So, let's take two types of investments, both with risk, and pretend there is no risk with one type, tell me which is better? That's an invalid pretext. There is risk there, regardless of your bad assumption.

This is a valid counter argument. But then: If you've never learned to swim, should you still go deep into the lake or should you just stay closer to the shore where you feel comfortable?
That's how I view dividend companies (wading) vs. growth companies (going into deep water).
The LT success of S&P500 is thanks to reinvestment of dividends. Speaking of investing in individual stocks only, even though dividend investing is considered risky like any investing in the stock market, I view it more conservative than looking for the next growth gem. The comfort for me comes from reading history that some companies have paid dividends for many years, but I am sure I would have sold Apple or Amazon if I invested in them from the beginning. I wouldn't be able to hold through their historical drastic jumps. My former boss bought 200-300 Apple shares when it went public and sold it a year before its bad fortune turned onto its success journey. He doesn't even want to look at it...

OTOH, I am OK with index investing and that's where the majority of our investments are in the 401k's and Roth IRA's.
I personally think that investment choices stem from the beliefs an individual has. It's similar to car selection: some swear by American brands and I swear by Japanese.
When I constantly sat on BH forums, I was 'married' to the index investing, but when I learned about dividend stocks, I wanted a little bit of spice. I don't know if I'll change my mind about them, hence my questions to this board to learn from their real life experience where and how much this 'spice' might hurt us in the long run and whether it's warranted to change our choices going forward.
Is it better to pay a success tax or let the tax tail wag the investment dog and claim I was successful in that way?

 

[augam]

Subscribed

 

[RunningBum]

OK, but I think the dividend folks dismiss the lower risk of dividend stocks as having no risk at all, as you just did. Simply not true.

btw, neither Rob nor I discussed growth stocks. Someone else may have, and you hopped on that as if we were all saying that. My equities are almost all in total market index funds. Pretty safe, with risk additionally offset by a set part of my AA being bonds, MMs, and CDs.

Such index funds have the advantage of being easier to control my MAGI for an ACA subsidy, and are more tax efficient. I'm likely to be able to pass some very nicely appreciated funds to my heirs, and they get a reset basis, as opposed to paying more taxes on dividends all along the way.

You don't want to switch away from dividend stocks? Don't. You asked how dividend stocks are worse for ACA purposes. I told you. I fully understand if that's not enough to sway you.

 

[ocean view]

Looks like your state's exchange is run better than mine.

Or maybe I’ve just been lucky

 

[Texas Proud]

IMO there is a disconnect in this discussion...


Some are talking about owning individual stocks and living off the dividends... that is fine if you pick the correct stocks and mitigate your risks... there is no CG as long as you do not sell anything...



Others are talking about dividend fund... where the fund will distribute out the dividends... now the problem with this is that it also will distribute out CG, and if you are with a managed fund it can be much more than the dividends... you have zero control of how much CG you will get...


When we talk about how to invest do not mix the two... there is a big difference in the outcome and also a possible big difference in return...

 

[robnplunder]

So, let's take two types of investments, both with risk, and pretend there is no risk with one type, tell me which is better? That's an invalid pretext. There is risk there, regardless of your bad assumption.

+1. My reply would have been something similar.





ald2003,



I have Fidelity, E*trade accounts whose tools I use to select mutual funds. My oft used pre-screen criteria are age of MF (at least 10 years old), performance in its class, overall performance, and go from there for final selection. Even after that, it's a crap shoot. I.e, I really don't know if my selection is going to behave the way I imagined.



Given my tax/ACA situation, I don't have higher dividend paying MFs. I also thought I accounted for my owned MFs' CG/distribution situation. The reason I got close to ACA subsidy MAGI limit for 2018 was ... there was this one MF I owned for years which had near 0% yearly CG in its long history. But in 2018, it unexpectedly gave out about 10% CG/div distributions putting my MAGI over the limit. This forced me to sell one of my "2018" bought MF which was under water. I sold it before the year-end to take a loss and reinvested right back to a similar MF in the 1st week of Jan.

 

[aida2003]

Here's an illustration of the ACA "cliff".

For a couple, both 63, in my medium cost of living area, the 2019 subsidy based on ACA MAGI income -

$40,000 = $1290/mo $15,480/yr
$45,000 = $1220/mo $14,640/yr
$50,000 = $1149/mo $13,788/yr
$55,000 = $1108/mo $13,296/yr
$60,000 = $1067/mo $12,804/yr
$65,000 = $1026/mo $12,312/yr
$65,840 = $1019/mo $12,228/yr
$65,841 = $0/mo

The subsidies are valuable and going over the cliff can cost you a bundle. That's why it's discussed here so often. They are based on plan costs in your zip code, for your family size and AGE, so your results could be very different.

For us, we contribute the full amount to our HSAs if we have qualified High Deductible Health Plans which lowers our ACA MAGI, by $9000 for 2019. Some years I also put my part-time income into a Traditional IRA so that it's not included in MAGI.

Thank you for sharing, Sue. This is the visual explanation I was looking for. If my understanding is correct, the ACA MAGI is pretty much as an AGI on Form 1040 which is *before* standard deduction, correct? If it's the same MAGI for a couple living in SF and NYC as opposed to a couple living in South Dakota or Florida, then it's extremely disproportionate, isn't it?

How does the situation change when one spouse reaches Medicare's age, but not the other?
Is MAGI calculated as if for a single person even though they MFJ?
Do people feel some alleviation in overall costs (premiums, co-pays, OOP max) as compared to ACA insurance once both spouses reach Medicare age?
I've noticed people IRMAA, but as I don't expect us to generate such income, I'm not concerned. However, my question is whether couples pay progressively more for Medicare depending on their AGI or MAGI? Just curious as we're quite a few years away from it.

Thank you.

 

[Dtail]

Thank you for sharing, Sue. This is the visual explanation I was looking for. If my understanding is correct, the ACA MAGI is pretty much as an AGI on Form 1040 which is *before* standard deduction, correct? If it's the same MAGI for a couple living in SF and NYC as opposed to a couple living in South Dakota or Florida, then it's extremely disproportionate, isn't it?

How does the situation change when one spouse reaches Medicare's age, but not the other?
Is MAGI calculated as if for a single person even though they MFJ?
Do people feel some alleviation in overall costs (premiums, co-pays, OOP max) as compared to ACA insurance once both spouses reach Medicare age?
I've noticed people IRMAA, but as I don't expect us to generate such income, I'm not concerned. However, my question is whether couples pay progressively more for Medicare depending on their AGI or MAGI? Just curious as we're quite a few years away from it.

Thank you.

See below for the MAGI rules. It is close to AGI, but there can be a few adjustments.
Same MAGI no matter where one lives. Conceptually while working, if one lives in a HCOL area, their eventual SS benefits might be higher than one who lives in a LCOL.
http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

See below for the IRMAA rules. Yes couples would pay progressively more as their income (MAGI) rises.
https://www.ssa.gov/pubs/EN-05-10536.pdf

 

[aida2003]

IMO there is a disconnect in this discussion...

Some are talking about owning individual stocks and living off the dividends... that is fine if you pick the correct stocks and mitigate your risks... there is no CG as long as you do not sell anything...

Others are talking about dividend fund... where the fund will distribute out the dividends... now the problem with this is that it also will distribute out CG, and if you are with a managed fund it can be much more than the dividends... you have zero control of how much CG you will get...

When we talk about how to invest do not mix the two... there is a big difference in the outcome and also a possible big difference in return...

Texas Proud, yes, you're right about dividends and CGs from the dividend funds. That is one of the disconnects that you caught correctly. Thanks

Could you elaborate more on your last paragraph please? If you have some examples with numbers to show the difference I would be curious to read.

 

[robnplunder]

If it's the same MAGI for a couple living in SF and NYC as opposed to a couple living in South Dakota or Florida, then it's extremely disproportionate, isn't it?

I live in Bay Area where a couple making $65k won't live well at all. Penalty for living in near paradise.

 

[aida2003]

See below for the MAGI rules. It is close to AGI, but there can be a few adjustments.
Same MAGI no matter where one lives. Conceptually while working, if one lives in a HCOL area, their eventual SS benefits might be higher than one who lives in a LCOL.
http://laborcenter.berkeley.edu/pdf/2013/MAGI_summary13.pdf

See below for the IRMAA rules. Yes couples would pay progressively more as their income (MAGI) rises.
https://www.ssa.gov/pubs/EN-05-10536.pdf

Thanks so much! I'll add this to my Word document too. Whenever people share useful links or discussions that might apply to my future, I copy/paste in my document because it might come handy once I approach that age. All I will need to do is look for an updated future information.

 

[aida2003]

My equities are almost all in total market index funds. Pretty safe, with risk additionally offset by a set part of my AA being bonds, MMs, and CDs.

Such index funds have the advantage of being easier to control my MAGI for an ACA subsidy, and are more tax efficient. I'm likely to be able to pass some very nicely appreciated funds to my heirs, and they get a reset basis, as opposed to paying more taxes on dividends all along the way.

You don't want to switch away from dividend stocks? Don't. You asked how dividend stocks are worse for ACA purposes. I told you. I fully understand if that's not enough to sway you.

I think I sound argumentative because we are still in accumulation stage and we don't have a lot in CD apart from EF. Bond fund is within 401k's. I think I'm having a hard time visualizing the difference in math terms when switching from one kind of investments to 'tax-efficient' investments. Like somebody suggested, I should play with a tax preparation program to get an idea. Of course, that would only be a play with hypothetical numbers.

Just for curiosity: What MAGI do you shoot for each year?
It depends on location. Couples living in HCOL are probably forced to go over the 'cliff' every year. Perhaps I started this topic in vain, but I wanted to get my questions answered in one place . I don't know where we will live in 5-10 years and whether we'll have an insurance via employment or not. Some people leave to live outside the USA until Medicare, so who knows what the future will bring to us.

 

[aida2003]

You can find out your 2019 subsidy amount via healthcare.gov or https://www.kff.org/interactive/subsidy-calculator/ . There's no reason to wait until early 2020. Everyone trying to manage MAGI for the ACA subsidy should know exactly where the edge is. You may not be able to precisely know your income but at least know your target.

This is a classic case where you can do some planning. The worst thing is to go just over the edge. If you're going over, set yourself up for the following years by selling off some of those funds that give unpredictable and often large distributions. Perhaps set yourself up with enough cash to supplement dividends to live off of so you don't have to sell big gainers for living expenses. Invest the other proceeds with index funds that rarely throw cap gains, and a predictable level of dividends.

I think this is where we will fall when/if we FIRE. We will need to bite the bullet one year in order to reap benefits the following few years. However, I think one should play on TT or other tax preparation tool to see how worth it is.

 

[aida2003]

OP, I'm an income-oriented investor, but not because we need it right now. It's just something I sort of fell into as a defensive measure against my lousy stock investing abilities in the past. RunningBum gave you an excellent reason why growth investing vs. income investing is preferable to some for ACA purposes. I think the most important thing first is that you continue to invest in a way that is understandable to you and helps you sleep at night. Income management for ACA purposes should be secondary.

Here is a PDF that shows the FPL's for 2018 and 2019. You can see they're not indexed much for inflation:

http://www.healthreformbeyondthebasics.org/wp-content/uploads/2017/11/REFERENCEGUIDE_Yearly-Guidelines-and-Thresholds_2019.pdf

I think you got my thinking right as you appear to be doing something similar. It could be faulty thinking and I will learn of my mistakes the hard way, but I found this discussion very beneficial to me. I gained new information and I appreciate it.

Thank you for the link. This is awesome! It also backs up Sue's provided numbers for her family.

 

[RunningBum]

Just for curiosity: What MAGI do you shoot for each year?

I shoot for just under 400% FPL. I can't get down to 250% and cost sharing, so I convert some of my tIRA to a Roth each year up to a safety factor under 400%.

 

[jim584672]

Thank you for sharing, Sue. This is the visual explanation I was looking for. If my understanding is correct, the ACA MAGI is pretty much as an AGI on Form 1040 which is *before* standard deduction, correct? If it's the same MAGI for a couple living in SF and NYC as opposed to a couple living in South Dakota or Florida, then it's extremely disproportionate, isn't it?

Alaska and Hawaii have higher FPLs.

 

[daylatedollarshort]

We have a home equity line of we use if we need more cash to cover expenses and can't cash out any more investments without going over the 400% federal poverty limit MAGI for the year. Low interest rate loans are golden at our house as long as the interest is less than around $24K a year because that is what our ACA tax credits have been annually. Credit card hacks and their travel points are great too because the reward points are not usually taxable income. Roth IRAs can be cashed out as needed if you have them.

Tax on I bond interest does not have to be paid annually so we've made use of those to defer taxable income in after tax accounts. If you can control the timing of your income, lowering or deferring expenses in general can help stay under the MAGI limit by lowering your annual cash flow requirements. Or trying for credits every other year is another option.

 

[Montecfo]

Still receiving an income but will fully retire this year. Plan to receive ACA subsidy. Strategies:

70%+ of retirement funds are in tax deferred accounts, to be tapped beginning post-65.

No equity mutual funds in taxable accounts.

Low basis stocks have been used to fund charitable giving annually.

Remaining low basis stocks used to fund donor advised fund last year for peak tax deduction. This will fund charitable giving during ACA subsidy years.

Taxable accounts feature conservative portion of portfolio including cash, CDs, short-term bonds and other investments which can be tapped for little to no tax cost.

SS and DW small pension deferred to FRA.

Roth conversions possible post 65.

 

[MrLoco]

I think you need to be careful that you do not get into a situation of the "tail wagging the dog."


What I mean by example, if you really wanted to get an ACA subsidy , you could have a dedicated checking account with $250,000 paying 0.05 interest and use this account to pay for ACA premiums. This assumes any other taxable assets generate income to keep you off the ACA cliff.


But what if the bull market continues? And you instead put the $250,000 in a large cap stock fund which returns 10-12% / year? Now you can easily pay the full amount of the premiums plus any deductible and still come out ahead.


Another strategy would be using ROTH money....but I would not do this as we want our Roth accounts to go to heirs.


Also, remember, that if you itemize deductions.....you can still get medical/ dental expenses deducted for amounts over 10% of AGI. Not bad.

 

[RunningBum]

I think you need to be careful that you do not get into a situation of the "tail wagging the dog."


What I mean by example, if you really wanted to get an ACA subsidy , you could have a dedicated checking account with $250,000 paying 0.05 interest and use this account to pay for ACA premiums. This assumes any other taxable assets generate income to keep you off the ACA cliff.

I don't know of anyone who is doing that, going for a subsidy at all costs. What I do and hear instead is strategies like using a certain type of investment--index funds instead of managed funds or high dividend funds that generate more taxable income. There's no right or wrong about that. I sold off a very high-performing management fund (VG Primecap) but there's no guarantee it will continue to beat the index as it had been doing.

Now, I could see if someone calculated they would be within $1000 to sabotage themselves and put some in checking rather than making money. If you had $25000 that would make 4%, trading that $1000 income to make an $8000 (or whatever) subsidy makes sense. And you don't even have to keep that money out of the market, you just move more equities to an IRA. Now if your subsidy was only going to be $500 for the year, of course you shouldn't do it.

Probably the closest I've done to this is to pay a little more for an HSA eligible insurance plan so I could make an HSA contribution and reduce my MAGI. The other "trick" I do is limit the amount of Roth conversion I do to keep from going over the cliff. In fact that's how I started. I wasn't planning on taking the subsidy, but realized my living would allow it, and all I had to do is do less of a conversion than I'd planned. I've done the long-range analysis and think it's better than converting less now and take the subsidy. I'll have 65-70 to do larger conversions and I'll get most or all of it done then.

 

[Tom52]

Our plan leading up to retirement was to have a fairly large amount of cash stashed away in a CD ladder to carry us both to full retirement age (66) without tapping into any IRA or 401-K investments. This plan was put in place starting in 2008, prior to the ACA becoming law. When we finally had made the decision to fully retire, at ages 61 and 59, in 2014, it was looking like the ACA would be a blessing to us. With approx. $500K in our CD ladder and approx. $250k in taxable mutual funds, our income from dividends, CG, and INT was low enough to easily qualify us for nearly maximum ACA subsidy.

Then things suddenly changed. Shortly after retirement we inherited some dividend paying stocks and a couple of IRAs. We were required to convert the IRAs to annuities so as not to take a huge tax hit in one year by cashing them out. As a result our MAGI number took a sudden jump. To help keep the MAGI number as low as possible we signed up for an HSA eligible ACA Bronze policy and contributed the maximum amount allowed into the HSA account each year.

For the years 2014 thru most of 2018 we lived strictly off the CD ladder and the annuity payments. All CGs and dividends were reinvested. I came off ACA starting in 2018 when I became Medicare eligible. For the one year 2018 DW was on an ACA HSA eligible policy. We did not fair so well for the subsidy in 2018 as our income increased somewhat. DW starting her SS a bit earlier than expected and our HSA deduction was cut in half due to only her contribution.

Since our income starting in 2019 would be too high to qualify for ACA subsidy, it was not cost effective to buy DW health insurance for the months of January and February prior to her going on Medicare starting March 1st. For those two months we purchased a short term policy thru United Healthcare. Cost was less than $250 per month. While the lowest cost Bronze ACA policy would have cost over $1,400 per month.

Mostly by dumb luck our original plan started in 2008 worked out fairly well for us with regards to the ACA subsidies. There were a few minor bumps along the way, inheritance is a good bump, taking SS when we did was a good bump to maximize SS but a bad bump by increasing MAGI. Overall we are happy that ACA is behind us but we are happy it was available for the 5 years we needed it.

 

[RetireAge50]

Some ideas we used or may use:
1. Borrowed against our home (fixed 2.95% 10 year).
2. Roth contributions ($160k available)
3. Home sale proceeds ($400k net of debt available)
4. Potential inheritance money
5. Live cheaply by river

 

[Dtail]

Some ideas we used or may use:
1. Borrowed against our home (fixed 2.95% 10 year).
2. Roth contributions ($160k available)
3. Home sale proceeds ($400k net of debt available)
4. Potential inheritance money
5. Live cheaply by river

I assume not in a van down by the river......

 

[Samuel61]

You wrote that you are a few years out from retirement....let's hope that the ACA subsidy is still around then and that preparing for "the cliff" is still an issue!

Here is my real-life experience: Our income the last few years has been specifically managed to avoid the cliff. Our income "naturally" will fall close to the cliff threshold and, like you wrote, I too don't want to feel stupid for earning $1 too much and losing out on it.

Here's my methodology: a couple of times a year, I monitor our YTD income and this helps me decide if I want to take some losses or not. It helps, in that it keeps me conservative.

My SO is a substitute teacher and can pick when she wants to work, so we can limit our income too.

Twice now, though, I have miscalculated and we have gone over the cliff. What saved us? Contributing to an IRA. When you are doing your taxes for the year, you can "play with" your IRA contribution level to see if you can get your MAGI down enough. Works like a charm.

One thing that bit me in the butt, though: my kid had income during the year that I did not realize had to be added to my MAGI-for-cliff-calculation-purposes only. It was a shock to see that the last $1000 of her income put me over the cliff. So we solved it by having her do an amended 1040, and having her open a $1000 IRA (funded by me, the least I could do!). She was happy to save $100 or so in taxes and I was happy to save the thousands!

 

[LRDave]

You wrote that you are a few years out from retirement....let's hope that the ACA subsidy is still around then and that preparing for "the cliff" is still an issue!

Here is my real-life experience: Our income the last few years has been specifically managed to avoid the cliff. Yet, I don't think the tail wags the dog. It's just that our income "naturally" will fall close to the cliff threshold and, like you wrote, I too don't want to feel stupid for earning $1 too much and losing out on it.

Here's my methodology: a couple of times a year, I monitor our YTD income and this helps me decide if I want to take some losses or not. It helps, in that it keeps me conservative.

My SO is a substitute teacher and can pick when she wants to work, so we can limit our income too.

Twice now, though, I have miscalculated and we have gone over the cliff. What saved us? Contributing to an IRA. When you are doing your taxes for the year, you can "play with" your IRA contribution level to see if you can get your MAGI down enough. Works like a charm.

One thing that bit me in the butt, though: my kid had income during the year that I did not realize had to be added to my MAGI-for-cliff-calculation-purposes only. It was a shock to see that the last $1000 of her income put me over the cliff. So we solved it by having her do an amended 1040, and having her open a $1000 IRA (funded by me, the least I could do!). She was happy to save $100 or so in taxes and I was happy to save the thousands!

Very good, practical advice!