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

[aida2003]

Hello,

I was just reading this thread http://www.early-retirement.org/foru...cgs-96466.html and got me thinking:
How do people structure their investments before retirement so they can qualify for subsidies on ACA (pre-Medicare) and then not pay high premiums once on Medicare? Or to reap some other tax related goodies?

One poster on that thread mentioned to not let taxes wag investments which is a great point but I think getting a minor subsidy due to good investment choices instead of paying an extra $12-15K/year for health insurance is also a great thing. If the amount taxable investments generate gets eaten by the additional payments on ACA due to 'a cliff', it would make me upset that I was dumb in planning.

How are dividend producing stocks worse to hold in taxable accounts vs. an index fund? You get dividends or you must sell shares of the index fund to cover your living expenses. Then there's a psychological obstacle... Dividend lovers claim that money keeps rolling even when the value of stocks drop whereas it could be mentally hard to sell shares of $1M portfolio that's become $600K now (after exhausting 2-4 years of cash).
If you don't get divvies or sell shares of index fund, where does money come from then? Unless you have a huge stash in a checking account, how can one limit that tax wagging?

I think my issue is that we are still a few years away from RE (if we want to retire in early 50's) and I haven't paid attention to such topics until now.
Now I started noticing words like "tax planning for retirement", "didn't structure investments very well before retirement", or "painful to reorganize my investments for ACA and taxes purposes post FIRE" that it's getting me a little worried that perhaps I haven't done a good job from the tax angle because I never really thought about them.
Another issue is that in order to understand better, I need visual not verbal explanation. So, a few questions to the board:

- Where could I read the explanations with mathematical presentations for different scenarios that would show the difference in consequences of holding index funds vs. dividend stocks in taxable accounts?

- Could members of this board provide some real life examples (not necessarily sharing your numbers) showing how brightly or poorly you planned finances because now you reap subsidies of ACA or must pay the full freight?

- How do the numbers change when the planning is done for a couple with 2 children or a couple with no children?

- Any chances for this couple to do Roth conversions or would it be not worth it (or a wash) considering a 'cliff' for ACA which I'm clueless about?

Let's assume that this couple lives in the Southern side of the US and the state tax is in the 5-7% range.
They have saved $1M in taxable and $2M in 401k's before the market's drop (hopefully not 40% drop but what do we know).
I don't think we would benefit in muni fund investments (at least not on the state level)
Children would be in high school or freshmen in college at our assumed FIRE ages.

At this point I am having difficulty understanding why LTCG would be better vs. receiving dividends. If you've held a fund for a long time, the cost basis will be very low, no? What points are dividend lovers missing that they cling to their DG stocks?

So, I think I need to understand the basic math on this topic. If you could provide examples and/or guide me to easily understandable material on this topic I would appreciate it.

Thank you.

PS. For a full disclosure, we do own dividend paying stocks in the taxable account (roughly 50% of the hypothetical $1M) but we also own VTSAX, VFWAX, and DODGX . We stopped contributing to the latter fund once I noticed those large CG's in the last few years. I've been reinvesting them, but now I think it would be more prudent to take them in cash and invest in VTSAX. What do you think?
401k's and Roth IRA's contain index funds mostly.

[RunningBum]

If you need $50k and rely on dividends, your $50K of dividends is $50K of taxable income (MAGI)

If instead you rely on selling investments, you can sell $50K of investments, but the taxable income (MAGI) is only that part above the basis. Using specific ID, you may be able to generate a lot of cash with only a little income. Even if you have no high cost shares, you won't have a basis of 0, so harvesting the same amount of cash through LTCGs always generates less income than the same amount of cash in dividends.

That's the main concept in planning. Not sure I have the energy to answer all of your questions or to present this visually.

Some people won't be able to hold income low enough for the subsidy without sabotaging their investments. If you are close to the cliff, it can be worth putting some extra money in checking to limit income, but you can only do so much of that before the subsidy is no longer worth while.

One strategy that can be used is to take a lot of income thru LTCGs every other year, or every third year, and not take a subsidy that year, but keep income low the other years since you won't have the need to sell in those years.

[robnplunder]

A family of two here and my ACA subsidy level limit is 65k+ of MAGI. I've been retired for 3 years and qualified for ACA subsidy in all three years. But the increasing mutual fund distributions and CCs are threatening this limit. Last year, my MAGI was 59k, too close for comfort. I have moved a few MFs into more efficient ones, sold money losing MFs or stocks to qualify each year. Now, I have run out of those options. Moving a MF now means realizing big capital gain which will add to 2019 MAGI. Dangerously, my 2019 MAGI appears to be around 63k - a near danger zone. One unexpected increase in MF distribution, I would forgo the subsidy.



But in two years, my deferred wages from my last job will complete its payment to me. They are worth 12k to my MAGI. Until then, I am at mercy of MF distributions.




To OP, aggressively move to more tax efficient options - like low dividend paying ETFs and/or stocks, etc. Look at all income streams that you have, or may have in the future. One year, a casino winning of all things, added to our MAGI. Plan ahead with those. And be aware of any MFs or stocks under water and offset the gains to balance MAGI.

[Doribe]

I am converting IRA to Roth in the years before my MAGA will be used to determine my Medicare premium. Paying the tax is painful, but I feel confident this is the right decision. This will help keep my Medicare premiums at the lowest possible and also not get caught in RMDs. I have private insurance from my former employer so I don't have to worry abut ACA.

[brucethebroker]

Look at the income guidelines. If you are close, something simple like HSA or IRA contributions might do the trick. OR

(Some of the following are ideas I found a few years ago-check with your CPA to see if any still apply)
Starting a business or owning real estate investments will provide some deductions. Sell your principal residence every two years (tax free capital gains). Borrow money to live on (HELOC?). But I am not sure these strategies will do the trick over the long run (a decade or longer before your Medicare eligibility).

Remember, the earnings threshold is a smaller problem in lower cost of living areas-is moving an option? ($60k a year goes alot further in the Midwest than in CA.)

The thing to remember is: if selling an investment will put you over the threshold, find a way NOT to sell the investment. Or not to work PT (if you still work). Reducing your cost of living will help, but who wants to live that way for 10 years or longer??

[footenote]

The advice you've gotten so far here is excellent. Here are a couple more tools:

1) A helpful person on this forum recommended I use the i-orp calculator "Advanced" option to explore optimizing Roth conversions with regard to ACA MAGI. The UI is poor, but I recommend trying it to test different approaches. (Be prepared to invest some time if you try it.)

2) I've also used the Kaiser Foundation ACA subsidy calculator (kff.org/interactive/subsidy-calculator/). It's very easy to use and will give you approximate, state-specific numbers that take into account children and family size as well as income.

Happy calculating

[Dtail]

I qualify for 11k in tax subsidies, but have a different situation than yourself.
My DGF lives with me, but not married. She receives SSDI already plus child support for a few more years. Thus her household income is not included in my calculation. The rest of our living expenses is spent through built up cash investments in taxable accounts.

We have started to do some minor Roth conversions and planning to hold off until 70 for my SS.
RMD tax torpedo could be somewhat of an issue, but will spend down some of the portfolio between 65 and 70 y.o.

[Sue J]

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.

[Dtail]

Quote:

Originally Posted by Sue J 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.

It should be noted that the differences in the Out Of Pocket (OOP) differences using the above example between 40k and 65k in my area is ~$10,000.

Thus while premiums at different income levels don't change drastically under the "cliff" levels, the OOP can change quite a bit.

[sengsational]

What I would do is use tax software to model your first few years of retirement. So you'll need to guess at some numbers, but no need to be exact. Start with just taking out the W-2 income. If your income is still too high, find an action to be taken so that won't happen. It's probably worth paying some cap gains taxes beforehand to get under the wire later. But you might be surprised that once there's no W-2 income, that opens a lot of space for dividends, etc.

[walkinwood]

RunningBum explained the reasons why selling investments to fund your cashflow is better than dividends for limiting MAGI.


The problem with some actively managed mutual funds is that the dividend income is not predictable and can swing widely. As an example, in 2017, I finally dumped HAINX (for many reasons but large unpredictable distributions was one) which I had owned since the early 90s and paid a huge cap gains tax on it. I put that money into vanguard's total international stock fund (VTIAX). Go look at the difference in distributions for 2018. HAINX distributed almost 33% of its value this year.


Unwinding long held equity positions can lead to a large tax bill, so you need to estimate future benefits carefully.

[scrabbler1]

From 2014-2016, I qualified for a small ACA subsidy, under $500 per year. My MAGI had always been near the maximum amount o qualify. I figured if I pierced the cap, it wouldn't cost me much. I had some room I my portfolio so that if the stock fund I hae held since 1996 generated a few thousand dollars more in LTCG, I would still qualify for the small subsidy.


But that all changed in 2017. That year, the LTCG distribution nearly doubled from 2016 and that pushed me over the ACA subsidy cliff. Had I remained just under the MAGI limit, the subsidy would have been nearly $900, double the amount in 2015 and 2016.


I had such a large, unrealized cap gain that to sell shares in the stock fund would have generated an even larger cap gain, increasing my tax bill without keeping me on the cliff. Maybe I should sell so I could avoid the cliff in 2018, I thought?


I stayed put but the LTCG distribution at the end of 2018 was even larger than the one in 2017, pushing me over the cliff again. The subsidy it cost me this time had more than doubled again, to nearly $1,900.


Now what do I do? Do I sell, taking a cap gain to likely push me over the cliff again, or stay put and hope the LTCG distribution won't be large enough to push me over the cliff again? I don't really know what the final subsidy will be for 2019 until early next year when the SLCSP is announced. But if it rises the way it has the last few years, I would expect the subsidy to rise to somewhere between $2,500 and $3,000.


Ugh.

[RunningBum]

Quote:

Originally Posted by scrabbler1 From 2014-2016, I qualified for a small ACA subsidy, under $500 per year. My MAGI had always been near the maximum amount o qualify. I figured if I pierced the cap, it wouldn't cost me much. I had some room I my portfolio so that if the stock fund I hae held since 1996 generated a few thousand dollars more in LTCG, I would still qualify for the small subsidy. But that all changed in 2017. That year, the LTCG distribution nearly doubled from 2016 and that pushed me over the ACA subsidy cliff. Had I remained just under the MAGI limit, the subsidy would have been nearly $900, double the amount in 2015 and 2016. I had such a large, unrealized cap gain that to sell shares in the stock fund would have generated an even larger cap gain, increasing my tax bill without keeping me on the cliff. Maybe I should sell so I could avoid the cliff in 2018, I thought? I stayed put but the LTCG distribution at the end of 2018 was even larger than the one in 2017, pushing me over the cliff again. The subsidy it cost me this time had more than doubled again, to nearly $1,900. Now what do I do? Do I sell, taking a cap gain to likely push me over the cliff again, or stay put and hope the LTCG distribution won't be large enough to push me over the cliff again? I don't really know what the final subsidy will be for 2019 until early next year when the SLCSP is announced. But if it rises the way it has the last few years, I would expect the subsidy to rise to somewhere between $2,500 and $3,000. Ugh.

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.

[gwraigty]

Quote:

Originally Posted by sengsational What I would do is use tax software to model your first few years of retirement. So you'll need to guess at some numbers, but no need to be exact. Start with just taking out the W-2 income. If your income is still too high, find an action to be taken so that won't happen. It's probably worth paying some cap gains taxes beforehand to get under the wire later. But you might be surprised that once there's no W-2 income, that opens a lot of space for dividends, etc.

+1 I use a spreadsheet myself.

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.healthreformbeyondthebasi...holds_2019.pdf

[Texas Proud]

Quote:

Originally Posted by Dtail It should be noted that the differences in the Out Of Pocket (OOP) differences using the above example between 40k and 65k in my area is ~$10,000. Thus while premiums at different income levels don't change drastically under the "cliff" levels, the OOP can change quite a bit.

Yes, if you can get your income low enough you can get cost sharing... that does make a difference on just regular cost of a Dr visit or drugs...




As to managing the income, one of the biggest sources of income for me are CG distribution from a few funds... so when I have to sell a fund I choose one of these instead of the others..


The funds to be in are Tax Advantaged funds at Vanguard... you do get the dividend distributed but they manage cap gain really well..


When I reach the level I anticipate for the year and still need money (and I always do) I withdrawal from my ROTH... that is not considered income for MAGI...


And it is not having the tail wag the dog... a $12K subsidy is real 'income' when you compare... also, you can have certain investments in an IRA vs a taxable account... as IRA divis also do not count unless you take them out.. which means you might be able to have exactly the portfolio you want but you have to put it in the correct account...

[scrabbler1]

Quote:

Originally Posted by RunningBum 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.

While the KFF calculator has some useful info for 2019 that I didn't know already (i.e. max %-of-MAGI), it doesn't contain a vital piece of data I need to determine my subsidy, the SCLSP (Second Lowest Cost Silver Plan). When I have called up my state's (New York) exchange, they tell me they don't even know this crucial amount until the following January shortly before they mail out the 1095-A forms.

I recall a few times trying to estimate this amount from the list of premiums shown in the website when I enroll in a (Silver) plan. But they were always off, sometimes by quite a bit, so I gave up on that.

My own subsidy "calculator" is simply the calculation shown on Form 8962, the one used to determine the ACA subsidy. For me, the MAGI determines if I get or don't get a subsidy. If I am getting one, the SLCSP, not my annual premium paid, determines how much the subsidy is.

The FPL I already had. The %-of-MAGI I just got from the KFF website you linked me to (thanks!). But the SLCSP is the big unknown and I won't know what it is until next January. So, I will know if I am eligible for a subsidy around early November when the LTCG estimates come out. But I won't really know how much it is (or how much it would have been) until I get Form 1095-A in the mail next January.

I live off dividends now, so I never have to sell anything. It's those unusually large LTCG distributions which are killing me the last few years. The last time they were this big was in the late 1990s during those boom years. From 2001-2014 they were either pretty small or zero, like an index fund (which it isn't). Is it worthwhile to sell it all and move to an index fund, realizing and paying lots of taxes on all those unrealized gains, just to hopefully prevent something which very likely won't happen very often anyway?

[VanWinkle]

This is the second year on the ACA for DW and me. She has re-occurring treatment for cancer and is in costly care for the last 3 years. I have used my taxable account, small pension, and dividends to keep my taxable income below 30,000 per year to get maximum premium and cost subsidies. We have 150 ded and 2600 OOP maximum for her. I am delaying SS and any IRA withdrawals other than a small conversion just to stay out of Medicaid.

This has work well for 2 years. I will hit Medicare in Nov 2019, and DW will get Medicare in June 2020.

The coverage has been as good as any coverage I had through employment.

VW

[RunningBum]

Quote:

Originally Posted by scrabbler1 While the KFF calculator has some useful info for 2019 that I didn't know already (i.e. max %-of-MAGI), it doesn't contain a vital piece of data I need to determine my subsidy, the SCLSP (Second Lowest Cost Silver Plan). When I have called up my state's (New York) exchange, they tell me they don't even know this crucial amount until the following January shortly before they mail out the 1095-A forms. I recall a few times trying to estimate this amount from the list of premiums shown in the website when I enroll in a (Silver) plan. But they were always off, sometimes by quite a bit, so I gave up on that. My own subsidy "calculator" is simply the calculation shown on Form 8962, the one used to determine the ACA subsidy. For me, the MAGI determines if I get or don't get a subsidy. If I am getting one, the SLCSP, not my annual premium paid, determines how much the subsidy is. The FPL I already had. The %-of-MAGI I just got from the KFF website you linked me to (thanks!). But the SLCSP is the big unknown and I won't know what it is until next January. So, I will know if I am eligible for a subsidy around early November when the LTCG estimates come out. But I won't really know how much it is (or how much it would have been) until I get Form 1095-A in the mail next January.

I don't get that. All of the 2019 plans have known premiums for the year. You can see a list of them available to you at healthcare.gov. You can look at the silver plans, and pick out the 2nd lowest cost one. That's what the subsidy is based off of, and that's what that website and KFF use to tell you what your subsidy will be based on your income estimate. How can the SLCSP variable and not known until Jan 2020? I know the official form doesn't come out until then, but the information is known.

I haven't really looked at exact numbers in the past to verify they don't somehow change, but use it as a rough guide to see if I'm getting ~$800/month or $200/mo or whatever. I've always been right around what I expected, and it's been close enough for me to see if it's worth going for the subsidy, or if it's so small I should consider other strategies, like making a large Roth conversion.

Quote:

I live off dividends now, so I never have to sell anything. It's those unusually large LTCG distributions which are killing me the last few years. The last time they were this big was in the late 1990s during those boom years. From 2001-2014 they were either pretty small or zero, like an index fund (which it isn't). Is it worthwhile to sell it all and move to an index fund, realizing and paying lots of taxes on all those unrealized gains, just to hopefully prevent something which very likely won't happen very often anyway?

You said you got pushed over the cliff in 2017 and 2018, so I wouldn't assume it's very likely it won't happen again, but that's up to you. I would at least get the information that everyone else seems to know, the approximate size of your subsidy, to decide whether to do anything or not. It looks to me you're only approximating based on last year's subsidy and the apparent increase rate. But if you want to do things in the dark, go ahead. Don't complain about surprises. The information is there.

[ocean view]

Quote:

Originally Posted by scrabbler1 While the KFF calculator has some useful info for 2019 that I didn't know already (i.e. max %-of-MAGI), it doesn't contain a vital piece of data I need to determine my subsidy, the SCLSP (Second Lowest Cost Silver Plan). When I have called up my state's (New York) exchange, they tell me they don't even know this crucial amount until the following January shortly before they mail out the 1095-A forms.

For the past three years I have determined my SLCSP while shopping for the upcoming year’s plan. So in Nov 2017 I determined that my SLCSP for 2018 was $20,695.32 (from my notes) actual reported on 2018 1095-A, (part III, line 33 col b) was $20,695.32.

What I do is on my exchange (covered CA) I enter my personal info (zip code, family size and ages) and for projected income I enter something large enough so that there is no PTC eligibility, say $100k. Then when it shows me the plans available in my area, filter for silver plans, find the second cheapest and multiply the monthly cost by 12. My result has been accurate within rounding differences each year.

[EastWest Gal]

Very useful discussion. I’m retiring in May and think Cobra will be a better deal than ACA, due to lower deductible and lower out of pocket, with similar dividends. However, in 2020 and 2021, I will probably be able to report a capital loss (my share about $17K/year for two years), as we replant an entire orchard. My dividends and cap gains put my annual investment income around $70K, just over the subsidy limit.

So, if I get COBRA until December 2020, and sell some of my after tax portfolio and start ROTH conversion in 2020, then do this every other year, then I can probably get a subsidy in 2021 and 2023. We pay full bore only in 2022, and of course COBRA. Then in 2024 DH and I hit Medicare age. If we qualified for a subsidy, we would save $19K per year.

I’ve heard of others doing the every other year plan. This might work for us.