Learning to Live with Maggie (MAGI)

[BubbaChris]

We didn’t plan to ER this year, but my DW did in March and I’m just over a week away from my last day. We’re both 60 and our top financial priority is to maintain our ACA Premium Tax Credits. Having extremely affordable healthcare is the main catalyst behind being able to ER.

My living life priority is to set things up so number crunching isn’t a weekly or even a monthly activity. I intend to lay out a strategy and supporting tactics, then sleep well at night. I will manage our taxes with an eye towards the future, yet a 2%-3% difference in estimated estate value at death isn’t worth jumping through many hoops.

I had not been studying FIRE until a handful of months ago, and I first want to strategize on where I’m pulling our living expenses from until we hit 65. Our balance sheet is 30% after-tax, 60% tIRA, 10% ROTH. We have money market accounts which could cover 3.3 years of our low budget or 2.5 years of our high budget.

One of the take-away’s I have from reading through about a dozen MAGI threads here is how LTCG is great from a tax viewpoint, but not given special treatment for MAGI. And because one-third of my after-tax account is in an S&P 500 mutual fund that we’ve held for decades, my cost basis on those shares is only 36% of the current market value. My more recently purchased ETFs have an average cost basis around 87% of current value.

At this point our “income” for the next handful of years will come from a combination of tIRA, ETF, and Money Market withdrawals. ETF withdrawals will carry the biggest chunk, with tIRA being used with the goal of mildly shrinking my RMDs down the road. Between age 65 and taking SS, the S&P MF will become primary. Here’s a chart I’m using to visualize the impact from each source. ROTH will likely only be tapped if we have a sudden large expense (home repair).

Does this approach resonate with anyone else in their ACA years?

Best regards,
Chris

 

[RunningBum]

First thing I did was to stop automatic reinvestment of dividends in my taxable account funds. You have to pay the tax whether you reinvest or not, so there's no additional MAGI impact to taking the cash. After that I sold off the higher basis shares, and kept the ones with lower basis. Eventually I might have to sell those with lower basis, but I should be able to make it past 65. If I never have to sell, my heirs get stepped up cost basis. I also have taken two years without the ACA subsidy to sell off some funds and put it in CDs and other cash-like savings, which will help me get the subsidy for my last 5 years before Medicare.

When there was an ACA cliff, I tried to take my income as close to the cliff as I could. Most years I had enough to live on and could convert a little of my tIRA. While the ACA cliff is gone, I take my income to the point where qualified dividends and LTCGs would be taxed. This gives me room for a little more Roth conversions. I lose subsidies at the rate of 8.5% with the conversions, but I estimate that my marginal income tax on RMDs will be more than 8.5% higher than what I'm paying now.

This may get into the hoop jumping you wish to avoid but I see so many uncertainties in the future like a very possible return to higher tax brackets, IRMAA, and the SS tax hump which make me want to fully convert my tIRA to a Roth if I can do so at 12% now.

 

[MRG]

I turn 65 in February and retired in 2013 at 56. First year I took COBRA till the end of the year and started ACA in 2014. Our plan was similar to yours, controlling MAGI was a priority and we utilized after tax assets for that. It has worked very well although last year we blew our MAGI way past our 200% FPL projection and paid back 12k at the end of the year. Pandemic stress? Probably that and boredom. Anyway I'm waiting for the IRS to send that money back because the rescue plan says it didn't count.

The only thing we did differently was delay any withdrawal, to allow for greater growth, in the tax free withdrawal Roth. Is the 17,650 estimated income for one?

 

[38Chevy454]

You should be able to specify which shares you want to sell, such as the ones with newest purchase date and highest basis, to minimize the cap gains. Of course this does not change the tax effect for the older shares, but it does delay that until you are medicare age and not affecting ACA income limits.


Agree to stop dividend reinvestment, since you are paying the tax on them regardless if you take it as cash or not. Might as well take the cash now.

 

[qwerty3656]

Yes, I'm stuck between ACA and Roth Conversions.

 

[daylatedollarshort]

The latest stimulus legislation changed the whole cliff limits, so for us it is not as big of an issues as it was before.

Some things we found that helped were optimizing expenses so we didn't need as much income, having a HSA plan, and getting a HELOC. When we would get close to going over the cliff in a given year, we could use the HELOC for more cash instead of taking it out of taxable accounts. Credit card reward points are great because they aren't taxable income. Every little bit helps get us to Medicare age.

 

[EastWest Gal]

Stop dividend reinvesting-agree!

No ACA cliff in 2021 and 2022. Sell more than you need these next two years to beef up your cash so you don't have to sell much investments in 2023-2025. Or if you do, you can sell the ones which have the least capital gains. If you have been investing all along, some of the funds will have different lots, and you can specify which lots to sell. In Schwab, for each fund, there is a pull-down menu to the right and click on Lot Details. I imagine there is something similar in most brokerages such as Fido and Vanguard.

You cannot contribute to an HSA if you don't have an HSA compatible health insurance plan. If you choose an HSA compatible plan, you can put $3600 each in an HSA. I don't believe family HSAs can be used for this though, I read that you have to have one for each of you. This can bring your MAGI down quite a bit if you're close to the cliff.

As was mentioned, get a HELOC. We got a $100K HELOC in 2014 and don't have to have it completely paid off until 2044.Do this before you retire. You don't to take any money out of it if you don't need it.

You may have to pay full-ride HI for one or two of the years 2023-2025, but probably not all.

 

[bobandsherry]

Stop dividend reinvesting-agree!

No ACA cliff in 2021 and 2022. Sell more than you need these next two years to beef up your cash so you don't have to sell much investments in 2023-2025. Or if you do, you can sell the ones which have the least capital gains.

For me, I'm selling but not dumping into cash. Instead I'll sell and recognize the gain then reinvest surplus cash mostly in same stocks. I'll have smaller gains in the future making management of my MAGI easier in the future. I just don't want to leave sitting in cash earning 0%.

 

[BubbaChris]

First thing I did was to stop automatic reinvestment of dividends in my taxable account funds. You have to pay the tax whether you reinvest or not, so there's no additional MAGI impact to taking the cash. After that I sold off the higher basis shares, and kept the ones with lower basis. Eventually I might have to sell those with lower basis, but I should be able to make it past 65. If I never have to sell, my heirs get stepped up cost basis. I also have taken two years without the ACA subsidy to sell off some funds and put it in CDs and other cash-like savings, which will help me get the subsidy for my last 5 years before Medicare.

When there was an ACA cliff, I tried to take my income as close to the cliff as I could. Most years I had enough to live on and could convert a little of my tIRA. While the ACA cliff is gone, I take my income to the point where qualified dividends and LTCGs would be taxed. This gives me room for a little more Roth conversions. I lose subsidies at the rate of 8.5% with the conversions, but I estimate that my marginal income tax on RMDs will be more than 8.5% higher than what I'm paying now.

This may get into the hoop jumping you wish to avoid but I see so many uncertainties in the future like a very possible return to higher tax brackets, IRMAA, and the SS tax hump which make me want to fully convert my tIRA to a Roth if I can do so at 12% now.

RunningBum,

Thank you for jumping in and giving me food for thought/action. This is why I do a post like this, so I can learn from those ahead of me. It sounds like you have multiple years under your belt and can see the runway for hitting Medicare. Are you worried about increased healthcare costs after getting to 65?

Turning off dividend and capital gains reinvestment is so quick, easy, and logical I paused to make that change while reading your reply.

In going through other MAGI threads, I noted a few times where forum members bit the bullet and maximized what they could in un-subsidized years. Our PTCs are just over $26K for the year, so I would want to be really sure before passing up on them for a year. Here's the reply my insurance agent provided when I asked about my ranges for 2021: "For a family of two if you make between $25,859 and $34,479 then you can be asked to pay back up to $650. From $34,379 to $51,719 up to $1,600 payback. From $51,719 to $68,959 up to $2,700 payback. Above $68,959 can ask you to pay it all back."

I'm pretty sure I'll look more seriously at ROTH conversions between 65-72, as my RMDs plus SS have the potential to put us into IRMAA territory. But looking at the current IRMAA brackets, we'd be working from a place of abundance if we got there.

 

[BubbaChris]

I turn 65 in February and retired in 2013 at 56. First year I took COBRA till the end of the year and started ACA in 2014. Our plan was similar to yours, controlling MAGI was a priority and we utilized after tax assets for that. It has worked very well although last year we blew our MAGI way past our 200% FPL projection and paid back 12k at the end of the year. Pandemic stress? Probably that and boredom. Anyway I'm waiting for the IRS to send that money back because the rescue plan says it didn't count.

The only thing we did differently was delay any withdrawal, to allow for greater growth, in the tax free withdrawal Roth. Is the 17,650 estimated income for one?

Congratulations on your 8 years of ER and success in working MAGI to your benefit. Fingers-crossed the IRS gets through their backlog during this calendar year and you get that refund.

I'm guessing your quote of $17,650 is just totaling most of that right colum. Our low budget is $65K for two, I just wanted a summary tool that showed the MAGI impact per $10K sourced from the different accounts/holdings. We'll also have a small amount of W-2 income this year, but I didn't need to confuse the issue at hand.

ROTH is a last-case source of funding in our early years of retirement. From other things I've seen/read I may look into the costs for a HELOC to allow for time arbitrage when I have unbudgeted large expenses.

Best regards,
Chris

 

[qwerty3656]

I've seen a number of references to a HELOC. I called my mortgage broker and he said all their HELOCs were adjustable rate (and implied all HELOCs are adjustable rate). Is that right? If so, aren't you taking a pretty big risk?

 

[BubbaChris]

The latest stimulus legislation changed the whole cliff limits, so for us it is not as big of an issues as it was before.

Some things we found that helped were optimizing expenses so we didn't need as much income, having a HSA plan, and getting a HELOC. When we would get close to going over the cliff in a given year, we could use the HELOC for more cash instead of taking it out of taxable accounts. Credit card reward points are great because they aren't taxable income. Every little bit helps get us to Medicare age.

This is roughly the third time this week I've seen a HELOC mentioned. It's the right time for the message to sink in so I can lay the groundwork for one.

Best regards,
Chris

 

[daylatedollarshort]

I've seen a number of references to a HELOC. I called my mortgage broker and he said all their HELOCs were adjustable rate (and implied all HELOCs are adjustable rate). Is that right? If so, aren't you taking a pretty big risk?

In our case, we saved around $24K a year on insurance premiums staying under the ACA cliff. A $50K average balance HELOC at 3% interest would cost $1.5K a year in interest. The interest would have to go to 48% a year to even reach the break even point with savings on the ACA plan.

 

[Livefree]

Stop dividend reinvesting-agree!

No ACA cliff in 2021 and 2022. Sell more than you need these next two years to beef up your cash so you don't have to sell much investments in 2023-2025. Or if you do, you can sell the ones which have the least capital gains. If you have been investing all along, some of the funds will have different lots, and you can specify which lots to sell. In Schwab, for each fund, there is a pull-down menu to the right and click on Lot Details. I imagine there is something similar in most brokerages such as Fido and Vanguard.

You cannot contribute to an HSA if you don't have an HSA compatible health insurance plan. If you choose an HSA compatible plan, you can put $3600 each in an HSA. I don't believe family HSAs can be used for this though, I read that you have to have one for each of you. This can bring your MAGI down quite a bit if you're close to the cliff.

As was mentioned, get a HELOC. We got a $100K HELOC in 2014 and don't have to have it completely paid off until 2044.Do this before you retire. You don't to take any money out of it if you don't need it.

You may have to pay full-ride HI for one or two of the years 2023-2025, but probably not all.

My wife is still on the ACA for 2 more years. We sold an income property this year, and will blow way past the cliff for 2021.



Are you saying we don't have to pay back the subsidies at tax time?

 

[daylatedollarshort]

My wife is still on the ACA for 2 more years. We sold an income property this year, and will blow way past the cliff for 2021.

Are you saying we don't have to pay back the subsidies at tax time?

Kaiser has a summary of the changes here How the American Rescue Plan Will Improve Affordability of Private Health Coverage | KFF

 

[wallygator69]

For me, I'm selling but not dumping into cash. Instead I'll sell and recognize the gain then reinvest surplus cash mostly in same stocks. I'll have smaller gains in the future making management of my MAGI easier in the future. I just don't want to leave sitting in cash earning 0%.

We have an investment condo we want to dump but have $60k in deprecitiation we need to add to our Magi if we sell and lose ACA. If someone tells me we can dump it and keep our Obama care I will kiss them and buy them dinner after I talk to my Accountant...


Thx


Wally

 

[bobandsherry]

We have an investment condo we want to dump but have $60k in deprecitiation we need to add to our Magi if we sell and lose ACA. If someone tells me we can dump it and keep our Obama care I will kiss them and buy them dinner after I talk to my Accountant...


Thx


Wally

For the next 2 years there is no cliff. At most you'll pay 8.5% tax rate. As a result for next two years it's a gradual phase out of the subsidy. There is no loss of ACA, don't know your specifics but chances high this is time to realize the depreciation. But do your own research.

 

[RunningBum]

We have an investment condo we want to dump but have $60k in deprecitiation we need to add to our Magi if we sell and lose ACA. If someone tells me we can dump it and keep our Obama care I will kiss them and buy them dinner after I talk to my Accountant...

No kisses, please, but you can keep your ACA policy. Whether you get an ACA subsidy is a different question. Not sure which you were asking. The ACA cliff is gone for at least 2021-22, so it's a sliding scale and if you make enough money that you could cover the cost of the 2nd lowest cost silver plan with 8.5% or less of your income, you get no subsidy. That's the way it always should have been. The cliff was a terrible idea.

 

[Aerides]

We have an investment condo we want to dump but have $60k in deprecitiation we need to add to our Magi if we sell and lose ACA. If someone tells me we can dump it and keep our Obama care I will kiss them and buy them dinner after I talk to my Accountant...

by dump and depreciation, if you mean selling at a loss and thus dramatically reducing your MAGI - to where you'd come in with an income too low to qualify for the ACA, it's fine. You don't get bumped to Medicaid or told you no longer qualify for the ACA. You then enter your expected income when renewal time comes up again the following year again like nothing happened.

 

[RunningBum]

RunningBum,

...It sounds like you have multiple years under your belt and can see the runway for hitting Medicare. Are you worried about increased healthcare costs after getting to 65?

10 years retired, and just over 5 until Medicare. I retired before ACA was even a proposal and I had no problems getting coverage. But now I have just enough health issues that I would worry about getting coverage if the ACA went away, so getting to Medicare with continuous coverage has been my worry. I haven't actually looked all that closely at what the total costs under Medicare will be, in both the premiums and the deductions and max costs. My main concern is that a major injury or illness does not break me. What I pay to get that insurance is of lesser concern, as long as it is not prohibitive.

 

[Winemaker]

We're screwed. No ACA, No IRMAA limits, just take it as it comes. Be humble and say prayers for your blessings. All could be gone in a matter of moments. People plan, as we do, and the dear Lord scoffs. God helps those who help themselves, treat others as you want to be treated, enjoy life as you can. Life is too short to drink bad wine.

 

[ncbill]

We have an investment condo we want to dump but have $60k in deprecitiation we need to add to our Magi if we sell and lose ACA. If someone tells me we can dump it and keep our Obama care I will kiss them and buy them dinner after I talk to my Accountant...


Thx


Wally

1031 exchange?

The 5 Best 1031 Exchange Companies for 2020

 

[BubbaChris]

Some of this stuff takes a day or two to sink in. The American Rescue Plan has a provision that limits ACA premium payments to 8.5% of income for the Benchmark Plan.

I read the KFF link and found this CMS description as well.

To deliberately over-simplify a scenario, I believe this means I could generate $80K in LTCG and also take $20K out of my IRA for a MAGI of $100K and only owe a maximum of $8,500 on the PTC reimbursements.

Is this in the ballpark of a correct interpretation?

Best regards,
Chris

 

[GTFan]

We're screwed. No ACA, No IRMAA limits, just take it as it comes.

Not following this at all, especially for 2021-22. Everyone can get ACA and get subsidies subject to the 8.5% scale, and if your income is so high you pay everything OOP then there's no issue IMO. Was this a joke?

 

[scrabbler1]

In going through other MAGI threads, I noted a few times where forum members bit the bullet and maximized what they could in un-subsidized years. Our PTCs are just over $26K for the year, so I would want to be really sure before passing up on them for a year. Here's the reply my insurance agent provided when I asked about my ranges for 2021: "For a family of two if you make between $25,859 and $34,479 then you can be asked to pay back up to $650. From $34,379 to $51,719 up to $1,600 payback. From $51,719 to $68,959 up to $2,700 payback. Above $68,959 can ask you to pay it all back."

You probably came upon my story about going over the cliff a few years until I finally got tired of forgoing an ACA subsidy whose value had grown a lot in those 3 years (2017-2019). At the end of 2019, I finally bit the bullet and sold off an actively managed stock fund I had owned since 1996 (and it had built up a large LTCG). I had to pay about $10k in added income taxes, but it didn't cost me any ACA subsidy because I was already going over the cliff anyway. It did, however, get me back on the subsidy train in 2020. I figured out I will recover the added taxes by the end of this year in the form of a growing subsidy. The recent law change which eliminated the cliff got me a little more in subsidy, but it was simply getting the subsidy again in 2020 which was far more valuable.