mortgage or cash - for ACA

[Retireby45ish]

Hi all,

Had a question I wanted to run by everyone.
I will be selling my home and buying a new one. But I am also planning to retire in the next 2 years or so (at 44ish). A big part of that is keeping health insurance costs low by using ACA. For that I want to stay under the 400% threshold. This means I need to keep my dividend and other passive income low enough.

at first I figured I would just buy the new house outright ($700k or so) and that way I wouldn’t have to sell assets which counted towards the ACA income calculation. I was just going to treat the paid off house as kind of bond. And I could live that way to minimize MAGI. But now I’m torn. What am I missing? Here are my thoughts…

Cash benefit route:
Get about 7k of premium benefits per year plus a much lower out of pocket max. (Not sure about second part). Will this change much over time?

Invest and sell cap gains or dividends benefit:
Rate of return above mortgage (long run estimate = 2%). On 700k is 14k per year. After taxes = 10k

It seems like it might be worth it to not pay cash for the house?!

Also, on ACA…the wife is sicklier than I am (needs Dr visits and such often) and I wonder if there are cost savings to getting a better coverage for her than me. Can a married couple get different coverages?!

 

[RunningBum]

First question, do you have enough money accessible to make it to 59.5 when you can start tapping retirement accounts? If not, a mortgage helps leverage your money better.

If you assume a better investment return on your investments than your mortgage, then it will definitely come out better to take a mortgage. But you can't get a better return without taking some risk, so you have to weigh that.

On the other hand, if you have no mortgage, and thus less money in taxable investments generating interest and dividends, then your income will be lower and it'll be easier to qualify for a subsidy. If you can qualify for a subsidy either way, you'll get a bigger one by not having a mortgage.

What's your tax hit to sell assets to pay cash for the house? If it's large, you might pay cash that you can easily raise without a lot of taxes, and take a mortgage for the rest.

Lots may change in the future. The ACA, or ACA subsidies, may not even exists. Or maybe the ACA cliff elimination for 2021-22 will be made permanent.

I'm not married so I haven't looked into whether you can differ different coverage from your spouse.

Sorry, no clear answers!

 

[Retireby45ish]

First question, do you have enough money accessible to make it to 59.5 when you can start tapping retirement accounts? If not, a mortgage helps leverage your money better.

If you assume a better investment return on your investments than your mortgage, then it will definitely come out better to take a mortgage. But you can't get a better return without taking some risk, so you have to weigh that.

On the other hand, if you have no mortgage, and thus less money in taxable investments generating interest and dividends, then your income will be lower and it'll be easier to qualify for a subsidy. If you can qualify for a subsidy either way, you'll get a bigger one by not having a mortgage.

What's your tax hit to sell assets to pay cash for the house? If it's large, you might pay cash that you can easily raise without a lot of taxes, and take a mortgage for the rest.

Lots may change in the future. The ACA, or ACA subsidies, may not even exists. Or maybe the ACA cliff elimination for 2021-22 will be made permanent.

I'm not married so I haven't looked into whether you can differ different coverage from your spouse.

Sorry, no clear answers!

Thanks. Yes plenty of non retirement money accessible.
We’ll have around 3M (not counting house cash) with 2.7 of that in taxable accounts.

I agree it’s more of a risk vs stable bet of paying off house.

Another question I forgot: if we spend, say 3 months of the year abroad (can get coverage thru dual nationalities) can we get something like only 9 months of ACA coverage? As I’m still two years away I haven’t looked into this.

 

[Sue J]

Also, on ACA…the wife is sicklier than I am (needs Dr visits and such often) and I wonder if there are cost savings to getting a better coverage for her than me. Can a married couple get different coverages?!

Yes, you can get different coverages.

We are beyond ACA now but when we were on it we always had separate policies. The way to do this is that there is a step where you can designate Groups. Put yourself in one group and your wife in another group. Then half of your subsidy is supplied to each of you and you can pick individual policies. I think this step is after you get your Eligibility letter and before you pick plans, but it's been a while, I may not have that right.

Also, the cliff of 400% of FPL no longer applies. The newest changes allow incomes above that at a flat rate of 8.5% of income. I don't know if that's just for this year or if it's permanent. Please correct me if I have that wrong.

 

[RunningBum]

Also, the cliff of 400% of FPL no longer applies. The newest changes allow incomes above that at a flat rate of 8.5% of income. I don't know if that's just for this year or if it's permanent. Please correct me if I have that wrong.

As I said above it's only changed for 2 years, at least for now.

 

[CRLLS]

You didn't mention how much you'll net from the sale of your current home. If this was your primary residence for > 2 of the last 5 years, then the proceeds are not taxable and do not count against AGI. Then you can keep it as cash or pay it towards the new house.

You could also cash in some equities before you retire for buying the new house. It will not count against income for ACA. You can always write an excuse stating it was used for a one time home purchase, yada, yada and don't expect your future income to be that high.

Mortgages will not be significantly lower interest in the future.

So many ways to play the game. and for certain, the game will change over the next 15+ years.

 

[Retireby45ish]

You didn't mention how much you'll net from the sale of your current home. If this was your primary residence for > 2 of the last 5 years, then the proceeds are not taxable and do not count against AGI. Then you can keep it as cash or pay it towards the new house.

You could also cash in some equities before you retire for buying the new house. It will not count against income for ACA. You can always write an excuse stating it was used for a one time home purchase, yada, yada and don't expect your future income to be that high.

Mortgages will not be significantly lower interest in the future.

So many ways to play the game. and for certain, the game will change over the next 15+ years.

Yes I owned it for 3 years before selling. The issue isn’t the immediate ACA implications as I’m not yet retired. The issue is for the new house. The question: Is it worth paying off in cash so I don’t need more MaGI to pay mortgage or not?

 

[PaunchyPirate]

I can only tell you what I did. I bought my retirement home in 2017 (18 months before retirement) and didn’t really have a mortgage. In reality, I had a mortgage for 5 month while I juggled some funds. But my point is that I chose to not have a mortgage in my retirement. I LOVE just not having that payment going out every month. It makes for a very free feeling. While I was still employed, I sold enough taxable investments to live off of for a few years so I could keep my MAGI Low for ACA purposes.

In 2019, I ended up deciding to sell an underperforming stock before it lost more money and that put me over the ACA cliff after all. But that was a onetime decision. In 2020, my plan was back in place and I hope to hold to it in 2021.

I live off savings + dividends.

 

[CRLLS]

Yes I owned it for 3 years before selling. The issue isn’t the immediate ACA implications as I’m not yet retired. The issue is for the new house. The question: Is it worth paying off in cash so I don’t need more MaGI to pay mortgage or not?

I can't say. One option is to take a big hit now, pay any gains taxes on what you need for x years, not incurring Income. Then live off of that for x years, not incurring any MAGI. However, don't forget that you will have to have some income, otherwise you won't qualify for ACA. You'll be put into Medicare, as I understand it. In the end it is up to you to balance of how that works out in your situation. Others here may be able to direct you.

 

[nicholhowdy887]

Your thread is helpful for me to solve one major issue. Thanks!