Plan to finally end OMY this year, please check my numbers

[fh2000]

I am 60, and DW is almost 55. We have no pension. Only savings (before and after tax) and SS. We both plan to apply for SS at the age of 70.

We will need to get ACA next year. I have a spreadsheet to calculate Roth conversion and ACA subsidy numbers. Below is roughly how the plan goes for the first year (2017).

Income:
Roth convert from my IRA - $70,000.
Interest / dividend from after tax accounts: $10,000
Muni dividend: $10,000

Deduction:
Standard deduction & personal exemption (family of 4): $28,600 ($12,600 + $4000X4)
HSA contribution: $7,750

AGI (roth + interest/dividend - HSA):
$70,000 + $10,000 - $7,750 = $72,250

Taxable Income:
$72,250 - $28,600 = $43,650

MAGI for ACA (add Muni dividend to AGI):
$72,250 + $10,000 = $82,250. No subsidy if this amount is > $97,000.

Do I have the correct understanding how these numbers are generated?

 

[MBSC]

I am 60, and DW is almost 55.
Below is roughly how the plan goes for the first year (2017).

HSA contribution: $7,750

MAGI for ACA (add Muni dividend to AGI):
$72,250 + $10,000 = $82,250. No subsidy if this amount is > $97,000.

I'm glad you added back the Muni dividends. If your DW will be 55 before 2017 ends, she can deposit a $1k HSA catch-up contribution into a separate HSA account for a total deduction of $8,750.

If you are age 55 or older by the end of year, you can contribute an additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts if they want to contribute the maximum $8,750.

Reference: https://thefinancebuff.com/hsa-contribution-limits.html

 

[pb4uski]

You got it subject to what MBSC suggested if your DW turns 55 before the end of the year.

 

[ivinsfan]

Why only 10K from your after tax accounts...how much cash do you have in these accounts? Is there any way to bump up this number?

 

[Golden sunsets]

If you are converting the $70,000 to a Roth, what will the source of income be to fund your retirement expenses?

 

[fh2000]

Why only 10K from your after tax accounts...how much cash do you have in these accounts? Is there any way to bump up this number?

Our AA is 60/30/10. 10% cash. Much of our holdings in after tax accounts do not generate dividends such as Google and BRK-B. We do not plan on switching to dividend generating stocks either.

 

[fh2000]

If you are converting the $70,000 to a Roth, what will the source of income be to fund your retirement expenses?

We have 3 years of cash reserve for the estimated retirement spending.

After that, we will liquidate the holdings in after tax accounts. At age 70 or so, I will begin RMD, SS, and start using Roth. This is roughly based on the results from I-ORP calculator.

 

[ivinsfan]

How much subsidy are you leaving on the table by converting that Roth money? With 3 years of cash reserves I'm wondering why you don't go for very low cost insurance to bridge you until you hit Medicare and your dependents leave the nest.

 

[fh2000]

How much subsidy are you leaving on the table by converting that Roth money? With 3 years of cash reserves I'm wondering why you don't go for very low cost insurance to bridge you until you hit Medicare and your dependents leave the nest.

I know we will do Roth conversion and plan to also receive subsidy. The question is that these 2 factors are on the opposite side of the equation, so is there a sweet spot?

We have a family of 4. DD just graduated from college; will take a gap year before starting graduate school. DS is to start junior year in college. Education funds have already been set aside. From ACA point of view, I calculated using 4 and 3 people in household.

The result of ACA premium is below:
[# in household] [Household Income] [Anthem Bronze HSA PPO Premium Monthly]
4 $85000 $539
4 $90000 $619
4 $97500 $1279 (over the cliff)
3 $75000 $479
3 $80000 $580
3 $81000 $1100 (over the cliff)

It appears that, as long as I do not go over the cliff, the premium difference below that income level is small enough that I can afford to do more Roth conversion.

 

[ivinsfan]

Yes but are you taking into account the income level where you qualify for lower deductibles and very small co-pays? If you have any large claims this could be a huge savings and you would not need to divert money to an HSA.

Have you read the "Root of Good" Fuegos blog, he goes into some detail on this.

 

[fh2000]

Yes but are you taking into account the income level where you qualify for lower deductibles and very small co-pays? If you have any large claims this could be a huge savings and you would not need to divert money to an HSA.

Have you read the "Root of Good" Fuegos blog, he goes into some detail on this.

Thanks for the tip. I will go seek out Fuegos blog on this issue.

 

[pb4uski]

Just keep in mind that the goodies that ivinsfan mentions only benefit you if you have health care cost other than routine physicals.... we have little since we are relatively healthy and have no chronic issues so that aspect of ACA is not a big draw for us.

 

[fh2000]

Just keep in mind that the goodies that ivinsfan mentions only benefit you if you have health care cost other than routine physicals.... we have little since we are relatively healthy and have no chronic issues so that aspect of ACA is not a big draw for us.

All 4 of us are also very healthy. We would like to get HSA Bronze first for the low monthly premium (high deductible). If we start needing more than just the routine physical, we will consider switching to Silver the following year.

 

[pb4uski]

That sounds like a good plan.... similar to what we do.

 

[ivinsfan]

Just keep in mind that the goodies that ivinsfan mentions only benefit you if you have health care cost other than routine physicals.... we have little since we are relatively healthy and have no chronic issues so that aspect of ACA is not a big draw for us.

True, with 4 people to insure it might be a little bigger consideration. The key is deciding how much that Roth conversion is costing you in increased premiums. You certainly would be giving away part of the future tax savings to present insurance premiums and possible out-of-pocket expenses.

 

[pb4uski]

I think the best thing to do would to figure health insurance + health care and federal and state income tax costs without a Roth conversion and those same costs with a Roth conversion... the difference in those costs divided by the amount of the roth conversion is the "effective" tax on the Roth conversion.

 

[ivinsfan]

How much dollar value would you assign to much lower deductibles and lower OOP for 4 people, I think that's the number that would hard to quantify. It's certainly worth something.

 

[pb4uski]

If the 4 people are healthy and historically don't use their health insurance (only preventative care) then I would apply little value to lower deductibles and lower OOP for 4 people... perhaps a few hundred a year. One way might be average deductibles and co-pays plus 1 or 2% of the OOPM for a healthy household.

We are in that situation... virtually no claims over the last 4 years. Same if I include DD and DS. For households that use health care regularly then it is a whole different story.