Finance Dave
Thinks s/he gets paid by the post
- Joined
- Mar 29, 2007
- Messages
- 1,861
I'm sure some of you have read about potential legislation affecting the ACA cliff (temporary at least). To my knowledge, nothing is final yet...but it's already got me thinking about tactics we can use. My goal would be to get some of our TIRA funds into our Roth IRAs over the next two years if the legislation passes. Our income would likely never be high enough to trigger IRMAA, but this would mitigate issues with excessive RMDs at 72, Medicare premium increases based on income, potential future marginal tax bracket increases, and improve our flexibility in regards to tax-efficient withdrawals.
We have been managing MAGI carefully to stay below the cliff amount, and have been successful so far. We are 59/62.
Currently:
TIRAs - $1.8M
Roth IRAs - $.36M
Rental properties (all paid for) - $.45M
Checking accounts - $80,000
Our income sources are:
1) Handyman income I make doing occasional work - I can control this to some extent by aggressive marketing or turning down jobs...but in 2020 I netted about $8k....so that's a safe number to use.
2) Withdrawal from DW's TIRA - as needed...with the goal to stay below ACA cliff
3) Passive net income from rental properties...about $25k/year (actually this is cash flow...and we use this to pay living expenses)
*** We are eligible for SS. DW would get about $20k/year at age 67, and I'll get about $26k/year at 67....or I may defer to 70.
We need about $75k to support our lifestyle...so recently we've been withdrawing about $45k/year from DW's TIRA.
As you can see, most of our retirement savings are in our TIRAs, which were funded by Megacorp 401k rollovers when we FIREd. I'm not yet 59 1/2...so for this year would probably want to use only DW's Roth of about $148k if necessary...mine makes up the remaining $212k.
What I'm wondering about as a strategy, assuming they lift the ACA subsidy limits, is doing Roth conversions for the next two years to provide more future tax-flexible withdrawals. We could at least convert up to the top of the 22% bracket, and maybe somewhat into the 24% bracket. I'm unclear based on the legislation how this would work in regards to our subsidy/HC premiums. Obviously we'd need to come up with the funds to pay the taxes (more on this below). But if we do a large conversion, would the legislation make our subsidy decrease such that we are paying 8.5% of a much higher income amount and therefore make this a bad decision?
In other words, let's say previously our MAGI was $68k. Now let's say the legislation passes, and in 2021 we do a large Roth conversion up to the top of the 24% bracket...such that our MAGI was around $171k. Does that then mean that our health care premiums would be subsidized only to the point that we would pay 8.5% of the $171k? If so, this may not be worth it...or perhaps we simply choose a lower number to convert?
If we can get the numbers to work and do conversions for the two years in a tax-efficient way, we might want to do it.
Here are some additional key notes:
1) We don't have enough cash in the bank to simply live off for the next two years...we will need cash flow from somewhere. The rental business gives about $26k, and my handyman work gives us about $5k-$10k....but we'd need another ~$40k...or more if we have pay taxes on conversions.
2) We do have a HELOC with no balance ($125k max line of credit). We typically don't borrow money, but opened this prior to retirement as a backstop knowing that it may be difficult to get a loan with no earned income later. I don't really like the idea of borrowing to pay taxes on conversions, but this is an option.
3) As I said, we do have a fair amount in our Roth IRAs...so is it permitted to do a conversion to a Roth and withdraw from it in the same year? I think this is where the 5-year rule comes into play (we've had ours opened for many years and last contributed about 6-7 years ago)...so I think we could take out up to $148k (the entire current balance in DW's Roth, which is devoid of any recent conversions or contributions) during the conversion year without any issues, right?
Other comments welcome.
We have been managing MAGI carefully to stay below the cliff amount, and have been successful so far. We are 59/62.
Currently:
TIRAs - $1.8M
Roth IRAs - $.36M
Rental properties (all paid for) - $.45M
Checking accounts - $80,000
Our income sources are:
1) Handyman income I make doing occasional work - I can control this to some extent by aggressive marketing or turning down jobs...but in 2020 I netted about $8k....so that's a safe number to use.
2) Withdrawal from DW's TIRA - as needed...with the goal to stay below ACA cliff
3) Passive net income from rental properties...about $25k/year (actually this is cash flow...and we use this to pay living expenses)
*** We are eligible for SS. DW would get about $20k/year at age 67, and I'll get about $26k/year at 67....or I may defer to 70.
We need about $75k to support our lifestyle...so recently we've been withdrawing about $45k/year from DW's TIRA.
As you can see, most of our retirement savings are in our TIRAs, which were funded by Megacorp 401k rollovers when we FIREd. I'm not yet 59 1/2...so for this year would probably want to use only DW's Roth of about $148k if necessary...mine makes up the remaining $212k.
What I'm wondering about as a strategy, assuming they lift the ACA subsidy limits, is doing Roth conversions for the next two years to provide more future tax-flexible withdrawals. We could at least convert up to the top of the 22% bracket, and maybe somewhat into the 24% bracket. I'm unclear based on the legislation how this would work in regards to our subsidy/HC premiums. Obviously we'd need to come up with the funds to pay the taxes (more on this below). But if we do a large conversion, would the legislation make our subsidy decrease such that we are paying 8.5% of a much higher income amount and therefore make this a bad decision?
In other words, let's say previously our MAGI was $68k. Now let's say the legislation passes, and in 2021 we do a large Roth conversion up to the top of the 24% bracket...such that our MAGI was around $171k. Does that then mean that our health care premiums would be subsidized only to the point that we would pay 8.5% of the $171k? If so, this may not be worth it...or perhaps we simply choose a lower number to convert?
If we can get the numbers to work and do conversions for the two years in a tax-efficient way, we might want to do it.
Here are some additional key notes:
1) We don't have enough cash in the bank to simply live off for the next two years...we will need cash flow from somewhere. The rental business gives about $26k, and my handyman work gives us about $5k-$10k....but we'd need another ~$40k...or more if we have pay taxes on conversions.
2) We do have a HELOC with no balance ($125k max line of credit). We typically don't borrow money, but opened this prior to retirement as a backstop knowing that it may be difficult to get a loan with no earned income later. I don't really like the idea of borrowing to pay taxes on conversions, but this is an option.
3) As I said, we do have a fair amount in our Roth IRAs...so is it permitted to do a conversion to a Roth and withdraw from it in the same year? I think this is where the 5-year rule comes into play (we've had ours opened for many years and last contributed about 6-7 years ago)...so I think we could take out up to $148k (the entire current balance in DW's Roth, which is devoid of any recent conversions or contributions) during the conversion year without any issues, right?
Other comments welcome.
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