Possible legislation re: ACA cliff

[Finance Dave]

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.

[FANOFJESUS]

I have been reading this https://jabberwocking.com/the-first-...s-coming-soon/

Is there anything more I can read about it?

Going by that chart a single would get about half the subsidy if the went 50% over the old cliff. Maybe 25% subsidy if they went double the old cliff limit. Going by that chart.

I am thinking of using it for all the 12% maybe a hair more if I don't lose to much subsidy.


Let say I had an income of 55k would that mean a health care bill of $4675? That does not sound to good. Under the cliff I am at $1515

What I don't understand is 8.5% is about a 4k health care bill at 47k income and right now I am only paying $1515. Not sure how this is going to work.

[Finance Dave]

Here is another article:

https://www.healthaffairs.org/do/10....1%20and%202022.

[FANOFJESUS]

From what I understand if you go above 400%FPL then you are under the 8.5% rule. Is that right?

[PaddyMac]

We are planning on doing the same thing: cashing out some SEP-IRA funds and moving it into Roth IRA and Roth 401k space. But we're not planning on hitting such a high tax bracket. The past couple of years we've managed to adjust our income to 395%(!) of the poverty level, and the subsidy reduced our monthly premium from $1100 to about $350. But it's always irked me that there still was plenty of space in the 10% and 12% tax bracket we could have used.

I'm doing 2020 taxes now, as being self-employed and in an industry that didn't take a hit, our income actually went up compared to 2019. The only way I could fit into the ACA cliff was to Section 179 (write off 100%) two new computers. I was hoping to Depreciate them over 5 years.

So I have a slightly different question, about the clawback in 2020:

"Prevent taxpayers who misestimated their income in 2020 from having to repay excess premium tax credits at tax time."

Is there any *asterisk in the fine print in the final bill? I mean, is there a difference between 401% or 500% of the poverty level? If anyone sees any, please post.

[FANOFJESUS]

More info
https://www.kitces.com/blog/the-amer...-need-to-know/

Looks like most of the cliff is still there.

[GTFan]

No, the cliff has been eliminated for two years. If you have substantially high income such that 8.5% of income would pay for the policy then yes, you won't benefit because you won't get a subsidy (in my area and ages you'd have to make something like $200k with two people to not get one).

But there are now millions of people that will.

[Fermion]

Take advantage of the absurdly low rates and get a equity loan on your rentals and use that for living expenses?

Think about it. If you are paying 4% on a $100,000 loan but saving $10,000 a year in ACA costs....win?

[Big_Hitter]

I'm coming off COBRA in August and will likely be eligible for a premium subsidy since my 2020 income much lower than when I was w*rk$#g. I need to do some calculations...

[FANOFJESUS]

Quote:

Originally Posted by GTFan No, the cliff has been eliminated for two years. If you have substantially high income such that 8.5% of income would pay for the policy then yes, you won't benefit because you won't get a subsidy (in my area and ages you'd have to make something like $200k with two people to not get one). But there are now millions of people that will.

The old cliff for a single is about 51k. Help me understand this. If I am single and make 55k would I owe 8.5% of 55k? Right now I am a little under the old cliff and was paying $1500 for health care. 8.5% of 55k is $4675 About three times my old bill for only 4k more of income. Someone help me am I overlooking something?

[cathy63]

Quote:

Originally Posted by FANOFJESUS The old cliff for a single is about 51k. Help me understand this. If I am single and make 55k would I owe 8.5% of 55k? Right now I am a little under the old cliff and was paying $1500 for health care. 8.5% of 55k is $4675 About three times my old bill for only 4k more of income. Someone help me am I overlooking something?

8.5% is the upper limit of what you have to pay. If you are lucky enough to be able to find a plan for less than 8.5% of your income, then you get to pay the lower amount.

[niven]

Quote:

Originally Posted by cathy63 8.5% is the upper limit of what you have to pay. If you are lucky enough to be able to find a plan for less than 8.5% of your income, then you get to pay the lower amount.

Not exactly - this has been covered in other threads, but the subsidy is based on the second-lowest cost silver plan. If that's the plan you choose, the cost to you would be 8.5% of your ACA MAGI, assuming you're at 400% or more of the federal poverty level. If you pick a cheaper silver or bronze plan, or a more expensive silver or gold plan, the subsidy is the same. Therefore, you can pay less than 8.5% for a cheaper plan, but more than 8.5% for a more expensive plan.

[Finance Dave]

Quote:

Originally Posted by GTFan No, the cliff has been eliminated for two years. If you have substantially high income such that 8.5% of income would pay for the policy then yes, you won't benefit because you won't get a subsidy (in my area and ages you'd have to make something like $200k with two people to not get one). But there are now millions of people that will.

So do you understand how it will work? For example, if our income is $150k, then it seems that we would only get a subsidy if the HC plan we choose has premiums above 8.5% of that, or $12,750/year. Is that right? If so, then would the subsidy amount be only enough to get you down to where you pay $12,750/year? If so, that's not much of a subsidy.

Currently we pay $213/mo (based on staying below the cliff), and if the above were to happen (I'm assuming we do Roth conversions to get to that income level) we'd be paying about $1,050/mo, or about an $800/mo increase in premiums. Yes, I'm comparing apples to oranges based on two completely different incomes...but I'm trying to understand what my options/costs would be.

[Finance Dave]

Quote:

Originally Posted by Fermion Take advantage of the absurdly low rates and get a equity loan on your rentals and use that for living expenses? Think about it. If you are paying 4% on a $100,000 loan but saving $10,000 a year in ACA costs....win?

yes, that is an option. I hate borrowing money and paying interest, but there are a few examples of where it really makes sense...in the short run.

[Finance Dave]

Quote:

Originally Posted by niven Not exactly - this has been covered in other threads, but the subsidy is based on the second-lowest cost silver plan. If that's the plan you choose, the cost to you would be 8.5% of your ACA MAGI, assuming you're at 400% or more of the federal poverty level. If you pick a cheaper silver or bronze plan, or a more expensive silver or gold plan, the subsidy is the same. Therefore, you can pay less than 8.5% for a cheaper plan, but more than 8.5% for a more expensive plan.

Ok, this starts to get at what I'm trying to understand...

Let's say I've been managing my income below the cliff for the past couple years, which I have. My HC premium for 2020 is $2,480/yr (bronze plan)...based on $66,000 MAGI. I know we can't do an exact comparison here because I have a bronze plan and not the silver...but....

Let's assume for 2021 I go over the "old" cliff....so my income is now $72,000. So that means if I chose the second lowest cost silver plan I'd receive a subsidy such that I would pay no more than $6,120 (72k x 8.5%)?

That doesn't make much sense to me...that still seems like a pretty big "cliff" to me of $3,700 more in premiums. Of course I'd be getting better coverage via the silver plan...or I could choose another bronze plan and perhaps see a lower premium?

I just want to make sure I'm thinking this through correctly.

[RunningBum]

Quote:

Originally Posted by Finance Dave Ok, this starts to get at what I'm trying to understand... Let's say I've been managing my income below the cliff for the past couple years, which I have. My HC premium for 2020 is $2,480/yr (bronze plan)...based on $66,000 MAGI. I know we can't do an exact comparison here because I have a bronze plan and not the silver...but.... Let's assume for 2021 I go over the "old" cliff....so my income is now $72,000. So that means if I chose the second lowest cost silver plan I'd receive a subsidy such that I would pay no more than $6,120 (72k x 8.5%)? That doesn't make much sense to me...that still seems like a pretty big "cliff" to me of $3,700 more in premiums. Of course I'd be getting better coverage via the silver plan...or I could choose another bronze plan and perhaps see a lower premium? I just want to make sure I'm thinking this through correctly.

You aren't thinking correctly. As you said yourself, you would pay no more than $6120. It might be less.

If $66K was right at 400%FPL, additional income would cost you 8.5% in subsidies. $510. It's a sliding scale, not a cliff.

If $66K is a little under 400%FPL, it's a little more of an impact because the multiplier is a little less than 8.5%.

[FANOFJESUS]

Hope this helps others
https://www.kff.org/interactive/subsidy-calculator/

[GTFan]

Quote:

Originally Posted by FANOFJESUS The old cliff for a single is about 51k. Help me understand this. If I am single and make 55k would I owe 8.5% of 55k? Right now I am a little under the old cliff and was paying $1500 for health care. 8.5% of 55k is $4675 About three times my old bill for only 4k more of income. Someone help me am I overlooking something?

I'm confused as to whether you're quoting $1500/mo. or per year. Your $4675 amount is the max premium for the second lowest cost silver plan, so if that plan's unsubsidized cost is $9k/yr., for example, you would now only pay $4675 and the gov't would pay $4325. If you got a bronze plan for say $6k a year you'd pay even less because the subsidy is still $4325, so you'd pay $1675 which is only a little more than the $1500 you're paying now (if it's per year). Without this cliff removal you'd pay the full $6k or $9k.

[FANOFJESUS]

Quote:

Originally Posted by GTFan I'm confused as to whether you're quoting $1500/mo. or per year. Your $4675 amount is the max premium for the second lowest cost silver plan, so if that plan's unsubsidized cost is $9k/yr., for example, you would now only pay $4675 and the gov't would pay $4325. If you got a bronze plan for say $6k a year you'd pay even less because the subsidy is still $4325, so you'd pay $1675 which is only a little more than the $1500 you're paying now (if it's per year). Without this cliff removal you'd pay the full $6k or $9k.

$1500 a year. Thanks for the answer.

[niven]

Quote:

Originally Posted by Finance Dave Ok, this starts to get at what I'm trying to understand... Let's say I've been managing my income below the cliff for the past couple years, which I have. My HC premium for 2020 is $2,480/yr (bronze plan)...based on $66,000 MAGI. I know we can't do an exact comparison here because I have a bronze plan and not the silver...but.... Let's assume for 2021 I go over the "old" cliff....so my income is now $72,000. So that means if I chose the second lowest cost silver plan I'd receive a subsidy such that I would pay no more than $6,120 (72k x 8.5%)? That doesn't make much sense to me...that still seems like a pretty big "cliff" to me of $3,700 more in premiums. Of course I'd be getting better coverage via the silver plan...or I could choose another bronze plan and perhaps see a lower premium? I just want to make sure I'm thinking this through correctly.

Your current subsidy is the second-lowest-cost silver plan (SLCSP) premium MINUS 6,487.80 (66,000 x 9.83%, my assumption for you under the "old" law). If you increase your ACA MAGI to 72,000 under the new law, it will be the SLCSP premium MINUS 6,120 (72,000 x 8.5%), so you would still come out ahead. Does that help?