Pulling plug ACA taxable/IRA withdrawal ?'s

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I will be pulling the plug early next year at age 47, wife is 40. At a minimum she intends to work her job for 5 years longer which has great health insurance, job and company stable.

So I am laying out my spreadsheet for the long term and I think I have it but was hoping for collective wisdom. The overall withdrawal rate stuff works to my liking at roughly 4% so no focus for now there.

Right now we are about 50/50 taxable vs IRA/401K (my 401K, soon to be IRA is 5x hers). We will actually live off her salary while working but after year 5 begin to deplete taxable 1st. I show we can make this last until I am 59.5. That primarily sits in a tax exempt bond fund and that interest would be our only income combined with principal withdrawal.

In those years I think I will need to do a small amount of roth conversions to bump income to necessary ACA levels to maximize subsidy while staying off medicaid. So I may have say $20G in interest of actual MAGI and convert $30 to maximize subsidy say at $50 MAGI for 2. Round numbers.

Fast forward, so now I am 59.5, wife is 52.5, taxable is zero and we start hitting my IRA. Annual living expenses would need a withdrawal above ACA subsidy levels. Say $100K a year.

So that said, I am thinking I need to do enough roth conversion each year beginning in 2023 that those withdrawals would essentially become enough to live on until she reaches medicare at age 65. In essence starting in 2023 convert $100G a year and live off that ladder or roth withdrawals post 59.5 for me until she is 65. Probably would even need to do some roth conversions in these years to hit ACA income since we would be living off withdrawals.

Or should I start roth converting and plan on living off some of that before 59.5 leaving some taxable account behind to live off of post 59.5.

This means I will be doing large roth conversions and paying tax of course on those but beats losing ACA subsidy for potentially 20 years as I see it.

This all assumes the rules stay the same, I see that unlikely but all I have for now. I know this seems confusing so fire away.

In summary if I deplete our taxable account by age 59.5 to zero what should I have done before or after to manage potential ACA subsidies for 13 years for me (52-65) and 20 years for her (45-65).

I am struggling to model the buckets and my spreadsheet has taken on a life of its own.

 

[pb4uski]

I think you're right to manage income to get ACA subsidies... if your taxable funds run out you can access Roth contributions and any Roth funds after you are 59 1/2.. so that may help. Also of course you can withdraw money from tIRAs penalty free after 59 1/2 but you'll need to pay tax on them.

Does you 401k offer a stable value fund? If so, what does it yield? If you can access a good stable value fund through your 401k you may want to leave some money there.

 

[Blooming Late]

Someone please correct me if I'm wrong-- but "starting in 2023 convert $100G a year" would put you well over the ACA cliff for two people.
Converting to Roth means withdrawing money from 401k/IRA, paying tax, and then it is claimed as income, right?

 

[pb4uski]

Yes.

 

[Dtail]

Many situations one can maximize the savings of managing MAGI for the ACA over the savings achieved by Roth conversions.
Try to play around with a spreadsheet with different inputs.

 

[npage]

Someone please correct me if I'm wrong-- but "starting in 2023 convert $100G a year" would put you well over the ACA cliff for two people.
Converting to Roth means withdrawing money from 401k/IRA, paying tax, and then it is claimed as income, right?

My wife's work will provide insurance for next five years. I picked 2023 in theory as I have RSU's that will be done and that is about as low as our income will get while she is working. I was thinking I needed a long time of roth conversions to create a yearly ladder or income from withdrawals for what could be 13 years for her until medicare, 5 for me.

I see the real issue after I turn 59.5. Up till then we can live off taxable and manage with whatever plug figure ROTH conversion we need. At that point I have 5 years unitl medicare, she has 13 and if we did not have enough roth contributions withdrawals in that period we would no doubt go over ACA cliff with just straight IRA withdrawals. So If I don't start doing conversions in large numbers before 59.5 that is the issue I hit.

It's a challening timing exercise way in the future. If I get it wrong I am budgeting $2G a month for insurance, if I get it right, well, a lot less. Assuming ACA looks something like today.

And yes my 401K offers stable value, currently 3.25%. I was thinking of rolling some to Vanguard IRA but yes keeping a decent chunk at 401K to use this tool in future.

For simple math I think I will need enough roth conversions to support 12 years of living below ACA threshold. Taxable up till 59.5, 52.5, then 12 years of roth withdrawals of that ladder until she is 65.

So in essence I need to start a ladder in 2023-2034, for ease say $100G a year. Now in 2035 in theory I have $100G a year I could withdraw not counting as income until 2046 when she hits Medicare, I would have hit in 2039.

All in I believe paying the taxes at what will likely be the 22% bracket all those years on conversions would still be cheaper than full non subsidized premiums. Of course if that 22% in taxes had stayed invested all those years maybe not, it shouldn't be this hard!

 

[pb4uski]

Have you looked into a 72t? Or raising cash through a cash-out refi or HELOC if you won a home? Any other assets you could use as collateral for a loan to see you through that period?

 

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So you are thinking use a little 72T before 59.5 to build up the taxable side? What would benefit be over Roth conversions, near as I can tell almost all of my IRA will need to be converted before 59.5. I am sort of ignoring my wife's IRA, could come from there too but I see no real difference, all one pool.

Own home, no mortgage.

 

[pb4uski]

I guess that I was thinking of it as a way to use tax-deferred money for living expenses until you are on ACA and preserve the taxable funds for the 5/13 year period that you will be on ACA that is your liquidity issue.

Probably very similar to a Roth conversion ladder but more flexible in that you don't have to track tranches of conversions to make sure that you don't violate the 5-year rule.

IOW, as I understand it you have to keep income low for ACA for a 13/20 year period starting 5 years from now when you wife stops working... the idea is to build as much penalty free sources of cash to carry you through those years over the next 5 years and getting penalty free money out of tax deferred is the best available source.

 

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No, that is some good thinking and why I posted here. I need to think about that one. As to tracking, I figured I would just do one conversion a year in the right dollar amount so would not be too hard to track.

To be clear, the next 5 years living and health insurance will be covered by Wife's take home pay and work benefits.

We certainly have enough IRA balance to convert enough, you summed it up right though at a 13/20 year problem. Maybe if medicare ever moves to age 60 it becomes a 8/15 problem The reality is it will require enough 72T or conversion that we will hit 22% bracket regardless of not working while doing either in the early years. I do not see a way around that.

My spreadsheet is likely aggressive and I suspect my current taxable funds will last more likley till I hit social security at 62 but who knows.

 

[Blooming Late]

If you can find no other option but to go over the ACA cliff, one possibility is to convert a larger chunk every other year or two. On the alternate years you could qualify for ACA. Not very elegant, but better than nothing.

 

[npage]

If you can find no other option but to go over the ACA cliff, one possibility is to convert a larger chunk every other year or two. On the alternate years you could qualify for ACA. Not very elegant, but better than nothing.

That's another good idea. In essence I am betting today for later unnknown. So over next 10 years say I convert $100G a year and for sake of argument I pay $20G in taxes each year or $200G total in taxes to arrive at $1MM in roth conversion money.

That $1MM of conversions will be availabe to carry me and wife until I am 65 and then her. And let's say that allowed me to have a high subsidy ACA plan for $500 a month only instead of $1500 or some amount unsubsizided.

Figuring out which one is cheaper not knowing the future of ACA gets complicated and is making me stressed and reducing life expectancy

Which is a whole nother issue. I won't even get into the very real likelihood neither of us has a typical long life expectancy for a variety of pre existing genetic short straws but I have to assume we do depsite low odds.

 

[Gotadimple]

You can plan out for x number of years. Which is a good exercise to give you an idea of 'how' things might develop. The reality is you will revisit your plan every year because things will change and the plan will change.

- Rita

 

[npage]

You can plan out for x number of years. Which is a good exercise to give you an idea of 'how' things might develop. The reality is you will revisit your plan every year because things will change and the plan will change.

- Rita

Agreed, what I do know is right now if I did nothing and the plan of us both being done in 5 yrs (me next year) happens and I am 52 and she is 45, we have a long time of ACA premiums. Keeping them as low as possible is goal.

Up till I am 59.5 I think we live off taxable so fine. So really we come back to the 5 year and 12 year options at that point. To your point given the 1st stage in that starts 14 years from now it is hard to forsee.

 

[npage]

More I think about it, 1st stratgey should be to Roth convert soon as possible so 5 years from now (actually 5 years from 2021) I can take those conversions to live off of and leave the taxable funds alone as long as possible. Straight taxable funds will be easier to sort down the road. That won't solve the whole gap but will defer the potential issue to later at least.

Next year will not be ideal for taxes, but 2022 will look about as good as it will get for us.

 

[pb4uski]

That's the best thing, to get (Roth conversions) while the getting is good (you are in a low tax bracket).

Over the last 7 years I converted $389k and only paid 8.5% in tax.

 

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In the 5 years my wife is still working the roth conversion part will mostly hit the 22%. I have adjusted my spreadsheet to show no conversions for 1st 5 years, then start converting my IRA for 8 years (2026-2033, up till age 59, but inital conversions become available at age 55) and manage to 12% bracket. Then we live off those withdrawals primarily and taxable as necessary and convert a few years (2035-2039) of her IRA in that period, no overlap of roth conversins for us to keep income low. The first of her conversions becomes available in time on a ladder to bridge the final gap to Medicare for her. In all of that I doubt we spend what we convert in full and it builds up along with taxable cushion baked in we may just live on at least from some years.

There are all sorts of assumptions and unknowns into such a long forecast but it seems a reasonable guide. Given what has happened just to me since I turned 40 and family history it almost seems laughable to try and plan to those years but.....what can you do. Also why I tend to be a bit more health insurance obsessed than someone who has been lucky so far. I was just starting my career and healthy as an ox and 1st started thinking about retire early reading the original retireearly homepage (actually after I read Paul Terhorst book) in the late 90's of John Greaney before it was a thing; it occurred to me back then even that health insurance was the single hardest thing I could not model. I did not even know what a pre existing was then and to this day it's still a crapshoot but slightly better. I digress. That is why I tend to be a "close enough" guy in my spreadsheet once it lays out about in the ballpark.

Worst case I mess up and we have some years way down the road we end up with no subsidisies (assuming ACA even exists), if my plan has lasted that long and we are not living in a box under a bridge by then it will probably be OK. I have a plan to not take SS until 70, wife at 62, but given families life expectancy and genetics, I am not bettting on it like so many here. I may take at 62 and it would just pay our insurance premiums. No kids either, so if it all ends in a crash owing money, no worries here ;-)