ER Taxable income, and ACA MAGI

[fh2000]

I am 58, and DW is 52. We plan to ER soon. We have no pension, and plan to take SS at 70.

I just got around working on a spreadsheet to estimate my soon ER tax and ACA MAGI situation. DW and I have collectively 1M in IRA. We plan to live on our after-tax money for 10 years before I am 70, and doing Roth conversion during this time.

We have to convert at least $35,000 each year to be above the Medi-Cal level, per Covered California website. So, I am looking into converting between $35,000 and $60,000 a year. Taking into consideration of the amount from Deduction/Exemption (reduces taxable income), and Muni dividends (increases MAGI), I see these ranges below:

Conversion Taxable_Income ACA_MAGI
---------- --------------- -----------
$35,000 $27,000 $65,000
$60,000 $52,000 $89,000

For each conversion amount, I tried to estimate how much RMD including SS I would have to take, and see it appears to be better to start lower amount to receive both lower tax rate, and lower ACA premium. When I am 65, I can start converting more.

In other words, it appears to me that a slow ramp-up conversion is more favorable to us. Do any members with similar IRA amount yield the same conclusion?

 

[audreyh1]

Your numbers aren't high enough to trigger AMT as far as I can tell, and ordinary income from an IRA isn't likely to trigger it anyway.

 

[fh2000]

Your numbers aren't high enough to trigger AMT as far as I can tell, and ordinary income from an IRA isn't likely to trigger it anyway.

Sorry to miss lead you. I corrected the word 'amt' in my original post. I did not mean AMT. It is an old habit of my programmer era to use it as a short variable name to mean 'amount'.

 

[pb4uski]

I'm your age and DW is 59. A little more IRA. I'm finding it best to skip the subsidy and convert to the top of the 15% tax bracket from now until 70 to minimize my time in the 25% tax bracket beginning at 70.

I look at projected end of life NW in comparing. But I want to emphasize the difference is very slight - only abut 1% - but I prefer forgoing the subsidies because it is less hassle as well.

One thing you might want to look into is forgoing the subsidies and keeping your income low enough to buy a catastrophic policy even though you are over 30. You need to limit your MAGI to the lowest cost bronze plan divided by 8% (you're eligible if the lowest cost bronze plan available to you exceeds 8% of your income).

The difference between the cat policy and the lowest cost bronze plan is similar to the subsidy assuming you are in good health and don't typically get close to your deductible, but you can convert more - best of both worlds in some cases.

That is the direction I am heading.

 

[fh2000]

One thing you might want to look into is forgoing the subsidies and keeping your income low enough to buy a catastrophic policy even though you are over 30. You need to limit your MAGI to the lowest cost bronze plan divided by 8% (you're eligible if the lowest cost bronze plan available to you exceeds 8% of your income).

The difference between the cat policy and the lowest cost bronze plan is similar to the subsidy assuming you are in good health and don't typically get close to your deductible, but you can convert more - best of both worlds in some cases.

That is the direction I am heading.

Very interesting. Thanks for the tip. I will look into this option.

 

[walkinwood]

I'm your age and DW is 59. A little more IRA. I'm finding it best to skip the subsidy and convert to the top of the 15% tax bracket from now until 70 to minimize my time in the 25% tax bracket beginning at 70.

Are you using some online calculator to reach this conclusion? It is a calculation that I probably should do too.

 

[daylatedollarshort]

We are still researching this, but our current thinking is to max out the ACA subsidies with a Bronze HSA plan until age 65, SS at 62 (if we aren't still working part time) and minimize income taxes as much as we can until RMD time. This may mean lower Roth conversions than we might have done prior to the ACA, but we feel the subsidies (over $1K a month) combined with the possibility of zero or low taxes now to age 70 are birds in the hand we feel are too good to pass up.

We're putting a priority on not lowering our net worth in the short term over having the highest possible portfolio value if we live to statistically longer than average old age.

 

[ERhoosier]

I just got around working on a spreadsheet to estimate my soon ER tax and ACA MAGI situation. DW and I have collectively 1M in IRA. We plan to live on our after-tax money for 10 years before I am 70, and doing Roth conversion during this time.

We have to convert at least $35,000 each year to be above the Medi-Cal level, per Covered California website. So, I am looking into converting between $35,000 and $60,000 a year. Taking into consideration of the amount from Deduction/Exemption (reduces taxable income), and Muni dividends (increases MAGI), ....

As you fine tune your SS, might want to check that bit about deductions/exemptions reducing income. It appears that Medi CAL, like most other states' HI programs, now will use Fed's ACA definition of MAGI in income calc's.
http://www.dhcs.ca.gov/Documents/Eligibility%20Simplification%20-%20MAGI%20BY%20AID%20CODE%20CHART%209-26-11.pdf

ACA's definition of MAGI includes gross income (form 1040 Line 37), plus non-taxable SS, plus muni bond interest, plus overseas income (if any).
http://laborcenter.berkeley.edu/healthpolicy/cal
Exemptions & standard (or itemized) deductions are considered AFTER Line 37, so do not reduce MAGI for ACA like they reduce Taxable Income (Line 43).
http://www.irs.gov/pub/irs-pdf/f1040.pdfculator/

 

[Another Reader]

I did not know you could buy a catastrophic plan if you are over 30. If I understand pb4uski correctly, if you are ineligible for subsidies but cannot find an ACA plan for less than 8 percent of your MAGI, you can buy such a plan even if you are over 30.

Next year, my pension system is dumping the pre-Medicare retirees into CoveredCA. That means a single person in their early 60's can have a MAGI of approximately $83-$90,000 and not be able to find a plan for 8 percent of MAGI at 2014 prices. Buying a catastrophic plan instead of extending a big fat middle finger to the ACA would be attractive to many folks. Where can I verify that this is an "approved" alternative?

 

[pb4uski]

Are you using some online calculator to reach this conclusion? It is a calculation that I probably should do too.

Custom spreadsheet. Pretty complex.

 

[pb4uski]

I did not know you could buy a catastrophic plan if you are over 30. If I understand pb4uski correctly, if you are ineligible for subsidies but cannot find an ACA plan for less than 8 percent of your MAGI, you can buy such a plan even if you are over 30.

Next year, my pension system is dumping the pre-Medicare retirees into CoveredCA. That means a single person in their early 60's can have a MAGI of approximately $83-$90,000 and not be able to find a plan for 8 percent of MAGI at 2014 prices. Buying a catastrophic plan instead of extending a big fat middle finger to the ACA would be attractive to many folks. Where can I verify that this is an "approved" alternative?

https://www.healthcare.gov/exemptions/

You may qualify for an exemption if:.....

• The lowest-priced coverage available to you would cost more than 8% of your household income .....

Note: If you get an exemption because coverage is unaffordable based on your expected income, you may also qualify to buy catastrophic coverage through the Marketplace. This may be more affordable than your other options.

Another exemption is if your pre-ACA plan was cancelled.

https://www.healthcare.gov/catastrophic-plan-information/

 

[Another Reader]

Yep, there it is. Thanks!

Sadly, the cheapest "catastrophic" plan is only $100 a month cheaper than the cheapest bronze plan. I picked age 61 and in my zip code the cheapest annual catastrophic premium is 8 percent of $66,000. A lot of fat middle fingers will likely be extended to the ACA....

 

[pb4uski]

....A lot of fat middle fingers will likely be extended to the ACA....

Why do you keep saying that? My ACA premium (bronze plan with similar coverage as my 2013 HDHI plan) is about $50 more per month than my premium last year and it usually goes up that amount anyway.

Besides, are you really going to be foolish enough to go without health insurance and have a mid-sized health event wipe out your hard earned savings?

 

[Another Reader]

I had better than gold subsidized insurance through my employer and then through the pension system. I'm not going to pay a higher price for crap insurance. I'm healthy and the risk of some acute problem is small. I can self insure a mid-sized health event. If I develop a chronic condition or cancer, I can move to another state with good healthcare and sign up for a top tier plan as moving is a qualifying event. My exposure is limited to an expensive acute problem like a stroke or heart attack.

I'm old enough to remember when all insurance plans were catastrophic. Then came Kaiser and the HMO model, which no one in their right mind in the Bay Area in the 1960's would use. The unions negotiated free healthcare from the automakers and other large industrial employers at the same time. "Healthcare" has been deteriorating since.

I won't have to pay the penalty if I work the MAGI and get an exemption. Someone else can pay for all the sick folks and the overwhelming bureaucracy. I will invest the premiums instead.

 

[pb4uski]

I hope it works out for you.

IMO, the other benefit of health insurance is ready access to negotiated rates with health care providers. If you don't have insurance you'll be charged the "rack" rate and have to try to negotiate down from there.

One unfortunate thing is that people have become spoiled and expect to get health care for a modest co-pay on top of their premiums and the reality is that the cost of those plans is skyrocketing and is IMO a poor value for healthy people. Few people realized the high cost of those plans since they were commonly heavily subsidized by employers and when people need to get their own insurance they get sticker shock. We seem to be heading towards HDHI plans that are more similar to the insurance plans that you (and I) are old enough to remember.

Like you, we are relatively healthy. So our $8k or so annual cost of our bronze plan (for 2) is worth it to me to get access to negotiated rates and insure the cost of a health event over our $13k combined deductible. So most years health care will cost me $10-11k (premiums + deductibles) and worst case it would be $20k.

While it is a lot of money and I wish it were less, IMO it is much better than self-insuring.

 

[Another Reader]

Totally agree with you about the negotiated rates. It's difficult to negotiate after receiving the service. I watched some friends of mine work their way through a cancer situation. The top tier providers were not in network, so they chose to go out of network and pay the difference. They negotiated on everything. Everyone came down to the insurance company UCR's except the premiere doctor in the field. They paid their $60k share of the cost for him.

None of the plans in CoveredCA have acceptable provider lists. I think astute people see this and realize the ACA is going to cost a lot of money and provide poor coverage. We will move to a fee for service model outside the ACA where if you want the best care, you will contract directly with the provider.

 

[daylatedollarshort]

None of the plans in CoveredCA have acceptable provider lists. I think astute people see this and realize the ACA is going to cost a lot of money and provide poor coverage. We will move to a fee for service model outside the ACA where if you want the best care, you will contract directly with the provider.

I guess it depends on your area and what you were paying previously for insurance. We live near a top tier hospital with a very large provider list, including all our regular doctors. Plus our premiums dropped by over $2K a month. We are quite thrilled with our ACA plan. It is a fantastic benefit to us and from what I've read here and other boards, a main factor that is allowing many people to retire early.

We had friends try to retire early a few years ago, only to find our what they thought were relatively minor, pre-existing health issues made them uninsurable without employer group health insurance.

 

[Another Reader]

Where are you located? Which plan did you select? I would like to compare that with what I was offered on the website.

 

[daylatedollarshort]

Where are you located? Which plan did you select? I would like to compare that with what I was offered on the website.

I live in California and we have a Blue Shield Bronze HSA plan through Covered California. But I am not sure how that would help you if you live in a different state now. You won't save money overall moving to California. Anything you save on health insurance would likely be outweighed by increased housing and taxes.

Added -

Missed the post where you already live in California. It might be worth driving a bit for doctor appointments to a metro area with a large selection of providers, if you live in a limited option area now.

 

[MichaelB]

None of the plans in CoveredCA have acceptable provider lists. I think astute people see this and realize the ACA is going to cost a lot of money and provide poor coverage. We will move to a fee for service model outside the ACA where if you want the best care, you will contract directly with the provider.

BCBS has PPO plans with large nation-wide networks (IIRC Bluecard). They aren't available in California through the exchange? The Kaiser Permanente plans have also have lots of positive mentions here.

 

[gardenfun]

I live in California and we have a Blue Shield Bronze HSA plan through Covered California. But I am not sure how that would help you if you live in a different state now. You won't save money overall moving to California. Anything you save on health insurance would likely be outweighed by increased housing and taxes.

Added -

Missed the post where you already live in California. It might be worth driving a bit for doctor appointments to a metro area with a large selection of providers, if you live in a limited option area now.

I live in the bay area of CA and also have the Blue Shield Bronze PPO HSA plan. The unsubsidized premiums are less than what I was paying before ACA for Aetna (whose premiums increased 20% over two years BTW), insuring myself (not thru employer).

 

[Another Reader]

I live in the Bay Area. BCBS is on the exchange, but many of my doctors are not part of the ACA plan network. I wonder if these plans limit you to providers near your home.

Kaiser is a joke and their HMO model is at the root of a lot of the problems with healthcare and insurance today. The original Oakland hospital/medical center was a hellhole back in the mid-1960's. When Kaiser opened the HMO to others beyond Kaiser employees, everyone with any knowledge avoided the medical plan and the center like the plague. There are some bright spots, but they have always hired the lowest quality doctors, these days mostly doctors with medical degrees from overseas. I would not set foot in Kaiser.

 

[daylatedollarshort]

I live in the Bay Area. BCBS is on the exchange, but many of my doctors are not part of the ACA plan network. I wonder if these plans limit you to providers near your home.

Another Reader - Have you looked at the provider directories by plan on the Blue Shield and other major insurance company sites?

I checked my plan and there were around 2,000+ doctors in the Blue Shield network in total among the various plans within 5 miles of my zip code, and slightly more than 1,500 doctors in network within 5 miles for my particular ACA plan. The three hospitals closest to my house were all in network. Within 10 miles there were 3,000 doctors listed.

I changed the distance to 100 miles and have a choice of over 36,000 doctors.

Plus, this list is on the Blue Shield Bronze HSA plan alone. There are a multitude of other plans and insurance companies to choose from.

You can search for your doctors on this site and see which Blue Shied plans they accept, if any -

https://www.blueshieldca.com/fap/app/search.html

 

[M Paquette]

I live in the Bay Area. BCBS is on the exchange, but many of my doctors are not part of the ACA Kaiser is a joke and their HMO model is at the root of a lot of the problems with healthcare and insurance today. The original Oakland hospital/medical center was a hellhole back in the mid-1960's. When Kaiser opened the HMO to others beyond Kaiser employees, everyone with any knowledge avoided the medical plan and the center like the plague. There are some bright spots, but they have always hired the lowest quality doctors, these days mostly doctors with medical degrees from overseas. I would not set foot in Kaiser.

You may be surprised to learn that some things may change with the passage of 50 years or so.

Then again, you might not be interested in such trivia as the mere passage of time, people, policies, or programs.

Flexibility, and the ability to adapt and recognize change over time is something that I find beneficial.

 

[Another Reader]

Having LIVED here for those 50 years, the list of Kaiser horror stories is endless. No point including 10 paragraphs of those in the post. If I had seen positive change in the people or the facilities, I would not have my current attitude. In fact, I would have signed up for Kaiser, because the insurance was always considerably less expensive than the alternatives.

I have friends that can't communicate with their Kaiser doctors because the English skills are so appalling. The closest hospital to me is Kaiser and I had to take my father to that emergency room on a couple of occasions in his last years. On one trip, the waiting room had puddles of urine on the floor and I was told no one was "available" to mop it up.

I will give them points on their billing department. They managed to bill his insurance and Medicare correctly. And their hospitals here in Silicon Valley are a huge step up from Oakland or Hayward.