A conundrum: ACA savings or returns?

[MrLoco]

A bit of a problem . Here is the situation. I am 56....my wife is 55. I am retired. She will retire this year.We will need to buy health coverage on my state's exchange under ACA.

I can purchase a silver plan for only $146/month with a $700 deductible. Nice right? The only catch is that our MAGI needs to be under $31,000/year. Some forms of investment income in taxable I can manipulate. Some I cannot such as an inherited IRA and dividend income from stock funds in taxable( do not want to sell or exchange these as we would have large capital gains and this would disrupt asset allocation).

One strategy I could employ would be to exchange muni fund in taxable for a money market fund to the tune of $1million.....small capital gain.

Pros: Qualify for above listed silver plan at listed monthly premiums and deductible.

Cons: Have $1 million in a money market fund paying (YIKES!!!) .039% and miss out having this money invested in stocks if the market has a good run the next 6 years. I say 6 years because in 2022 our pensions would kick in and we would have to pay full price for any health care plans at that time anyway until MEdicare coverage.


NOTE: The money in the MM fund is 25% of total investable assets. Also AA would remain at 50/50 equities/fixed income. The only change would be that the 50% in fixed income would now include the $1million in the money market fund with another $1million in a total bond fund in IRA's. MAke sense? If I do not take any action we would most likely , on the same silver plan, be paying $1,500/month in premiums and a $4,000 family deductible.

Any thoughts? Just hate to not take advantage of the gov't. subsidies/cost sharing reductions. And it would only be for the next 6 years anyway.

 

[MichaelB]

Any thoughts? Just hate to not take advantage of the gov't. subsidies/cost sharing reductions. And it would only be for the next 6 years anyway.

You could just project the total value of lost income and asset growth (after tax) over the entire period, and compare that with the value of the tax credit you gained.

 

[2017ish]

...
Any thoughts? Just hate to not take advantage of the gov't. subsidies/cost sharing reductions. And it would only be for the next 6 years anyway.

Make sure that the providers that you may want to see are included in the panel for the exchange plan. Participation levels vary vastly by state/city/plan.... We will buy individual policies off the exchange for that reason (and, to be fair, given our Roth conversion plans, we won't be meeting the subsidy levels).

 

[ivinsfan]

I would hesitate to do this because I don't believe the income only part of ACA is guaranteed to continue forever. Worse case scenario would be that you convert to MM and income and assets are counted towards subsidy money.

 

[pb4uski]

I think you are too preoccupied with ACA subsidies. As I understand your post, the value of the subsidies is ~$1,350/month ($1,500 - $142) or $16,200/year. That is 1.62% of $1 million you are thinking of redeploying so if the investment shift results in a more than 1.62% reduction in investment income then you are worse off.

Unless you use a lot of medical services, why go with such a low $700 deductible?.... typically high-deductible health insurance policies cost much less. At this stage the two main purposes of health insurance is to protect yourself against an expensive serious health event and to gain access to negotiated rates for medical services.

Use this period of low income to convert taxable funds to a Roth at a much lower cost than once SS and pensions and RMDs start (assuming you will get SS). I think the tax savings on conversions will exceed the value of the subsidies.

Also, if the lowest cost bronze plan exceeds 8% of your income you may be able to buy catastrophic coverage. In some states, catastrophic coverage for people our age is much lower than bronze coverage (40% in my case) but in other states the difference is minimal.

 

[photoguy]

If you give away all your money, you can even get ACA health care for free.

I think you are too preoccupied with ACA subsidies. As I understand your post, the value of the subsidies is ~$1,350/month ($1,500 - $142) or $16,200/year. That is 1.62% of $1 million you are thinking of redeploying so if the investment shift results in a more than 1.62% reduction in investment income then you are worse off.

+1. OP should think about this in terms of the expected cost/loss in investment income.

Another thing to keep in mind for the OP is that the premium subsidy doesn't have a hard cap until you reach 400% of the FPL (somewhere north of 60k for a couple). So if investment returns are variable, it won't matter much if it pushes you to 240% as opposed to 205%. It's still better to have the extra money.

However cost sharing does have hard caps at 200% and 250% of FPL. But as pb4uski notes, unless you are a heavy user of medical care, you probably won't hit the deductible every year anyway. So it's definitely worth less than it's nominal dollar amount.

Finally If I really wanted to maximize both ACA subsidy and investment gains, I'd put that 1million into a slice of equities that doesn't pay much in dividends or cap gains (you could do this with individual stocks and maybe some indexes - perhaps growth oriented).

 

[GTFan]

If I had the OPs $4 mil+ in assets I sure as heck wouldn't be trying to game ACA subsidies. Not only is it going to be hard to do to max out Silver plans, it just doesn't make financial sense for the investments ($1 mil in a MM fund?? Really?).

OP get a high deductible Bronze plan and just factor in having to pay an extra $6-7k every once in a while if you have a health issue, then move on to more profitable ideas such as maxing out conversions.

 

[marko]

If I had the OPs $4 mil+ in assets I sure as heck wouldn't be trying to game ACA subsidies.

As they used to say: "how do you think a man with my money got to be a man with my money?"

I know of a few guys with equal or more in assets than that who are taking HELs to cover expenses and stay under the income radar for the 4-5 years they need before they hit Medicare.

 

[pb4uski]

But is that wise one SS starts and RMDs hit and you get bumped from the 15% tax bracket to 25% or 28% or more? Getting ACA subsidies for someone with $4m may be penny wise and pound foolish.

 

[marko]

But is that wise one SS starts and RMDs hit and you get bumped from the 15% tax bracket to 25% or 28% or more? Getting ACA subsidies for someone with $4m may be penny wise and pound foolish.

Well.....I'm slowly reaching the point where it seems all the financial gyrations and running around eventually end up with a net zero gain, or at least not enough to be worth the effort. Feels like a suckers game to try and outwit the tax man; he's so far ahead of us mortals.

Taking SS at 62 or 70 is actuarialy neutral, withdrawing from your already taxed accounts leads to higher RMDs, gaming the ACA subsidies lead to higher tax brackets, moving to non-income tax states have higher property taxes, and so on.

 

[jim584672]

With that kind of $$$ just get a catastrophic / bronze plan and don't worry about the subsidies.

 

[Fedup]

I agree it's not worth the effort.


Sent from my iPad using Early Retirement Forum

 

[sengsational]

Here's what you do (if I've captured the problem correctly): Go to healthcare.gov, put in your family size and expected income without the muni interest. Note the value of the annual premium tax credit amount. If the annual PTC amount is greater than 1M*(interest rate on muni fund - tiny interest rate on the alternative investment), then do it. Otherwise, pay the piper for health insurance. You probably get like 2.5% on the munis? 25K seems like a lot for health insurance, so you'll probably leave it in the muni's.

 

[shortstop14]

Use this period of low income to convert taxable funds to a Roth at a much lower cost than once SS and pensions and RMDs start (assuming you will get SS). I think the tax savings on conversions will exceed the value of the subsidies.

In my situation, I'm trying to figure out exactly this - which is more valuable to me, ~$12,000 a year ACA subsidy now, or converting roughly $800,000 in current traditional IRA assets to Roth over the next few years. I'm struggling with the present value / future value calculations to put a value on the conversions.

The Roth conversions will be my only income, so I can manipulate it to any level. I'd really just as soon not mess with the ACA subsidy, but I also hate to leave money on the table.

A different situation than the OP, since my RMDs aren't going to be as large.

 

[sengsational]

SS: When you have a few hours, go to i-orp.com Consider dropping a few bucks in the tip jar too. I'm not anything more than a user of the site, but I think it's great, and it answers exactly what you're trying to get answered. You can turn on and off Roth conversions, and you can turn on and off ACA income limitations. It will show you the magnitude of the RMD tax torpedo.

My situation is similar to yours and ACA came out on top of Roth conversions, but it depends on many things, including your expected healthcare "utilization" (I don't spend much). You also should price catastrophic policies; if you can get one cheap, you can forgo the PTC, but get bigger Roth conversions.

 

[shortstop14]

sengsational - thanks, I'll check that out. I've played with i-orp in the past, but not in regards to the impact of RMDs. I just always figured I'd do Roth conversions starting this year, but the ACA subsidy reducing current expenses is hard to ignore. We've run with a high deductible plan for years, and our medical expenditures are bumpy - ongoing predictable allergy treatment for my wife, and my unfortunate occasional orthopedic surgeries from sports injuries.

I suspect my optimal answer is to take an ACA subsidy and manage income via Roth conversions to a level somewhere between the ACA Medicaid lower limit and the ACA upper limit.

 

[haha]

moving to non-income tax states have higher property taxes, and so on.

This last one is easily addressed. Lots of good cardboard goes to waste is any city. Just get a warm coat at Value Village and stake out a doorway. Ideally it will be near a good spot for panhandling, to get some tax-advantaged income.

Ha

 

[Texas Proud]

I do not see a reason to try and keep income so low just to get a cost sharing silver plan....

Invest the money and you will make much more than what you would save... and BTW, you will still qualify for the subsidy.... not as much, but probably most of what you are looking to get....

 

[meierlde]

This last one is easily addressed. Lots of good cardboard goes to waste is any city. Just get a warm coat at Value Village and stake out a doorway. Ideally it will be near a good spot for panhandling, to get some tax-advantaged income.

Ha

actually not being so drastic, if relocating in texas move where there is no municipality involved and you can cut property taxes by 25% by paying just school and county taxes. Now you will pay more for water (perhaps need a well), and pay for trash service. You can also look around to see which school districts in an area have the lowest taxes as many school districts exist in counties.

 

[FreeBear]

I suspect my optimal answer is to take an ACA subsidy and manage income via Roth conversions to a level somewhere between the ACA Medicaid lower limit and the ACA upper limit.

Same here. I think we'll stay just above the ACA medicaid lower limit to capture as much of the subsidy as possible, while they last. We have enough after tax investments to hold out for a few years. Once we tap the IRA's, we'll try hard to keep below the ACA subsidy upper limit by tempering IRA income with the remaining taxable savings.

We're focussing on the ACA subsides while they last. They seem to be decreasing year-to-year, who knows in several years. ROTH conversions are a secondary priority due to our relatively low expenses but high burn rate (high SWR). We'll need to withdraw heavily from the IRA's well before 70 yo, so RMD's probably won't be a big factor unless the egg nest grows much greater. Not a bad problem to figure out...

 

[daylatedollarshort]

You might consider checking out the Bronze plans instead. Our max allowed MAGI is much higher than $31K and we still get a significant subsidy.

We took out a HELOC and refinanced our mortgage for more after tax income until we are 65 and on Medicare. We come out ahead each year on the spread between what we pay on the mortgage interest and what we receive from the ACA tax credits.

 

[pb4uski]

In my situation, I'm trying to figure out exactly this - which is more valuable to me, ~$12,000 a year ACA subsidy now, or converting roughly $800,000 in current traditional IRA assets to Roth over the next few years. I'm struggling with the present value / future value calculations to put a value on the conversions.

The Roth conversions will be my only income, so I can manipulate it to any level. I'd really just as soon not mess with the ACA subsidy, but I also hate to leave money on the table.

A different situation than the OP, since my RMDs aren't going to be as large.

It is quite difficult. I ended up building a model in excel for my retirement plan that had embedded in it an on/off switch for Roth conversions to the top of the 15% tax bracket and a robust federal and state tax calculation.

i-orp was giving me a answer to convert to the top of the 28% bracket as soon as possible and I don't really believe it and am not willing to write such big checks to the tax man.

What you could do is do a pro forma tax return under an optimize ACA subsidy scenario and a forget ACA subsidies and convert to the top of your selected tax bracket (15% for me) and see what the difference in tax and difference in Roth conversion is and one divided by the other is the effective tax rate on your Roth conversions.

Then see if you can look to see what tax bracket you will be in 10 or so years down the road and what your effective tax rate on Roth conversions will be. The difference between the two tax rates times the Roth conversion is your tax savings and compare that to your ACA savings.

My case is pretty easy. Last year we paid about 10% tax on our Roth conversion. Once SS and pensions and RMDs start I expect to be in the 25% tax bracket so I figure that I saved $11k in taxes by doing the Roth conversion. If I had not done the Roth conversion we would have had a fully subsidized bronze plan (cost = $0) but with the Roth conversions we paid $5.5k for catastrophic coverage, so my net savings were about $5.5k. Second order savings will be that because of my lower deferred tax balances I expect to spend less years in the 25% bracket later in life.

 

[papadad111]

Well.....I'm slowly reaching the point where it seems all the financial gyrations and running around eventually end up with a net zero gain, or at least not enough to be worth the effort. Feels like a suckers game to try and outwit the tax man; he's so far ahead of us mortals.



Taking SS at 62 or 70 is actuarialy neutral, withdrawing from your already taxed accounts leads to higher RMDs, gaming the ACA subsidies lead to higher tax brackets, moving to non-income tax states have higher property taxes, and so on.

+1. I'm drawing this same conclusion. In most cases my time is more valuable doing other things.

Then again I've never been a coupon clipper or play the a credit card cash back or points games. My DW gives me crap because the airlines want me to spend some of my million banked miles too ...

I was also smart enough not to tuck everything into a tax deferred accounts over the years ... so even Roth conversions ... are not a huge concern although a nice to have, am not gonna stress over it when that time comes to do conversions.

As to OP : he could just put that $1M in a 10 year treasury paying about 1.85 percent guaranteed by the government and he will come out ahead of a his money market+ACA subsidies investment ...

Not to mention what may change to ACA subsidies may be put in place over the next 4 years ..

 

[MrLoco]

OP here. Thanks to everyone for your thoughts and perspective. One of the greatest things about this forum is being able to bounce things off each other and digest various perspectives.

A few thoughts. I will end up keeping the muni bonds as is. This will give us MAGI of between $50-$55,000/ year ( invest income) yet still qualify for a subsidy as we will be just below the $400FPL of $63,720 for a family of 2.

Even though we are both healthy (for now,) will stick with a silver plan and while I have done some ROTH conversions, plan to do the bulk of converting between 65 and 70 1/2 and delay social security until age 70. If the ACA subsidies change for the worse before age 65, then we can always do more Roth conversions before then. Will just see what happens in the near term. Thanks again for the suggestions.

 

[walkinwood]

If you're healthy, a bronze plan may make more sense. Your savings on premiums will offset your low out of pocket expenses. Model it for varying amounts of medical expenses. If your health changes, you can always get a silver plan the following year.