Allocations and managing MAGI for ACA subsidies

[Retireby45ish]

I’m planning for retirement in a few years.

I’d love someone to check my general setup and allocation of funds and then to offer some insight into how to manage MAGI to keep ACA subsidies under control.

First, we need about $100k per year to live comfortably. Been keeping track of expenses and that gives us enough cushion on the 90k we have been averaging. This does not include any health insurance, which I’m estimating will be 15k per year (but that depends on question 2, below). DW and I are both 41. She also isn’t working now and we are planning on her not doing so.

We currently have $3M investments and $1M in home equity (no mortgage, or rather I’m planing to take 400k off the equity to pay off mortgage when I retire since that will lower the MAGI I’ll need each year in a few years). I think once I save about $500k in next 2-3 years (which is my expectation) I’m done. That effectively gives $3.5M in investments with no mortgage. So let’s work off this simplified example…

Here is my asset split:

70% in VTI/SPY (simplified, but essentially this)
30% in BND.

All the BND is in IRA accounts, with about 20% of that in a Roth IRA.

This should give me as little dividend or other drag as possible.

Question 1: is there anything I can change here or is there anything I’m missing? I’ve done extensive research and I think I have this as efficient as possible. However, this ties into the next question …

Question 2: I will have about 35k of dividends (~1.5%), with about 66% of that as qualified. Therefore I’ll have to sell some equities to get the ~100k I’d need to live on each year (maybe more for taxes). Doing this will impact the ACA subsidy I’m trying to maximize to help me minimize the healthcare piece. Is there a way to do this effectively?

For example if I sell off 70k then my MAGI will be pretty high and i won’t get much of a subsidy. That means an extra 15-20k per year.

I’ve toyed with taking our 2-3 years at a time into cash to reduce some year MAGI, but I can’t quite figure out if that’s worth it.

This is the part of the retirement piece I just can’t quite figure out!

Thanks all…I’m so close to freedom…

 

[jim584672]

The 400% FPL income cutoff comes back Jan 2026, $1 over and zero subsidies. The current law has no hard cutoff and a better subsidy formula, but the law expires end of 2025. Family of 2 4xFPL = $78,800.

 

[SecondCor521]

Miscellaneous thoughts:

I think your asset placement is good. You'd want the BND in your traditional IRA, not Roth IRA - hopefully that's the case. If not, you can adjust without tax penalty (beware wash sales though). See Bogleheads asset placement wiki.

If it's only the two of you, for 2023 in the lower 48, 400% of FPL is about $79K ACA MAGI. Above that number the subsidy currently fades away and in 2026 it will completely go away.

Note that for ACA MAGI purposes, it's only your gain that matters. If you sell $70K, you might only have $35K of capital gains.

It won't matter for ACA subsidy purposes, but you probably want to realize LTCG before any STCG.

You could offset gains with losses if you have any, which will give you more spendable dollars for the amount of net CGs.

$3.5M at the 4% rule is $140K. Even if health care is $15K a year, you don't need the subsidies for your plan to work.

If I were in your shoes and healthy, I'd look into a ACA Bronze HDHP HSA compliant plan and start building up HSAs for you and your wife. At your ages, in my zip code, assuming $80K ACA MAGI, you could get a plan for $452 a month after subsidy. There are lots of tax benefits to HSAs which have been discussed here before.

Fundamentally, you're not going to be able to both (a) spend $100K a year and (b) get a good ACA subsidy without either saving up cash and living off savings in some fashion or another. Selling stock which doesn't have much LTCG is in this vein.

If you're not willing to save up another million or two to live off for another two decades before Medicare, the only other option I know of would be to do "ACA bunching" -- sell enough in odd numbered years to live on for two years at a time, then qualify for ACA in even numbered years. Then do unsubsidized ACA in odd numbered years. The opportunity cost of selling a year of expenses to cash a year early might outweigh any subsidy you might get in even numbered years, though - $100K at 10% is $10K, and the subsidy calculated by my state website is only $250 a month or so, or about $3K a year.

Were I in your shoes, I'd probably just simplify things and buy an ACA Bronze HSA qualified plan, spend $100K a year, and forgo the subsidies.

ETA: You might find that your taxes are lower too, which can offset the increased health care costs. Not sure if you've done that exercise, or if you include taxes in your budget (some do, some don't).

 

[Retireby45ish]

Miscellaneous thoughts:

I think your asset placement is good. You'd want the BND in your traditional IRA, not Roth IRA - hopefully that's the case. If not, you can adjust without tax penalty (beware wash sales though). See Bogleheads asset placement wiki.

If it's only the two of you, for 2023 in the lower 48, 400% of FPL is about $79K ACA MAGI. Above that number the subsidy currently fades away and in 2026 it will completely go away.

Note that for ACA MAGI purposes, it's only your gain that matters. If you sell $70K, you might only have $35K of capital gains.

It won't matter for ACA subsidy purposes, but you probably want to realize LTCG before any STCG.

You could offset gains with losses if you have any, which will give you more spendable dollars for the amount of net CGs.

$3.5M at the 4% rule is $140K. Even if health care is $15K a year, you don't need the subsidies for your plan to work.

If I were in your shoes and healthy, I'd look into a ACA Bronze HDHP HSA compliant plan and start building up HSAs for you and your wife. At your ages, in my zip code, assuming $80K ACA MAGI, you could get a plan for $452 a month after subsidy. There are lots of tax benefits to HSAs which have been discussed here before.

Fundamentally, you're not going to be able to both (a) spend $100K a year and (b) get a good ACA subsidy without either saving up cash and living off savings in some fashion or another. Selling stock which doesn't have much LTCG is in this vein.

If you're not willing to save up another million or two to live off for another two decades before Medicare, the only other option I know of would be to do "ACA bunching" -- sell enough in odd numbered years to live on for two years at a time, then qualify for ACA in even numbered years. Then do unsubsidized ACA in odd numbered years. The opportunity cost of selling a year of expenses to cash a year early might outweigh any subsidy you might get in even numbered years, though - $100K at 10% is $10K, and the subsidy calculated by my state website is only $250 a month or so, or about $3K a year.

Were I in your shoes, I'd probably just simplify things and buy an ACA Bronze HSA qualified plan, spend $100K a year, and forgo the subsidies.

ETA: You might find that your taxes are lower too, which can offset the increased health care costs. Not sure if you've done that exercise, or if you include taxes in your budget (some do, some don't).

A lot of good misc points. Thanks!!

Yes I guess I’ll just have to wait and see about the 400% FPL cliff in 2026, and how that affects things.

Good point that it’s only the gain that matters for ACA MAGI. I’m guessing it’s best to sell all the lower gains, as a percentage, first and let the larger ones ride until I turn 65. For example, I have things that have 40% returns and others with 800%.

 

[Aerides]

Therefore I’ll have to sell some equities to get the ~100k I’d need to live on each year (maybe more for taxes).

Remember, only the gains portion of the sold equities will be taxed (assuming this is from taxable accounts). So selling ~$70k of assets might result in half or less of that being income, depending where you sell from. You will of course want to be selective and pick the lowest hanging fruit so you might even have stuff that you sell at a loss some years.

Other strats are building cash/CD's now, or selling in chunks - say 3 years at a time - and then only taking the hit against subsidies every 3 years, or every other year.

 

[madatrub]

A lot of good misc points. Thanks!!

Yes I guess I’ll just have to wait and see about the 400% FPL cliff in 2026, and how that affects things.

Good point that it’s only the gain that matters for ACA MAGI. I’m guessing it’s best to sell all the lower gains, as a percentage, first and let the larger ones ride until I turn 65. For example, I have things that have 40% returns and others with 800%.

Im in a similar situation, although I have a large carryover loss from a failed business more than a decade ago. My plan is to maximize aftertax capital gains, offset with capital loss carryforward, then use Roth conversions to fine tune my income in a given year in order to hit a specific MAGI, and therefore maximize roth conversions while maximizing ACA subsidies.

 

[Texas Proud]

One thing that I did was withdrawal from my ROTH for living expenses... that was after running out of cash and low gain investments from my taxable account...


I also was low enough income a few years to get the really low cost silver plan that give you cheaper copays and lower deductible...

 

[SevenUp]

Roth Conversion and Capital Gains On ACA Health Insurance might be useful for you.

 

[Koolau]

A lot of good misc points. Thanks!!

Yes I guess I’ll just have to wait and see about the 400% FPL cliff in 2026, and how that affects things.

Good point that it’s only the gain that matters for ACA MAGI. I’m guessing it’s best to sell all the lower gains, as a percentage, first and let the larger ones ride until I turn 65. For example, I have things that have 40% returns and others with 800%.

Depending upon who is in charge and who needs brownie points from the public, I look for some/many of the current tax advantages about to expire in '26 to be made permanent though don't bet the farm on it.

 

[Retireby45ish]

One thing that I did was withdrawal from my ROTH for living expenses... that was after running out of cash and low gain investments from my taxable account...


I also was low enough income a few years to get the really low cost silver plan that give you cheaper copays and lower deductible...

For some reason I thought all withdrawals from ROTH counted towards MAGI. If not that might be an interesting route to explore.

 

[Koolau]

For some reason I thought all withdrawals from ROTH counted towards MAGI. If not that might be an interesting route to explore.

This site says no. Qualified withdrawals from a Roth are not counted in MAGI.

https://obamacarefacts.com/question...taking them back out doesn't affect your MAGI.

 

[SevenUp]

For some reason I thought all withdrawals from ROTH counted towards MAGI. If not that might be an interesting route to explore.

I don't think Roth distributions count toward any of the various MAGIs listed in that link.

 

[Koolau]

For some reason I thought all withdrawals from ROTH counted towards MAGI. If not that might be an interesting route to explore.

Sorry, I forgot that I wanted to say that I think of my Roths as sorta being sacrosanct. I wouldn't touch my Roths until I had nothing but Roths left. They just have so many advantages that I just don't want to let them go.

I'm sure there are times that it makes sense to take from your Roth, but you're giving up a lot by doing so (In my opinion.) SO YMMV.

 

[RunningBum]

A really nice thing about having a Roth is that it is that after 59.5 you can pull from it tax free for any number of good reasons. You might have a large purchase that would put you in a high tax bracket if you had to take other investments, or you might use it to keep MAGI down for ACA or other subsidies, to name a couple. Just compare the tax savings now vs. what the cost would be later when you are getting SS + maybe a pension, + RMDs, to make sure you are using the Roth wisely. A Roth has great advantages, but it might be to your advantage to take some from it earlier rather than hoard it to the end. Do the math rather than just labeling it untouchable. Likewise with an HSA, which I'd take from before a Roth with qualifying medical expenses, since an HSA isn't as good to pass to heirs.

Sure Roths have 5 year rules, but I don't think those are as restrictive as many people worry about.

I plan to use my Roth up before selling investments that would have high LTCGs. As long as my heirs get step up basis, it works out better to let them inherit the appreciated shares over a Roth.

 

[skibum]

Ideally you keep MAGI below 400% of poverty level, 78,800 in 2023 for MFJ. This keeps you in the 12% tax bracket, (<89,450 income MFJ), so tax rate on LTCG and qualified dividends is 0%.

With MAGI of 78.8k, and standard deduction of 27,700, this allows a total taxable income of 106,500. If you are selling appreciated after tax assets, you should shoot for 105k of LTCG and dividends for ACA subsidies at < 400% of FPL and pay almost zero in taxes. With 35k in annual dividends, this allows 70k in capital gains or IRA withdrawals per year. If the assets sold have 50% cost basis you would have 140k per year of stock sales and 35k of dividends, for a total of 175k available annually with ACA credits and near zero federal taxes. It is a bit tighter if you are living from IRA withdrawals, or a combination of IRA withdrawals and after tax fund sales, but still feasible.

High deductible plans and HSA savings accounts provide additional tax advantages and income potential. The HSA triple tax advantages are well known, and a few other opportunities are available when managing MAGI for ACA credit. Having an HSA account in place can provide additional funds if needed without incurring taxable income using qualified withdrawals for current year or prior year medical expenses. Also, the annual HSA contribution limit of 8,750 for MFG reduces annual income, even for unearned income, and is available up until the tax filing deadline. If the ACA cliff returns, this can provide a bit of flexibility after all the W-2's arrive to fine tune taxable income for the year and avoid the cliff.

 

[RunningBum]

With MAGI of 78.8k, and standard deduction of 27,700, this allows a total taxable income of 106,500. If you are selling appreciated after tax assets, you should shoot for 105k of LTCG and dividends for ACA subsidies at < 400% of FPL and pay almost zero in taxes. With 35k in annual dividends, this allows 70k in capital gains or IRA withdrawals per year. If the assets sold have 50% cost basis you would have 140k per year of stock sales and 35k of dividends, for a total of 175k available annually with ACA credits and near zero federal taxes. It is a bit tighter if you are living from IRA withdrawals, or a combination of IRA withdrawals and after tax fund sales, but still feasible.

I don't see how this is possible. You've flipped some terms.


AGI is all of your income, with a few adjustments such as a subtraction for HSA contributions.
MAGI is AGI plus/minus some adjustments.
Taxable taxable income is AGI - deductions.

So if you have $106,500 AGI (not total taxable income), your standard deduction can bring your total taxable income down to $78.8K and you probably have zero fed income tax. But your MAGI is also at or near $106,500, way over 400% FPL. There is no ACA cliff right now, so you might still get a small ACA subsidy, but nothing like you'd get at 78.8K MAGI.

 

[skibum]

I don't see how this is possible. You've flipped some terms.


AGI is all of your income, with a few adjustments such as a subtraction for HSA contributions.
MAGI is AGI plus/minus some adjustments.
Taxable taxable income is AGI - deductions.

So if you have $106,500 AGI (not total taxable income), your standard deduction can bring your total taxable income down to $78.8K and you probably have zero fed income tax. But your MAGI is also at or near $106,500, way over 400% FPL. There is no ACA cliff right now, so you might still get a small ACA subsidy, but nothing like you'd get at 78.8K MAGI.

My apologies, thanks for the correction. I had previously stayed under the MAGI cliff at a little over $100k for a family of four, and now manage income tax claimed after deductions. Had a senior moment and confused the two, incorrectly thinking ACA MAGI was after std deduction.

 

[Koolau]

A really nice thing about having a Roth is that it is that after 59.5 you can pull from it tax free for any number of good reasons. You might have a large purchase that would put you in a high tax bracket if you had to take other investments, or you might use it to keep MAGI down for ACA or other subsidies, to name a couple. Just compare the tax savings now vs. what the cost would be later when you are getting SS + maybe a pension, + RMDs, to make sure you are using the Roth wisely. A Roth has great advantages, but it might be to your advantage to take some from it earlier rather than hoard it to the end. Do the math rather than just labeling it untouchable. Likewise with an HSA, which I'd take from before a Roth with qualifying medical expenses, since an HSA isn't as good to pass to heirs.

Sure Roths have 5 year rules, but I don't think those are as restrictive as many people worry about.

I plan to use my Roth up before selling investments that would have high LTCGs. As long as my heirs get step up basis, it works out better to let them inherit the appreciated shares over a Roth.

I see your point. Limiting LTCGs and I assume income in general is important not to mess up MAGI for various reasons.

The good news on Roths - the 5 year rule only affects your proceeds - not what you put in. You can take out what you put in anytime IIRC.

Thanks for the tutorial!

 

[SecondCor521]

For some reason I thought all withdrawals from ROTH counted towards MAGI. If not that might be an interesting route to explore.

As others have said, qualified Roth withdrawals do not add to MAGI.

Roth withdrawals are qualified if (a) they're contributions, (b) they're conversions over 5 tax years old, or (c) after age 59.5. There may be other situations where a Roth withdrawal is qualified.

Non-qualified Roth withdrawals are generally taxed and often penalized, so they're usually avoided.

 

[Texas Proud]

Sorry, I forgot that I wanted to say that I think of my Roths as sorta being sacrosanct. I wouldn't touch my Roths until I had nothing but Roths left. They just have so many advantages that I just don't want to let them go.

I'm sure there are times that it makes sense to take from your Roth, but you're giving up a lot by doing so (In my opinion.) SO YMMV.

When you are getting $17K to $20K in insurance premiums by keeping your MAGI low it is not as sacrosanct as you might think...

 

[Koolau]

When you are getting $17K to $20K in insurance premiums by keeping your MAGI low it is not as sacrosanct as you might think...

I gotcha. I guess I need to change my financial religion.