Anyone using covered call income etfs to reduce MAGI for ACA?

[dobig]

Seems like a no brainer using income funds such as SPYI, QQQI, GPIX, GPIQ, etc that pay dividends as ROC (return of capital) so they don't increase your MAGI for Obamacare. There's been some recent mentions about this topic but wanted to see if anyone is using this strategy for ACA susbsidies. I would think if you're an income investor pre medicare age this would be a good game plan to keep from going over the ACA cliff while still getting the income you need in retirement.


We've been moving money from cefs and some preferreds to these covered called income etfs but are wondering if we're missing something? The way I view it we're getting similar income as cefs with some capital appreciation and very good tax efficiency for our needs.

 

[COcheesehead]

As long as you can carry the capital gains deferral out past ACA window.

 

[dobig]

As long as you can carry the capital gains deferral out past ACA window.

Seems that shouldn't be too hard. Taking GPIQ as an example. Pays a 9.81% dividend with 97% of that as ROC which should carry us 10 years from our current age of 55 to 65.

IF we invested $100,000 in it we would get $9,810/year in income of which only $293 would be taxed and count as income towards our MAGI. Seems too good to be true.

 

[COcheesehead]

I used a Yieldmax options strategy for income. I lost 40% overall. Single worst investment. I got the income, but the basis dropped even more. Be careful. Not saying it won’t work, but things can and do go both ways.

 

[dobig]

I used a Yieldmax options strategy for income. I lost 40% overall. Single worst investment. I got the income, but the basis dropped even more. Be careful. Not saying it won’t work, but things can and do go both ways.

Understood. No interest in those insanely high paying funds. Sticking with the more conservative 8% - 11% yielders.

 

[CalBird]

It’s helpful but not controllable. The big challenge is if you already invested in equity with big capital gains, how you can move them into SPYI without triggering capital gains.

 

[dobig]

It’s helpful but not controllable. The big challenge is if you already invested in equity with big capital gains, how you can move them into SPYI without triggering capital gains.

For us it would be new money + stagnant/losers. We're not talking big swings here. Maybe 15 - 20% of taxable.

We sold some cefs and preferreds so really no capital gains.

 

[SRV]

When I FIRED last year I found I was uncomfortable selling shares of VTI to fund our everyday expenses, so we pivoted towards a partial income strategy. I sold roughly half of my bond position in our taxable account and bought QQQI. The income from QQQI pays for all our expenses.

From a tax standpoint QQQI is almost entirely tax free for now. 99.5% of the distributions last year were ROC and didn’t count towards income. It’s important to note that every distribution lowers your cost basis, which will eventually reach zero. When that happens, all income will still be reported as RoC but will be taxed as long term capital gains at that point. Depending on what your income looks like, it could potentially still 0% or 15%.

 

[Semi-Retyrd]

I used SPYI for a while with the same idea of reducing my MAGI to reduce taxation of my SS benefits. However I couldn't live with the volatility of SPYI even though it was less than SPY. Also I expect a correction or crash in the next two years that will hit the covered call funds nearly as hard as SPY or VOO.
For better sleep I have switched to QLENX and ORR which are long-short funds that will crash significantly less IMO due to their short positions. QLENX is fairly tax efficient and ORR is very tax efficient.

I use these now to give me headroom for Roth conversions..

 

[surprising]

I replaced some CEFs with SPYI in my taxable to reduce MAGI for ACA. I use the distributions for monthly expenses, and I don't plan to sell any shares at least for a year. I understand at that time cost basis will be near 0, so everything will be taxable at LTCG rate. I also will try very hard to keep under 0% LTCG rate so any sales would be taxed at 0%.

 

[dobig]

When I FIRED last year I found I was uncomfortable selling shares of VTI to fund our everyday expenses, so we pivoted towards a partial income strategy. I sold roughly half of my bond position in our taxable account and bought QQQI. The income from QQQI pays for all our expenses.

From a tax standpoint QQQI is almost entirely tax free for now. 99.5% of the distributions last year were ROC and didn’t count towards income. It’s important to note that every distribution lowers your cost basis, which will eventually reach zero. When that happens, all income will still be reported as RoC but will be taxed as long term capital gains at that point. Depending on what your income looks like, it could potentially still 0% or 15%.

This was how we also looked at it. Instead of individual bonds and preferreds we held paying an average of around 5.4% and that count towards our MAGI we could buy some tax efficient income funds paying almost double and the best part was the dividends didn't count towards our income for ACA.

Is there more risk? Sure. But if you buy some of the more conservative income funds like the ones from Goldman that only use covered calls on 25 - 75% of the holdings I doubt the risk is substantially more. Biggest risk I can see is a longer term bear market where there's a deep drawdown which could bring the price and therefore the dividends down.

 

[dobig]

I replaced some CEFs with SPYI in my taxable to reduce MAGI for ACA. I use the distributions for monthly expenses, and I don't plan to sell any shares at least for a year. I understand at that time cost basis will be near 0, so everything will be taxable at LTCG rate. I also will try very hard to keep under 0% LTCG rate so any sales would be taxed at 0%.

If you're holding SPYI wouldn't it take around 8 years for your cost basis to be near 0% when it's paying around 12% in dividends?

 

[surprising]

If you're holding SPYI wouldn't it take around 8 years for your cost basis to be near 0% when it's paying around 12% in dividends?

Yes that's correct. Not sure what I was thinking.

 

[SRV]

This was how we also looked at it. Instead of individual bonds and preferreds we held paying an average of around 5.4% and that count towards our MAGI we could buy some tax efficient income funds paying almost double and the best part was the dividends didn't count towards our income for ACA.

Is there more risk? Sure. But if you buy some of the more conservative income funds like the ones from Goldman that only use covered calls on 25 - 75% of the holdings I doubt the risk is substantially more. Biggest risk I can see is a longer term bear market where there's a deep drawdown which could bring the price and therefore the dividends down.

Yes, I definitely see a large/deep drawdown as the biggest risk. In that case your portfolio balance would take a hit (QQQI won't provide ballast like a tradional bond fund), and you would likely see reduced dividends/distributions until the market recovers.

But I'd like to add that I see QQQI (and other similar CC funds) as a good hedge against one of the other large risks we face: a flat or low growth scenario, or a so-called "lost decade" scenario. In this case, your CC fund would also remain flat, but would still provide healthy cash flow, thus reducing your need to liquidate your core holdings (VTI, VOO, VT, BND etc.).

 

[dobig]

....................................

But I'd like to add that I see QQQI (and other similar CC funds) as a good hedge against one of the other large risks we face: a flat or low growth scenario, or a so-called "lost decade" scenario. In this case, your CC fund would also remain flat, but would still provide healthy cash flow, thus reducing your need to liquidate your core holdings (VTI, VOO, VT, BND etc.).

This is exactly why we have our taxable brokerage set up to pay all our expenses thru dividends with quite a bit of wiggle room. I never want to be in a position where we have to sell.

 

[jim584672]

Covered call writing is going to create a lot of income. Those funds are horrible, you destroy your principal in the process.

 

[L-5Player]

Those funds are horrible, you destroy your principal in the process.

YieldMax funds, yes. And some of the more primitive CC funds like QYLD, also yes.

But one of the oldest covered call funds, EOI, has existed for over 21 years. In that time it has a CAGR of nearly 9% with payouts reinvested, and is essentially flat in price alone (+0.13% CAGR). This is effectively like a bond that has paid a 9% coupon for 21 years.

EOS, another fund of similar vintage from Eaton Vance, is even better with 9.57% CAGR with 0.52% NAV alone.

Not so bad, right, assuming you are looking for income vs. pure growth.

JEPI has been around for close to 6 years with NAV growth of 2.98% CAGR, or 12.16% with DRiP. Also pretty darn good.

Since then, newer funds like SPYI and GPIX have developed more sophisticated algorithms designed to capture and retain more of the underlying index gains. Time will tell, but the space is promising and not at all "horrible" if you choose assets wisely.

 

[dobig]

YieldMax funds, yes. And some of the more primitive CC funds like QYLD, also yes.

But one of the oldest covered call funds, EOI, has existed for over 21 years. In that time it has a CAGR of nearly 9% with payouts reinvested, and is essentially flat in price alone (+0.13% CAGR). This is effectively like a bond that has paid a 9% coupon for 21 years.

EOS, another fund of similar vintage from Eaton Vance, is even better with 9.57% CAGR with 0.52% NAV alone.

Not so bad, right, assuming you are looking for income vs. pure growth.

JEPI has been around for close to 6 years with NAV growth of 2.98% CAGR, or 12.16% with DRiP. Also pretty darn good.

Since then, newer funds like SPYI and GPIX have developed more sophisticated algorithms designed to capture and retain more of the underlying index gains. Time will tell, but the space is promising and not at all "horrible" if you choose assets wisely.

Thanks for bringing IOS and EOS to my attention. Another pretty safe income fund I use is UTG which is a utility CEF. CAGR of 10.9% with a history of rising dividends and price appreciation.

 

[robnplunder]

Without the COVID-19 ACA subsidy extension, my 2026 MAGI could go over the subsidy qualification limit (household of 2 = $84600). In my case, it is hard to predict the amount of capital gain distribution from my mutual funds. It has been drastically different from year to year. I may have to move some money around, or incur capital gain loss, such that my MAGI falls below $84600.

 

[Texas Proud]

Without the COVID-19 ACA subsidy extension, my 2026 MAGI could go over the subsidy qualification limit (household of 2 = $84600). In my case, it is hard to predict the amount of capital gain distribution from my mutual funds. It has been drastically different from year to year. I may have to move some money around, or incur capital gain loss, such that my MAGI falls below $84600.

Well.... crapola... I have one more year with DD but will be going to two next year... maybe.... she is going to graduate school and maybe I will keep her on!!

 

[hesperus]

That is a clever approach for managing ACA subsidies. Using Return of Capital (ROC) to keep MAGI low while maintaining cash flow is a major advantage for early retirees.

The shift from CEFs to these newer covered call ETFs makes sense if you’re prioritizing tax efficiency and trying to avoid the "ACA cliff". It’s essentially getting the income you need without the immediate tax hit that traditional dividends or interest would trigger.

Are you finding that the capital appreciation on these newer funds is holding up better than your previous preferreds?

 

[dobig]

That is a clever approach for managing ACA subsidies. Using Return of Capital (ROC) to keep MAGI low while maintaining cash flow is a major advantage for early retirees.

The shift from CEFs to these newer covered call ETFs makes sense if you’re prioritizing tax efficiency and trying to avoid the "ACA cliff". It’s essentially getting the income you need without the immediate tax hit that traditional dividends or interest would trigger.

Are you finding that the capital appreciation on these newer funds is holding up better than your previous preferreds?

Yes. I like Goldman Sach's covered call funds. GPIX with an 8% yield and GPIQ with a 10% yield.

 

[joejetski]

That is a clever approach for managing ACA subsidies. Using Return of Capital (ROC) to keep MAGI low while maintaining cash flow is a major advantage for early retirees.

The shift from CEFs to these newer covered call ETFs makes sense if you’re prioritizing tax efficiency and trying to avoid the "ACA cliff". It’s essentially getting the income you need without the immediate tax hit that traditional dividends or interest would trigger.

Are you finding that the capital appreciation on these newer funds is holding up better than your previous preferreds?

I assume that works for IRMAA also?