Dealing with MAGI uncertainty

[Physics Guy]

In a couple of months I'm going to have a choice between staying on state extended benefits for insurance (slightly expensive for 5 more years but then cheap after I turn 60 and technically retire) or get an ACA plan (potentially cheaper but more expensive if the cliff comes back and we go over it; doesn't get cheaper in 5 years).

I have the info I need except that our MAGI is so dependent on returns. Between fluctuations in MAGI and the uncertain nature of the the recent removal of the income cliff I'm at a lose for planning. Having money outside of retirement accounts is a good problem to have but also frustrating.

 

[oldtimer]

How much is the time you will spend in determining & monitoring your MAGI during the year? Is that time plus the extra stress in your life to avoid the ACA cliff worth the potential savings?

We had to make a similar choice, but instead of variable returns it was my spouse's commission-based income. So we chose the retiree medical insurance instead of the ACA route. It was one less variable to concern ourselves about. I now have the stress of avoiding hitting IRMAA threshold 2 years in advance so we can reduce tax-deferred savings by doing Roth conversions to avoid IRMAA from SS+RMDs+commission-based income at 72.

 

[Physics Guy]

Yes, the simplicity makes me lean hard into the retiree healthcare route. Yet I still feel the pain looking at the difference as I wait until age sixty.

 

[ownyourfuture]

Yes, the simplicity makes me lean hard into the retiree healthcare route. Yet I still feel the pain looking at the difference as I wait until age sixty.

I understand your concern with the income cliff very well.
Retired in 2015 and went on ACA Insurance starting in 2017.
I have a large taxable brokerage account at Fidelity that kicks out lots of dividends.

I did a little shuffling here and there to make sure I stayed under the cliff, but late in 2018 one of my stocks was acquired by a competitor which resulted in an unexpected $4000 in capital gains. Put me over the cliff by $200 & cost me dearly.

I think you're leaning the right way.

 

[RunningBum]

Why does your MAGI fluctuate so much? And when you say it depends on returns, are you talking about distributions? Or are you doing a lot of buying and selling?

I only keep index funds in my taxable account that have never had capital gains distributions for me, and dividends aren't too high. I even took a one year hit to get rid of the international index because the distributions were higher and even at the end of the year I didn't know exactly how much they'd be because of the foreign tax.

But that's part of the drawback to managing MAGI for an ACA subsidy. I'm less diversified without that international fund. Even though it worked out selling because US stocks have done better, it still wasn't what I really wanted. I have less room to do Roth conversions, and if I need to come up with a larger chunk of money I'd have to take from my HSA and probably from my Roth to avoid a higher MAGI. The ACA plan has kind of handcuffed me.

Even though you might give up some money not going the ACA route, you have more flexibility and overall you might even come out ahead in these next 5 years. Besides, you said it was only slightly (more?) expensive, so how much pain can you be feeling?

 

[Rianne]

I think the subsidy cliff for ACA was removed for 2021 and 2022. But you have 5 years to go. Tough decision but for safety, I'd say stick with your state extended benefits. Better than trying to predict the future.

 

[Physics Guy]

Why does your MAGI fluctuate so much?

Inertia mainly (which argues for the state plan!) as we have never gotten around to a financial cleaning house. Roughly 2/3rds of our money is not tax advantaged in any way. Plus we still have mutual funds from our first big round of investing in the late 80s. They've been good enough that we've never reshuffled the money into index funds but they do throw off some taxable income every year.

It is possible that it isn't fluctuating as much as I think. The last 4 tax years have been much less hands on while we've been overseas and using a tax prep guy. Last year's number seemed very high (well above the 400% level even with my income removed from the equation) but it is possible that I am misremembering numbers from earlier.

BTW the numbers break down very roughly like (monthly covering both of us);

State Extended Silver $1750 / $310 (prior to 60 / after 60)
ACA Silver. $850 or $1515 (doesn't change at 60)

ACA calculations with last year's MAGI where $850 is with the cliff removed and $1515 is with the cliff in place. There is also a potential plan of doing State for me and ACA for my wife but she hasn't looked into that yet.

 

[RunningBum]

BTW the numbers break down very roughly like (monthly covering both of us);

State Extended Silver $1750 / $310 (prior to 60 / after 60)
ACA Silver. $850 or $1515 (doesn't change at 60)

ACA calculations with last year's MAGI where $850 is with the cliff removed and $1515 is with the cliff in place.

I assume you can't do the ACA now and switch to the state plan at 60, otherwise you wouldn't have started this thread.

I really hope the cliff will be removed for good but there's no guarantee of that. There's not even a guarantee that any subsidy will continue, or even the ACA for that matter, but I think those going away is unlikely.

It sounds like you have no hope of staying under 400% FPL unless you sell your existing funds (big tax hit, I'm sure, since you've had them 30+ years) and put them into more tax-efficient index funds, if that is even enough to help.

And actually the ACA plan costs change every year, and age is part of the calculation so it definitely can change. I don't know all of the factors in the HI premium cost, but age is one that would cause it to rise. My monthly unsubsidized premiums since 2016 are 362, 489, 783, 887, 858, 817, 841. This is for a single male, now age 60.

So you're paying ~$900 more for 5 years, IF you can continue getting a subsidy, but $1200 less at age 60 for 5 years? Unless I'm missing something here I would definitely take the state plan and not deal with ACA uncertainties, unless you have some knowledge that the state plan isn't so solid either.