Help with ACA and Inherited IRA tax situation

[silvor]

I’m trying to help a friend out with a tax situation:

54, female, healthy
$58k salary, but no health insurance so she’s on ACA.
She has a $280k inherited IRA that needs to be emptied in 6 years. She obviously didn’t manage this well, but the market has increased her balance quite a bit.
She has about $80k more in Roth IRA (the contributions have been withdrawn) and a little in her individual account.
She has a house worth about $250k with a $125k mortgage.

Would Traditional IRA contributions count towards MAGI?
How about HSA contributions?

She’s mentioned quitting her job for a few years to get ACA or going without health insurance for a bit. I said both are bad ideas.

She then mentioned just taking the tax hit for a year and paying off her mortgage. I think that would save her $800 month – but she still has HOA and property taxes.


Anything she can do here to qualify for subsidies? Any help is appreciated.

 

[cathy63]

She needs to stay under 400% of the FPL for a single person in order to get subsidies. For 2026 that's $62,600. For 2027, it's $63,840. So if she's only making $58K at her job then without other income she would qualify for subsidies.

Does she have to take RMDs from the inherited IRA because the person she inherited from had reached their required beginning age? It sounds like she inherited at age 54 so her divisor now would be something like 27.5 or 28.5 meaning she has to take over $10K per year in RMDs, which kicks her above the ACA subsidy range.

As you noted, she can put $8600 in a tIRA of her own; and if she has an HDHP, then she can put $5400 in an HSA and both of those will reduce her MAGI for ACA and get her below the subsidy line again.

It seems to me she can do that for 5 years and empty the inherited IRA in the 6th year and take the tax hit and just forego subsidies when she's 64. She'll go on Medicare the following year so she won't be on ACA the full year when she turns 65. She will get hit with IRMAA two years after the big withdrawal.

I didn't do all the math, and some of it would be guessing about future premium costs and tax rates, but my gut feel is that the ACA subsidies for 5 years are worth more than the tax hit on the lump sum plus IRMAA.

The other option would be to empty the account now and pay the full price of an ACA plan this year. Then she can get ACA subsidies in future years until she reaches Medicare age and there would be no IRMAA hit. I don't know whether paying off the mortgage is the best use of the money if she does take it now, but she probably shouldn't quit her job.

 

[silvor]

That is some good news @cathy63 At least some of it can be deferred.

She has had the inherited IRA (her fathers) for 4 years, so she has 6 to go. Her father died in 2021.

2026 salary 58000 - 14,000 IRA and HSA = 44,000.
pull 18,000 from inherited IRA = 62,000

^^ yes I know the limits and markets should rise, but it's a ballpark

2031 pull the rest of the money $190k (plus any appreciation)

Or pull it all now...
hmmmm...

 

[RunningBum]

If she's going to have to forego subsidies one year it might be better to empty it now. Health insurance at 64 is going to cost here a lot more than it does now. Convert most of it to a Roth so it's not generating taxable income. I suppose she could use it to pay of her mortgage but that depends on her interest rate.

On the other hand, who knows what the ACA will look like in a few years. Maybe the 400% cliff will go away again.

 

[cathy63]

If she's going to have to forego subsidies one year it might be better to empty it now. Health insurance at 64 is going to cost here a lot more than it does now. Convert most of it to a Roth so it's not generating taxable income. I suppose she could use it to pay of her mortgage but that depends on her interest rate.

On the other hand, who knows what the ACA will look like in a few years. Maybe the 400% cliff will go away again.

Unfortunately, she's not allowed to convert the inherited tIRA to a Roth.

 

[gauss]

That is some good news @cathy63 At least some of it can be deferred.

She has had the inherited IRA (her fathers) for 4 years, so she has 6 to go. Her father died in 2021.

2026 salary 58000 - 14,000 IRA and HSA = 44,000.
pull 18,000 from inherited IRA = 62,000

^^ yes I know the limits and markets should rise, but it's a ballpark

2031 pull the rest of the money $190k (plus any appreciation)

Or pull it all now...
hmmmm...

That plan for $62,000 is very much approaching the 400% FPL limit. If she receives any significant additional income, and she exceeds the limit by $1 her subsidies will go to $0 in a heartbeat.

Even if she doesn't exceed the limit, her subsidies will be capped based on her income (ie she will need to come up with ~ 8.5% x 62000 = $5300 /year or ~440/month as her share assuming a second lowest cost sliver plan).

In contrast consider paying the full retail cost for a bronze/catastrophic plan for 2 years.
The incremental cost would be on the order of $5,000 additional for HI premiums each year.

Then, I would consider emptying the IRA over 2 years to put her to the top of the 24% tax bracket -- but avoid the 32% bracket. (Taxable income 201,775 for a single in 2026).
201,775
-62000 (agi from above
+18000 (no RMD)
-16000 (single Std Ded)
---
~ 142,000 - available to distribute each year from IRA and stay within 24% tax bracket.

would allow 142,000 to be distributed the first year. The second year she could likely take the remainder.

After that, she will have this behind her and can likely receive ACA subsidies going foward. This is a more robust plan (wrt exceeding the 400% cliff) assuming she can handle the cash flow which she should be able to, considering the IRA distributions.

-gauss

p.s. she could invest the after tax IRA proceeds into something like Roundhill BATS:XDIV to avoid significant hits to taxable income (fund does not intend to distribute any dividends) while still maintaing near full SP500 market growth.

 

[Exit 2024]

Other thought - does she have access to 401k at work?

If yes, she can max it out at $24500 + $8000 catch up for a total of $32500, Plus traditional IRA and HSA - additional $8600+$4300 =$12900. So she can safely take $45,400 out of inherited IRA and have no change to the subsidy. She can also take a little more to get closer to the 400% cliff.
If she will turn 55 this year - that is additional $1k catch up contribution in HSA.

In about 6 years she can effectively move all the money from Inherited IRA to 401k, Trad IRA and HSA in her name.

 

[silvor]

Even if she doesn't exceed the limit, her subsidies will be capped based on her income (ie she will need to come up with ~ 8.5% x 62000 = $5300 /year or ~440/month as her share assuming a second lowest cost sliver plan).

I must completely misunderstand how subsidies work..

When I go to healthcare.gov and put in her info
54, single female, 62k a year, 32221 zip code, I get a $624 credit - which then gets her a bronze plan from Ambetter Health for $216.57 a month.

I thought the subsidy was based of the 2nd lowest sliver plan, not what she actually pays.

 

[TickTock]

Good suggestions in this thread. My opinion is that this is complicated enough to justify hiring a planner who has an excellent understanding of taxes/inherited IRA rules/ACA rules.

 

[pb4uski]

The problem is that she needs to rip off the band-aid sometime unless she can change jobs to a job that offers health insurance so the ACA subsidy issue becomes moot.

If she can't change jobs, then I think the best thing is to split withdrawals from the inherited IRA betwen 2026 and 2027, absorb the ~$7,488 ($624/mo) loss of ACA subsidies and pay the tax and then for 2028 and onwards go back on ACA subsidies assuming they still exist (I think likely).

Or she could continue with smaller inherited IRA withdrawals for the next few years to stay below the 400% FPL cliff and then clean it out in years 5 and 6.

Best option is to find a job with health insurance and then take it out ratably over the next 6 years (balance at start of year divided by remaining years).

But above all, don't let the tax tail wag the investment dog.

 

[gauss]

Does the friend work for an employer of less than 50 people or do they intentionally limit her hours to no more than 35/week?

I believe employers who do not fall into both of these categories can be substantially penalized for not offering affordable employer sponsored health insurance.

-gauss

 

[gauss]

I must completely misunderstand how subsidies work..

When I go to healthcare.gov and put in her info
54, single female, 62k a year, 32221 zip code, I get a $624 credit - which then gets her a bronze plan from Ambetter Health for $216.57 a month.

I thought the subsidy was based of the 2nd lowest sliver plan, not what she actually pays.

The amount of the subsidy is very zip code dependent (zip code drives the cost of the SLCSP).

I tried the same scenario in 32221 zip (subsidy credit of over $700 month) vs 48127 zip (subsidy credit $334 per month).

That is why I try to compare taxpayer "contribution amounts" instead of subsidy amounts. They should be the same regardless of age or zip code. IRS Form 8962 will walk you through the calculations for last year.

For someone close to 400% of FPL, then the individual contribution amount will be ~ ~ 8.5% of ACA MAGI - for the SLCSP plan. If the ACA MAGI income was 200% of FPL then the contribution would be 2% of ACA MAGI. Gold plans will have higher contribution amounts and Bronze plans less depending upon the dollar for dollar difference in the unsubsidized premiums vs the unsubsidized premium of the SLCSP.

I think it is quite straightforward when viewed in this matter, but the Marketplace does it backwards IMHO, and makes it quite opaque.

-gauss

 

[imnontrad]

I view my inherited IRA as a gift and use it for things like paying federal income taxes. She could consider withdrawing enough in one year to not only pay for the extra taxes but also pay off the house and do any necessary repairs. That will bring her monthly expenses down to a much lower level for the future.