How to manage income to stay under ACA cliff

[Conundrum]

Greetings to all,

I just got off the phone with a health insurance broker. I am planning to go ACA gold or silver plan upon the end of COBRA. I am 51, wife is 49. Does anybody have strategies to stay under the $64960 cliff limit?

I am budgeting for about $95k gross for total annual needs. Some of the 95 will go to fed & state taxes. However, that $95k does include $1600/mo for insurance premiums and another $300 for copays, medicine, etc. so roughly $23,000 annually.

Maybe pay premiums from savings or even a HELOC to get under cliff? Yes, I would have to pay the HELOC back and I have not done a cost analysis between the two. 30 year amortization would make payment low but interest would offset some of the savings.

Also, we have a rental property. Perhaps a LLC Might offer a solution? I didn’t want to go the LLC route due to losing a step up in basis if one of us passes.

I still need to go see my accountant to see what MAGI would look like. Perhaps that will also help me understand how close I am to the cliff.

I don’t know; just random thoughts. Hopefully, this will spur some kind of discussion?

Thanks for listening!

 

[Dtail]

Greetings to all,

I just got off the phone with a health insurance broker. I am planning to go ACA gold or silver plan upon the end of COBRA. I am 51, wife is 49. Does anybody have strategies to stay under the $64960 cliff limit?

I am budgeting for about $95k gross for total annual needs. Some of the 95 will go to fed & state taxes. However, that $95k does include $1600/mo for insurance premiums and another $300 for copays, medicine, etc. so roughly $23,000 annually.

Maybe pay premiums from savings or even a HELOC to get under cliff? Yes, I would have to pay the HELOC back and I have not done a cost analysis between the two. 30 year amortization would make payment low but interest would offset some of the savings.

Also, we have a rental property. Perhaps a LLC Might offer a solution? I didn’t want to go the LLC route due to losing a step up in basis if one of us passes.

I still need to go see my accountant to see what MAGI would look like. Perhaps that will also help me understand how close I am to the cliff.

I don’t know; just random thoughts. Hopefully, this will spur some kind of discussion?

Thanks for listening!

Do you have a taxable investment account and/or cash investments which you could use to supplement your yearly expense needs to keep your MAGI under the cliff?
I use the ACA subsidy heavily by using partial cash, but also have income coming in on my DGF/SO side who is already on Medicare, so that helps me greatly to have 2 pots to play with.

 

[joeea]

I just got off the phone with a health insurance broker. I am planning to go ACA gold or silver plan upon the end of COBRA. I am 51, wife is 49. Does anybody have strategies to stay under the $64960 cliff limit?

Buy a silver plan, not gold.

I am budgeting for about $95k gross for total annual needs. Some of the 95 will go to fed & state taxes. However, that $95k does include $1600/mo for insurance premiums and another $300 for copays, medicine, etc. so roughly $23,000 annually.

Try to get some of that $95k from other than salary. Cash savings for example. If you have an HSA, consider using some of that.

Maybe pay premiums from savings or even a HELOC to get under cliff? Yes, I would have to pay the HELOC back and I have not done a cost analysis between the two. 30 year amortization would make payment low but interest would offset some of the savings.

Also, we have a rental property. Perhaps a LLC Might offer a solution? I didn’t want to go the LLC route due to losing a step up in basis if one of us passes.

I still need to go see my accountant to see what MAGI would look like. Perhaps that will also help me understand how close I am to the cliff.

Yes, your accountant and/or financial adviser should be helping with this.

In my case, we use our cash savings for our expenses, and my wife has been maxing out her 401k. That diverted $24k of her income out of MAGI and helped us get terrific subsidies.

 

[Conundrum]

$45k cash & $12k in stock w/ Merrill Lynch. $2.2M in 401k. $450k in primary res. $400k rental both paid for.

Planning FIRE soon. Income will be from 72t distribution on 401k along with rental income cash flowing about $1400 net per month.

 

[woodguy00]

Easy fix. I’d reduce the 401(k) draw for now and arrange a HELOC for part of the living expense so that MAGI is solidly below cliff. Then consider a bronze plan. You may find little or no premium cost depending on what the second lowest silver came in for your area. The equity in the real estate makes this work very well.

 

[woodguy00]

How much are you budgeting for taxes? It will be very low with the above strategy. Probably $5k federal with minimal health premiums, your cash need is then likely much lower than $95k.

 

[MichaelB]

I just got off the phone with a health insurance broker. I am planning to go ACA gold or silver plan upon the end of COBRA. I am 51, wife is 49. Does anybody have strategies to stay under the $64960 cliff limit?

Buy a silver plan, not gold.

This spreadsheet (here) was built by forum member Animorph. It's an excellent tool to compare the total cost, including premiums, copays, & deductibles, of different policy options.

 

[daylatedollarshort]

As mentioned by other posters, a HELOC and HSA can help. We have a Bronze plan that is $2 a month. The co-pays and deductibles come out of the HSA, which is not included in the 400% federal poverty maximum limit. When we reach the MAGI limit for the year we can draw from the HELOC as needed. A home business made some of our expenses deductible like health insurance premiums (they used to be higher), a home office, and part of our Internet and phones expenses, etc.

We also reviewed and optimized all of our expenses. Credit card sign up points are generally not taxable so playing the credit card games gives us a little extra income over the 400% limit. Our goal is to go three more years at least as our unsubsidized premiums for the two of us are approaching $2K a month and we aren't getting any younger.

On the expense front we lowered our energy usage by putting in LED bulbs and low flow shower heads, bought an energy and water efficient washer; got rid of the landline, switched to a cheaper phone line, etc. All the frugal ideas we found here and places like Reddit to lower expenses helped, as it is not just saving on the recurring expenses themselves that helps our budget but the lower annual expenses kept our MAGI lower and kept us us from having to spend $20K a year in premiums we've averaged the last several years. Plus the college financial aid limits for our state had similar cutoffs as the ACA so we saved on college expenses as well.

 

[Conundrum]

How much are you budgeting for taxes? It will be very low with the above strategy. Probably $5k federal with minimal health premiums, your cash need is then likely much lower than $95k.

CPA ran a rough number @ 11% fed and 7% state

 

[zinger1457]

Have to admit I never used a HELOC so probably don't fully understand what is being recommended. I could see using a HELOC to help supplement small amounts to stay under the ACA cliff but if you need to draw ~$25-30K/year you still have to budget from your taxable income (72t) to make the loan payments. Seems like the interest charges over time would make it a wash. What am I missing?

 

[RunningBum]

Have to admit I never used a HELOC so probably don't fully understand what is being recommended. I could see using a HELOC to help supplement small amounts to stay under the ACA cliff but if you need to draw ~$25-30K/year you still have to budget from your taxable income (72t) to make the loan payments. Seems like the interest charges over time would make it a wash. What am I missing?

Yeah, I don't know that it's a good strategy for potentially 14-16 years, if the ACA subsidies last that long.

If it was for, say, 3 years, it could make a lot of sense. You take out a $100K loan against your house, using $33K/year to help with expenses, while paying a fraction of that back in principal. Pay back the principal once you can take more income.

Maybe with low interest rates it works indefinitely, but for a $300K loan (67% of the OP's equity), that's only ~$20K/year to use, and a bigger interest payment.

The OP has an accountant, why not make that person run the actual numbers? I can't and won't offer an opinion based on the limited info provided. In some places that subsidy is not worth all that much, especially at a younger age. It comes at a cost of not limiting Roth conversions and paying uneven tax rates. Getting an ACA subsidy should not be a standalone goal.

 

[woodguy00]

Have to admit I never used a HELOC so probably don't fully understand what is being recommended. I could see using a HELOC to help supplement small amounts to stay under the ACA cliff but if you need to draw ~$25-30K/year you still have to budget from your taxable income (72t) to make the loan payments. Seems like the interest charges over time would make it a wash. What am I missing?

The key here is access to cash that doesn’t create taxable income. By staying under the cliff and then using a bronze plan, a couple could legally save perhaps $15-20k annually on health care expense. Interest on $25k HELOC draw might be $1250 per year. Someone asked early on if OP had after tax savings. Since not too much there, HELOC was next best.

 

[daylatedollarshort]

Another option is to get the subsidies every other year, or at least take some years "off" to build up more after tax savings. Then use the after tax savings to live off of in the subsidy years and keep MAGI under the limit.

We've gotten very creative at keeping the old lifestyle while lowering expenses. It has been kind of a fun game with bonus round points of around $20K a year from the ACA subsidies.

 

[pb4uski]

$45k cash & $12k in stock w/ Merrill Lynch. $2.2M in 401k. $450k in primary res. $400k rental both paid for.

Planning FIRE soon. Income will be from 72t distribution on 401k along with rental income cash flowing about $1400 net per month.

What you need to do is to find out how much your 72t will be and your Schedule E income (cash flow net of depreciation) and if that is over $65k.

You're going to need to fill a $30k hole for 8-10 years.

I would take out 30 year mortgage on the two properties and invest the proceeds in taxable accounts.... then use the taxable account funds for the $30k/year gap and mortgage payments.... then when you no longer need subsidies you can pay off the remaining morgage balances.

Don't forget to factor into MAGI dividends and interest on the new taxable account and make sure that your 72t distirbutions, Schedule E income and taxable account dividends, interest and capital gains are less than $65k to avoid a nasty surprise.

 

[Scout]

Do dividends earned from retirement accounts count toward MAGI? If so, how do you keep MAGI low enough even if you’re spending cash?

 

[woodguy00]

Do dividends earned from retirement accounts count toward MAGI? If so, how do you keep MAGI low enough even if you’re spending cash?

It depends how much dividends you have. If not over the limit, I’d take the dividends to use, not reinvest them. You also have to be careful that if you sell after tax investments to generate cash that capital gains don’t push you over the cliff. Staying below the cliff is A bit of a management challenge,doable for many,but impossible if you have too much taxable income. Well worth it if you can.

 

[VanWinkle]

It depends how much dividends you have. If not over the limit, I’d take the dividends to use, not reinvest them. You also have to be careful that if you sell after tax investments to generate cash that capital gains don’t push you over the cliff. Staying below the cliff is A bit of a management challenge,doable for many,but impossible if you have too much taxable income. Well worth it if you can.

I retired(at 61) with a taxable account with 4 years of bonds to cover my expenses to age 65. This allows me to stay in the 150% of poverty level and receive full subsidies and cost sharing with a silver plan, 50.00 ded and 2450.00 out of pocket max. Total premium of 30,240 for 2(wife incl) and subsidies cover the premium in full. I do receive a small pension, 8000 in dividends and interest, and still have to do a small Roth conversion just to stay out of Medicaid.

 

[zinger1457]

Do dividends earned from retirement accounts count toward MAGI? If so, how do you keep MAGI low enough even if you’re spending cash?

Any withdrawals from tax deferred (IRA or 401K) retirement accounts are taxed as ordinary income and count towards MAGI, that includes any earnings on those accounts. There's no separate tax for dividends.

 

[woodguy00]

Scout

I misread your question. Agree with Zinger that all withdrawals (deposits and earnings) from tax deferred accounts like 401(k) count as taxable income. Dividends received on after tax accounts also count as income as I referenced above.

 

[Scout]

Any withdrawals from tax deferred (IRA or 401K) retirement accounts are taxed as ordinary income and count towards MAGI, that includes any earnings on those accounts. There's no separate tax for dividends.

If those dividends from the IRA specifically are reinvested do they still count toward MAGI? I gather that dividends from taxable accounts will count whether reinvested or not, but I’m having difficulty understanding if reinvested dividends from ira will.

 

[zinger1457]

If those dividends from the IRA specifically are reinvested do they still count toward MAGI? I gather that dividends from taxable accounts will count whether reinvested or not, but I’m having difficulty understanding if reinvested dividends from ira will.

No, the only time you need to be concerned with how an IRA affects your MAGI is when you make a withdrawal and then the entire withdrawal is treated as ordinary income so it all counts toward your MAGI. Of course if you made a qualified contribution into an IRA then you would reduce your MAGI by that amount.

 

[Dogman]

This is a very important question that I feel is understated on this forum. My personal situation is similar, but I am age 63 with my wife age 64. In Phoenix, AZ the only plan offered is an ACA plan costing $27,500.00. The plan has very few doctors and only the worst hospitals and is an HMO plan. I struggle to keep my income under the $64,900, being sure that all dividends are qualified, I invest in no Reits, MLP's, or other dividends that are excluded. We live off of my wife's SS of $4,656. and pension of $12,000 total $16,656 and cash from my taxable account. I cannot withdraw from my very large IRA, draw SS, or continue in my small business without paying the $27,500 for substandard insurance. I have to be very careful regarding what investments I use with my taxable account. I refuse to pay the $27,500.00 for substandard insurance and a 7,000 deductible even if I incur poor returns in my taxable account.

I thought retiring would make life easier, now I have to worry about health insurance, my wife is sickly so it costs me $7,000.00 every year for the deductible, trying to find safe investments with reasonable returns 4% would be fine. Yes, I have won the game, but playing the final quarter is getting to be more difficult every day.
Sorry about the rant!
I need a new dog!

 

[ShokWaveRider]

You can shelter some income in a Fixed Annuity in the short term till you get onto Medicare. Assuming you have enough cash funds to live off.

 

[bobandsherry]

I struggle to keep my income under the $64,900, being sure that all dividends are qualified, I invest in no Reits, MLP's, or other dividends that are excluded.

What difference does it make if dividends are qualified or not? Perhaps I'm mistaken, but all dividends, qualified or not, are included in MAGI. The only benefit is if they are taxable or not.

 

[VanWinkle]

What difference does it make if dividends are qualified or not? Perhaps I'm mistaken, but all dividends, qualified or not, are included in MAGI. The only benefit is if they are taxable or not.

You are correct- they all count for MAGI