How to meet near term cash needs without blowing up your ACA subsidy or running afoul of IRMAA

[Gumby]

Reading recently about attempts to trim "income" to prevent falling over the ACA cliff or awakening our evil Aunt IRMAA, it occurs to me that part of good planning for retirement is to strategize ahead of time how to meet what may be short term cash needs without generating MAGI. Ideally, this will be planned and in place well before the need arises. Here are some of the things I have thought about:

1. Take the money from a Roth account - but to avoid any tax or penalty, you need to be 59.5 or older and have had a Roth open for more than 5 years. If you are not, you need to be familiar with the deemed order of withdrawal rules. The other downside is that you can't put the money back into a Roth.

2. Home Equity Line of Credit - most HELOCs have a 10 year draw period. During that time you only have to keep up with the interest on any funds borrowed, but you can repay principal too if your finances permit. After the first 10 years, you usually can't borrow more and must pay back the principal amortized over 20 years. Of course, if you want to move during that time you'll need to get the loan paid off to remove the lien.

3. Margin loan on your securities account - there is interest and you may get a margin call if your securities tank.

4. Securities Backed Line of Credit - similar to a margin loan, but the securities are held in a separate account and you can't buy more securities with the loan proceeds.

5. Whole Life Insurance - many whole life insurance policies allow you to borrow a substantial percentage of the cash value at an interest rate only slightly above the crediting rate. However, there is a "seven pay test" for the initial funding that must be followed to prevent it from being deemed a "modified endowment contract" (MEC). If deemed a MEC, the money is not tax free when you receive it and there is an early withdrawal penalty before age 59.5 So this option requires substantial planning ahead.


Are there other strategies that you can envision or already employ.?

 

[CalBird]

Reverse mortgage?

 

[TheWizard]

Reverse mortgage?

No...

 

[Al18]

5 years before retiring:

1. Build a CD ladder to fund 5 years of base retirement expenses.
2. Deposit $10K per year in iBond.
3. Fund a MYGA, which you typically can withdraw up to 10% per year once you are over age 59 1/2

 

[SouthernHeaven]

I maxed out a HSA account during my working years. I invested the contributions in VTI, and paid out of pocket for medical expenses. Then in early retirement I was able to reimburse myself based on the saved receipts I had hoarded over the years. Tax free going in, tax-free growth of invested funds, and tax-free income on the way out.

 

[RetiredHappy]

We did not have a Roth account, well not until last year when my spouse managed to convert $23K over, but we did it at the expense of IRMAA and NIIT. We went over our budget last year and my spouse wanted to use his IRA to pay for the extra expenses instead of using our taxable account and paying capital gains, so it brought us into IRMAA and NIIT land. To piggy back on going over the cliff, we decided to convert a small amount to Roth since we were already in the penalty box.

I think our short term strategy is to avoid IRMAA this year by funding shortfall using taxable accounts, and then we will be solidly in IRMAA and NIIT land starting in 2027. We cannot avoid IRMAA and NIIT in the future because of rising RMD.

 

[Gumby]

5 years before retiring:

1. Build a CD ladder to fund 5 years of base retirement expenses.
2. Deposit $10K per year in iBond.
3. Fund a MYGA, which you typically can withdraw up to 10% per year once you are over age 59 1/2

One thing common to these choices is that the interest will add to your MAGI when the CD's mature, the IBonds are redeemed or the MYGA is drawn on.

I maxed out a HSA account during my working years. I invested the contributions in VTI, and paid out of pocket for medical expenses. Then in early retirement I was able to reimburse myself based on the saved receipts I had hoarded over the years. Tax free going in, tax-free growth of invested funds, and tax-free income on the way out.

If you're stuck with a high deductible health insurance plan, you might as well make the most of it. I was fortunate to have really good insurance while I was employed.

 

[COcheesehead]

Start an all cash business.

 

[Gumby]

I presume that, being a law abiding citizen, you would of course properly report all your income to the IRS.

 

[Al18]

If your CD is in a taxable account, there are no taxes when redeemed. You’ll just need to pay the yearly taxes on interest, once you buy the CD.

It is true you’ll need to pay taxes on an iBond or MYGA if/when they are redeemed.

 

[Gumby]

If your CD is in a taxable account, there are no taxes when redeemed. You’ll just need to pay the yearly taxes on interest, once you buy the CD.
....

So, in a sense this just means one should have more available funds in one's taxable account in the first place.

 

[TripleLindy]

Those are some interesting options. I’m kinda stuck due to dividend income that I can’t change without reallocating investments. We’ll max HSA contributions, take a $3k capital loss, and eliminate interest income where we can until Medicare eligible in 2027 for me and 2028 for my wife.

Looking ahead to the year when I’ll be on Medicare but my wife on ACA, I’m curious to find out if filing separately might help. Most of our retirement investments are in my name, so I’m wondering if I can claim all (or enough) of the income and keep her under the subsidy cliff. That bridge is a couple of years off, but I’m thinking about it.

 

[Aerides]

I'm in this boat so I've been thinking of things to have in my back pocket:

HSA withdrawals - Save the receipts and leverage a timely withdrawal if cash is needed. I know many of us plan to keep the cash in there for a while, but I have been reimbursing myself from time to time. Not anymore. Now I'll let it sit and have it available for covering gaps.

Credit Card - I don't mean carry a balance, but a new card with a balance transfer can often help you float a couple of months, especially helpful if the bigger purchase is at the end of the year. IE, incur the expense in November, transfer to a new card in December, pay in January. Even without a new card, if you are savvy about your billing dates, it's easy enough to get just under 2 months of float.

 

[Aerides]

Looking ahead to the year when I’ll be on Medicare but my wife on ACA, I’m curious to find out if filing separately might help. Most of our retirement investments are in my name, so I’m wondering if I can claim all (or enough) of the income and keep her under the subsidy cliff. That bridge is a couple of years off, but I’m thinking about it.

I do not believe the ACA cares if you file MFJ or separate, it only cares about household income.

 

[COcheesehead]

I presume that, being a law abiding citizen, you would of course properly report all your income to the IRS.

I was just posting as a community service for those in need.

 

[Al18]

So, in a sense this just means one should have more available funds in one's taxable account in the first place.

I guess that’s one way of looking at it. Throughout my career I’ve always used CD ladders for down payments on new cars, big/unplanned household expenses, and to help fund early retirement prior to age 59 1/2.

 

[Gallaher]

We did everything we could.
Roth withdrawal, sold a couple pieces of real estate, financed some real estate that was free and clear, sold stuff (motorcycle, camp trailer, jeep, boat…all stuff we were going to sell anyway)
Everything but work!

 

[Gumby]

I guess that’s one way of looking at it. Throughout my career I’ve always used CD ladders for down payments on new cars, big/unplanned household expenses, and to help fund early retirement prior to age 59 1/2.

You are of course correct that having sufficient cash or cash equivalent assets in the taxable account avoids having to sell something which might generate a capital gain. I guess I was just thinking of a situation where someone didn't. I probably could have been clearer.

 

[RobLJ]

We've converted up to (and the last 3 years above) the 12% tax limit and unspent funds are in the taxable brokerage, which is largely in muni CEFs, a foreign and US index, and 1/3 in a short-term MM.
This will cover, I suspect, more than 1 emergency per year; actually it keeps growing.

At this point, we will probably do conversion Roths in DW's account until she takes SS.

As many have pointed out, perhaps one should reverse the order. But the funds in the taxable brokerage are really quickly available, between 1 and 5 days. I cannot envision any emergency when I would have to tap the entire brokerage account.

I am meeting with the Fidelity Advisor in the next month on rolling over DW's existing Roth and then rolling over her withdrawals to her Roth. Not sure if we will do this, or just keep rolling excess over into the taxable brokerage in advance of my RMDs. I will go to the Roth threads for advice, just noting that the free cash in the brokerage (at capital gains rates) is no doubt less preferable than Roth monies, but as Wemmick says to Pip in Great Expectations, "Portable Property, Pip!"

(For the nerds:
'"And now, Mr. Pip," said he (note: the speaker is Wemmick, the Attorney Jarvis's clerk; Pip is eating dinner with him and his AgedP at Wemmick's "castle"in Walworth, a lower mid-class house with a moat, i.e., ditch), with his hands still in the sleeves, "I have probably done the most I can do; but if I can ever do more - from a Walworth point of view, and in a strictly private and personal capacity - I shall be glad to do it. Here's the address. There can be no harm in your going here to-night and seeing for yourself that all is well with Tom, Jack, or Richard, before you go home - which is another reason for your not going home last night. But after you have gone home, don't go back here. You are very welcome, I am sure, Mr. Pip;" his hands were now out of his sleeves, and I was shaking them; "and let me finally impress one important point upon you." He laid his hands upon my shoulders, and added in a solemn whisper: "Avail yourself of this evening to lay hold of his portable property. You don't know what may happen to him. Don't let anything happen to the portable property."')

As an aside to those still here, nodding to Grandpa like Wemmick to his deaf and demented AgedP, Wemmick's distinction of himself between his Walworth morals (his advice to Pip) and his London morals as clerk to Jarndice/English legal system is a particularly telling analysis by Dickens, whose first real job other than at a blacking factory was as a stenographer to the Parliamentary newspaper that covered the courts. Bleak House and Little Dorritt are also relevant here, in terms of Dickens's analysis of the British judiciary system. I can't help myself!, sorry!

 

[pb4uski]

...Are there other strategies that you can envision or already employ.?

A healthy well funded taxable account with assets that are not highly appreciated so they can be withdrawn for spending with negligible tax consequences.

 

[mebden]

All I did was when I retired at 58 had enough money in my Online savings account earning over 4% and had no income to report except interest and some earnings I had made in the 1st few months I worked that year before hitting age 58 to keep me under the ACA cliffs to get help with subsidiaries and the next year at 59.5 I converted up to the max to get help with the ACA subsidiaries. Now till 62 I live off Roth and convert my IRA so I have a reportable income for the ACA

 

[pb4uski]

.Credit Card - I don't mean carry a balance, but a new card with a balance transfer can often help you float a couple of months, especially helpful if the bigger purchase is at the end of the year. IE, incur the expense in November, transfer to a new card in December, pay in January. Even without a new card, if you are savvy about your billing dates, it's easy enough to get just under 2 months of float.

Actually, in some circumstances it might be better to carry a credit card balance for some time to avoid going over the ACA subsidy cliff and having to pay back premium.tax credits.

 

[TripleLindy]

I do not believe the ACA cares if you file MFJ or separate, it only cares about household income.

Yes, interestingly, married filing separately automatically disqualifies either spouse from receiving a subsidy. At least that’s what a quick google search shows.

 

[pb4uski]

...1. Take the money from a Roth account - but to avoid any tax or penalty, you need to be 59.5 or older and have had a Roth open for more than 5 years. If you are not, you need to be familiar with the deemed order of withdrawal rules. The other downside is that you can't put the money back into a Roth. ...

On the last part, you can put the money back in within 60 days as a rollover contribution as long as you haven't done so in the prior 12 months.

 

[Dalton]

You could have a chunk of money in a taxable mm account to draw from (oh, I see that was covered above). I had a windfall, shortly after I retired, so kept a decent chunk as cash/mm (was making over 4% at the time), knowing it might help me to bridge to 59.5, 65, and SS.

Or, if you have the ability to plan it out, could also sell shares out of brokerage and use the LTCG to fill up your declared ACA magi while using the basis toward those cash needs. I may have done the latter in December, because I hadn't needed to spend my full budget, so went ahead and sold some shares after Christmas and was able to roll the basis and LTCG into this year as cash with no tax ramifications for 2026.