Is anyone here purposely paying full ACA premiums so you can do Roth Conversions?

[pb4uski]

I will take the massive savings on ACA premiums and OOP costs in exchange for a future tax benefit I might not be around to see, thanks. Also because I really think it's close to a wash in our case anyway.

Just remember though, if you are not around to see it then your heirs will inherit the IRA and the tax obligation so if you're thinking more openly you need to consider their tax rates.. which may be lower or higher than your tax rate on RMDs.

 

[COcheesehead]

I am struggling with this question.

DH retired 3 months ago and will go on Medicare. I will go on ACA for the next 5 years. At that point, his age 70, he will start SS. Since RMD’s start very shortly afterward we won’t have much time to do any conversations for him.

Since he is 5 years older than I, and in poorer health, we suspect I could be left dealing with the tax torpedo. That would point to doing Roth conversations now for his IRA but that would mean paying close to 10k in premiums and another 8k in taxes. Over 5 years that is a lot of cash out the door, we might have to sell mutual funds to cover it.

OTOH, we plan on going into a CCRC in 7-10 years and I heard that part of the payment to get in and maybe some of the monthly charges could be tax deductible so maybe we could reduce our IRA/401k balances that way?

His IRA/401 balances are currently about 1.6 mil, and mine is 600k. We have about 1.5 mil in brokerage/savings.

Would love to get anyones thoughts on this if you were in a similar position or even if you weren’t.

They eliminated the income caps this year and next up to I think about $300k. So just about everyone will qualify for a premium credit. We just signed up for a policy starting Jan 1 and dropped our rate from $1900 on Cobra for a silver plan to $800 for a gold plan. The savings outweighs any savings we may (or may not) see with a conversion.

 

[GTFan]

Just remember though, if you are not around to see it then your heirs will inherit the IRA and the tax obligation so if you're thinking more openly you need to consider their tax rates.. which may be lower or higher than your tax rate on RMDs.

I've mentioned in other threads (long ago) that our plan is to QCD most of it, not leave it to the kids so there shouldn't be much to deal with. Everyone has a different plan here and it also depends on state tax rates etc., but I think taking present-day savings is hard to beat if you can save $15k or more a year on ACA premiums/OOP costs vs. conversions. This has changed a bit with the temp removal of the ACA cliff (can make Roth look better if you're not losing all ACA subsidies at higher incomes), so YMMV.

It's a complicated calculation IMO, because some of it is just speculation on future taxes and it also depends on how much you need to live on, how much healthcare you're using etc. You can move to a no-income tax state, fed tax rates and RMDs can change (as we've seen with new 72 age rule), you can decide to QCD some or all of your IRAs etc. If you go with ACA you're taking guaranteed yearly savings (which compounds) vs. possibly uncertain savings.

 

[ImaCheesehead]

Yes, there are so many moving parts and some of them are hidden in a misty future.

This has been swirling around in my brain for some months now, but I must make a decision in the next 30 days so procrastination is no longer an option. If I decide to Roth convert in 2022 I will stay on COBRA, but it seems like tax and premiums are going to be at least 20% of the conversion amount and in the end it is just a drop in the IRA bucket. If I go on ACA I have to get signed up by 12/15 but to do that I first have to change my domicile from SD to FL (both are zero income tax states) since SD doesn’t offer any ACA plans appropriate to full time RVers like DH and I.

We don’t have any heirs to leave our money to, and we currently only spend about 60k per year. We are using a bucket approach to fund that 60k spending until SS kicks in at which point SS and Pension covers it all. The buckets pay for everything until 2027 so the 3.3 mil remaining is for covering our health care in old age and any splurges we may have.

 

[4legsgood]

I've decided to do a couple years of up to 24% tax rate roth conversions and sacrifice ACA subsidy. I want to leave a nice estate. I live in a state with low bar estate tax so that's another reason to convert and pay taxes now (I think). I want for sure enough in the roth to pay for estate tax and taxes on the inherited t-ira. I'd probably have different thoughts if I didn't care about heirs.

 

[azdre]

I was recently updating my plan in Pralana and the Roth conversion optimizer had me doing all of my conversions in 2022 (for 40% of pretax $) and then having almost no taxable income in subsequent years. (I’m 43). It blew my mind and I thought it was broken. I thought for sure a ladder was my way to get my money out of pre-tax lock-up. Most of our savings is pre-tax.

Based on what I’ve read here I need to look out for (1) FAFSA impact for my 7 yo in 10 yrs (2) RMD (3) ACA and HI cost (4) my own add: income too low and pushed to Medicaid or into AZ’s gap (5) inheritance (6) ?

Anything else to weigh when deciding on whether to listen to the plan?

 

[pb4uski]

That makes no sense at all. Assuming that you have no other income, each year you can do Roth conversions for an amount equal to your standard deduction and pay $0 tax to the top of the 10% bracket and pay very little and to the top of the 12% bracket and pay a little more.

For a single person under 65 in 2021 if you had no other income you could convert $12,550 (the itemized deduction amount) and pay $0 in tax, $22,500 and pay $995 (4.42%) in tax or $53,075 and pay $4,464 (8.79%) in tax... and you can do that every year.

So why in the world would anyone do it all in one shot and pay 40%? Doesn't make sense.

Seems like you would be wasting the itemized deductions and low ordinary tax brackets in all future years.

 

[SecondCor521]

I was recently updating my plan in Pralana and the Roth conversion optimizer had me doing all of my conversions in 2022 (for 40% of pretax $) and then having almost no taxable income in subsequent years. (I’m 43). It blew my mind and I thought it was broken. I thought for sure a ladder was my way to get my money out of pre-tax lock-up. Most of our savings is pre-tax.

Based on what I’ve read here I need to look out for (1) FAFSA impact for my 7 yo in 10 yrs (2) RMD (3) ACA and HI cost (4) my own add: income too low and pushed to Medicaid or into AZ’s gap (5) inheritance (6) ?

Anything else to weigh when deciding on whether to listen to the plan?

(6) IRMAA considerations in the year you turn 63 and later.

 

[thefist]

I was recently updating my plan in Pralana and the Roth conversion optimizer had me doing all of my conversions in 2022 (for 40% of pretax $) and then having almost no taxable income in subsequent years. (I’m 43). It blew my mind and I thought it was broken. I thought for sure a ladder was my way to get my money out of pre-tax lock-up. Most of our savings is pre-tax.

Based on what I’ve read here I need to look out for (1) FAFSA impact for my 7 yo in 10 yrs (2) RMD (3) ACA and HI cost (4) my own add: income too low and pushed to Medicaid or into AZ’s gap (5) inheritance (6) ?

Anything else to weigh when deciding on whether to listen to the plan?

When I used Pralana I got a similar result. It suggested a full conversion over the next 4yrs. But you need to review the plan in total to see if it really makes sense. Mathematically correct and practical are not the same. The usual suggested withdrawal order puts Roth late in the order. In some scenarios the conversions create a large Roth balance that may NEVER get spent. In my case I’m not optimizing for heirs, so this is not optimal from my point of view.
I think Pralana Roth optimizer optimizes the final balance. So personally choosing to spend from Roth for things such as large purchases or avoiding the many tax cliffs is something to keep in mind when using these tools.

 

[Magus]

I have the same quandary. I calculated that the effective marginal tax rate implied by my ACA subsidies is a little over 13% (it changes based on income level, but that’s where it is now). So say I’m in the 12% federal tax bracket, and I pay 4.25% to my state, that gives an effective tax rate of around 30% on Roth conversions.

Who knows what tax rates will be in the future, but if they stay the same as they are now, then I will likely be in the 24% federal tax bracket when I start taking RMD’s (state gives us a break on retirement income). So it doesn’t seem to make sense for me to pay 30% tax now to save 24% in the future. Am I missing anything? I know there could be IRMAA issues but the effective IRMAA marginal rate is only around 3 or 4% - much less than the 13% of the ACA subsidy.

Will all of the $ be in the 24% bracket? It might be less. The nice thing about 401ks/IRAs, is your contributions come off your highest marginal rate and in return start at the bottom on a lower rate. For a married couple, you'd need over $81k just to get to 22% and $175k to get into 24% but all the money from 0 to $81 is well below 22% and the next 94k is at 22%, not 24%.

 

[Magus]

That makes no sense at all. Assuming that you have no other income, each year you can do Roth conversions for an amount equal to your standard deduction and pay $0 tax to the top of the 10% bracket and pay very little and to the top of the 12% bracket and pay a little more.

For a single person under 65 in 2021 if you had no other income you could convert $12,550 (the itemized deduction amount) and pay $0 in tax, $22,500 and pay $995 (4.42%) in tax or $53,075 and pay $4,464 (8.79%) in tax... and you can do that every year.

So why in the world would anyone do it all in one shot and pay 40%? Doesn't make sense.

Seems like you would be wasting the itemized deductions and low ordinary tax brackets in all future years.

Agree 100%

 

[I am He]

I saw the tax changes for my Mom once widowed so when we had a cancer scare, we converted 1/2 and paid 22%. We're laddering the rest so the total will average out lower.

And WI does tax it, too. So if you thought you'd go to FL or TX, etc., you might want to wait until you move.

 

[I am He]

PS...With rates in the toilet, I'm fine with paying for care so in the event I wanted to do another big conversion or realize CG, I'm ready for action.

I think it might even make me more prone to pulling the trigger instead of worrying about "blowing my ACA credit," i.e. the tax tail wagging the dog.

 

[meleana]

Thanks for the replies.

Normally I think I am a person that can wait for the second marshmallow, but paying out all that extra now in exchange for the unknown possible future tax savings later is giving me anxiety. I don’t think I am going to be very good at doing the tax math but may give it a go. Does anyone know a source for a good online Tax CPA?

I am the same. I am 65 and my husband is 67. We are living on cash from our savings account. I was on an ACA plan for 5 months this year until I went on Medicare. Our Financial Advisor is talking about us doing Roth conversions for this year (I only have until the end of this year), next year and the following year until my husband starts collecting SS. I am not sure how worth it it is. I mean- first off we have to be careful of how much we convert this year due to the ACA plan (I took the subsidies up front). Then also we have to watch the Medicare premiums, which are based on income.


Then, as he stated, the RMD requirement is now age 72 and might even be raised.


So I have to go through converting some money that might not even have that much impact once we start RMDs, pay taxes on it from our savings account, since it doesn't make sense to take the taxes out of the distribution (and I don't understand where you even send the check to the IRS and when and how!) and why worry about it since the RMDs start at age 72 and maybe even later?



(I might add I am already taking RMD's from an inherited IRA.)


OK. So he says the money converted to the Roth is good as it grows tax free (well it does in a traditional IRA also) and also can withdraw tax free- I get that. But can;t touch it for 5 years. And, he said for our son if he inherits it, he won't have to pay taxes on it. Well- can't I just withdraw money from the IRA and pay the taxes and give him some money now possibly?


So a lot to think about and I am not sure what to do either. I like simplicity.

 

[BubbaChris]

I will take the massive savings on ACA premiums and OOP costs in exchange for a future tax benefit I might not be around to see, thanks. Also because I really think it's close to a wash in our case anyway.

We're in this boat, to the tune of $25K/yr in ACA PTCs. And since we're child-free, we aren't playing the legacy game too hard when considering strategies.

Rather than doing ROTH conversions, we're using our tIRA starting now (age 60) to chip away at later RMDs.

We have 30% of investment assets in after-tax accounts, so our pre-SS years can be managed to zero federal tax if we like. This year I'm taking some LTCGs to the point our payback on ACA premiums will be roughly 7% of MAGI.

On another board I was trying to get someone to take a less panicked view of IRMAA, so I did a rough calculation for Married Filing Jointly - For a MAGI of $300K, they'd pay under $3K in additional Medicare Part B premiums above the base Part B costs.

Best regards,
Chris

 

[RunningBum]

PS...With rates in the toilet, I'm fine with paying for care so in the event I wanted to do another big conversion or realize CG, I'm ready for action.

I think it might even make me more prone to pulling the trigger instead of worrying about "blowing my ACA credit," i.e. the tax tail wagging the dog.

I have no idea what you're trying to say here. Which rates are in the toilet? What does "paying for care" mean, No subsidy, or no insurance? What would be the "event" causing you to want to do a big conversion or realize CGs? What "action" are you ready for? What trigger are you pulling?

This is all a matter of taxes, if you include the subsidy as part of the tax situation. There's no dog being wagged here; you aren't giving anything up, you just try to make the best financial decision. I don't think the OP is worried about blowing their ACA credit but rather making the right choice, financially.

Not trying to be combative here. Literally, nothing you've said here is clear.

 

[RetiredHappy]

I am the same. I am 65 and my husband is 67. We are living on cash from our savings account. I was on an ACA plan for 5 months this year until I went on Medicare. Our Financial Advisor is talking about us doing Roth conversions for this year (I only have until the end of this year), next year and the following year until my husband starts collecting SS. I am not sure how worth it it is. I mean- first off we have to be careful of how much we convert this year due to the ACA plan (I took the subsidies up front). Then also we have to watch the Medicare premiums, which are based on income.


Then, as he stated, the RMD requirement is now age 72 and might even be raised.


So I have to go through converting some money that might not even have that much impact once we start RMDs, pay taxes on it from our savings account, since it doesn't make sense to take the taxes out of the distribution (and I don't understand where you even send the check to the IRS and when and how!) and why worry about it since the RMDs start at age 72 and maybe even later?



(I might add I am already taking RMD's from an inherited IRA.)


OK. So he says the money converted to the Roth is good as it grows tax free (well it does in a traditional IRA also) and also can withdraw tax free- I get that. But can;t touch it for 5 years. And, he said for our son if he inherits it, he won't have to pay taxes on it. Well- can't I just withdraw money from the IRA and pay the taxes and give him some money now possibly?


So a lot to think about and I am not sure what to do either. I like simplicity.

MA, have you asked your FA to help you with the Math as to how much to convert each year, to keep within the 22% bracket until your husband starts SS at 70? It should be easy enough - taxable account dividends + Inherited IRA as your annual income. Take the top of the 22% bracket for a couple minus taxable account dividends and inherited IRA, add back standard deductions plus extra for over 65 yo, would the the amount to convert your IRA. If you have to sell positions in your taxable account that will incur capital gains, that number needs to be subtracted from the total as well.

I suspect that you are already pushing to the top end of 12% or maybe already into the 22%, hence I suggested 22% above.

You don't want to simply withdraw money from IRA, pay the taxes and give your son the money now because you can instead put that same IRA investments in Roth which will grow tax-free for as long as you and/or your husband is alive. Thereafter, your son has 10 years to liquidate it. Those are many years for the investments to grow tax-free in Roth. You can give money to your son from your taxable account if you so wish.

 

[2retireearly]

Be sure to get familiar with IRMAA, for the Medicare premium, if your taxable income goes above a certain level. I'll be screwed for what I made in 2020, for my first year on Medicare in 20022. Be careful.

 

[OrigamiRN]

Please correct me if i am wrong, but you only have to pay the RMD on the 401/IRA of 1.6 million. At 3%, that comes out to $48,000/yr. Even with adding in SS, you’d still be in a relatively low tax bracket if you file together(assuming you’re married). By all means, convert what you can to a ROTH, but I wouldn’t sweat it too much and certainly wouldn’t volunteer to pay to much in taxes or HI premiums before the RMD kicks in. You’re in a sweet spot. Hire a good financial advisor for a couple of hours for fine tuning. Good luck.

 

[ImaCheesehead]

So I tried to do a few calculations and I think it is making some sense for me to give up the ACA subsidy, pay the full premium and bite the bullet on taxes.

There is no way to totally bring down the IRAs to zero but I don’t really want to anyway. We are likely to move to a CCRC with a large entry fee and then high monthly rents. A portion of these expenses can be funded with IRA money, but only the prepaid medical part, and that is only deductible above 10% of our AGI.

We will have 4 years before tax brackets are scheduled to go back up, 5 years before his SS kicks in and 7 years before his first RMD.

We are actually former Cheeseheads and currently in a zero income tax state so now would be a good time for conversions as we may possibly live in a state with taxes at some future point. I don’t want to rule it out.

I calculated it will cost 20k additional dollars to convert 82k (top of 12% bracket for us with divs and a small pension) for a total income tax rate of 18.69%

It will cost 40k additional dollars to convert 174k. (top of 22%) bringing total income tax rate to 20.10% and will likely incur level 1 IRMAA. For that reason I would likely only convert 163k to keep under 188,000.

Then I tried to think about what my rates would be in the future if my older, less healthy spouse does predecease me.

If I was 72 and widowed today with a 2.2mil IRA the RMD would be 86k. That 86k, plus the 25k pension/divs and 42k for Survivor SS already puts me in the 24% bracket (which actually will be the 28% bracket starting 2026) AND adds about 4k in IRMAA charges.

I don’t like paying the extra 8-10k each year in current health insurance premiums, but it is only for 5 years. The future IRMAA and higher tax rate for singles could go for many years and cost a LOT more.

Does it seem like I am thinking correctly here?

 

[Retired Expat]

I am struggling with this question.

DH retired 3 months ago and will go on Medicare. I will go on ACA for the next 5 years. At that point, his age 70, he will start SS. Since RMD’s start very shortly afterward we won’t have much time to do any conversations for him.

Since he is 5 years older than I, and in poorer health, we suspect I could be left dealing with the tax torpedo. That would point to doing Roth conversations now for his IRA but that would mean paying close to 10k in premiums and another 8k in taxes. Over 5 years that is a lot of cash out the door, we might have to sell mutual funds to cover it.

OTOH, we plan on going into a CCRC in 7-10 years and I heard that part of the payment to get in and maybe some of the monthly charges could be tax deductible so maybe we could reduce our IRA/401k balances that way?

His IRA/401 balances are currently about 1.6 mil, and mine is 600k. We have about 1.5 mil in brokerage/savings.

Would love to get anyones thoughts on this if you were in a similar position or even if you weren’t.

I hate to even broach this topic but if your husband is in poorer health is delaying SS a good idea. Taking it sooner for more years might work out better?

Had this frank discussion with my financial planner some years ago. As a 3x cancer survivor and a Diabetic with then very bad numbers he said take it at 62! Since that conversation have lost 50 pounds, have my diabetes under control and feeling great! But actuarially I am close to a “Dead Man Walking”.

Isn’t it all really a crap shoot?

 

[ImaCheesehead]

I hate to even broach this topic but if your husband is in poorer health is delaying SS a good idea. Taking it sooner for more years might work out better?

Had this frank discussion with my financial planner some years ago. As a 3x cancer survivor and a Diabetic with then very bad numbers he said take it at 62! Since that conversation have lost 50 pounds, have my diabetes under control and feeling great! But actuarially I am close to a “Dead Man Walking”.

Isn’t it all really a crap shoot?

It totally is a crap shoot, agreed!

The reason we plan on age 70 is precisely because his health is less than great. In our case, we are thinking that survivor benefits would be better being higher since one SS will drop off (mine) at the first to pass.

PS - awesome work losing weight and amazing that you are a 3x cancer survivor!

 

[SecondCor521]

A portion of these expenses can be funded with IRA money, but only the prepaid medical part, and that is only deductible above 10% of our AGI.

The government keeps fiddling with the number, but as of right now it's 7.5% for everyone.

 

[pb4uski]

... Does it seem like I am thinking correctly here?

What you wrote seems sensible to me.

 

[ImaCheesehead]

The government keeps fiddling with the number, but as of right now it's 7.5% for everyone.

Thank you, you are correct of course. I had read it was going up to 10% but now I see that it is staying 7.5. That is helpful to us!