Please check my thinking on this plan

[GoodbyeYellow]

With me (62) having retired earlier this year, DW (59) and I are working on a plan for her exit by the end of this year. Which means that, before Medicare, I have a 3-year wait and she has 6, so we are working up a plan for ACA and minimization of income to leverage this.

We figure we will need up to $800K for these six years. Could be less but probably not more, unless weird stuff happens, for which we do have a back-up of simply drawing down tIRAs. Due to income levels while working (we often just missed the cutoff and frankly this wasn't even on our radar until recently), we don't have much in Roth but would like to work on strategies to do so.

The funding plan below is in broad strokes and will definitely need a frequent revisit and re-direction, but hopefully in small ways only. Thought I'd run it by y'all to see if you could find flaws in assumptions etc and/or find ways to improve it.

(All numbers are for six years total)
Dividends: $120K (counts towards MAGI)
Cash: $240K
tIRA drawdowns: $100K (counts towards MAGI)
Roth money, resulting from 'excess' paid into 401Ks over several years: $110K
Sale of equities in non-retirement accounts: $240K
Except as noted, none of these sources should hit MAGI. Average MAGI would be around $35K (div+tIRA)

The $800K includes about a $5K inflation factor yearly. In a mid-level scenario our spending will likely not exceed $770K or so (and maybe as low as $700K), so I've got some buffer in there. If we have large unforeseen expenses I guess further tIRA drawdowns are a safety net but of course at the cost of increase MAGI.

Some questions present themselves:

a. Which of the above sources, if any, should be used up first (frontloaded) and which later? Initially I thought we'd use the cash first in order to minimize inflation loss, but then there could be loss from equities as well. Another thought (and my Excel model) shows each source spread roughly evenly over the 6 years. But not sure if this is the best strategy.

b. The equities sale is intended to not hit AGI at all, or just minimally. This is because, from an old, bad investment, we have about $125K in loss carryforwards. So, rough plan is to sell $240K in equities at an average of 100% profit (which makes the basis $120K), thereby writing off all of the loss carryforward without it ever hitting AGI. But I haven't really run this by anyone but DW yet - does it make sense? Is there any IRS-related gotcha I haven't thought about?

c) In cash - we currently hold about $300K, so the plan leaves a $60K buffer. To alleviate the inflation effect, is it smart to put some of this to work in extremely low-risk ways? Of course, that also means extremely low return, so is there any point to doing that? I know next to nothing about bonds except their return lags inflation nowadays.

I know I also need to address out years (beyond 6). We have a good-sized nest egg (around $5M, about equally spread between brokerage and the two IRAs), so I don't anticipate there would be much bad news except possibly higher taxes. SS... haven't analyzed that deeply or even factored it in, but definitely after year 6. Probably FRA or close to it for each of us.

 

[38Chevy454]

Are you trying for maximum ACA subsidy benefit? Or just ensuring that you don;t go over the limit for any subsidy? That answer may determine what you do to control MAGI. I can't help with the calculations since I get my health ins through my retiree benefits and never needed to understand the cutoffs.


It's good to use up those loss carry forwards. i can see where at some point that may change or be limited.

It certainly would be wise to have at least some minimal return on your cash with low risk. Maybe CD ladder, or TIPS? Maybe even some high quality muni bonds that (I think) would not affect your MAGI for ACA purposes?

What I see as your bigger problem is a big tax torpedo with RMDs. Once you also have SS income, plus your other after tax income, you have a large potential tax. So it may be wise to do some Roth conversions, likely small if controlling income for ACA, but larger later once you are medicare and prior to RMD age. Bottom line is a big pretax amount that will most likely grow in value another 50-100% between now and RMD age.

 

[rodi]

A couple of thoughts on choosing income sources for ACA purposes.

1) Many prefer to be *above* the medicaid income levels. Some are ok with coverage provided by medicaid - but I think that is highly dependent on your area, your doctors, etc.

2) If you have enough already taxed money to do this - there is a sweet spot of above mediCAL and below some level (between 150 and 200% of FPL). It gets you the silver plan with tons of cost sharing. So basically good insurance and very little out of pocket. There are other cost sharing levels as you move from 200%-250% of federal poverty level.

3) If you are just looking for *some* premium subsidy, just manage your taxable income under the 'cliff'. Your profile says you are in California - so you might be aware - California subsidizes to a higher level than the federal income cliff. The federal cliff is 400% federal poverty level... CA covers the gap up to 600% of FPL.

Here's a chart that breaks it down for 2021 income levels based on household size.
https://www.healthforcalifornia.com/covered-california/income-limits

I just had a big adjustment to our household when older son moved out and got on his own plan. He is right at the bottom of the silver 96 income range. (Works part time while going to school part time.) That changed our household size (but not our income.)

Welcome to the forum

 

[rodi]

One more thought.

If you do not need the premium tax credits (aka subsidies) up front you can sign up with a coveredCA plan stating a higher income, then get the tax credits back when you file for taxes. I did that for years because my kids kept getting put on mediCAL, even though they didn't qualify (our income was higher but CA wants to make sure that kids are covered no mater what so they set higher internal guidelines.) 2 years in a row spending a month proving that our income was too high for mediCAL for the kids I started 'estimating my income generously'. (Don't want to say I lied - I was just anticipating much larger IRA withdrawals and rental income that what turned out. LOL.)

 

[GoodbyeYellow]

Thanks.

Yes I have calculated the ACA part to be above Medicaid incomes but still provide high savings; Silver CSR is the target level.

Does the tax loss writeoff plan make good sense? I was not thinking of future potential changes so that makes it a stronger case.

Can someone link to a good, concise overview of bonds and fixed income securities? All our $ are in equities (yes I know, but OTOH had I converted 5 or 10 years ago I might well be $1M lower than today). However I am ready to look at them now.

Tax torpedo: I see this is as a 'lesser of the evils', compared to say paying $20-$40K/yr (all in) in healthcare costs today vs managing to the torpedo 10+ years later. Maybe I'm being shortsighted. Honestly this is the hardest part to figure up, mainly because it entails the long view, which of course gets blurrier as you add time.

 

[GoodbyeYellow]

If I may, I'd also like to repeat (and isolate) part (b) of my OP. This is because I am not clear if this is permitted, but I think it should be. Also, what about the $3K that one is allowed to claim in loss carryforward? Does one have to claim that, or can one state somewhere on the 1040 that no, I don't want to claim it this year, for example?

b. The equities sale is intended to not hit AGI at all, or just minimally. This is because, from an old, bad investment, we have about $125K in loss carryforwards. So, rough plan is to sell $240K in equities at an average of 100% profit (which makes the basis $120K), thereby writing off all of the loss carryforward without it ever hitting AGI. But I haven't really run this by anyone but DW yet - does it make sense? Is there any IRS-related gotcha I haven't thought about?

 

[ivinsfan]

The thing about the six years is once you go on Medicare you will have Medicare and supplement costs and your ACA costs will not go down. They might go down a little but not much....Your peak subsidy is most definitely front loaded for the first 3 years.


Just so you understand this when planning your income...

 

[rodi]

The thing about the six years is once you go on Medicare you will have Medicare and supplement costs and your ACA costs will not go down. They might go down a little but not much....Your peak subsidy is most definitely front loaded for the first 3 years.


Just so you understand this when planning your income...

I disagree with this. But it varies widely by geography.

I'm in San Diego. We had my husband on a bronze HDHP w/HSA. When he went on Medicare with a F-prime and drug plan (plus part B) we saved $300/month. I am actively looking forward to the savings from Medicare in 5 years for myself.

An extended family member in PA had the opposite experience. His medicare and alphabet soup was more than his private insurance.

 

[ivinsfan]

I disagree with this. But it varies widely by geography.

I'm in San Diego. We had my husband on a bronze HDHP w/HSA. When he went on Medicare with a F-prime and drug plan (plus part B) we saved $300/month. I am actively looking forward to the savings from Medicare in 5 years for myself.

An extended family member in PA had the opposite experience. His medicare and alphabet soup was more than his private insurance.

But if I remember you had 4 people on your plan dropping to 3..this makes a difference. Most couples going from two to one on ACA plans have a rise in cost

Depending on your income you could well save going on Medicare...

 

[GoodbyeYellow]

Rodi,

We are in San Diego also. I see from your other posts you like Kaiser as well (our preference and we were with them for 20+ years, then switched to BCBS this year to try to save some costs - bad move, but that's another story).

I think we will end up paying more in total after I go on Medicare but that's ok.

Where we are struggling to make a decision now is whether to lower ACA costs by not touching tIRAs (or not touching them much, just like $10-$15K/yr) or go big with the conversions and pay for higher cost coverage. I'm sure others have faced this 'problem' and I may post another thread on this alone.

Also am starting to look at i-orp to see if I could figure it out from there. The big unknowns are: a) what will the portfolio do in the 10 years or so and (b) what will tax rates be.

 

[pb4uski]

With me (62) having retired earlier this year, DW (59) and I are working on a plan for her exit by the end of this year. Which means that, before Medicare, I have a 3-year wait and she has 6, so we are working up a plan for ACA and minimization of income to leverage this.

We figure we will need up to $800K for these six years. Could be less but probably not more, unless weird stuff happens, for which we do have a back-up of simply drawing down tIRAs. Due to income levels while working (we often just missed the cutoff and frankly this wasn't even on our radar until recently), we don't have much in Roth but would like to work on strategies to do so.

The funding plan below is in broad strokes and will definitely need a frequent revisit and re-direction, but hopefully in small ways only. Thought I'd run it by y'all to see if you could find flaws in assumptions etc and/or find ways to improve it.

(All numbers are for six years total)
Dividends: $120K (counts towards MAGI)
Cash: $240K
tIRA drawdowns: $100K (counts towards MAGI)
Roth money, resulting from 'excess' paid into 401Ks over several years: $110K
Sale of equities in non-retirement accounts: $240K
Except as noted, none of these sources should hit MAGI. Average MAGI would be around $35K (div+tIRA)

The $800K includes about a $5K inflation factor yearly. In a mid-level scenario our spending will likely not exceed $770K or so (and maybe as low as $700K), so I've got some buffer in there. If we have large unforeseen expenses I guess further tIRA drawdowns are a safety net but of course at the cost of increase MAGI.

Some questions present themselves:

a. Which of the above sources, if any, should be used up first (frontloaded) and which later? Initially I thought we'd use the cash first in order to minimize inflation loss, but then there could be loss from equities as well. Another thought (and my Excel model) shows each source spread roughly evenly over the 6 years. But not sure if this is the best strategy.

b. The equities sale is intended to not hit AGI at all, or just minimally. This is because, from an old, bad investment, we have about $125K in loss carryforwards. So, rough plan is to sell $240K in equities at an average of 100% profit (which makes the basis $120K), thereby writing off all of the loss carryforward without it ever hitting AGI. But I haven't really run this by anyone but DW yet - does it make sense? Is there any IRS-related gotcha I haven't thought about?

c) In cash - we currently hold about $300K, so the plan leaves a $60K buffer. To alleviate the inflation effect, is it smart to put some of this to work in extremely low-risk ways? Of course, that also means extremely low return, so is there any point to doing that? I know next to nothing about bonds except their return lags inflation nowadays.

I know I also need to address out years (beyond 6). We have a good-sized nest egg (around $5M, about equally spread between brokerage and the two IRAs), so I don't anticipate there would be much bad news except possibly higher taxes. SS... haven't analyzed that deeply or even factored it in, but definitely after year 6. Probably FRA or close to it for each of us.

Good plan. I would leave the Roth money alone. There is no problem with gains trading as you plan to do to use up the NOL... in fact, you can reinvest the same day in the same stock if you wish to as long as it is a gain.

From what you describe it sounds like after you start SS and are subject to RMDs that you'll be getting crushed in income taxes.

I might consider selling all the equities now at $0 tax and selling fixed/buying equities in tax deferred accounts. This would reduce MAGI for the dividends on those equities and you can use the proceeds for spending and use the headroom in MAGI that it creates for either additional tIRA withdrawals or, if you don't need the money for spending, Roth conversions while you are at (relatively) lower tax rates.

You'll want to consider both additional federal and state income taxes and reduced ACA subsidies in relation to the conversion vs the federal and state taxes that you would pay if you continue to defer and pay taxes as RMDs occur.

You'll have to run some numbers and see if it make sense for you.

For SS, check into opensocialsecurity.com. Check the box at the top when you enter your information. I chenge the mortality tables to Preferred Non-smoker and the discount rate from the 20-year TIPs rate that the author advocates to the real return I expect on the money that I'll be using while delaying SS.

 

[kyzymurgist]

Roth and after tax funds are the obvious first choices to fund living expenses before Medicare while maximizing ACA subsidy. But given the huge real estate boom in many regions, you may have another option.

My local credit union offers a no fee HELOC up to 80% of equity for Prime minus 1% with a floor of 3% interest rate. So 3% currently.

For those who FIRE without much after tax or Roth savings, this could make a big difference. A cheap source of funds to get a possible huge ACA subsidy while maintaining pre retirement lifestyle. Our subsidy was nearly $20k last year.

 

[GoodbyeYellow]

From what you describe it sounds like after you start SS and are subject to RMDs that you'll be getting crushed in income taxes.

I might consider selling all the equities now at $0 tax and selling fixed/buying equities in tax deferred accounts.

You'll want to consider both additional federal and state income taxes and reduced ACA subsidies in relation to the conversion vs the federal and state taxes that you would pay if you continue to defer and pay taxes as RMDs occur.

You'll have to run some numbers and see if it make sense for you.

For SS, check into opensocialsecurity.com. Check the box at the top when you enter your information. I chenge the mortality tables to Preferred Non-smoker and the discount rate from the 20-year TIPs rate that the author advocates to the real return I expect on the money that I'll be using while delaying SS.

Thanks...
Trying to figure out what the level of 'crush' is... if it offsets present gains (ACA benefits) on an NPV basis then it could be a viable course of action.
My mental hurdle on this is... we got our savings to where they are by frugality (incomes were decent but by no means high). This same frugality gets in the way of paying up to $35K/yr for healthcare (aprx $18K for premiums plus about $17K in MOOP). Yes I know the MOOP is not a firm number...

What does this mean? "selling fixed/buying equities in tax deferred accounts." Did you mean to say either selling or buying?

I did the OpenSS calc using both the default and the Preferred non-smoker as you did. Perhaps 8% difference.

The idea to sell all the (relevant) equities now is interesting, thanks. This had not occurred to me, will need to model it.

 

[GoodbyeYellow]

Roth and after tax funds are the obvious first choices to fund living expenses before Medicare while maximizing ACA subsidy. But given the huge real estate boom in many regions, you may have another option.

My local credit union offers a no fee HELOC up to 80% of equity for Prime minus 1% with a floor of 3% interest rate. So 3% currently.

For those who FIRE without much after tax or Roth savings, this could make a big difference. A cheap source of funds to get a possible huge ACA subsidy while maintaining pre retirement lifestyle. Our subsidy was nearly $20k last year.

Good idea, will investigate. Current lender (Wells) does not offer HELOCs so will need to find another, will look at credit unions.