Roth conversion and income the year prior to ACA coverage

[Finally FI]

I retired last year. DW is currently employed, and we have health insurance through her employer.

Our current plan is for her to retire at the end of this year. That would mean 12 years of ACA before we're both on Medicare.

Most of our portfolio is pre-tax, and i-ORP shows issues with us staying under our desired AGI for ACA subsidies.

So, I'm planning to do a big Roth conversion this year to address that, but want to make sure I'm understanding everything correctly before pulling the trigger.

Please let me know if these are correct or if I'm misunderstanding something:

• ACA subsidies are based only on the AGI of the year ACA is used. AGI's of prior years are not taken into consideration, no matter how large.
  
  
• Roth contributions and Roth conversions are completely separate. We can contribute $7500 each this year, and I can do a Roth conversion for as much as I'd like.
  
  
• For 2023, $117,150 keeps us in the 12% tax bracket ($89,450 bracket max plus $27,700 MFJ standard deduction). That would be the total of her income (less pretax items like employer health insurance, 401k & HSA contributions, etc.) plus interest & dividends plus the Roth conversion.

 

[RunningBum]

There's a very minor issue that you may get questioned why your income is so much less than the previous year. "We retired" is a perfectly satisfactory answer to that question.

 

[SevenUp]

• ACA subsidies are based only on the AGI of the year ACA is used. AGI's of prior years are not taken into consideration, no matter how large.
• Roth contributions and Roth conversions are completely separate. We can contribute $7500 each this year, and I can do a Roth conversion for as much as I'd like.
• For 2023, $117,150 keeps us in the 12% tax bracket ($89,450 bracket max plus $27,700 MFJ standard deduction). That would be the total of her income (less pretax items like employer health insurance, 401k & HSA contributions, etc.) plus interest & dividends plus the Roth conversion.

Those are all correct, assuming you are age 50+ and <65.

When you start using ACA, the discussion in Roth Conversion and Capital Gains On ACA Health Insurance may be helpful.

 

[Finally FI]

Those are all correct, assuming you are age 50+ and <65.

When you start using ACA, the discussion in Roth Conversion and Capital Gains On ACA Health Insurance may be helpful.

Thank you for the verification. I've seen that discussion and will definitely be digging in further!

There's a very minor issue that you may get questioned why your income is so much less than the previous year. "We retired" is a perfectly satisfactory answer to that question.

Thanks for that. Where/when does that question get asked?

 

[SecondCor521]

Correct on all three points, assuming neither of you are blind, which would increase your standard deduction if either of you were.

ACA coverage and APTC are based on your estimated AGI for the applicable year (2024 in this case). You'll get asked for this when you apply for coverage this fall (I think the window is October-ish through November-ish, but it can vary from year to year).

In some states, the marketplace may ask you to justify your estimated AGI and they may ask to see your latest tax return. RB is right, that if your 2023 actual is $120K or whatever and your estimated is $40K, they'll want a justification for the decrease, and "My wife retired" should work just fine.

I think the main reason for this is that if you underestimate your income, your APTC will be too high, and you'll have to pay back some of the APTC on your tax return. The marketplace doesn't want taxpayers to be cranky at them when their tax bill comes due. So they sometimes push back a little, but not very much usually.

 

[Finally FI]

Correct on all three points, assuming neither of you are blind, which would increase your standard deduction if either of you were.

ACA coverage and APTC are based on your estimated AGI for the applicable year (2024 in this case). You'll get asked for this when you apply for coverage this fall (I think the window is October-ish through November-ish, but it can vary from year to year).

In some states, the marketplace may ask you to justify your estimated AGI and they may ask to see your latest tax return. RB is right, that if your 2023 actual is $120K or whatever and your estimated is $40K, they'll want a justification for the decrease, and "My wife retired" should work just fine.

I think the main reason for this is that if you underestimate your income, your APTC will be too high, and you'll have to pay back some of the APTC on your tax return. The marketplace doesn't want taxpayers to be cranky at them when their tax bill comes due. So they sometimes push back a little, but not very much usually.

Great information, thanks. I had to Google "APTC". I'm learning lots of new acronyms here on ER.

 

[Exchme]

One item to note in doing Roth Conversions this year is that you should watch your AGI as any dividends and long term capital gains that push your AGI above the 0% LTCG bracket (essentially the same number as the top of the 12% ordinary income bracket) pushes the last dollars into a 27% bracket, the sum of the 12% ordinary income tax and 15% for the LTCG tax phase-in.

 

[Finally FI]

One item to note in doing Roth Conversions this year is that you should watch your AGI as any dividends and long term capital gains that push your AGI above the 0% LTCG bracket (essentially the same number as the top of the 12% ordinary income bracket) pushes the last dollars into a 27% bracket, the sum of the 12% ordinary income tax and 15% for the LTCG tax phase-in.

Good to know, thanks!