What is the Sweet Spot for Taxable Income?

[Blue Collar Guy]

Ummm...it is obvious that when one talks about the 5 year look back provision to qualify for MEdicaid...one is specifically talking about having Medicaid pay for nursing home assistance. Most here I am sure made this connection....most.......

The topic is above your pay grade.

Here is the first free lesson. Medicaid will pay for home based nursing 24/7, 1 month after you give away your assets. They call it community based long term care.

The 5 year look back is for when they move to a nursing home. You might have struck yourself too hard with the face palm for it to sink in.

You need to consult with a social worker or an elder attorney before you re-comment. Save yourself from being corrected again. When Im wrong, I make public apologies, you need to start drafting yours.

 

[Texas Proud]

My input based on looking into this and over a long term view, I believe the sweet spot is to be just below 400%. You can manage lower but run a higher risk later in life of needing to withdraw more which can cost you tax on SS benefits and perhaps put you in a higher tax bracket. At the 400% level you keep a fair portion of you subsidy and have lowest tax rate for any taxable income. Just don't go $1 over the 400% or that dollar will cost you a bundle.

I would much rather save a $1 in taxes today than save $1 10 years from now... and who knows, I might be able to work the system then where I do not have to pay taxes then either...

When I get to medicare I can do conversions etc.... still, I might not since DW will still have to buy insurance... but I think the credit will be much lower with 1 person than with the 4 we have right now...

 

[Fermion]

I would much rather save a $1 in taxes today than save $1 10 years from now... and who knows, I might be able to work the system then where I do not have to pay taxes then either...

It is the philosophy of that burger lover guy

"I will gladly pay you Tuesday for a hamburger today!"

I also agree with this, save $1 now and maybe maybe have to pay $1 more 10 years from now.

 

[bingybear]

Would it be a good strategy to manage income for ACA before Medicare, and then do Roth conversion between 65 and 70 by delaying social security to 70? That seems to take care of everything tax-wise.

you can do that, but be aware you will likely make medicare be more expensive as it is income dependent. I can't guess right or wrong. It all depends on the situation.
I think many optimize locally and do not take the long term picture. Other seem to look at the global problem. What is best is likely dependent on the specific situation and the assumptions one makes about the future.
If one person has no tax differed (TIRA like investments) and someone else has no after tax assets... the problem is just different.

 

[bingybear]

It is the philosophy of that burger lover guy

"I will gladly pay you Tuesday for a hamburger today!"

I also agree with this, save $1 now and maybe maybe have to pay $1 more 10 years from now.

I guess I see the roth conversion in my case as spending $1 today to save $15 to $20
plus taxes on the growth of the conversion. Obviously the investment may not be successful or tax laws may change.

 

[Fermion]

I guess I see the roth conversion in my case as spending $1 today to save $15 to $20
plus taxes on the growth of the conversion. Obviously the investment may not be successful or tax laws may change.

So you want to pay $1000 in taxes on $10,000 today because you think in the future it will grow to $100,000 and you will be in a higher bracket and owe $20,000 in taxes on it?

That would be quite a bit of growth. Also you have to remember that you could invest the $1000 you didn't pay today and it would have grown to $10,000 (which I guess would be only $8,000 after tax), bringing your realized saving back down a bit. All this assuming of course you can achieve this 1000% growth.

 

[bingybear]

So you want to pay $1000 in taxes on $10,000 today because you think in the future it will grow to $100,000 and you will be in a higher bracket and owe $20,000 in taxes on it?

That would be quite a bit of growth. Also you have to remember that you could invest the $1000 you didn't pay today and it would have grown to $10,000 (which I guess would be only $8,000 after tax), bringing your realized saving back down a bit. All this assuming of course you can achieve this 1000% growth.

I agree my numbers on tax savings are a bit off. But I'm paying low taxes (HSA offsets part of it), but I'd expect to be in the 25% to 28% bracket just based on RMD 14 years from now assuming growth consistent with inflation in the tax bracket... and no tax code changes.

What I move to Roths gets invested higher risk/return. The conversion at the end of last year went into EM equity. It may be time to capture those gains and reinvest.

But to your point $1 to day for $2.5 to $3 assuming no growth beyond inflation.

 

[Fermion]

I agree my numbers on tax savings are a bit off. But I'm paying low taxes (HSA offsets part of it), but I'd expect to be in the 25% to 28% bracket just based on RMD 14 years from now assuming growth consistent with inflation in the tax bracket... and no tax code changes.

What I move to Roths gets invested higher risk/return. The conversion at the end of last year went into EM equity. It may be time to capture those gains and reinvest.

But to your point $1 to day for $2.5 to $3 assuming no growth beyond inflation.

Yes ok, maybe. I am also converting to Roth but only do it because I actually need the income to get above poverty level LOL. I don't pay anything for the conversion so it is sort of a no brainer in my situation. If I had to pay a buck to save potentially $2 down the road decades, I don't know...I am very much a bird in the hand type.

 

[Texas Proud]

I agree my numbers on tax savings are a bit off. But I'm paying low taxes (HSA offsets part of it), but I'd expect to be in the 25% to 28% bracket just based on RMD 14 years from now assuming growth consistent with inflation in the tax bracket... and no tax code changes.

What I move to Roths gets invested higher risk/return. The conversion at the end of last year went into EM equity. It may be time to capture those gains and reinvest.

But to your point $1 to day for $2.5 to $3 assuming no growth beyond inflation.

Yes ok, maybe. I am also converting to Roth but only do it because I actually need the income to get above poverty level LOL. I don't pay anything for the conversion so it is sort of a no brainer in my situation. If I had to pay a buck to save potentially $2 down the road decades, I don't know...I am very much a bird in the hand type.

Yea, me also... I know that if I have any more income my ACA credit goes down... I round it to 10%... I do not think that I will be paying more than 15% marginal when I have to take RMD... and I will likely work that down a bit after I am on medicare and before SS...


But even then... I would rather save $1 in taxes today and pay $1.50 in taxes 10 years from now... and probably less...



Edit to add.... I guess it also makes a difference in how much you have in tIRAs..... I converted a lot of mine way back when, when it was 'cheaper'.... but that was at 25% marginal (or there about) so I already have ran across this and made a bad decision in hindsight.... but it looked like a good one then...


Edit to add more... WELL.... I have much more in tIRAs and 401(k)s than I thought... did a quick calculation on my current balance and I will have much more RMD than I was anticipating... might have to start looking at things a bit different...

 

[truenorth418]

Maybe I should file this under pet peeve.

I find gaming the ACA for subsidies when your sitting on more wealth than 90 % of Americans equal to transferring assets to children to qualify for medicaid. Both are legal , just not the intended spirit of the laws.

But more power to you, its legit , just not my style.

“The intended spirit of the law”? Our elected representatives carefully crafted this legislation and it is obvious that the intended spirit of the law is what the law says. Who am I to disagree? Do I not take my standard deduction on my 1040? Do I not take the full value of my HSA contribution as an above the line deduction?

I have been happy to accept my subsidies. The subsidies are legal and I am grateful to my elected representatives and president for providing them to me.

 

[foxfirev5]

Even the POTUS alluded to not paying taxes because he's "smart". Warren Buffet has said he doesn't pay a fair share. Should he make it right by giving some back?
What about jacking up a public pension by loading up on the overtime for the last few years?
Life's not fair and I have a hard time criticizing anyone who plays by the rules. As I've said before if you don't like it get involved

 

[MrLoco]

The topic is above your pay grade.

Here is the first free lesson. Medicaid will pay for home based nursing 24/7, 1 month after you give away your assets. They call it community based long term care.

The 5 year look back is for when they move to a nursing home. You might have struck yourself too hard with the face palm for it to sink in.

You need to consult with a social worker or an elder attorney before you re-comment. Save yourself from being corrected again. When Im wrong, I make public apologies, you need to start drafting yours.

When people discuss transferring assets to have Medicaid pay their long term care needs; they are referring to nursing home care most of the time... probably 95% of the time. That is why I responded to the other poster as I did. Elder care attorneys advertise this fact ad nauseum. As such, they are referring to Chronic MEdicaid i.e. nursing home costs being paid by Medicaid NOT community based Medicaid or in home coverage, which you referred to. Glad I could clear that up for you!
Your Welcome!
BTW....we game the system ( as you put it ) now. We have investable assets north of $ 5 million and I have been able to manipulate our income ( by delaying pensions and SS as well as tax loss harvesting in our taxable accounts ) until we reach the age of 65. We receive a monthly subsidy of about $600 for a silver Blue Cross/Blue Shield Plan. This is what smart people do. And I sleep well at night.

 

[MikeTN]

I look at it differently. I had an above-average income when I was working. We can't all be subsidized by the government. Somebody has to pay their own way and more. It must be those of us who were blessed with good intelligence and good health so that we could earn above average incomes.

So I would not retire early unless I could pay my own way. I'm willing to take any tax breaks offered to me. But managing my income to take subsidies intended for those who are less well off just seems wrong to me.

I do not criticize those who see it differently. However, suppose you lived on a small island where you knew almost everyone. Would you still do it?

 

[Fermion]

I look at it differently than that. We had an above average income while we were working partly because we lived in a high COL area and still had 1+ hr commutes each way in heavy city traffic. The government did not care about our high COL or commute time (and gasoline) and still charged us $60,000 a year in federal tax.

Someone making less money per year but in a low COL area with very short commute could have exactly the same lifestyle and pay far lower federal tax.

So now we live in low COL area and get ACA subsidy. It is just paying back our high tax rate years.

 

[daylatedollarshort]

We try to go to the 400% federal poverty limit without going a $1 over. We came too close for comfort last year in estimating our taxable income so we are leaving a bit more headroom this year. I don't know if we can stay under the limit until DH is on Medicare, but we're going to try. When the kids were in college we stuck to the state grant limit which was a bit less than ACA. Our state college grant program had asset tests but most of our assets were in exempt asset classes, including our small businesses and their retirement plans, so we still qualified.

We retired before the ACA came along and without knowing the kids could go to college tuition free, but I'm not going to turn down free money that comes along after filling out our income tax forms and FAFSA forms accurately. We're enjoying our Prop 13 tax break, too, as well as our small business expense deductions, 401K / IRA deductions and tax deferred compounding, HSA accounts, personal exemptions, and mortgage interest and property tax deductions.

 

[Curmudgeon]

So I would not retire early unless I could pay my own way.

So, you'll also be saying 'No, thanks' to SS and Medicare?

 

[brucethebroker]

Slippery slope, this "managing income to get ACA subsidies" is bad stuff. Working tax law/subsidies is a game that many successful FIRE and retirees have mastered over years of accumulating wealth. Home mortgage interest deduction, homestead credits on property taxes, HSA's, IRA's, Roth's, charitable contributions, LTCG & dividend tax treatment, business/charity and medical mileage deductions, most business deductions, etc. Is tax law ever taken advantage of? Sure. One of my pet peeves is the people who take deductions for worthless used clothing donated to Goodwill (even a former president donated used underwear).

Our elected federal officials live in a bubble of high income/no worry pension/medical plans. I guess they honestly believe that people can't live on less than $62k (400% poverty level, approx.) income and have decided to help those "poor souls out". If some retirees have planned out how to do just that, that is no reason to criticize them. (In fact, some who criticize would consider it stupid to have $63k in income and lose subsidies when so close to the MAGI number.) Subsidies don't seem to draw ire while building wealth. Why when conserving wealth?

 

[teejayevans]

On a related subject, do you pay now or pay later....
For example, medicare also goes up with income, so do you pull money out of your IRA temporarily pushing you up into a much higher tax bracket (say 15%->28%) today with idea of lowering RMDs and keeping income below the thresholds? I guess it also depends on whether your crystal ball says taxes will be higher or lower in the future.

 

[bingybear]

On a related subject, do you pay now or pay later....
For example, medicaid also goes up with income, so do you pull money out of your IRA temporarily pushing you up into a much higher tax bracket (say 15%->28%) today with idea of lowering RMDs and keeping income below the thresholds? I guess it also depends on whether your crystal ball says taxes will be higher or lower in the future.

Did you mean medicaid or medicare?

Which is better is partially personal choice (bird in hand) and part extrapolation (which will be worse based on modelling).

If it were me and my situation I would not just pull $ out of IRA to increase income, but would do a Roth conversion instead of standard IRA distribution. You may be able to play both cases by roth converting up to just under the 400% FPL. You would get the bulk of the PTC and some RMD reduction.

Each person has their own motivation and their individual circumstance. This is not one size fits all. Which provides you with the most optimum or satisfying result?

 

[teejayevans]

Did you mean medicaid or medicare?



Which is better is partially personal choice (bird in hand) and part extrapolation (which will be worse based on modelling).



If it were me and my situation I would not just pull $ out of IRA to increase income, but would do a Roth conversion instead of standard IRA distribution. You may be able to play both cases by roth converting up to just under the 400% FPL. You would get the bulk of the PTC and some RMD reduction.



Each person has their own motivation and their individual circumstance. This is not one size fits all. Which provides you with the most optimum or satisfying result?

I meant medicare, corrected post, the problem with the Roth conversion is it requires substantial money to live off and pay taxes on money you're not going to use. I've gotta research Roth withdrawal rules, for now I've treated it as emergency only since it's growing tax free.

 

[Fermion]

I meant medicare, corrected post, the problem with the Roth conversion is it requires substantial money to live off and pay taxes on money you're not going to use. I've gotta research Roth withdrawal rules, for now I've treated it as emergency only since it's growing tax free.

One reason it can be very advantageous to sell your house and rent. You can live off the tax free proceeds from your house (especially a lot if you have paid it off). This enables you to pretty much have any income level you desire with any tax rate you want for 6 to 10 years.

Say someone sold their house for $400,000 and they need $60,000 to live on. Even in a CD ladder their $400k would last them over six years and it is all tax free (except the minor couple of thousand you might get in interest). So you could do around $21,000 a year of Roth conversion each year of those six years and still have a MAGI of $23,000 and get full ACA subsidy plus cheese (cost sharing). This is for a married couple no kids. After six years you would have converted $126,000 to Roth and you could withdraw $21,000 of that each year tax and penalty free. So you could then continue to live on $60,000 while only pulling $39,000 from your investments.

 

[bingybear]

I meant medicare, corrected post, the problem with the Roth conversion is it requires substantial money to live off and pay taxes on money you're not going to use. I've gotta research Roth withdrawal rules, for now I've treated it as emergency only since it's growing tax free.

as noted, it depends on personal circumstance. I'm 56. Taking distributions from TIRA is more expensive when including 10% penalty. However, I do have reasonable after tax assets. Downside, these do generate some taxable income. Upside, it gives me choices and I don't need to generate income to live on using tax deferred or tax free accounts.

One reason it can be very advantageous to sell your house and rent. You can live off the tax free proceeds from your house (especially a lot if you have paid it off). This enables you to pretty much have any income level you desire with any tax rate you want for 6 to 10 years.

Say someone sold their house for $400,000 and they need $60,000 to live on. Even in a CD ladder their $400k would last them over six years and it is all tax free (except the minor couple of thousand you might get in interest). So you could do around $21,000 a year of Roth conversion each year of those six years and still have a MAGI of $23,000 and get full ACA subsidy plus cheese (cost sharing). This is for a married couple no kids. After six years you would have converted $126,000 to Roth and you could withdraw $21,000 of that each year tax and penalty free. So you could then continue to live on $60,000 while only pulling $39,000 from your investments.

I had not thought of this... likely not relevant in my case. Present plans are to stay here for a while, so I'm not sure I want sell. I'm not sure I would do this unless I really had to if my long term plan was to live in personally owned homes.

edit: Semi general questions often get a variety of answers. What is the sweet spot? It depends: where are your assets? Your age? Do you have medical conditions that cause high co pays and thus having cost sharing is a big benefit (vs you just have well care). Do you have an Ed Slott type retirement time bomb? How are you getting cash to live on?

It is likely that there is not a sweet spot in general. It gets more complicated when you try to optimize multiple things... like retirement in general. TJ - my optimization would be much different than yours if you are using TIRA distributions to live on.

 

[Texas Proud]

I look at it differently. I had an above-average income when I was working. We can't all be subsidized by the government. Somebody has to pay their own way and more. It must be those of us who were blessed with good intelligence and good health so that we could earn above average incomes.

So I would not retire early unless I could pay my own way. I'm willing to take any tax breaks offered to me. But managing my income to take subsidies intended for those who are less well off just seems wrong to me.

I do not criticize those who see it differently. However, suppose you lived on a small island where you knew almost everyone. Would you still do it?

Once they get rid of all the other waste in the gvmt that I do not like, I will continue to manage my income to get as many tax breaks/subsidies I can get...


Are you upset at the people who can afford to put in solar panels and get a big tax break? Poor people cannot do that...

What about buying electric cars? Same...

What about them paying farmers NOT to grow stuff... my old boss's mom had been getting payments for 30 years even though her DH had died and there was no intention of her planting anything...

What about the multi-millionairs who are hedge fund managers and get a lower tax rate using carried interest? Poor people do not get this...

And there are many more... actually most of the big ones go to corporations...


BTW, I also got a credit when I upgraded my AC system a couple of months ago... but I had to put in a high SEER system that cost me more money... and I do not think poorer people are going to spend that much on an AC system...

 

[Texas Proud]

Now, it is not even close to being done, but if the new tax law gets past then the calculation for what income level is best changes...

IOW, I can hold onto taxable income longer since I will have a much larger amount that is not taxable when I start Medicare... and can convert cheaper than now...

 

[Rianne]

I look at it differently. I had an above-average income when I was working. We can't all be subsidized by the government. Somebody has to pay their own way and more. It must be those of us who were blessed with good intelligence and good health so that we could earn above average incomes.

So I would not retire early unless I could pay my own way. I'm willing to take any tax breaks offered to me. But managing my income to take subsidies intended for those who are less well off just seems wrong to me.

I do not criticize those who see it differently. However, suppose you lived on a small island where you knew almost everyone. Would you still do it?

There are many articles that show the tax subsidies of the rich. Do you think for one minute the super rich consider the poor when they take their tax subsidies. You are noble in your opinion but unrealistic and somewhat blind to the real world.
http://www.huffingtonpost.com/bill-...-for-the-rich-and-corporations_b_4589188.html