Author Topic: Determining income for ACA when you live off unpredictable investment income?  (Read 5254 times)

The Pigeon

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Sorry, I'm a dummy, and I can't figure this out. I cry for help from the wizened MMM community...

I FIRE'd this June, and am currently getting my health insurance through COBRA.
I want to determine if I can get a better rate for insurance with the ACA/Covered California. I'm just unable to figure out how to factor in my investment income (unpredictable) into the first thing they ask for: "how much income will I have in 2016."

I can not use past years as a guide, since I quit work this year. My income will be solely from investments--mainly from a static monthly amount ($3500) that comes from my taxable account as my paycheck replacement.

This taxable account could possibly earn an amount that exceeds my fixed monthly withdrawal. Those earnings will be reinvested. Do those reinvested earnings count? If so, how do I pre-determine a number for that?

This year I also became the beneficiary of a small trust my parents had set up for my dotage. Any yearly earnings from that will be transferred to me as income to avoid the ~45% trust tax levied on earnings. That number is also unpredictable.

So how do I determine my income for ACA purposes with these unpredictable numbers?

1. 42,000/year comprised of 12 monthly withdrawals from my investments
2. ?? whatever my taxable accounts yield, if any, beyond the above number? (does this income count--any earnings beyond 42,000 would be reinvested)
3. ?? Trust income, if any (paid to me, but will be deposited into my taxable accounts)

Sorry to be a dum-dum. I hope some of you can clear this up for my feeble mind, because the door to enrollment for 2016 is slowly closing.

Or if you can point me to some links that will help me with this quandary, explained for a simpleton...

Thanks!

-Piccione

Frankies Girl

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I'm kind of winging it really (I've read quite a bit, but I'm easily confused sometimes, so take what I say with many grains of salt). What I'm doing is looking at the past cap gains/dividends generated by my investments (checking my investment year end statements from past years), and then figuring that any additional living expenses would be coming from my selling of funds (so LT cap gains) to make up the amount we believe we will be living on. I'm okay with us over/underestimating for the first year or two and having to either pay back or get more in subsidy.

I played with the numbers in turbotax's taxcaster to see how the MAGI broke out, and used that to get my estimated income for 2016.
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

Yes, reinvested earnings count - any cap gains, dividends or other moneys generated in a taxable account will be counted towards income (no matter if you actually pull them out and use them or not) from what I understand. As will MRDs from any sheltered account, and your trust income very likely as well even if you're not spending it, as pushing it into the taxable is still accessing it. So it sounds like you're income will be pretty high actually.

I'll be interested in any other responses as well.

lhamo

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Isn't it possible to recapture the subsidy when you eventually file your taxes, assuming you qualify, versus taking it up front?  If that is the case, then one option would just be to estimate your income on the high side and pay the full market rate for the insurance, and then let it all sort itself out later when you file your taxes.  This is basically what I am doing -- putting in $100k as our estimated 2016 income, which pushes us well out of subsidy range (as well as Medicaid range for the kids, which allows for a surprisingly high income in WA).  Later once our financial situation has stabilized and is more predictable, I'll probably do what FG is doing, basing estimated income on previous years' investment returns + any planned work, and taking the subsidy up front.

Disadvantage is obviously paying the higher premiums up front and then getting a large tax return back, but seems worth it compared to possibly having to pay a large subsidy back.

jorjor

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Isn't it possible to recapture the subsidy when you eventually file your taxes, assuming you qualify, versus taking it up front?  If that is the case, then one option would just be to estimate your income on the high side and pay the full market rate for the insurance, and then let it all sort itself out later when you file your taxes.  This is basically what I am doing -- putting in $100k as our estimated 2016 income, which pushes us well out of subsidy range (as well as Medicaid range for the kids, which allows for a surprisingly high income in WA).  Later once our financial situation has stabilized and is more predictable, I'll probably do what FG is doing, basing estimated income on previous years' investment returns + any planned work, and taking the subsidy up front.

Disadvantage is obviously paying the higher premiums up front and then getting a large tax return back, but seems worth it compared to possibly having to pay a large subsidy back.

Yes, it's settled at the end when you file taxes. In fact, the technical term for the subsidies if they are received monthly is "Advanced Premium Tax Credits" which suggests the obvious...that you're receiving the estimated tax credits in advance so you can use them to pay monthly premiums as you go.

seattlecyclone

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There are two different types of subsidies for ACA plans.

The first type (premium subsidies) is finalized when you file your taxes; if you had more income than you told the exchange, you might owe some more money, if you had less you might get some money back. For this purpose there's not too much problem with estimating on the high side for your first year of retirement. You'll be giving a bit of an interest-free loan to the government, but it's not going to be the end of the world. If the path of least resistance with the people running your local exchange is to tell them your income will be the same as it was the last year, you'll get the right amount of subsidy in the end.

There's a second type of subsidy ("cost sharing") that affects the actual coverage your plan offers. You need to have an income less than 250% of the poverty level to qualify for these. If you do, silver plans have their coverage level upgraded a bit, especially if your income is below 200% of the poverty level. If this is what you expect for the next year, it may be worth trying as hard as possible to convince the people running your exchange that you actually do expect to have a much lower income this year.

See my post at https://seattlecyclone.com/optimizing-the-affordable-care-act/ for more information about what income counts for the ACA and what doesn't. Dividends and capital gains in a taxable brokerage account do count for this whether they're reinvested or not.

lhamo

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Wow -- that is one helpful writeup!  Thanks!!

The Pigeon

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Thanks for the insight and good explanations. I can ride out my COBRA until next year, but want to compare and see if switching to ACA at this juncture would be better.

I didn't realize that there was a "settlement" of sorts at the end of the tax year, where under/over-payment was assessed. I was afraid there might be some awful penalty for getting it wrong.

I think I'll do as Frankie's Girl, and estimate on the high side of things--I do live in a HCoL area (SF Bay! one of the highest), so tweaking income into the range to acquire any subsidy at all is likely to take a lot of planning. I definitely can not live on 250% of the FPL, but kind of hoping to score in the at-least-some subsidy category.

So I guess I'll estimate the investment income based on the paltry gains of this year (paltry) and see if I qualify for any subsidy at the end of 2016.

Thanks for the link, SeattleCyclone--I am *trying* to understand the bureaucratic gobbledygook, and health insurance seems to be the most convoluted of all, with co-insurance, deductibles, out of pocket maximums, and all the other little bits that make it really difficult to compare. Ugh.

Thanks, all! I definitely feel a bit more informed for my foray onto the ACA arena.

-Tauben

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ACA should be much cheaper than COBRA in almost all cases, from what I understand.
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seattlecyclone

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ACA should be much cheaper than COBRA in almost all cases, from what I understand.

Yes. With a COBRA plan, you're paying the full cost of your former employer's insurance. This is often very expensive! Most people don't realize how much their employers actually spend on health insurance. In most cases it's more than a decent ACA exchange plan costs, even before taking subsidies into account. Once your income falls below the level where you would qualify for some ACA subsidies, it is hardly even a question anymore which plan will be cheaper.

Penny Lane

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Thank you, Seattlecyclone, for your blog with the indepth review of these programs.  My DH and I ( both formerly in the med bz) refer to the ACA as the " Available Care Act" as affordable it is not.  Politically, there was no way pricing was going to be addressed in this bill, so it is better than nothing, but it is mystifying to me that people think the premium will go down while the pricetag for services/drugs etc is allowed to rise every year.  Insurerers  cannot legally agree amongst themselves, let's only pay x for an MRI;  because monopoly, anticompetitive.

But, it is available, and if you are 60ish in the old system, insurance would not have been available.  Over a grand a month with big deductable, but it's there.

Spork

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ACA should be much cheaper than COBRA in almost all cases, from what I understand.

Yes. With a COBRA plan, you're paying the full cost of your former employer's insurance. This is often very expensive! Most people don't realize how much their employers actually spend on health insurance. In most cases it's more than a decent ACA exchange plan costs, even before taking subsidies into account. Once your income falls below the level where you would qualify for some ACA subsidies, it is hardly even a question anymore which plan will be cheaper.

And, maybe too late in the year for Pigeon to worry about it, but worth mentioning:  You CAN sign up for ACA mid year.  There's really no reason to hit the COBRA button.  Even if you don't get subsidies, you can at least pick a high deductible plan and get much lower rates.

(This is robably mentioned in seatlecyclone's post... it's been a while since I read it.)

furrychickens

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^^Yeah, because switching /leaving jobs counts as a life event that triggers a personal open enrollment period. At least that's how I understand it.

Spork

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^^Yeah, because switching /leaving jobs counts as a life event that triggers a personal open enrollment period. At least that's how I understand it.

It worked for me that way, anyway.  I had too much income for subsidies this year, though.  (Or at least I think so.  I have only done rough 2015 estimates.)

lhamo

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^^Yeah, because switching /leaving jobs counts as a life event that triggers a personal open enrollment period. At least that's how I understand it.

One thing to keep in mind, though, is that if you switch plans mid-year you will most likely have to pay up to TWO full sets of deductibles.  Because any part of the deductible you met on your original plan will not count toward the deductible for the second plan.

And it can be slow to get approved for coverage on the exchanges.  I applied in late June, and was not approved until the end of August, and only after considerable nagging about when they were going to approve me.  This was with a very simple case with clear documentation of my qualifying event via a COBRA notice.  And at that point, they would only let me backdate my coverage to cover August, not July.  Which meant I have to pay out of pocket for some medical expenses I incurred in July.  It ended up being less than what I would have paid for the additional coverage, since I have a $1000 deductible anyway, but was kind of annoying.


Spork

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^^Yeah, because switching /leaving jobs counts as a life event that triggers a personal open enrollment period. At least that's how I understand it.

One thing to keep in mind, though, is that if you switch plans mid-year you will most likely have to pay up to TWO full sets of deductibles.  Because any part of the deductible you met on your original plan will not count toward the deductible for the second plan.

And it can be slow to get approved for coverage on the exchanges.  I applied in late June, and was not approved until the end of August, and only after considerable nagging about when they were going to approve me.  This was with a very simple case with clear documentation of my qualifying event via a COBRA notice.  And at that point, they would only let me backdate my coverage to cover August, not July.  Which meant I have to pay out of pocket for some medical expenses I incurred in July.  It ended up being less than what I would have paid for the additional coverage, since I have a $1000 deductible anyway, but was kind of annoying.

True on the deductible.  (I didn't even think of that, actually.)  We are healthy and have generally been minuscule consumers of health care products.  So for us that didn't matter really.

My coverage was approved super fast.   I think it was 2-3 weeks from start to finish.  This may vary by state and by what company you end up buying the coverage from.

teen persuasion

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^^Yeah, because switching /leaving jobs counts as a life event that triggers a personal open enrollment period. At least that's how I understand it.

One thing to keep in mind, though, is that if you switch plans mid-year you will most likely have to pay up to TWO full sets of deductibles.  Because any part of the deductible you met on your original plan will not count toward the deductible for the second plan.

And it can be slow to get approved for coverage on the exchanges.  I applied in late June, and was not approved until the end of August, and only after considerable nagging about when they were going to approve me.  This was with a very simple case with clear documentation of my qualifying event via a COBRA notice.  And at that point, they would only let me backdate my coverage to cover August, not July.  Which meant I have to pay out of pocket for some medical expenses I incurred in July.  It ended up being less than what I would have paid for the additional coverage, since I have a $1000 deductible anyway, but was kind of annoying.

When we tried out the NY website, they told us if you apply before the 15th of the month your coverage may begin on the 1st of the next month.  If after the 15th, it may begin on the 1st of two months out.

iris lily

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AlwaysBeenASaver

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I FIRED in June as well, and have spent the past 2 days trying to figure out the same thing as you, Cobra vs ACA. Without subsidies, my cobra premiums are a bit less than ACA premiums, with a much lower deductible as well. With subsidies the ACA premiums are lower, but still have the higher deductibles. I'm borderline as to whether I'd qualify for subsidies.

My Cobra ends Dec 1st, so either way I'm going to end up on ACA for December. I'm pretty sure I'd stick with Cobra if it could cover me for all of 2016, but because it doesn't, it's a harder decision for me.

The Pigeon

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My Cobra ends Dec 1st, so either way I'm going to end up on ACA for December. I'm pretty sure I'd stick with Cobra if it could cover me for all of 2016, but because it doesn't, it's a harder decision for me.

In California, we get 18 months of COBRA. Is it different in other states?

Like you, my ACA will be *more* than COBRA, by $120/mo,  for comparable, but slightly lesser coverage. I may let COBRA run its course until next year.

-Pidge

Spork

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My Cobra ends Dec 1st, so either way I'm going to end up on ACA for December. I'm pretty sure I'd stick with Cobra if it could cover me for all of 2016, but because it doesn't, it's a harder decision for me.

In California, we get 18 months of COBRA. Is it different in other states?

Like you, my ACA will be *more* than COBRA, by $120/mo,  for comparable, but slightly lesser coverage. I may let COBRA run its course until next year.

-Pidge

Ah.  Now I understand.  I never realized COBRA was ever cheaper.  For me, COBRA was like > $1000 a month (for high coverage/low deductible) as compared to a high deductible bronze ACA that was in the $450 a month range.   I never even glanced at COBRA.  I knew up front the prices were not comparable.  I have no idea how long it lasts here.

AlwaysBeenASaver

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My Cobra ends Dec 1st, so either way I'm going to end up on ACA for December. I'm pretty sure I'd stick with Cobra if it could cover me for all of 2016, but because it doesn't, it's a harder decision for me.

In California, we get 18 months of COBRA. Is it different in other states?

Like you, my ACA will be *more* than COBRA, by $120/mo,  for comparable, but slightly lesser coverage. I may let COBRA run its course until next year.

-Pidge

I'm in California too, so not sure about other states. My COBRA actually ends Dec 6th 2016 (started on June 6th 2015), I just said 1st for simplicity. ACA can't be started mid-month, so I'd have to stop Cobra on Nov 30th and start ACA on Dec 1st. I spoke with the ACA folks and they said this would be do-able, but would have to be done via phone rather than online. Unfortunately the company I had been working for ends medical coverage on the last day of work, they don't carry it forward to the end of the month.

I'm currently leaning towards getting the Bronze plan for all of 2016.  If I don't have any major medical issues, this will cost me more than Cobra would, however it will avoid having to switch plans for December, avoid the risk of paying 2 deductibles if I happen to have a medical issue in December after switching plans, and open the possibility of receiving the subsidy when I file my 2016 taxes, if my income falls below the limits. I actually like the Silver plan better, but in almost all medical scenarios, the bronze plan seems to work out to cost less.

AlwaysBeenASaver

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Actually I changed my mind. I'm going to stick with Cobra until it runs out, then get ACA for Dec 2016. I worked on the numbers some more and came to the conclusion that if I stick with my financial plan, I won't get the subsidy, and I don't really want to change my plans (to sell investments I don't want to hold) just to get the subsidy, and, without the subsidy, there's only 1 scenario in which Cobra comes out more expensive, and that would be a medical disaster December 2016 (when I'll be on my first month of ACA). If that happens, I'll just have to pay the price.

The Pigeon

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Here's another thought about this, as we grow closer to the Dec. 15 deadline for Jan 1 coverage --

Apparently, if you sign up for the ACA, and think you won't, but *do* end up qualifying for the subsidies, you get the tax credits. If you opt to stick with COBRA, you are ineligible for any subsidies.

Is that correct?

-The Pigeon, who is waffling on the choice.

AlwaysBeenASaver

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Here's another thought about this, as we grow closer to the Dec. 15 deadline for Jan 1 coverage --

Apparently, if you sign up for the ACA, and think you won't, but *do* end up qualifying for the subsidies, you get the tax credits. If you opt to stick with COBRA, you are ineligible for any subsidies.

Is that correct?

-The Pigeon, who is waffling on the choice.

That's my understanding of the subsidies too.