US health insurance question..

[tasimo]

Hey guys,

I'm trying to plan a budget for post-FIRE and better understand self-insuring after.  I had read a blog that linked to Kaiser's premium calculator:

https://www.kff.org/interactive/subsidy-calculator/

I was happily surprised how much tax credit you get even at moderate income levels.  My question is if adjusting where my annual spend comes from can affect this.  About half of my retirement is in Roth accounts, my understanding is that doing 401k conversions and drawing the contributions (but not gains) I can access these post-tax dollars before 59.5 without any penalties.  I think that Roth money is not considered income; would selectively drawing from that give my family a low income and qualify for really cheap insurance?  What about post-tax brokerage accounts, would spending dividends/sales from those also not count towards income? Thanks!

[reeshau]

What about post-tax brokerage accounts, would spending dividends/sales from those also not count towards income? Thanks!

Capital gains and qualified dividends are income, and do count.  The good news is that their income tax rate starts at 0%!  The other thing is, it's only the gains that count from a sale; your original purchase price does not.  So, if you sell a security which has gained 100%, then your income would be 50% of that sale.  You can free up a lot more cash than will show up on your tax return.

Too low is not necessarily good, unless you are shooting to qualify for Medicaid.  I find that my tax planning is looking for a balance, and my end-of-year action is generally to do a Roth rollover such that the income taxes (plus any ACA subsidy adjustment) eat up my tax credits, and balance close to zero due at April, without estimated tax payments.  I am on year 4 of this exercise.

[tasimo]

Yes, this makes sense.  I'm not shooting for medicaid, but cutting my on paper income in half seems to make a huge difference in how much tax credit I get for health insurance.  Thanks!

[sonofsven]

Yes, this makes sense.  I'm not shooting for medicaid, but cutting my on paper income in half seems to make a huge difference in how much tax credit I get for health insurance.  Thanks!

One thing to note, not only does a lower "income" give you a larger subsidy, it can also give you a lower deductible and max out of pocket, in the same plan.
In my case, an income below $31k gave me a max oop in a silver plan of $2100. Above $31k the max oop becomes $7400 in the same silver plan.

[Morning Glory]

Yes, this makes sense.  I'm not shooting for medicaid, but cutting my on paper income in half seems to make a huge difference in how much tax credit I get for health insurance.  Thanks!

One thing to note, not only does a lower "income" give you a larger subsidy, it can also give you a lower deductible and max out of pocket, in the same plan.
In my case, an income below $31k gave me a max oop in a silver plan of $2100. Above $31k the max oop becomes $7400 in the same silver plan.

 I found 200% fpl to be the sweet spot for no-premium silver with CSRs. To the op, you should be able to find a table of fpl by family size, and it doesn't change if only part of your family is on aca.

[seattlecyclone]

What about post-tax brokerage accounts, would spending dividends/sales from those also not count towards income? Thanks!

Capital gains and qualified dividends are income, and do count.  The good news is that their income tax rate starts at 0%!

Just to clarify something that often trips people up: even though this income is in a 0% tax bracket it still counts as income for the purpose of calculating your health care MAGI.

But to your original question, yes there are lots of knobs you can turn to manipulate your income to get the health care plan you want. Withdrawals of your Roth principal don't count toward your income. Selling taxable stock only partially counts as income (the capital gains count but the cost basis doesn't). Meanwhile if you want to avoid Medicaid and your income is looking too low you can do a Roth conversion or harvest some capital gains that you have no intention of spending right away.

[FIRE 20/20]

Yes, this makes sense.  I'm not shooting for medicaid, but cutting my on paper income in half seems to make a huge difference in how much tax credit I get for health insurance.  Thanks!

One thing to note, not only does a lower "income" give you a larger subsidy, it can also give you a lower deductible and max out of pocket, in the same plan.
In my case, an income below $31k gave me a max oop in a silver plan of $2100. Above $31k the max oop becomes $7400 in the same silver plan. 

 I found 200% fpl to be the sweet spot for no-premium silver with CSRs. To the op, you should be able to find a table of fpl by family size, and it doesn't change if only part of your family is on aca.

This is really critical.  I generate the right amount of income each year to keep my out of pocket max and deductible extremely low.  I threw away my notes as I was shopping for insurance this year, but I think by dropping my income by $1 I was able to have a $1,400 out of pocket max vs. $7,200.  The story about the deductible is similar.  If you're able to generate the "right" amount of income somehow (I use 401(k) -> Roth conversions) then it's really easy to keep health insurance costs very reasonable. 
@Morning Glory correctly states that these cliffs are related to the % of the Federal Poverty Level.

[yachi]

...my understanding is that doing 401k conversions and drawing the contributions (but not gains) I can access these post-tax dollars before 59.5 without any penalties.  I think that Roth money is not considered income; would selectively drawing from that give my family a low income and qualify for really cheap insurance?

The Roth withdrawal would not be considered federal income, but the Traditional 401(k) to Roth IRA conversion would be considered federal income.  It's not unreasonable to account for 5 years' inflation in your conversion, so in this case your income would be higher than your spending.  At 2%, 5 year's inflation increases your spending by 10%.

If you skip the conversion to have really low income one year, you'll need a plan for where to draw income 5 years from now.

What about post-tax brokerage accounts, would spending dividends/sales from those also not count towards income? Thanks!

In these types of accounts, your dividends get immediately taxed in the year they hit your account and count as income in that year whether you spend them or reinvest them.  I would say "why not send the straight to your spending account?"  Sales are different.  Here your income is only the gain.  If you have $20K in stock that you purchased for $10K, you can sell all of it, spend $20K that year, and only show $10K of income.

By the way, I say federal income in the first part because Pennsylvania state does weird things with IRAs.  Opposite of the feds they consider the conversion to be a non taxable event, but the withdrawal a taxable event.

[tasimo]

...my understanding is that doing 401k conversions and drawing the contributions (but not gains) I can access these post-tax dollars before 59.5 without any penalties.  I think that Roth money is not considered income; would selectively drawing from that give my family a low income and qualify for really cheap insurance?

The Roth withdrawal would not be considered federal income, but the Traditional 401(k) to Roth IRA conversion would be considered federal income.  It's not unreasonable to account for 5 years' inflation in your conversion, so in this case your income would be higher than your spending.  At 2%, 5 year's inflation increases your spending by 10%.

If you skip the conversion to have really low income one year, you'll need a plan for where to draw income 5 years from now.

What about post-tax brokerage accounts, would spending dividends/sales from those also not count towards income? Thanks!

In these types of accounts, your dividends get immediately taxed in the year they hit your account and count as income in that year whether you spend them or reinvest them.  I would say "why not send the straight to your spending account?"  Sales are different.  Here your income is only the gain.  If you have $20K in stock that you purchased for $10K, you can sell all of it, spend $20K that year, and only show $10K of income.

By the way, I say federal income in the first part because Pennsylvania state does weird things with IRAs.  Opposite of the feds they consider the conversion to be a non taxable event, but the withdrawal a taxable event.

Thanks, this is all helpful.  To clarify, the 401k is not traditional - it's all Roth 401k, and I have no traditional IRA.  It may have been dumb setting it up this way as I've paid so much in taxes over the years to get here.  So I have roughly 1/3 NW in Roth 401k/backdoor roth IRAs and the remainder in taxable brokerage accounts/RE/etc, no traditional IRA/401k.