Right now I can keep my income low and get subsidies for a cheap bronze plan, or I could add to my Roth conversions so I can access the money earlier and I lose most of the ACA subsidies.
Yes, this sums up the trade-off nicely.
Questions:
1) As far as my Roth conversions - Is this year significantly different for me since I have working income, versus in 2022 all of my income will be long term capital gains/dividends?
Yes, this year is a bit different. All that money you earned from your job is taxed at regular rates (same as Roth conversions), as opposed to the more favorable dividend/capital gains rates. Furthermore you'll probably find your income is higher this year. Every dollar you earned working counts as income, but when you sell a dollar of shares in your brokerage account you'll realize less than a dollar of income. Only the gain counts as income, not the cost basis.
Since my annual expenses will probably be close to 40k/year I don't have a lot of Roth conversion room in the 12% tax bracket.
Don't forget about the standard deduction! The tax brackets are based on your taxable income, which is your AGI minus your standard or itemized deductions. For a single person the standard deduction is $12,550 this year, and the 15% bracket goes up to $40,525 taxable income, which means you can gross $53,075 before you move up to the 22% bracket.
Do long term capital gains/qualified dividends not count towards income when looking at Roth conversions?
The capital gains/dividends stack on top of the regular income. Suppose your gross income this year is $40k from regular income (work and Roth conversions) and $20k from dividends/capital gains. You look at the regular income first. Subtract the $12,550 standard deduction and you have $27,450 of regular taxable income. The first $9,950 of this will be taxed at 10% and the rest will be taxed at 12%.
Now we look at the capital gains. Your total taxable income is $47,450 ($27,450 of regular income plus the $20k of capital gains). The 0% capital gains bracket ends at $40,400 of taxable income. You'll pay 0% capital gains tax on the first ($40,400 - $27,450 = $12,950) of capital gains income, and 15% on the remaining $7,050.
When you're straddling the border of capital gains rates like this, doing an extra $1 of Roth conversions will not only cost you 12¢ of tax from the Roth conversion directly, but because the capital gains stacks on top of the regular income you'll push a dollar of your capital gains income into the 15% bracket. That means the net cost of that Roth conversion will be 27%. Something to keep in mind for sure.
I'm currently thinking this year that a conversion doesn't make much sense, maybe a small one, but not a significant one. But in 2022 I can convert roughly 40k and keep that all in the 12% bracket. I'm hoping that's right.
Sure, you could convert this much in the 12% bracket when you take the standard deduction into account. Depending on your withdrawal strategy from your taxable brokerage account you may find that this pushes some of your dividends/capital gains into the 15% bracket, which may not be what you want.
I am kind of curious whether you really need to do Roth conversions at all. Your pre-tax retirement accounts make up less than a quarter of your wealth. You have enough in your taxable brokerage account for at least 15 years of your expected spending, plus your $1.4 million of existing Roth balances surely has enough principal to make it to 59½ and beyond. You might want to do some small amount of Roth conversion every year just to make 100% sure your RMDs won't be ridiculously large at some future date, but beyond that I don't really see the need. Drawing down your taxable account at a relatively low income level while you're on ACA coverage and then starting some Roth conversions once you're old enough for Medicare may be the winning strategy under current law.
2) Since I prefer future flexibility (access to money outside of my retirement accounts) over a few thousand dollars I may save in ACA subsidies, should I just ignore trying to be under income levels for ACA benefits? This is assuming ACA is similar in 2022 and going forwards. I'm guessing that I can keep my income low for 2021 since all of my income came from a job, but in 2022 I'll be having a decent amount of LTCG and Roth conversions so I realistically can't keep my income low enough for ACA subsidies in future years.
What's unrealistic about ACA subsidies? You expect to spend about $40k, which when you're spending from a taxable brokerage account means you should be able to keep your income below $40k. Remember that the withdrawal of your basis doesn't count as income for this purpose. Even if your income is $40k you'll be below the threshold of 400% of the poverty level where you would have disqualified yourself from ACA subsidies under last year's law. This year the 400% cliff is gone, so you could potentially receive some subsidy even at an income above 400% of the poverty line. Again, given your asset mix and spending plans I don't think you should have any problem keeping your income at a level where you would qualify for some subsidy.
