Author Topic: Near Fire - How to plan Taxes & Healthcare?  (Read 1532 times)

KitchenSink

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Near Fire - How to plan Taxes & Healthcare?
« on: October 16, 2020, 05:16:21 PM »
Hi - Forum user of many years here, posting anonymously because case study.

Life Situation:
DH (42) and DW (35), married 15 years and living near the anarchist jurisdiction of Seattle.
DH is just under 20 years in software, and the thrill is gone from the career.
DW doesn't work due to a health situation treated via medication and counseling.
No kids, as planned.  I guess that makes us SINKs.  Look at me!  I'm a sink!  Heh.

Though it's yet to sink (ha!) in, we're likely in the neighborhood of 28x expenses (3.5% WR) and could FIRE.
I hope for this to be a case study around planning our retirement withdrawal/taxes/healthcare strategy.

I've not listed any details on the expenses, since that's not what I want to focus on.
Please accept the expenses as stated, which I know is a hard thing for this crowd.

Expected ER expenses:
  $70k-$80k, before taxes and healthcare.

Liabilities:
  None

Assets:
  Taxable     -  $1,050k  (Basis: ~$700k, so ~50% gain on average, mostly long-term.)
  Trad 401k   -  $1,150k
  Roth 401k   -  $  300k  (Mega Backdoor Roth)
  Roth IRAs   -  $  230k  (Two Backdoor Roths)
  HSA         -  $   70k  (Invested in an index.)
  Cash        -  $   50k
  House       -  $  600k  (Est. per Zillow. Purchased in 2002 for $200k.)

  -- Liquid Net Worth: $2,850k
  --  Total Net Worth: $3,450k


Liquid Asset Allocation:
  Roughly 85/15 (all low-cost indexes w/ bonds held in 401k).

SS:
  DH has just passed the 2nd bend for social security. DW has nearly no credits.
  The worksheet projects ~$28k at DH's FRA, and thus ~$14k (50% of DH) at DW's FRA.

Specific Question(s):

We're looking for opinions/advice/models/calculators/rules-of-thumb on how to plan tax- and healthcare-strategies, since those things are so interlinked.
The goal should be to minimize the combined expense over our lifetimes, of course.

We assume continued moderately high use of healthcare for DW's medication and counseling, on the order of $1500/mo.
We also assume existing tax and healthcare structures will remain in place.  The future is unknowable, so might as well plan with what exists now.
DH will wait until at least after the election to FIRE, so we'll have at least that little bit of further understanding.  Maybe he'll even OMG (One More Government) it through to January/February.

So for example, we could do a Roth conversion pipeline ... but up to what bracket is most efficient?  And would the income blow any chance at ACA subsidies?  Does that make sense as a long-term strategy?

Or we could minimize income to maximize ACA subsidies and CSRs ... but can we meet our expenses while maintaining sub-cliff taxable income, and for how many years?  Does this leave a large tax bill for later in life?

We're aware of i-ORP.  It's somewhat inscrutable, but if it's the best tool we can make a more committed go at working with it.
Are there other tools or approaches?

How have the rest of you, of the recent 2018-2020 cohorts perhaps, approached this for yourselves?

Thanks!

KitchenSink

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #1 on: October 16, 2020, 05:19:38 PM »
And while I'm here, I did want to take a moment to say thank you to MMM for the blog, but even moreso to the forum community.
Though I was always a saver, it was the forum that brought me round to low-cost index funds, higher rates of saving, backdoor roths, mega backdoor roths, HSAs, metal roofs, electric cars, etc.  I've drunk the kool-aid, and I'm better for it.

Thank you!

terran

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #2 on: October 16, 2020, 08:55:14 PM »
Here are the the projected 2021 tax brackets. You'll almost definitely want to fill the $25,100 standard deduction and maybe the 10% or even some of the 12% brackets with Roth conversions. Since you've been around awhile (under another username) you probably already know this, but you'll be able to access these conversions after 5 years.

I would convert as much as you can while still leaving enough room in the 0% capital gains bracket to pay no capital gains tax, and probably keeping income low enough for ACA subsidies, while still realizing enough spendable income to live on.

You should look up your 5498 forms for your Roth IRA contributions (or form 8606 if these are backdoor contributions) and forms 1099R from your mega backdoor Roth contributions. Take a look at the ordering rules for distributions under "distributions" and the "Treatment of distributions" table under note 2. You'll see that you can take out contributions any time tax and penalty free. Taxable conversions come out next and have a penalty if the conversion was made less than 5 years ago. If your mega backdoor Roth had only small taxable gains on any conversions you made in the last 5 years I'd probably just pay the penalty on those since that will give you access to the non-taxable part of the conversion without penalty. You don't want to touch the earnings you've had in the Roth accounts until you're over 59.5 as you'll pay tax and penalty. The accessible portions of your Roth accounts will be a good source of spendable income that won't effect your tax bracket or ACA subsidies.

Frequent forum poster @seattlecyclone has a good blog post on the effect of income on ACA subsidies. Washington state is a medicaid expansion state, so you'll want to keep your ACA Modified Adjusted Gross Income (MAGI) above 138% of the Federal Poverty Level (FPL) and below 400% FPL if at all possible. I suspect you'd have a hard time lasting 30 years (when DW will be eligible for Medicare) at your desired spend while keeping ACA MAGI all the way at the bottom of that range, but you should be able to keep it below the top, I think.

You can get a quick estimate of your expected ACA premiums and subsidies using this Kauffman Foundation calculator, but it shouldn't take much longer to get actual estimates from healthcare.gov (or your state exchange if that's where it links you).

One thing you could consider is whether it might make sense to realize income above the subsidy limits now while you're in a cheaper age bracket so you can get more into Roth making it easier to get subsidies when the unsubsidized cost goes up as you get older. On the flip side, you want to make sure you always have enough available for conversion or realizable capital gains over the next 30 years to hit 138% of FPL or you get "forced" onto medicaid and won't be eligible for ACA subsidies. Of course, there's also the possibility (fingers crossed) that Biden gets in and the senate flips and they expand the ACA such that the subsidy cliffs go away and no one pays over a certain percentage of their income even at higher incomes.

MDM

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #3 on: October 16, 2020, 09:26:48 PM »
In addition to I-ORP, some tools that may be useful
- Retiree Portfolio Model
- Case Study Spreadsheet
- Open Social Security: Free, Open-Source Social Security Calculator
...although much can change over the next 20 years regarding SS benefits.

seattlecyclone

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #4 on: October 17, 2020, 12:34:15 AM »
Thanks for the batsignal, @terran.

I FIREd last year in Seattle, a year after my wife also left her job. We have a similar overall net worth to yours...a bit more in home equity and Roth accounts, less in taxable and pre-tax retirement accounts. Our liquid assets are roughly 80/20 stocks/bonds, with the bonds largely in the retirement accounts. Again, very similar to yourselves. We have two young kids, which changes the tax/healthcare math pretty significantly.

We've actually been on Medicaid since the beginning of the year. That's a story for another post, but in a nutshell they put us on that because Medicaid uses a monthly income standard (as opposed to the annual income standard used for the marketplace plans). I had a fairly sizable deferred compensation payout in a lump sum early this year that made our income needs fall below the Medicaid cutoff for the other 11 months of the year.

We're looking for opinions/advice/models/calculators/rules-of-thumb on how to plan tax- and healthcare-strategies, since those things are so interlinked.
The goal should be to minimize the combined expense over our lifetimes, of course.

We assume continued moderately high use of healthcare for DW's medication and counseling, on the order of $1500/mo.
We also assume existing tax and healthcare structures will remain in place.  The future is unknowable, so might as well plan with what exists now.
DH will wait until at least after the election to FIRE, so we'll have at least that little bit of further understanding.  Maybe he'll even OMG (One More Government) it through to January/February.

So for example, we could do a Roth conversion pipeline ... but up to what bracket is most efficient?  And would the income blow any chance at ACA subsidies?  Does that make sense as a long-term strategy?

Or we could minimize income to maximize ACA subsidies and CSRs ... but can we meet our expenses while maintaining sub-cliff taxable income, and for how many years?

One way I like to look at the income planning piece is to start by tallying up your basis in Roth and taxable accounts, plus cash. These amounts represent money you can withdraw above and beyond your reported MAGI. This is a nice piece of flexibility to have, but it's also finite. Start from the assumption that you'll spread these tax-free withdrawals evenly across the time you'll have ACA health care and see how that looks. For example if you have $1 million of such funds and 30 years until DW hits Medicare age, that means you might be able to sustain spending $33k above your reported income. With spending (pre-healthcare) in the $70-80k range, that means income in the $40-50k range: definitely in a place where you could get a bit of help paying for your premiums.

The federal poverty level for a two-person family is $16,910 for health care coverage this year. The Medicaid cutoff is $1,983/month ($23,796 annually). I don't think you should really even be thinking about income that low given your budget and current asset mix. You could make it happen for a few years if you had to, at the expense of much less flexibility later on. Staying a bit under 400% of the poverty level ($67,640) so that you can get some help with your premiums seems much more realistic and sustainable.

Looking at the Washington Exchange for a couple with your ages in King County, I see plans with premiums ranging from $595/month for a bronze plan with a $6,800 individual deductible to $1,191/month for a gold plan with a $1,500 deductible. For any of these plans you'd get $510/month in premium assistance if your income was $40k. This number goes down to $370/month with a $50k income, and $285/month at $60k.

As I explain more in my blog post that @terran also linked to above, the phase-out of these ACA subsidies acts as a separate tax system that sits on top of the normal income taxes. For a married couple with no dependents buying ACA insurance, the $40-50k range is actually the highest-taxed zone until you hit the 32% income tax bracket at $326k. You can see that the premium assistance changes quite a bit more from $40-50k than it does from $50-60k.

Quote
Does this leave a large tax bill for later in life?

Not necessarily. We're not talking about some crazy maneuvers to keep your income in the ACA subsidy range. Your spending isn't that much higher than the cliff for these subsidies. It's pretty normal to withdraw first from taxable accounts, and that naturally means you'll be withdrawing some untaxed basis to push your income a bit below your spending.

Your pre-tax 401(k) balance is pretty high. You have almost 30 years before you need to start RMDs. That's enough time for your 401(k) to double a few times, which might lead to some pretty big withdrawals indeed. The way to mitigate this is to make some Roth conversions in the interim. You might consider picking an income target somewhere below 400% of the poverty level, withdrawing any of your spending cash from the taxable account, and then any room remaining below your income goal will be used up by doing a Roth conversion at the end of the year.

ysette9

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #5 on: October 17, 2020, 08:51:20 AM »
Posting to follow as we are in a similar position.

4tify

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #6 on: October 17, 2020, 09:08:03 AM »
Following

earthshine

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #7 on: October 17, 2020, 08:34:25 PM »
Some awesome insightful info here!

KitchenSink

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #8 on: October 18, 2020, 12:01:25 AM »
Thank you all ( @terran, @MDM, @seattlecyclone ) for the thoughtful replies.
It will take me some time to do the reading and planning.

Yes, I had already read Mr. Cyclone's very informative blog on the subsidy phase-out acting as an additional tax.  It made me concerned enough that I think I went a bit overboard.  I had been thinking that I'd want to limit income in order to qualify for CSRs (so < 250% of FPL), which seemed like it would be difficult to do, and wouldn't be sustainable for the 30+ year horizon.

Reading your responses here, I'm encouraged that even 300%-400% of FPL still has meaningful premium-subsidies, and that it's likely sustainable, though I'll have to run the numbers.
Though I should have realized it myself, terran's observation that health insurance is cheaper when you're younger and therefore it may make sense to have higher income initially and lower subsidy-qualifying income in later years ... has really taken root with me.  Another facet to consider.

Anyhow, again, thank you for the responses.  I'm off to ponder for a while.

Paul der Krake

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #9 on: October 18, 2020, 12:40:13 AM »
Trying to predict portfolio movements and withdrawals over 30 years, taxes and health schemes for the next 30 years when we canít really predict the weather 3 days out... yeah.

Just optimize a couple years out and do your best. Like, 3 to 5 years tops. By all means keep tabs on developments and the big picture but you should accept that your model is going to be deficient in some way.

YOLO


terran

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #10 on: October 18, 2020, 08:01:49 AM »
Though I should have realized it myself, terran's observation that health insurance is cheaper when you're younger and therefore it may make sense to have higher income initially and lower subsidy-qualifying income in later years ... has really taken root with me.  Another facet to consider.

Note that this only makes sense if you go well above the 400% subsidy cuttoff and pay full ACA premiums in some younger years. While premiums go up as you get older (that and smoking are the only factors the insurers can vary cost on, I think) that just increases the subsidy if you qualify, so premiums don't actually go up as you age as long as your income remains the same and under the subsidy cutoff. They only go up if you're unsubsidized. 

Another option for the first few years could also be to continue on your husbands insurance under COBRA after he quits. This might be cheaper than unsubsidized ACA insurance (or it might not), which would let you front load some Roth conversions without worrying about ACA subsidy cut offs.

seattlecyclone

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #11 on: October 18, 2020, 11:01:54 AM »
Though I should have realized it myself, terran's observation that health insurance is cheaper when you're younger and therefore it may make sense to have higher income initially and lower subsidy-qualifying income in later years ... has really taken root with me.  Another facet to consider.

Note that this only makes sense if you go well above the 400% subsidy cuttoff and pay full ACA premiums in some younger years. While premiums go up as you get older (that and smoking are the only factors the insurers can vary cost on, I think) that just increases the subsidy if you qualify, so premiums don't actually go up as you age as long as your income remains the same and under the subsidy cutoff. They only go up if you're unsubsidized.

The sticker price of all plans goes up as you age. The net price of the SLCSP (second lowest-cost silver plan) will stay steady if your income stays steady. Your subsidy is a fixed amount that can be applied to any plan, and will increase by the amount that the SLCSP's premium increased. The effect of this is that the net price of any plan cheaper than the SLCSP will go down as you age, while the net price of any plan more expensive than the SLCSP will go up. Since your health care spend is pretty high you may find a gold plan to be the best deal now when you're paying more of the premium yourself, while at some point a bronze plan might start to look better when you're older and the government will pay most (or all) of the premium for you.

As an example, this year with $50k income the cheapest plan in King County is $238.73/month after subsidy, and the most expensive plan is $820.90 for a couple your age. Add ten years to each of your ages and these premiums are $196.04/month and $982.50/month, respectively. Add another ten years and it's $82.71 versus $1,252.48.

Quote
Another option for the first few years could also be to continue on your husbands insurance under COBRA after he quits. This might be cheaper than unsubsidized ACA insurance (or it might not), which would let you front load some Roth conversions without worrying about ACA subsidy cut offs.

Yes, this is worth considering. You get 18 months of COBRA if you want it. Given your health care spend you probably won't want to leave COBRA mid-year only to go on an unsubsidized ACA plan with a fresh deductible partway through the year. If you time it right and leave work mid-year you could have two tax years to front-load some Roth conversions and/or harvest some capital gains before the added ACA tax starts to apply. If DH is just fed up with work and itching to leave no later than inauguration day, you'll still get a year to do this. By increasing your stash of post-tax basis and decreasing the number of years where you might need to worry about ACA taxes, you could reduce your sustainable income level by a few thousand bucks.
« Last Edit: October 18, 2020, 11:15:20 AM by seattlecyclone »

lhamo

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #12 on: October 18, 2020, 01:55:50 PM »
For some reason they haven't posted yet (though the WA Heathplan Finder is already advertising them via Facebook ad), but starting in November 2020 you should be able to see the new pilot public option "Cascade Care" plans -- according to the press release that came out in July, at least five of the insurance providers currently operating in WA should have new plans under this umbrella. 

https://www.governor.wa.gov/news-media/inslee-announces-five-carriers-intend-participate-public-option

Of course things can change depending on how the upcoming election goes, but since a public option is already in the pipeline hopefully it will be harder to roll back.  Especially if it turns out to be more affordable than other options and if people use it/get used to it.

seattlecyclone

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #13 on: October 18, 2020, 08:22:01 PM »
For some reason they haven't posted yet (though the WA Heathplan Finder is already advertising them via Facebook ad), but starting in November 2020 you should be able to see the new pilot public option "Cascade Care" plans -- according to the press release that came out in July, at least five of the insurance providers currently operating in WA should have new plans under this umbrella. 

https://www.governor.wa.gov/news-media/inslee-announces-five-carriers-intend-participate-public-option

Of course things can change depending on how the upcoming election goes, but since a public option is already in the pipeline hopefully it will be harder to roll back.  Especially if it turns out to be more affordable than other options and if people use it/get used to it.

Interesting. I had forgotten that was scheduled to take effect next year already. The state has some good resources online for those interested in learning more. The "Cascade Care" umbrella can apply to two separate varieties of insurance plans. The first, more common one, is where insurers can offer standardized plans with identical financial parameters (deductibles, out-of-pocket maxima, copays, etc.). The different premiums between insurers offering these plans will only reflect differences in provider networks and negotiated reimbursement rates; it allows a much more apples-to-apples comparison than the plans where the insurers are free to tweak all the various pricing knobs in different ways. The second type, "Cascade Care Select" is considered more of the "public option." I don't see anything about additional subsidies for these plans, but they're restricted to paying doctors 160% of what Medicare pays. The idea is this restriction might cause premiums to go down.

I looked at the insurance commissioner's website. There are still a couple of insurance companies that haven't had their rates approved for 2021. That's likely one reason why the exchange website still isn't letting you browse plans for next year.

I looked through the documentation on the commissioner's website to find out a bit more about next year's plans (looking only at King County here). There will be eight insurers offering exchange plans in King County (up from six this year). Seven of these companies will be offering the standardized Cascade Care plans with no reimbursement restrictions, and the eighth company (United Healthcare) will be offering the Cascade Care Select plans. The Select plans seem to have pretty average to high premiums compared to the other plans at the same metal level. So far this "public option" doesn't seem to be a clear price winner, at least in King County. Perhaps the situation is different in other counties.

lhamo

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Re: Near Fire - How to plan Taxes & Healthcare?
« Reply #14 on: October 19, 2020, 09:01:11 AM »
Thanks for the link to that site!  Much easier to compare the basics of different plans/companies than through the healthplan finder.  Also interesting to see what the profit margins are (and aren't) and how few people are actually purchasing these plans.  And how hard it must be to get insurance in the more rural parts of the state, esp. Eastern WA.  Hardly any choices over there....