Author Topic: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies  (Read 1255 times)

moneytaichi

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I read lots of articles talking about how to optimize for converting traditional IRA to Roth in early FIRE years. One of the main reason is to pay income tax during lower income years before RMD and social security kick in. Almost all of them suggest to figure out an optimal account based on income tax bracket, but few mentioned about considering ACA subsidies.

2019 will be our first FIRE year. California requires about $23,000 MAGI to be eligible for ACA marketplace (we don't want to get into Medi-aid because the services are poor). I am trying to figure out two options in 2019:
1. Convert $24,000 from traditional IRA to Roth, which would give us most ACA subsidies. We'd also pay $0 Federal and state income tax because our AGI would be $0 after standard $24K deduction.
2. Convert $34,000 from traditional IRA to Roth, which would give us less ACA subsidies (we'd pay about $6K more on premium and deductibles). We'd also pay Fed/state income tax for $10K AGI.

We are thinking to choose option 1 of converting $24K. What do you think of this strategy? Do my reasoning make sense?

Many thanks for your thoughts on this!

MDM

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #1 on: October 20, 2018, 07:03:34 PM »
You might look at your marginal rates vs. amount of tIRA withdrawal, using the case study spreadsheet

You could do this for near-future years, and also run estimates for when SS benefits and/or RMDs start.  Depending on how the latter situations appear, you may wish to convert even more of the traditional funds to Roth in the near-future years.

lhamo

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #2 on: October 20, 2018, 07:37:37 PM »
Also, you might want to double down on research about what Medicaid provides.  Perhaps it is different in CA, but here in the Seattle area I have found the services provided through expanded medicaid to be as good or better than what you can get on a for-fee ACA plan.   Had cataract surgery in both eyes at a top eye center for no cost, for example.  You do have to be proactive about researching specialists, etc. and giving names prior to requesting referrals, but my doctors have been happy to put in referral requests for my preferred clinics/hospitals/drs.

There is a lot of bias/stigma about Medicaid that is not necessarily warranted, especially if you are in a large metropolitan area with good medical facilities.  And because Medicaid eligibility is determined by monthly income, not annual, once you are on the program there are ways to do Roth conversions that do not throw you off.

madamwitty

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #3 on: October 20, 2018, 07:48:54 PM »
I live in CA and from what I have read, Medi-Cal actually sounds pretty good. I currently have insurance with Kaiser Permanente through work and itís great. Apparently you can get Kaiser Permanente through Medi-Cal too, but (for now?) only if you are an existing member. Maybe itís a really popular choice?

secondcor521

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #4 on: October 20, 2018, 10:43:53 PM »
OP, I've asked similar questions before and never really gotten what I consider to be fantastic answers.

I think what it comes down to is a tradeoff between the costs and benefits.  My only thoughts are to look at everything and consider future years too.

By everything, I mean there are essentially a bunch of different taxes that phase in and out at different incomes.  Mostly we report and pay all these different taxes on our federal and state income tax returns.  But I have kids in college and there is effectively an additional tax system called financial aid that is based on federal AGI and other things.

Back to federal and state income taxes, what you'll find with such a low income is that there are tax credits that phase in and out at various levels - ACA premium tax credits are the most often discussed today, but there is also ACA cost sharing reductions, earned income credits, retirement savings tax credits, education credits, etc.

The easiest thing I've found to do is sit down with an online tax program (I like TaxAct for this), and plug in your base case and jot down how much you'd owe in federal and state taxes.  Then increase your conversion amount by $5K and see what it does to your taxes.  Then increase it by $5K again, and jot those numbers down.  Then if you plot those numbers on a X-Y graph (total taxes paid vs. income), you'll see if there are any bumps or slopes that are significant.  You can also decide - like I almost have - that paying X% of your income in taxes is OK, but not more.  Then you can pick that point on the graph and use it.

Usually I will find the broad strokes with a $5K resolution, then once I pick an area I'll go back in and do $1K intervals.  You can also look at the return itself and see, if there are any discontinuities, why they happen, which may lead you to make additional tweaks.

Often, as in the case of conversions, these steps need to be taken before the end of the year.  I usually start my tax planning around 12/1.

MDM

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #5 on: October 20, 2018, 11:35:59 PM »
The easiest thing I've found to do is sit down with an online tax program (I like TaxAct for this), and plug in your base case and jot down how much you'd owe in federal and state taxes.  Then increase your conversion amount by $5K and see what it does to your taxes.  Then increase it by $5K again, and jot those numbers down.  Then if you plot those numbers on a X-Y graph (total taxes paid vs. income), you'll see if there are any bumps or slopes that are significant.
One can certainly do that by hand.  One can also look at marginal rates - aka bumps and slopes :) - vs. amount of tIRA withdrawal using the case study spreadsheet

Ease of use may be in the keyboard of the beholder.  Answers should be pretty much the same.

moneytaichi

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #6 on: October 22, 2018, 04:23:10 PM »
Thanks for all the great information! I will look into both the cash flow spreadsheet and MediAid in CA. Stay tuned!

If anyone has additional inputs, thank you too!

moneytaichi

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #7 on: October 22, 2018, 10:05:36 PM »
Just for someone else who might be looking at similar issues in California, here is what I found on https://ournextlife.com/2018/01/08/early-retirement-health-insurance/

"in California, where MediCal (the state program name) is notoriously bad because so few doctors accept it, we did not want to be forced into the program."

Another report: https://www.chcf.org/publication/physician-participation-in-medi-cal-is-supply-meeting-demand/
« Last Edit: October 22, 2018, 10:15:29 PM by moneytaichi »

lhamo

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #8 on: October 23, 2018, 10:44:37 AM »
OK, California does seem to be worse than the national average -- according to the report you linked to at the time of the survey 62% of primary care physicians had MediCal patients, compared to a 69% national average.  Here is a nice graphic from Kaiser Family Foundation that shows the national breakdowns:

https://www.kff.org/medicaid/issue-brief/data-note-a-large-majority-of-physicians-participate-in-medicaid/

That being said, I am not convinced that the problem of access is all that serious, especially for those in large metropolitan areas.  WA only has an average rate of acceptance and we have had no trouble getting care.  I recall there are a few forumers from NY who use NY Medicaid without trouble. And I think I know of at least one forum friend who has had SIGNIFICANT medical care under MediCal and been very happy with it -- literally saved her life.  I will PM her to see if she is willing to weigh in on this discussion.

I don't put much stock in the blog post -- as I mentioned upthread, people have all kinds of stigma and assumptions about Medicaid that are not necessarily accurate. 

TNT

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #9 on: October 23, 2018, 04:27:05 PM »
n=1, obviously, but my experience with Medi-Cal (California's Medicaid program) has overall been very good. The doctor I had before going on Medicaid accepted it, as did my first choice of doctors when I started having serious medical problems and needed to switch. I had zero problems getting quick referrals when I suddenly needed an endocrinologist, a hepatologist, a hematologist, a pulmonologist, a neurologist, a neurosurgeon, an opthalmologist, and a sleep disorder specialist all at the same time. They covered my $1,000,000 bill at one of the best hospitals in California (UCSD) and my 10 different prescriptions without a single cent out of pocket. They even approved a medication that wasn't in their formulary, just because I told my doctor that's the one I wanted (Xarelto vs. Warfarin).

The only gripe I have is that I apparently live in a psychiatrist desert, and of the very few in my area, I have only a couple of choices. Also, counseling appointments are limited to 45 minutes rather than a full hour, which is kind of annoying. But they're 100% free.
« Last Edit: October 23, 2018, 04:29:35 PM by TNT »

lhamo

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #10 on: October 23, 2018, 04:33:35 PM »
Thank you, TNT!

Oh, yes -- mental health options do tend to be more limited.  But that is probably because a lot of mental health providers don't take insurance at all.  My DH also elected to pay out of pocket for periodontal cleaning he needed -- there was only one clinic in our area that might have provided it, and he would have had to take his records in/have a new intake appointment to confirm it was needed.  He decided that was too much of a hassle so we paid for it ourselves at the clinic he had been referred to (that didn't take Medicaid).

moneytaichi

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #11 on: October 26, 2018, 09:47:40 PM »
@TNT and @Ihama, thank you so much for sharing your information.

I have done quite a bit research on Medi-Cal and HMO now. My husband and I have concluded that we prefer PPO for now because DH has a complicated medical situation that often requires the top-notch specialists. We rather spend a little more money for a peace of mind. The good news is that our plan in 2019 would be a lot better than 2018 because our income would be only $24K.

Your information is valuable down the road, if we need to scale back our expenses. Thanks again!

lhamo

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Re: IRA to Roth IRA Conversion Optimization for Tax or ACA Subsidies
« Reply #12 on: October 27, 2018, 11:18:26 AM »
Sounds great -- yes, if you are able to keep income low enough then the subsidies and credits can make an ACA plan almost as cheap as full coverage through Medicaid. Hope all works out well for you guys.