Apologies for yet another post on ACA subsidies but I wanted to give some specific details of my situation, it got rather long so I didn't want to hijack an existing thread.
I will be retiring next month and will have health insurance through my employer through the end of the year. I will be eligible for COBRA so I need to decide whether to take COBRA or sign up for the ACA. If I sign up for the ACA I need to decide what MAGI to aim for in 2020 so that I can work out what the subsidies would be. I’ve been trying to decide this for months but I’m stuck on trying to take into account all the factors.
A bit of background. I live in the Bay Area in California. I’m 59 and my wife is 51. My wife plans to work for a few more years and has both self-employment income and part-time employee income. We file taxes as married filing jointly. Most of my wife’s income can be taken out of our MAGI by a) paying most of her self-employment income into a Solo 401k and b) paying into an HSA from her employee income.
So the first thing is to compare my choices for medical coverage. I am currently on a high deductible PPO plan through my employer. I plan to continue using an HSA so I will just look at HDHP options from the ACA. These are the costs with no subsidies:
| Per month | Per year |
COBRA (incl. Dental and Vision) | $1,117.25 | $14,206.20 |
COBRA (medical only) | $1,183.85 | $13,407.00 |
Blue shield Bronze HSA PPO | $1,837.03 | $22,044.36 |
Western Health Bronze HSA HMO | $1,349.56 | $16,194.72 |
Kaiser Bronze HSA HMO | $1,320.18 | $15,842.16 |
So, if I ignore subsidies it is a no-brainer - go with COBRA.
Also, my existing coverage has a deductible of $3000 while all the ACA options have a deductible of over $13,000. My existing coverage seems better all around.
One other thing to note on COBRA is that it lasts 18 months but it looks like we could extend it to 36 months (3 years) using Cal-COBRA in California. Not sure if I’m missing anything that would exclude that for us.
Subsidies
California has supplemented the ACA subsidies which means there is no “ACA cliff” at a MAGI of $67,640 and subsidies continue (gradually reducing) up to $101,460. I went on coveredca.com and put in some sample income levels to check the subsidies:
MAGI Subsidy (per month)
$40K $1638.15 (plus lower out of pocket costs)
$60K $1318.18 (this is for PPO plan - slightly higher subsidies for HMOs)
$80K $889.25
$100K $398.55
There are so many variables, so I’m going to assume for now that I would go with the PPO plan on the ACA. At the $100K income level COBRA would still be cheaper. At the $80K income level it is still very close. So let’s look at the $60K level…
Annual cost for the ACA PPO at that level is $6226.20 vs. $13,407.00 for COBRA medical only. So I would save $7180.80 per year going with ACA and subsidies.
Capital Gains
But what am I missing out on by keeping my MAGI below $60K in 2020? The main things seem to be possible LTCG harvesting (at 0% rate) and roth conversions.
I have several stock positions in taxable accounts that I would like to change anyway (like sell my Megacorp stock and put the funds in VTI). So I want to do some trades both to take advantage of 0% LTCG and to switch funds. The total unrealized LTCG in my taxable savings is $183k. Of this $113k is in positions that I want to change.
So let’s focus on LTCG.
Using 2019 tax brackets the 0% capital gains applies to taxable income up to $78,750. That is on top of the standard deduction of $24,400.
Let’s assume that the taxable income from my wife’s earnings (after HSA and Solo-401k deductions) will be $12,000.
If we aim for a MAGI of $60K (for ACA deductions) that leaves $48K we can use for LTCG (all at 0%). But if we don’t take subsidies we can get $91,150 of LTCG at 0% (24,400 + 78,750 - 12,000).
So there is some benefit to not taking the subsidy here but it is hard to quantify. We are saving paying $15% tax on $43,150 which would be $6472. We also have to freedom to take more LTCG in 2020 and pay the 15% tax - whereas if taking the ACA subsidies we can’t trade those stocks at all.
So, above, I said I would save $7180.80 per year going with ACA at a $60k MAGI. But I would also lose $6472 and some freedom. So the ACA saves me 7180.80 - 6472 = $708 if I ignore the freedom to trade at 15% tax.
Similarly if we kept our MAGI at $40K total we would be saving 15% of a larger $63,150 LTCG difference which is $9472.50 but the subsidy is higher saving me $11020.44 on the premiums for a total savings of $1548.
That is one way of calculating it and just two possible scenarios. But I feel like to know the “right” answer I have to calculate out all the scenarios/factors for every year between now and when I’m 70 or so.
Other factors to take into account:
- Roth conversions
- Are both ACA and COBRA premiums something that we can write some of off against my wife’s self employment income? How does that affect the calculations?
- If I just take 18 months of COBRA then 2021 is half COBRA and half ACA. Do I take subsidies that year?
- If I take subsidies every year I will build up a lot of unrealized capital gains. Eventually I won’t be able to fund my withdrawals because I have to sell some of my taxable holdings to live on.
- The HMO options are cheaper so they change the calculations a lot.
- Taking COBRA seems simpler and less stressful (and better coverage) but I fear that I’m spending money that I don’t need to.
Any thoughts on how to decide?