Author Topic: ACA killing Traditional to Roth Conversion Ladder  (Read 4392 times)

meatgrinder

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ACA killing Traditional to Roth Conversion Ladder
« on: September 24, 2019, 02:22:12 PM »
Anyone here converting their traditional IRA to Roth IRA and paying higher ACA premiums/getting lower subsidies as a result?

I'm doing the maths in preparation for retirement in a couple months and everything points to taking up the first $24K standard deduction tax free then doing no further conversions. 

Thanks in advance for taking time out of your retirements

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #1 on: September 24, 2019, 03:03:51 PM »
I have a spreadsheet showing different Roth conversion amounts, what that means for federal taxes, and ACA subsidies. Yes, doing more Roth conversions means lower subsidies. I havenít yet figured out how to analyze what the sweet spot is for subsidies vs overall lower taxes. Iím sure someone smarter than me here has figured that out.

But I donít necessarily conclude that the answer is always to do fewer conversions to maximize ACA subsidies. I suspect the answer is more nuanced than that.

anonprof

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #2 on: September 24, 2019, 05:22:55 PM »
I also need to figure this out for next year.  @ysette9 are you willing to share your spreadsheet?  I'm struggling on how best to do this analysis.  thanks!

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #3 on: September 24, 2019, 07:09:50 PM »
I also need to figure this out for next year.  @ysette9 are you willing to share your spreadsheet?  I'm struggling on how best to do this analysis.  thanks!
The spreadsheet doesnít do any calculations. It is just a single table that aggregates the info I gathered through various online calculators. I used covered Californiaís website to find out how much we would get it subsidies at various levels. Then I just used a simple online federal tax estimator to see how much tax we would owe at various Roth conversion levels.

MDM

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #4 on: September 24, 2019, 07:24:52 PM »
I also need to figure this out for next year.  @ysette9 are you willing to share your spreadsheet?  I'm struggling on how best to do this analysis.  thanks!
You might try the case study spreadsheet (works best in Excel).

Note the following from the Instructions tab - just in case you skip that tab. ;)
 - The Premium Tax Credit (PTC) for those with "simple" ACA insurance will be calculated if one enters the   
    - Enrollment Premium (aka the cost if one would receive no Premium tax credit) in cell B114.
    - Advance Premium Tax Credit in cell B115.  Enter this as a negative number.
    - Second Lowest Cost Silver Plan (SLCSP) cost for the year in cell AE100.
    - See https://thefinancebuff.com/tax-calculator-aca-obamacare-subsidy.html for a nice "how to" with pictures. Thanks, Harry Sit (aka thefinancebuff).

If this doesn't suffice for your situation, and your situation isn't unusual and changes to accommodate it would be "relatively easy", perhaps those changes could be made....


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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #5 on: September 24, 2019, 07:26:27 PM »
Anyone here converting their traditional IRA to Roth IRA and paying higher ACA premiums/getting lower subsidies as a result?

I'm doing the maths in preparation for retirement in a couple months and everything points to taking up the first $24K standard deduction tax free then doing no further conversions. 

Thanks in advance for taking time out of your retirements

Yes, me.

A couple of comments:

1.  Anything that increases MAGI within the ACA phaseout ranges (100%/138% to 400% FPL) will result in lower ACA subsidies; that's the way the law was written to work.  Roth conversions are one thing; side gigs and realized capital gains also are included.

2.  The ACA subsidy loss works somewhat like a parallel tax:  For every dollar of MAGI in that range, you probably have to pay some percentage in federal income tax, state income tax, and ACA subsidy loss.  These are additive.

3.  If you have kids in college receiving financial aid, FAFSA EFC acts like a fourth parallel tax in addition to the three mentioned in the previous item.

4.  How much to convert, and whether to prefer conversions over realizing capital gains, is a complicated question.  Many people I respect think it is a no-brainer to convert up to the 12% bracket, especially if you'll be in a 2x% bracket in retirement.

My conclusion, for my own situation, is to prefer conversions over capital gains, and to compare my marginal tax rate for the four tax systems against my projected marginal rate when I am age 70 and hit the tax torpedo.  I calculate these four rates by doing my taxes in December and then calculating the effects of various Roth conversion amounts.

I believe I should convert up to that age 70 marginal tax rate in order to even things out and probably have the most after-tax income possible over my lifetime.  I haven't done the math carefully yet, but I think that decision criteria will result in recommending that I convert a lot more than I need and maybe even more than I think I want to.

5.  It's hard to pay taxes now to avoid paying higher taxes 20 (or more) years in the future.

6.  Another thing that's pretty hard to model if one has kids is that the ACA ranges and tax brackets and things change as your kids grow and you lose the dependency exemptions (and your ACA household size drops one by one).

anonprof

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #6 on: September 25, 2019, 01:01:19 AM »
@MDM Thanks for the links, I've downloaded the most recent version and will make my best attempt to figure it out.   Question: is it feasible to update the spreadsheet to account for the new California state subsidy?
Beginning in 2020, California will provide a subsidy to reduce the cost of premiums up to 600% FPL. In some instances, you can receive both the state and federal subsidy.   https://www.coveredca.com/california-subsidy/   https://www.coveredca.com/PDFs/FPL-chart.pdf   

MDM

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #7 on: September 25, 2019, 09:56:00 AM »
@MDM Thanks for the links, I've downloaded the most recent version and will make my best attempt to figure it out.   Question: is it feasible to update the spreadsheet to account for the new California state subsidy?
Beginning in 2020, California will provide a subsidy to reduce the cost of premiums up to 600% FPL. In some instances, you can receive both the state and federal subsidy.   https://www.coveredca.com/california-subsidy/   https://www.coveredca.com/PDFs/FPL-chart.pdf
It's probably feasible, especially if someone wanted to modify it for personal use.

Chances of such a modification becoming part of the standard spreadsheet would increase greatly if someone were to do those modifications and share them. :)  Or, at the very least, provide a reference for all the details of the actual calculations (if the references above have those details I missed them...).

See State Income Tax calculations - Crowdsourcing request for more discussion of state-specific modifications.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #8 on: September 25, 2019, 09:03:07 PM »
1.  Anything that increases MAGI within the ACA phaseout ranges (100%/138% to 400% FPL) will result in lower ACA subsidies; that's the way the law was written to work.  Roth conversions are one thing; side gigs and realized capital gains also are included.

True, anything that increases your MAGI will reduce your insurance premium subsidies. A small side gig of the self-employment variety may actually reduce your MAGI compared to if you had instead withdrawn more from your investments. Self-employed people can deduct their health insurance premiums pre-AGI. If you make $10k from a side gig and that means you need to convert $10k less to Roth, and you also get to deduct $5k of health insurance premiums, your income (and therefore your health insurance premiums after tax credits) will be lower than if you didn't have the side gig. I wrote more about this effect in a recent blog post.

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2.  The ACA subsidy loss works somewhat like a parallel tax:  For every dollar of MAGI in that range, you probably have to pay some percentage in federal income tax, state income tax, and ACA subsidy loss.  These are additive.

I like the framing of the ACA subsidy phaseouts as a parallel tax system. The phaseout of a government subsidy as your income increases isn't exactly the same as a tax, but the way you can reason about it is.

I used the table in the middle of the Form 8962 instructions to generate a graph showing the marginal "tax" rate from ACA subsidy loss as your income (as a percentage of the poverty level) increases. See below:



Even though the percentage of your MAGI that you'll pay for the second-cheapest silver plan is always less than 10% when you get a subsidy at all, the marginal rate is often quite a bit higher than this because the percentage you owe increases with your income.

For example when your income goes from 150% of FPL to 151% of FPL your share of the premium goes from 4.15% of your MAGI to 4.20% of your MAGI. This new percentage applies to your whole MAGI, not just the percentage that exceeded 150% of the FPL, making the marginal rate be quite a bit higher than a mere 4.2%. In this case the marginal rate from making that jump is ((4.2% * 1.51FPL) - (4.15% * 1.5FPL)) / (0.01FPL) = 11.7%.

The jagged bits on that graph come from the fact that the IRS made tables rounding the percentage owed to the nearest hundredth of a percent. I could probably derive the underlying equation to smooth the graph out, but I think you get the idea. Between 300-400% of FPL the percentage of income you'll owe for the second-cheapest silver plan is fixed at 9.86%, so that's why we see a flat marginal rate of 9.86% there.

I think I need to keep this graph around for all the times people say something to the effect of "I won't bother contributing to my Roth account because there's no tax on capital gains anyway so it's just the same!" Oh yeah, just the same, huh?

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My conclusion, for my own situation, is to prefer conversions over capital gains, and to compare my marginal tax rate for the four tax systems against my projected marginal rate when I am age 70 and hit the tax torpedo.  I calculate these four rates by doing my taxes in December and then calculating the effects of various Roth conversion amounts.

I might have reached the opposite conclusion. Given the marginal rates for income under the ACA, tacked on to whatever normal tax rates you'll be paying, you could easily be paying 25% on your Roth conversions while on ACA insurance. When you withdraw from your taxable cost basis or your Roth basis it doesn't count as income and therefore doesn't get taxed at all. For that reason we currently plan to focus on drawing down the taxable accounts first.

The longer we wait to sell our taxable shares, the more we expect them to increase in value, which will in turn decrease the difference in MAGI between withdrawing a dollar from taxable instead of converting a dollar to Roth. Furthermore when our kids age out of our tax family, the applicable federal poverty level will go down, making it more likely that we'll be in the 9.86% zone for ACA marginal rates, making that a potentially more advantageous time to start realizing a bit more income through Roth conversions. Then after we hit age 65 and go on Medicare we'll have five years of even lower tax rates to really go to town on those Roth conversions before social security kicks in at 70. At least that seems to make sense under the current set of policies. I feel like we're unlikely to go through the next 35 years without some major changes in either social security and/or the ACA. We'll just have to roll with whatever changes get enacted in that time.

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5.  It's hard to pay taxes now to avoid paying higher taxes 20 (or more) years in the future.

Very true!

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6.  Another thing that's pretty hard to model if one has kids is that the ACA ranges and tax brackets and things change as your kids grow and you lose the dependency exemptions (and your ACA household size drops one by one).

Under the new tax rules that went into effect last year there's no more dependency exemption to worry about, just a flat child tax credit. As long as your spouse lives your filing status and therefore your tax brackets should stay the same. The ACA household size will make a difference. If your income stays the same when your kid ages out of being in your tax family you should probably expect a bigger health insurance bill when that happens. The flipside is that if this change bumps you into the 300-400% of poverty level range your marginal tax rate under the ACA will probably be lower than it was before.

I guess there are two ways to play this. One option is to realize a bit more income at higher marginal rates while you have kids at home, lowering your income after they leave to keep your health costs more constant over time. The other option is to defer income until the kids leave and reduce your marginal rate, and live with the fact that your health insurance will be more expensive as part of the deal. The latter option feels like a better bet to me, but I could be missing something.
« Last Edit: September 25, 2019, 09:05:52 PM by seattlecyclone »

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #9 on: September 26, 2019, 10:21:04 AM »
Great thread!  I appreciate all the thought people have put into this; it really helped me as I planned my Roth Ladder, ACA costs, and tax optimization.  One thing that has struck me in the past few years is how much more health care I've needed as I've gotten older.  I'm very fit, have great blood work, and eat well.  Unfortunately both my activity levels plus asthma and allergies have caught up with me and my health care costs shot up after I crossed the 40 year mark.  I wouldn't have done this math if it weren't for these forums.  Hopefully someone might find my numbers valuable as they look at their own planning.  If I manufacture $18k in income this year using a Roth ladder, my tax and expected health care costs will be about $2,500 for the year resulting in after tax/health spending money of $15.5k.  If I manufacture $32k in income the tax and health care costs could be about $12k, resulting in $20k of spendable money.  This assumes "medium" health care use per my state's calculator.  It's crazy to think that an extra $14k in withdrawals results in only $4,500 in actual extra money for me, but there it is. 
I will admit that this is probably a worst case scenario, because the bulk of the increase is in possible extra spending on health care.  However I have had significant health care expenses (in the $10k range) for the past couple of years - largely due to injuries from living a very active lifestyle. 

secondcor521

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #10 on: September 26, 2019, 01:24:20 PM »
@seattlecyclone, thank you for the extensive reply and comments.  I'm not going to quote it because it's rather long, but wanted to reply here with some of my own comments.  OP, if you want me to start a different thread or take it to PMs, let me know.

I agree with your point about a side gig possibly being better to MAGI than investment withdrawals.  In my actual case, I have side gigs, capital gains, interest, dividends, and Roth conversions.

The actual formula for the ACA phaseout ranges can be found if you poke around the web long enough.  IIRC it's three line segments.

Regarding marginal rates and conclusions, I didn't spell out my scenario precisely before.  I fund my living expenses first from any taxable income and non-taxable refunds, gifts, etc, then I sell from my taxable, which generates some LTCG.  Beyond that, I prefer Roth conversions over additional voluntary LTCG based on some reading I had done elsewhere and the fact that my taxable is relatively small and my tax torpedo at age 70 is likely to be large.

What I did last year was to look at varying amounts of Roth conversion and pick the amount that absorbed all of my CTC, kept me in SNT range for the FAFSA, and was at a total marginal rate that seemed reasonable.  Between federal, state, ACA, and EFC, I ended up in a 28% marginal bracket.

What I think I should do this year is the same, except I probably should be willing to be in a higher overall bracket, because I was ignoring state income taxes at age 70 when looking at the tax torpedo.  If current trends continue, I'll owe 24% marginal and 7% state.  So I really should be willing to pay up to about 30% now - if I believe that evening out taxes over the next 20 years (I'm 50) is the way to minimize taxes overall.

I have a fair number of other complexities in my financial situation which make it hard for me to try to predict and therefore optimize, including ACA, kids in college, child support and associated constraints, potential LTCG from a QSBS, a potential inheritance, etc.  I have tried to build accurate models of this in Excel before and they collapse under their own weight, so I usually just try to achieve a level of "not the worst option I could have picked".  For example, I'm doing some Roth conversions now, which is possibly not as good as somewhat larger Roth conversions, but also probably not as bad as zero conversions.  I may try to build a model in Excel again sometime soon.

Thanks for the correction about the dependency exemption.  You are right; I actually meant the CTC/DCTC.

Thanks for pointing out the 9.86% range.  I'll have to look at that more closely when I have more flexibility in my health insurance choices.  Currently I'm locked into a CSR87 silver plan until my youngest graduates from child support.

The fortunate thing is that in my case, as long as I make reasonable choices, I'll probably have success, as my safety factors are very wide.  But I also get frustrated that I can't seem to get my optimization completely built out the way I envision.

Thanks again.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #11 on: September 26, 2019, 01:48:07 PM »
...my tax torpedo at age 70 is likely to be large.

What I think I should do this year is the same, except I probably should be willing to be in a higher overall bracket, because I was ignoring state income taxes at age 70 when looking at the tax torpedo.  If current trends continue, I'll owe 24% marginal and 7% state.
Are you including IRMAA tiers when looking at age 70 (for that matter, age 63 or older)?

In the 24% bracket, IRMAA can easily add a few percent to your marginal rate....

secondcor521

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #12 on: September 26, 2019, 03:55:35 PM »
...my tax torpedo at age 70 is likely to be large.

What I think I should do this year is the same, except I probably should be willing to be in a higher overall bracket, because I was ignoring state income taxes at age 70 when looking at the tax torpedo.  If current trends continue, I'll owe 24% marginal and 7% state.
Are you including IRMAA tiers when looking at age 70 (for that matter, age 63 or older)?

In the 24% bracket, IRMAA can easily add a few percent to your marginal rate....

No, but I should.  As a single in the 24% bracket it will probably hit me.  Good reminder, thanks.

secondcor521

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #13 on: October 05, 2019, 02:06:14 PM »
...my tax torpedo at age 70 is likely to be large.

What I think I should do this year is the same, except I probably should be willing to be in a higher overall bracket, because I was ignoring state income taxes at age 70 when looking at the tax torpedo.  If current trends continue, I'll owe 24% marginal and 7% state.
Are you including IRMAA tiers when looking at age 70 (for that matter, age 63 or older)?

In the 24% bracket, IRMAA can easily add a few percent to your marginal rate....

No, but I should.  As a single in the 24% bracket it will probably hit me.  Good reminder, thanks.

If I did the math right, it will add 1.04% to my marginal rate based on my current plan.  It could be as high as 2.28% additional.  So 25.04% to 26.28% instead of 24%.

Thanks to you, my RMD spreadsheet is now my RMD and IRMAA spreadsheet.  Thanks!  :)

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #14 on: October 08, 2019, 03:51:49 PM »
If I did the math right, it will add 1.04% to my marginal rate based on my current plan.  It could be as high as 2.28% additional.  So 25.04% to 26.28% instead of 24%.

Thanks to you, my RMD spreadsheet is now my RMD and IRMAA spreadsheet.  Thanks!  :)
You might compare with what the case study spreadsheet calculates.  If they give the same result, both are probably correct.  If they differ, at least one is not correct. ;)

secondcor521

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #15 on: October 08, 2019, 04:30:31 PM »
If I did the math right, it will add 1.04% to my marginal rate based on my current plan.  It could be as high as 2.28% additional.  So 25.04% to 26.28% instead of 24%.

Thanks to you, my RMD spreadsheet is now my RMD and IRMAA spreadsheet.  Thanks!  :)
You might compare with what the case study spreadsheet calculates.  If they give the same result, both are probably correct.  If they differ, at least one is not correct. ;)

Can you give me a brief outline on how to calculate my IRMAA surcharge in 2039 with the case study spreadsheet?  I took a look at it and couldn't figure it out.  Thank you.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #16 on: October 08, 2019, 04:35:48 PM »
If I did the math right, it will add 1.04% to my marginal rate based on my current plan.  It could be as high as 2.28% additional.  So 25.04% to 26.28% instead of 24%.

Thanks to you, my RMD spreadsheet is now my RMD and IRMAA spreadsheet.  Thanks!  :)
You might compare with what the case study spreadsheet calculates.  If they give the same result, both are probably correct.  If they differ, at least one is not correct. ;)

Can you give me a brief outline on how to calculate my IRMAA surcharge in 2039 with the case study spreadsheet?  I took a look at it and couldn't figure it out.  Thank you.
The Medicare premium will appear on the Calculations tab in cells B65 and/or C65, using the table starting in AC76, given the appropriate age in cells G8 and/or H8.

Does that make sense?

secondcor521

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #17 on: October 08, 2019, 05:24:42 PM »
If I did the math right, it will add 1.04% to my marginal rate based on my current plan.  It could be as high as 2.28% additional.  So 25.04% to 26.28% instead of 24%.

Thanks to you, my RMD spreadsheet is now my RMD and IRMAA spreadsheet.  Thanks!  :)
You might compare with what the case study spreadsheet calculates.  If they give the same result, both are probably correct.  If they differ, at least one is not correct. ;)

Can you give me a brief outline on how to calculate my IRMAA surcharge in 2039 with the case study spreadsheet?  I took a look at it and couldn't figure it out.  Thank you.
The Medicare premium will appear on the Calculations tab in cells B65 and/or C65, using the table starting in AC76, given the appropriate age in cells G8 and/or H8.

Does that make sense?

Well, yes.  But how do I get it to use Medicare amounts and brackets as they will be in 2039, 20 years from now?  It looks like the CSS is built with 2019 - the current year - amounts and brackets.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #18 on: October 08, 2019, 06:16:32 PM »
Well, yes.  But how do I get it to use Medicare amounts and brackets as they will be in 2039, 20 years from now?  It looks like the CSS is built with 2019 - the current year - amounts and brackets.
Because starting on January 1, 2020, the threshold amounts will resume adjustment for inflation, using real returns and doing everything in 2019 dollars is a "not unreasonable" assumption.  In any case, whatever one assumes will probably be incorrect, but using 2019 brackets is also probably well within the error bands around whatever one assumes for investment rates of return.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #19 on: October 08, 2019, 07:01:52 PM »
Well, yes.  But how do I get it to use Medicare amounts and brackets as they will be in 2039, 20 years from now?  It looks like the CSS is built with 2019 - the current year - amounts and brackets.
Because starting on January 1, 2020, the threshold amounts will resume adjustment for inflation, using real returns and doing everything in 2019 dollars is a "not unreasonable" assumption.  In any case, whatever one assumes will probably be incorrect, but using 2019 brackets is also probably well within the error bands around whatever one assumes for investment rates of return.

Ah, right.  For better or worse, I'm assuming different inflation rates for the brackets (2%) and the amounts (7.7%).  I haven't checked the math, but it seems like, on a gut-level basis, that those differences will make the comparison irrelevant when looking at 20 years hence.  Thanks.
« Last Edit: October 08, 2019, 07:09:09 PM by secondcor521 »

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #20 on: October 09, 2019, 06:44:35 AM »
I haven't done the math (yet) but suspect the post age 70 tax savings offered by heavy Roth conversions in the 15 years prior will swamp any ACA subsidy benefit.  Has anyone calculated the IRA balance at age 70 which would, if converted instead, would yield greater savings than 15 years of ACA subsidy?

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #21 on: October 09, 2019, 09:37:37 AM »
I haven't done the math (yet) but suspect the post age 70 tax savings offered by heavy Roth conversions in the 15 years prior will swamp any ACA subsidy benefit.  Has anyone calculated the IRA balance at age 70 which would, if converted instead, would yield greater savings than 15 years of ACA subsidy?

Not yet.  People I know and respect on another board seem to think that the ACA subsidy trumps Roth conversions (which in turn trump 0% LTCG harvesting) in most cases.  Since I'm lazy and the subject is complex and it seems plausible, I'm going along with it for now.

I will point out that there are multiple factors to consider in the math:

1.  What your MAGI would be anyway if you weren't trying to manipulate it, and how that relates to how much you want to spend.  If you want to spend more but are constrained by MAGI due to ACA, you may be more inclined to do conversions.
2.  Your current vs. desired traditional / Roth / taxable balances and their asset allocations.  This affects how much you'd want to move anyway.
3.  Your age.  This affects how many years you have to do Roth conversions - the more years, the smaller the Roth conversion can be and still make a dent in the size of your traditional IRA.
4.  Your FIRE stash size and overall AA.  These two things will probably drive your RMD-age tax bracket, which in turn is - I think, anyway - a good indicator of how much Roth conversions to do now.
5.  Your family size, and how it will change between now and RMD age.  My family size now is 4, but as my kids graduate from college and get jobs and move away, it will drop to 1 (just me).  That affects the FPL level at which I can get subsidies.
6.  Married or single will affect the brackets and ACA subsidies.
7.  State tax rates and whether or not you plan to move at any point.

There are probably others.  So there probably isn't a one-size-fits-all recommendation anyway.

The way I currently do it (and I'm looking at improving my methods) is to take my current FIRE stash, age, and the current tax and IRMAA brackets and RMD tables, plug that all into a spreadsheet, and then figure out what my RMD plus 85% of my Social Security minus my standard deduction.  I then can estimate what my tax bracket and IRMAA surcharge will be at age 70.  I take those numbers, plus my state tax bracket, and know that I'll probably be paying about that tax rate at age 70.

Then in December I do a proforma tax return and increase the Roth conversion amount until the marginal rate gets close to but does not exceed that age-70 rate.  I can then go back to the previous RMD/IRMAA spreadsheet and see what conversions of that amount will do to where I end up at age 70 (in theory I could over-convert and pay too many taxes now, getting my RMD down to the next lower bracket).  I can then pick a conversion amount that I'm happy with given that analysis.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #22 on: October 09, 2019, 10:21:58 AM »
I'm thinking max ACA subsidy would save a family of two $10,000/yr so perhaps $150,000 savings over 15 years.  If Roth conversions save more than $10k/yr tax for at least 15 years (70-85), it's better to convert.  What size annual RMDs would yield that tax savings if converted? Maybe $100k?  What size IRA would kick out those size RMDs? Nearly $3 million at age 70?

seattlecyclone

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #23 on: October 09, 2019, 02:18:13 PM »
I'm thinking max ACA subsidy would save a family of two $10,000/yr so perhaps $150,000 savings over 15 years.  If Roth conversions save more than $10k/yr tax for at least 15 years (70-85), it's better to convert.  What size annual RMDs would yield that tax savings if converted? Maybe $100k?  What size IRA would kick out those size RMDs? Nearly $3 million at age 70?

That's an apples-to-oranges comparison. A dollar saved today is more valuable than a dollar saved in 15 years, as that dollar saved today will have a chance to compound quite a bit in that time. To correct for this you really need to look at the tax rates. If you're paying a higher tax rate to realize income today than in 15 years you'll be worse off by doing so, even if the number of dollars of tax paid today is less.

Greystache

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #24 on: October 10, 2019, 08:41:17 AM »
I don't do Roth conversions because I want to maximize my ACA subsidy. What I do instead is contribute to a HSA. A married couple can contribute around $7K a year, $8K if you are over 55. Unlike a Roth conversion, contributions to a HSA do not increase my MAGI. Like a Roth, the HSA grows tax free and I can spend it tax free later on. Yes, there are restrictions on what I can spend HSA money on, but I'm not worried that I will be able to spend it all later on. Also, you need to be on a high deductible plan, so this works better if you are healthy. Over the past 4 years we have built up an HSA balance of about $24K ($28K contributions minus $4K in medical out of pocket expenses).

JGS1980

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #25 on: October 10, 2019, 09:08:11 AM »
One thing I've seen again and again in the internet age:

If you've thought about something, someone else far geekier than you has not only thought about it, but implemented it too!

Anyone heard about I-ORP yet?

https://i-orp.com/Spend/extended.html

Plug in your data. Look at the "Affordable Care Act" section.


Have fun with number crunching!

JGS
« Last Edit: October 12, 2019, 05:25:42 AM by JGS1980 »

seattlecyclone

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #26 on: October 11, 2019, 03:48:13 PM »
I've been mulling over the discussion we had on marginal rates earlier in this thread and explored the topic a bit more on my blog.

I know we usually advice people around here to save in traditional retirement accounts as a default because their tax rate will likely be lower in retirement, but I think the magnitude of these combined marginal rates between regular taxes and the ACA phase-outs may turn that advice on its head in a lot of cases.

secondcor521

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #27 on: October 11, 2019, 04:40:37 PM »
I've been mulling over the discussion we had on marginal rates earlier in this thread and explored the topic a bit more on my blog.

I know we usually advice people around here to save in traditional retirement accounts as a default because their tax rate will likely be lower in retirement, but I think the magnitude of these combined marginal rates between regular taxes and the ACA phase-outs may turn that advice on its head in a lot of cases.

Thanks for the blog article.  I'm trying to smartly navigate the next 20 years (from 50.5 to 70.5).  Right now I have three dependents because my kids are in college/high school, but over the next five years or so that's going to probably drop to zero (here's hoping they get college degrees and self-sustaining jobs).  At that point I'll be 55 and will be doing what I can to maintain good health.  So I've thought I may go on a Bronze plan, which would still be free even with a higher ACA MAGI.  That would mean that I have room to do bigger Roth conversions between 55 and 70.  My current plan contemplates splitting my tIRA into two, and doing a modest SEPP on one and Roth conversions from the other.  That preserves my (relatively smaller) taxable account.  Although both would result in MAGI.

The other thing that I look at, in addition to ACA subsidy loss, is FAFSA EFC loss.  For people like me with kids in college, my marginal FAFSA EFC loss rate is about 5%.  So I try to look at federal (maybe 22%) plus state (7%) plus ACA (~10%) plus EFC (5%).  But hopefully the FAFSA thing will only be for 2020 and 2021 tax years.

(I would have commented on your blog but it wasn't clear my name would not be published.)

Paul der Krake

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #28 on: October 11, 2019, 04:44:32 PM »
I've been mulling over the discussion we had on marginal rates earlier in this thread and explored the topic a bit more on my blog.
Well shit, I had unsubscribed after years of no movement on the RSS feed. Good to see the free time is giving you time to write.

Here are two extra things to throw even more variables in the analysis: the length of the accumulation phase (how much gainz you got?), and the flexibility afforded by those who stumble into more earned income in their retirement.

Personally, having seen so many people announce their retirement promptly followed by income opportunities falling into their laps, I've given up on trying to model my expenses more than 6-12 months out. For young people like us, it's better to embrace the uncertainty.

Cali4en

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #29 on: November 02, 2019, 05:59:51 PM »
We spent quite a bit of time crunching numbers of the question of whether to maximize subsidies now or tax savings later, but ultimately there were too many unknowns to be able to truly lock it down with any certainty.  We decided to maximize the known current benefits and defer the question of extreme long term tax optimization for the future.

We'd be happy to revisit the topic if anyone has access to some definitive planning materials/spreadsheets, but we're also happy to accept the available benefits now and pay potentially more taxes in the future than we otherwise might have had to do.   The numbers so far for 2020 look like giving up around $40K in tax-free conversions in exchange for around $15K in subsidies (more if cost-sharing comes in to play with large medical bills).

Purely from a gut-level perspective, it is super nice to have incredibly good health insurance at effectively no upfront cost.  Sort of similar to how having a paid-off house is nice, though it may not be the best decision from a financial optimization standpoint.

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Re: ACA killing Traditional to Roth Conversion Ladder
« Reply #30 on: November 03, 2019, 01:28:11 PM »
I entirely agree with @Cali4en My RMD age is still 12 years out (sounds awfully soon and my chances of being dead in the next 20 years are rising rapidly).. But we really don't know what the tax rules will be at that point.

Will RMD's even exist? Will we have a wealth tax on anything above $1M?.. Nobody knows, so trying to optimize taxes that far seems a bit pointless to me.

But on the flip side max ACA subsidy is running around $13 to $18,000/year currently for a family of two. Thats a HELL of a lot of "free" money thats available TODAY.. Will it be there two years from now? Could very well not be.

I don't need to spend anymore than a MAGI of $32k easily provides plus I got 2 years of cash reserves.. Heck I'm taking all the subsidy I can legally get my hands on while its there.