Accounting for Dividends When Tax Planning/ACA Issues Post-Retirement

[desertadapted]

Part of my retirement planning involves keeping my income below ACA subsidy limits.  So I plan to draw more on cash/tax free accounts while still reliant on the ACA.  The subsidy cliff is (once again) real, and I don’t want to plan on a legislative fix.

The problem: my ordinary dividends/bond income from my brokerage account varies year to year.  Also, since I’m in the accumulation phase, it goes up every year, so I can’t identify a good pattern (limited data) to help me predict that my dividends will be $X.   

The question:  what strategies do you use to account for dividend/bond fluctuation to achieve a relatively stable income for subsidy purposes? (my googling sucks, so if it’s been covered in the forum already, I missed it). 

Thanks in advance!

[MDM]

The subsidy cliff is (once again) real, and I don’t want to plan on a legislative fix.

The cliff at 400% remains absent for 2022.  See (c)(1)(E) in 26 U.S. Code § 36B.

That gives you one more year to gather historical data on the annual payouts of the funds you own.  No guarantees (as recent years show) that the future will match the past, but it's a reasonable place to start.

[secondcor521]

Part of my retirement planning involves keeping my income below ACA subsidy limits.  So I plan to draw more on cash/tax free accounts while still reliant on the ACA.  The subsidy cliff is (once again) real, and I don’t want to plan on a legislative fix.

The problem: my ordinary dividends/bond income from my brokerage account varies year to year.  Also, since I’m in the accumulation phase, it goes up every year, so I can’t identify a good pattern (limited data) to help me predict that my dividends will be $X.   

The question:  what strategies do you use to account for dividend/bond fluctuation to achieve a relatively stable income for subsidy purposes? (my googling sucks, so if it’s been covered in the forum already, I missed it). 

Thanks in advance!

I do a few things:

1.  I only own a broad-market index mutual fund in my taxable account, so it pays a low and reasonably consistent dividend from year to year.

2.  In mid- to late-December, I do tax planning.  I identify my target AGI (which includes ACA considerations and other cliffs), total up my YTD income from dividends and all other sources, then do a Roth conversion for the difference.  I usually do the Roth conversion the last calendar week of the year when I know I won't get any more income.

3.  In the context of cliffs, I evaluate the risk/reward ratio of going over the cliff or falling short of it.  If it's an actual cliff, like the ACA might have in 2023 and there is a significant penalty for going over it, I will do what I can to make sure I fall a safe amount of $$$ short of the cliff.  So if my target ACA AGI is $42,500, I'll actually aim for $42,000 or whatever.

4.  I reserve some flexibility by not making my full HSA contribution for a given year until the year is over.  Then if I have made a mistake and went over my cliff or target AGI, I can make an HSA contribution between 1/1 and 4/15 for the prior year and lower my AGI back below the cliff.  This requires one to have been an eligible individual and have unused contribution space.  A similar thing can be done with traditional IRA contributions if one has earned income.

[bmjohnson35]

Retired for 2 years and still learning myself.  I suggest you track your investments and document.  I assume the your trend will be relative to your individual investments.  Dividends are not always consistent and changes in economy can also change their distribution.  I reallocated at the end of 2021 for this year with the intent to increase our dividends.  Our hope is avoid having to sell shares as much as possible, especially if the market crashes.  Distributions are quarterly, so future selling of our funds will likely keep this in mind.  SORR is always looming, especially during the earlier years of ER.

[desertadapted]

Inspired by your collective suggestions, revised for my own circumstances, and given a pre-59.5 retirement, this is my rough takeaway plan:

1.   Identify historical dividends best as possible; switch brokerage interest/dividends to distribute rather than reinvest, effective upon retirement.
       a.   I need to do more thinking about whether to send  457(b) dividends to a money market account I would draw on for purposes of limiting share sales (I get that there would be ordinary income irrespective).
2.   Over the year: live off cash reserves, distributions, and Roth principal withdrawal.
3.   Near end of year, assess YTD taxable income, sell 457(b) as needed to replenish cash reserves and to fine tune tax planning to avoid subsidy cliff.

SORR is definitely something I need to spend more time on.  A goal for the next year is to read the Early Retirement Now Guide to SWR.  My stock vs. bond still has an aggressive tilt and I know that I need develop a plan for switching my 457(b) and Roth more towards something I can reliably withdraw from during the pre-59.5 phase.  Like many people, I find the early post-FIRE SORR issues way(!) more complicated and stressful to think through than the pre-retirement planning. 

In any event, thanks to each of you.  I know some of this may be obvious, but it was super helpful to see how you address it.

[Monkey Uncle]

That sounds like a pretty good plan.  It's pretty close to what I do. 

I've been RE'd for 4 years and have a good feel for the annual capital gains and dividends generated in my taxable account (or so I thought).  Last year I got cocky and sold some shares early in the year instead of waiting until after gains/dividends were declared at the end of the year.  Of course that was the year that one of my funds paid out way more than it usually does.  So when I finally file my 2021 tax return, I'm going to be stuck paying back a portion of my PTC.  The real problem is that I've got actively managed funds in the taxable account, which can be very unpredictable in the amount of gains they declare.  This is a decades-old investing legacy from a time when I didn't know any better.  Can't sell those funds now because of accumulated unrealized gains.  Moral of the story: don't hold actively managed funds in a taxable account.

[seattlecyclone]

Flexibility is the key. You'll have some amount of dividend income, no way around that. Come up with a reasonable high/low boundary for how much this will be based on historical performance. Then make a plan for how you'll reach your income target in the high dividend income case and the low dividend income case. That might involve selling high-cost-basis shares (for lower capital gain) when the dividends come in at the higher end, and vice versa.