Author Topic: Steps to implement RE after death of spouse (esp ACA)  (Read 1830 times)

DaMa

  • Pencil Stache
  • ****
  • Posts: 915
Steps to implement RE after death of spouse (esp ACA)
« on: April 25, 2019, 07:05:18 AM »
I retired last year, but my husband was planning to work for 10 more years.  He died last week.  We have $20k cash and everything else in retirement funds.  I now have a large cash amount from life insurance, which I can live on.  I want to use the taxable investment income + back door Roth pipeline to keep my income at the correct level for ACA subsidy and minimize taxes.  How do people decide on what the correct annual taxable income should be and track it?  Could you point me to threads or other websites?

Thank you

« Last Edit: April 26, 2019, 06:18:14 AM by DaMa »

fuzzy math

  • Handlebar Stache
  • *****
  • Posts: 1726
  • Age: 42
  • Location: PNW
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #1 on: April 25, 2019, 08:06:20 AM »
Im so sorry for your loss.

Go Curry Cracker is my go to resource for Roth ladder stuff. if you search on his site for his annual tax numbers (just released 2018) he talks about how he does it every year. I think some of the #s changed with tax reform but the basics are similar in that you want to fill 100% of your tax free space. Good luck. I am not at that stage yet where i can roth ladder so I don’t have personal experience.


Sent from my iPhone using Tapatalk

Greystache

  • Pencil Stache
  • ****
  • Posts: 593
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #2 on: April 25, 2019, 08:36:10 AM »
If I understood your question correctly, you are asking about income limits for ACA subsidies? If so, here is a link to ACA income limits.
https://www.kff.org/health-reform/fact-sheet/aca-open-enrollment-if-you-are-low-income/.

Sibley

  • Walrus Stache
  • *******
  • Posts: 7428
  • Location: Northwest Indiana
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #3 on: April 25, 2019, 12:03:13 PM »
I'm so sorry for your loss. Take care of yourself.

The biggest piece of advice I can give you is slow down. Grief does weird things to us. As much as possible, don't make big decisions for a while - at least 6 months, but a year is better. For decisions you do need to make, try to get outside opinions, put things on hold for a week so you have time to process, etc.

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 7254
  • Age: 39
  • Location: Seattle, WA
    • My blog
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #4 on: April 25, 2019, 01:30:29 PM »
So sorry for your loss. I agree with the others who encourage you not to make any huge decisions right away.

As for what the ideal taxable income might be for ACA, that depends a lot on what you want to spend and how much you have in savings that wouldn't be taxed upon withdrawal (mainly existing basis in your taxable and Roth accounts).

Why your expected spending matters: to a first approximation, your income during retirement will be equal to your spending. The more you spend, the more you'll need to withdraw, and the withdrawals will often count as income for ACA purposes.

Why your existing basis matters: At this moment you have some amount of savings that will not be taxed upon withdrawal. This might include your cost basis in taxable shares (including the full purchase price of shares you buy with your life insurance money) or Roth contributions/conversions that you made already. You can cash in on this basis to push your income below your spending, but this amount is fixed-ish*. Once it's gone, it's gone. Use it wisely. Suppose you have $500k of such basis at the moment, and you expect to live another 50 years. That means on average you can sustain an income of $10k below your spending each year. If you want to adjust this for inflation, you might want to start a bit lower than $10k and bump it up a notch each year.

Take your spending and subtract your yearly basis withdrawal and you get the minimum income you might be able to realistically sustain over the long term.

Now, there are a few important thresholds for income where the ACA is concerned. From highest to lowest:
1) 400% of the poverty level ($48,560 for a single person in the 48 contiguous states in 2019). Above here, you get no premium subsidies.
2) 250% of the poverty level ($30,350 for a single person in the 48 contiguous states in 2019). Below here, you get some cost sharing subsidies that reduce the deductibles and coinsurance on silver plans.
3) 200% of the poverty level ($24,280 for a single person in the 48 contiguous states in 2019). Below here is where the cost sharing subsidies really start to look lucrative. A normal silver plan covers 70% of its customers' aggregate medical costs. Between 200%-250% of the poverty level, the silver plan covers 73%: a little better than normal, but not a huge difference. Between 150%-200%, the silver plan covers 87%, and below 150% they cover 94%. These latter two are essentially a platinum plan for the price of a silver!
4) 138% of the poverty level ($16,753 for a single person in the 48 contiguous states in 2019). Below here, if you live in a state that expanded Medicaid, you'll be on Medicaid instead of a private ACA plan. Pros of this: no out-of-pocket costs whatsoever. Cons: potentially lower availability of doctors depending on where you live and how many doctors take Medicaid patients.

Try to figure out which threshold makes the most sense to try for given the minimum sustainable income you calculated earlier. If that income amount is just a bit higher than one of these thresholds you can cash in on a slightly unsustainable amount of your tax-free withdrawal space and see how long you can make that last. Trying to go too far below is somewhat dangerous because once you run out of your basis you'll be stuck with income basically equal to your spending for the foreseeable future.

Again, sorry for your loss and good luck with the future.



* Once you turn 59½, your Roth earnings will become freely withdrawable as well. Otherwise any amount you add to this bucket will generally come at the expense of some other income (capital gains, Roth conversions, wages) in a prior year.

nancy33

  • Stubble
  • **
  • Posts: 218
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #5 on: April 25, 2019, 08:04:41 PM »
Sorry for your loss.

DaMa

  • Pencil Stache
  • ****
  • Posts: 915
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #6 on: April 26, 2019, 06:03:23 AM »
Thank you all. 

I only need to make 2 decisions soon, and then I'm sticking to the make no decisions for a year rule.
1.  Roll the 401k into an Inherited IRA or a regular rollover IRA
2.  Cobra or ACA for the rest of this year -- which will depend on the price of COBRA and whether the deductible carries over (HDHP already met this year).  Definitely ACA next year.

The ACA subsidies are a major factor in both decisions.  I learned from the MMM community that the best way to FIRE is to hit income level for ACA subsidies and back door Roth ladder to minimizes taxes, but never thought through the real details of how to do that until now.  I'm a smart woman with a finance background, and I hate to have to pay lawyers/accountants/advisors to try to sell me crap I don't want.  I really appreciate running this by you.

I'm going to have interest and dividend income, RMD from Inherited IRA (maybe), and IRA to Roth IRA transfers as income.  Do you basically just track until the end of December then do the IRA to Roth transfer?

I am an introvert, hate talking on the phone, have low tolerance for sales pitch/lack of knowledge, have a hard time putting thoughts into words, and am quick to anger at the best of times.   DH's employer has a beneficiary support team that has been anything but supportive.  I have to call Fidelity today.  It's like torture.

« Last Edit: April 26, 2019, 06:18:58 AM by DaMa »

seattlecyclone

  • Walrus Stache
  • *******
  • Posts: 7254
  • Age: 39
  • Location: Seattle, WA
    • My blog
Re: Steps to implement RE after death of spouse (esp ACA)
« Reply #7 on: April 26, 2019, 02:51:18 PM »
I only need to make 2 decisions soon, and then I'm sticking to the make no decisions for a year rule.
1.  Roll the 401k into an Inherited IRA or a regular rollover IRA

If you're under 59½, there can be some definite benefits to the inherited IRA treatment. You can withdraw as much as you like with no early withdrawal penalty or need to mess around with Roth conversions five years ahead of time.

There are RMDs, but they aren't very big, especially for a spouse beneficiary. If you're 40, you'll start out withdrawing 2.3% of the account your first year. If you're 50, it's 2.9%. If you're 60, it's a hair under 4%. If any of these amounts, just from this one account, are more than you were planning to spend, congratulations! You've won the financial game and can stop worrying about money.

On the other hand, if you think your life insurance payout will set you up pretty nicely all on its own, you might find it more beneficial to put the money in your own IRA. If you do this you'll be able to gradually convert this surplus cash to Roth on your own schedule, let it grow tax-free from then on, and leave it to your kids (if you have any).