Author Topic: Looking for input - insurance options for 2019 and how income is affected  (Read 689 times)

Mr. Green

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We've FIREd, so our income in 2019 will be derived from Roth IRA conversions and long term capital gains we elect to create through our taxable accounts. Next year, the only insurer in our state, Blue Cross Blue Shield, has made some changes to their Silver plans that gives us a pretty wide range of options for how we want to handle insurance. The Second Highest Cost Silver Plan, which is what our income-based insurance premium amounts are based on, includes an out-of-network maximum out-of-pocket amount. The cheaper Silver plan does not have an out-of-network max OOP amount. Of course we understand that if we get hit with an out-of-network medical emergency it's likely that we'll be balance billed for whatever our insurance won't cover so I'm not sure how much this would matter. The good news is our BCBS insurance is in-network across the entire country if we use facilities in other states that are in-network with their local BCBS network.

A benefit of going with the cheaper Silver plan is that our income can be higher while we still pay nothing for health insurance premiums because our ACA subsidy is based on the higher cost Silver plan. After running the numbers using the cheaper Silver plan, we could declare $22,000 more in capital gains while still paying no insurance premium. We'd pay state tax on that money, but not federal tax because we're in the lowest two tax brackets where capital gains are taxed at 0%. The trade off for this increased income is significantly higher deductibles and maximum out-of-pocket values on our health insurance. We are not expecting any significant healthcare expenses next year, and both plans have co-pays for regular doctor visits so it would take something like blood tests, MRIs, or hospital stays to run up the deductible.

Income    Roth conversion    Capital gains    Ins. deductible    Ins. Max OOP   
$31,170$21,400$0$500$1,200
$41,560$21,400$12,000$1,200$5,000
$51,950$21,400$22,000$8,000$12,800

I'm not sure if we should take the more expensive Silver plan and have a limit to any potential out-of-network costs (that the insurer would cover) or if we should take the cheaper plan and then consider having a higher income with the potential for higher out of pocket healthcare costs during the year.

lhamo

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I'm having trouble understanding why how much capital gains you should generate is the variable here.  How much money do you actually project you will NEED next year?  I would put that as the stable figure, and then maximize Roth conversions to take advantage of the rest of your low tax space.

As far as the options go, the mid-range plan seems to be the better option to me.  It keeps your deductible reasonably low and caps the OOP at a level you could probably cover out of a small sale of invested assets if you don't already have a large cash stash.  And it gives you an extra 22k worth of conversion/cap gains headroom.  You guys are pretty young, right?  So you have another 30 years or more to convert all your traditional accounts to Roths, right?  Doing it 10-20k/year and minimizing both taxes and HI costs seems to me to be a good middle of the road strategy.  And you won't get slammed if you do have an unexpected medical emergency.

Mr. Green

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We need 40k per year to live on, 8k of which currently comes from a real estate deal. So 32k needs to come from investments.

I assume we should go ahead and take distributions of our dividends from taxable accounts, correct? We're already paying the taxes on those dividends each year and if we continue reinvesting them that's just that much more money we have to pull from somewhere else. Currently we're seeing about 6k in dividends from our taxable accounts so that leaves 26k that we'll actually need to sell shares to get.

Our accounts are set up so I can sell specific shares, giving us more control over when we take gains or losses. Is there ever a situation where we don't want to sell our most appreciated shares in our taxable accounts for income? I assume not doing that only sets us up for a potential problem down the road as our taxable account is drawn down and we're only left with shares that are significantly appreciated.

In our case, selling 26k worth of our most appreciated shares will only generate about 7k of long term capital gains. So depending on which health insurance option we went with, it could leave some space for taking additional capital gains while only paying state income tax on them.

lhamo

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So how much do you have in traditional accounts that needs to be converted to Roths?  Personally I would probably frontload the conversions, taking only the cap gains and dividends you need to live on plus maybe a bit to build up a liquid cushion so that you don't have to sell/withdraw from the taxable funds in down periods.  Who knows how long Congress is going to let us all ride on the tax free conversion gravy train -- better to get as much of the taxable pot moved over, and let it start accumulating tax free gains.

As long as you have no-tax space, yes, I would sell off the most appreciated shares for your income needs.  If you ever start getting into taxable brackets, you can do some tax loss harvesting if it makes sense.

And on the insurance question, I think I would still go for the mid-range plan.  The deductible is really reasonable and the OOP max is not awful.  UNLESS the cheapest plan has an HSA option -- that would give you another way to move some of your taxable money into a tax-deferred (and tax-free for future medical expenses) pot. 
« Last Edit: October 29, 2018, 09:13:46 AM by lhamo »

Mr. Green

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We have about 800k in traditional IRAs and almost nothing in Roths. We want to convert as much as possible while balancing our total tax bill and cost of insurance. The way all these things are tied together can make it really confusing. I think I'm in agreement that the middle option of the cheaper Silver plan is the best way to go but it's complicated enough I felt like I needed to talk it out to make sure I'm not over looking something.

A related question just occurred to me. If we currently have short term losses in our taxable accounts would it be worth tax loss harvesting to the $3,000 limit to allow an increased Roth conversion amount at effectively 0%? I know in the long run harvesting those losses just mean more capital gains down the road but dealing with long term capital gains is easier because the space we have to do that it so large (up to ~77k for MFJ). Whereas the space we have for tax free Roth conversions is limited to our personal deductions and any losses we would declare.
« Last Edit: October 29, 2018, 10:30:59 AM by Mr. Green »

lhamo

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Yes, sounds like some tax loss harvesting might be a good idea in your case.

MDM pointed me to this thread/calculator over on Bogleheads, which I found really helpful in planning out a Roth conversion strategy. 

https://www.bogleheads.org/forum/viewtopic.php?t=97352

We've got 20 years to convert roughly 700k in traditional retirement accounts (I turn 50 soon, DH is 60), but we have the advantage of having the child/family tax credit for at least a few more years so I am probably going to front-end some big chunks to take advantage of that.  Even if we use up all of our 10% bracket space and a little of the 12% bracket, it works out to saving over 500k in taxes long term.  And we can handle a 2-3k tax bill per year.

Mr. Green

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I haven't looked at the Bogleheads thread yet but the spreadsheet seems SUPER complicated. I tried to fill it out and I'm still missing some data. I more or less have a slightly simpler version of that I already use to look at how our account balances will change over time as we draw down taxable accounts. Make Roth conversions, etc. It's helpful to see that we do need to make the most of our Roth conversions while we're Young or we'll end up with multiple 7 figures in tIRA accounts in our 70s, meaning huge RMDs. Who wants all that money being freed up that late in the game? Even waiting until 60 when the 10% early withdrawal penalty goes away makes it too late for us to do many of the things we'd want to with that kind of money.

I do like the way the spreadsheet shows what money you're paying in taxes in the different brackets so you can see more clearly if it's worth withdrawing more money now vs. later. I think I will add something like that to my own spreadsheet. It'll be less overwhelming than the Bogleheads one. I won't have to templatize nearly as much stuff since it only applies to us.

lhamo

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Yes, it took me a whole day of tweaking before I finally got a model I was reasonably happy with -- and a lot of "what they heck is going on?" moments beforehand!