Author Topic: ACA subsidy question  (Read 801 times)

JSMustachian

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ACA subsidy question
« on: June 05, 2019, 03:32:15 PM »
We plan to live off $40,000 in early retirement. Please help me understand how we can qualify for ACA subsidies when you are having to do roth conversion's each year to be able to access your money before 59.5.

Lets say we retire in 2025.

2025- Convert $40,000 (taxable event) for expected living expenses in 2030 and wait 5 years to withdraw. Repeat process each year. Sell $40,000 in taxable brokerage to live off of for 2025. Total income for ACA subsidies is $80,000 even though I am living off just $40,000 or is that wrong?

Or do I start my roth conversions in 2020 so that in 2025 when I FIRE I would only live off the roth conversions and not touch the taxable account?

secondcor521

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Re: ACA subsidy question
« Reply #1 on: June 05, 2019, 03:58:31 PM »
The usual idea is to have 5 years of expenses available in places that don't generate income when you use them to live on during the first five years of the Roth conversion ladder.

So a simplistic example using your numbers would be to have $200K in a taxable account in 2025.  From 2025 through 2030, you would do two things:

1.  Sell $40K of the taxable account to live on, and
2.  Roth convert $40K for your living expenses five years later.

Starting in 2030, you would be able to harvest the $40K in Roth conversions from five years previous and could stop touching the taxable account.

With a $40K income and two people in your household and living in the continental US, you would get ACA subsidies up to 400% of FPL.  For 2020 that number is $16,910 x 4 = $67,640.  So the $40K number would put you at about 236% of the FPL, which would mean you could qualify for cost sharing subsidies at the CSR73 level and a silver plan.

The above glosses over some details:

1.  You might have some capital gains embedded in that $200K in the taxable account.  This will generate some taxable income which would affect AGI and ACA.  But honestly it probably wouldn't be that much because you probably funded your taxable account after your tax deferred account.  And if it is enough to matter, then just save some more to account for that.

2.  Depending on how you're invested, you'd be taking somewhat of a risk that the $200K in taxable might shrink to $100K in 2027.  How you address that risk is up to you.  Some might invest the $200K in much more conservative investments.  Some might be willing to go back to work, or pick up a side gig, or cut back spending.

3.  The way I look at it, it is best to prime the pump on the Roth ladder after you retire - so in the example above you would do the first five years of your Roth ladder in the first five years of your retirement (2025-2030), not the last five years of your working career (2020-2025).  This way you're not stacking your Roth conversion taxable income on top of your full time job income and paying higher marginal rates.  However, this means waiting to FIRE until you have the $200K in taxable.

4.  The $200K could be in other places - CD's, cash, checking, Roth contributions.

5.  I'm doing some handwaving around 5 year periods.  It turns out that Roth conversions done any time during the calendar year are treated as having been done on January 1st and they are available January 1st five years later.  So a Roth conversion on December 29, 2020 is available for withdrawal on January 1, 2025 - a bit over four years later.

Frankies Girl

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Re: ACA subsidy question
« Reply #2 on: June 05, 2019, 04:03:47 PM »

You can't do 40K for the conversion and also sell off and then pull out an additional 40K from your taxable as that is obviously 40+40=80K and both need to be reported as taxable income on your taxes and for the purposes of ACA subsidies.

So yes, start the conversions early, or start saving up enough to live off of during the run up. Or have a part time job in that period that pays for insurance so you don't have to take the conversions into consideration for ACA.


seattlecyclone

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Re: ACA subsidy question
« Reply #3 on: June 05, 2019, 04:09:42 PM »
What matters for a taxable account here is not the amount you withdraw, but the amount of your income. The two numbers are not identical.

For one thing, you'll generally have dividend income from the taxable account that is independent of how much you withdraw. For many stock index funds this will be in the ballpark of 2% of the total balance. To keep things simple you might as well plan to just have this money go straight to your checking account to pay your bills rather than reinvesting the dividends as you might be doing now.

Whatever portion of your spending isn't covered by the dividends will have to come from selling shares. When you sell shares, only the capital gains count as income. If you sell shares that you bought last year for the same price that they're worth now, there won't be any income at all from this sale. If you sell shares that have doubled in value since you bought them, half the sale will count as income. If the shares have quadrupled in value, 75% of the sale will count as income, and so on. Take a look at how old your shares are and how much they've appreciated to get a sense for how much of these withdrawals will actually count as income for ACA purposes.

JSMustachian

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Re: ACA subsidy question
« Reply #4 on: June 06, 2019, 08:39:24 AM »
We have 1.5 years of expenses saved up already between cash, roth contributions, and funds in the brokerage account. We should remain in the zero percent tax bracket for long term capital gains so I think it would help if we exchanged our funds during the years leading up to our FIRE date to step up the basis. That should minimize some of the capital gains.

Thank you all for the helpful replies.

Fishindude

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Re: ACA subsidy question
« Reply #5 on: June 06, 2019, 11:39:27 AM »

You can't do 40K for the conversion and also sell off and then pull out an additional 40K from your taxable as that is obviously 40+40=80K and both need to be reported as taxable income on your taxes and for the purposes of ACA subsidies.

So yes, start the conversions early, or start saving up enough to live off of during the run up. Or have a part time job in that period that pays for insurance so you don't have to take the conversions into consideration for ACA.

Good advice above.
We just got off COBRA and on ACA.   I think the cut off was $67,000 annual income and below to get any kind of breaks which we did not qualify for.   We need more than that to operate on, so there was just no way of getting any breaks on the insurance, spouse and I are paying approx. $1285 / month now for ACA insurance.

Milkshake

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Re: ACA subsidy question
« Reply #6 on: June 06, 2019, 11:59:47 AM »
I'm pretty sure that income for ACA subsidies is MAGI, so you also get your standard deduction. If you're married that's $24,400 in 2019, so even if your whole taxable account was taxable, your $80K "income" is already down to $55,600.

secondcor521

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Re: ACA subsidy question
« Reply #7 on: June 06, 2019, 02:11:06 PM »
I'm pretty sure that income for ACA subsidies is MAGI, so you also get your standard deduction. If you're married that's $24,400 in 2019, so even if your whole taxable account was taxable, your $80K "income" is already down to $55,600.

ACA does use MAGI, but MAGI is before the standard deduction.  Taxable income is after the standard deduction.  So in the example you gave, ACA subsidies would be based on the $80K number; income taxes would initially be based on the $55,600.

FIREstache

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Re: ACA subsidy question
« Reply #8 on: June 06, 2019, 04:02:45 PM »
I'm pretty sure that income for ACA subsidies is MAGI, so you also get your standard deduction. If you're married that's $24,400 in 2019, so even if your whole taxable account was taxable, your $80K "income" is already down to $55,600.

ACA does use MAGI, but MAGI is before the standard deduction.  Taxable income is after the standard deduction.  So in the example you gave, ACA subsidies would be based on the $80K number; income taxes would initially be based on the $55,600.

Yep.  And the form of MAGI also includes both taxable and non-taxable SS benefits, something to watch if you're planning to take SS at age 62 while on the ACA.  That's one reason I would not take SS benefits any earlier than 65 when Medicare kicks in.

Glad someone mentioned dividends.  Heck, after dividends, interest, capital gains distributions, and limited realized capital gains from selling shares, I'm getting close to the next CSR subsidy cliff, so there's not much room for IRA conversions and keeping my MAGI in check.