To answer your question exactly, MM, zero coupon bonds or zero coupon CDs. But IMO I don't think you're asking the right question. First thing, why aren't you using COBRA? With a $1.6M portfolio and W2 income, why would you want to get under 400% FPL to qualify for ACA subsidies? It seems like the tax tail is wagging the dog.
I'm not MM, but I can think of several reasons to manage MAGI to get ACA subsidies in the OP's situation. You might prefer COBRA if you woke up in MM's situation, but there are factors that may differ and produce a different choice. A few factors off the top of my head would be the size of MM's family, if they have any children in college, if they have a paid off home, other assets besides the $1.6M inherited taxable account, what kind of lifestyle they want, and whether they are planning to stay in California.
Yes, true I am definitely looking at it through my own lens. If this were me and the goal were to take a one year sabbatical, maximizing wealth at the end of the sabbatical, that goal would not be met by shifting around investments to get the ACA subsidies. It would be met by splitting the sabbatical equally across calendar years '19 and '20 to minimize income tax and going with COBRA. The difference between this approach and the one assumed by OP would result in thousands of dollars lower NW at the end of CY21 in my situation.
Here in CA, ACA subsidies tend to be lower because SLCSP costs are among the lowest in the country -- if I lowered my MAGI to $40k, my subsidy would be $459 for the year. If I were to take off all of CY19 instead of splitting across two years, I would pay an additional $14.5k in W2 income taxes. This doesn't count the potential loss of returns from restructuring $1.6M in investments to minimize CY19 income. So let's say the total difference is $25k -- it would be "tail wagging the dog" to implement a strategy that costs me $25k to qualify for a $459 subsidy. This is why I wanted to challenge OP's original assumption that pursuit of ACA subsidies is inherently a wise financial
strategy and maybe open up the aperture of the discussion.
Thank you, RyaninLA. Your comments have me reconsidering my departure timing. I'm not the very well-versed in W2 taxes, so how are you getting a savings of $25k if I stopped working mid-2019 through mid-2020 ($14.5k/calendar year) rather than say, March 2019 - Dec/Jan 19/2020?
I'm single, no kids, rent, and my salary is about $95k. If I were to work through June 2019, I would have time to fully fund my 401k. Other than my taxable assets, I only have about $150k in Roth/401k.
I'm glad I convinced you to look at some other elements -- that's why we're all here on these forums to point this stuff out. My comparison was taking off Jan '19 - Dec '19 versus Jul '19 - Jun '20. If I plug $95k into the Smart Asset CA tax calculator, including $19k 401k contribution, it gives a total tax liability of $21k. If we split that sabbatical over two years and enter $47.5k of income w/ $19k of 401k contributions, the tax liability is $6k per year -- which I then multiply by two years for a total of $12k. So looking at the W2 impact alone, the estimated difference for you is $9k.
Then we add the theoretical income from investments, which I'm just going to plug as 3.5% from dividends and interest from with your portfolio optimized for the long run. That's $56,000 in income that's going to hit your MAGI on 1040.
Now when looking at subsidies and plans for someone at 35 y/o, subsidies max out at $18k/yr income and go to zero beyond $45k of income. To get down to this $18k MAGI, you would figure out how much income to shave off or defer by starting with 18k + $47.5k (salary) - $19k (401k) - $12k (std deduction) + $56k (1099 income) = $90k. So to get the max ACA subsidy of $3,675, you would have to shave off or defer $90k of income, which does not seem like a good deal to me.
Then I thought about COBRA. My 2019 plan premium is $64/mo, which is 50% of the total premium, so if I were to go on COBRA then my share would pop up to $128/mo and $1,536 for the year. It's an $1,850 deductible plan with $3,500 out-of-pocket max. This would cost $350/mo, $4,200/yr, on Covered California, but the max subsidy would bring the cost down to $500/yr.
So looking at this situation for you, it's possible to take advantage of the ACA subsidies, but the tradeoff seems really high. You can definitely wipe out that $56k of investment income, but consider that if your optimal allocation is yielding 7% nominal returns, a dividend-minimizing approach may give you 4%, a difference of $48,000 on a $1.6M portfolio.
This is the longest post I've ever written, but this is a somewhat complex tradeoff analysis so I wanted to show where my brain is at. Also welcome to the 1% -- how to optimize your finances for a sabbatical is definitely a first-world problem ;).