I want to set up a 1m or so investment portfolio for FIRE.
Insurance cost is the biggest concern for my FIRE planning.
We are a family of 5, so in order to get the best ACA rate, our income need to be around 43K.
[1] But how do you control your investment income? [2] My understanding is that any dividends and capital gains will be considered income, right?
[3] It's not how much you withdraw -- withdrawal is always more than capital gains. Right?
[4] For people who want to get the best rate on ACA plans, do you just keep track of your dividends and gains? If your income is lower than 138% of the poverty line, you actually won't qualify for ACA. And if it's higher than 138% of the poverty line, you have to pay more. I am guessing people error on the side of more income so that you at least qualify?
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1. I invest in index funds, which currently throw off 1.8% to 2.0% in dividends and no capital gains. I take and spend the dividends. If you invest in more active funds, that can be problematic as they might pass along large capital gains which make managing AGI for ACA much more problematic.
Only the dividends in my taxable account matter, and my taxable account is relatively small compared to my IRAs. So my dividends add to my AGI for ACA purposes, but I pretty much always want my income to be higher than my taxable account dividends, so it's not an issue for me. I just track my dividends and then make my Roth conversion in December to get my AGI where I want it to be.
2. Right.
3. Yes, your withdrawal amount will always be higher than your capital gains. Capital gains are what matter for AGI. As noted by someone else here, you will probably be able to pick and choose your tax lots in order to get both the spendable money you want and the capital gains you want.
4. Several things:
a. Your actual tax return income largely does not matter for ACA qualification purposes. What the ACA has you do is estimate your income for the next year, and that's what your advanced PTC is based on. If it's too high or too low, you'll reconcile at tax time on Form 8962 and either get more PTC or pay back some of the PTC if you got too much. So if you estimate 150% of FPL and end up at 120% of FPL, you won't get thrown off ACA as long as you continue to estimate 150% year after year. At some point in the future this "loophole" may be closed, but for now there is no feedback from the IRS to the ACA.
(Yes, in theory you're supposed to keep track and adjust your AGI estimate every time it changes, but I don't know anyone who does that, and the model doesn't really work well for early retired folks who's income is probably variable and lumpy.)
b. You do pay more for ACA health insurance as your income goes from 138% to 400%. It's like a parallel tax system where the marginal rate is between 10% and 20%. So it's certainly something to consider. Note that there are also CSR (cost sharing reduction) breakpoints at 150%, 200%, and 250% of FPL, so you may want to take those into account when estimating or determining your income.
[A] I keep hearing about Roth conversion. I think I need to learn about it for the purpose of generating income.
My plan now is very simple. I have a 401K, and a taxable investment account. My understanding is that 401K is for when I turn 59 1/2. I am 45 now.
So I will be playing with my taxable investment account. My goal is that when I do FIRE, my taxable investment account will reach 1m or close to it. So the income, as I understand it, is dividends + capital gains.
Am I right thinking this way?
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[A] A Roth conversion is just moving money from your traditional IRA to your Roth IRA (preferably directly). Everyone who has a traditional IRA and a Roth IRA can do them regardless of age or income level. (*) You generate ordinary income and pay ordinary income taxes on the value of the conversion. So if you need $10K more in income to hit your ACA target AGI, you can move $10K from your traditional IRA to your Roth IRA and it will end up adding $10K to your AGI. Of course, you'll owe income taxes on that $10K.
There are several ways to access your 401(k) before 59.5. Google and read up on Roth conversion ladders, SEPPs (AKA 72(t)), and the rule of 55.
(*) There are some obscure corner cases, see IRS website for details.