Author Topic: Trying to understand how ACA work in relationship to investment income  (Read 2967 times)

frugalor

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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.

But how do you control your investment income?  My understanding is that any dividends and capital gains will be considered income, right?

It's not how much you withdraw -- withdrawal is always more than capital gains. Right?

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?

Paul der Krake

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #1 on: October 20, 2020, 11:26:23 PM »
You're asking the right questions! It's definitely more of an art than an exact science.

First off, you need to really get a good grasp on what constitutes income, and how you plan on getting it out. The typical FIRE household will generally have the option to pull from 3 distinct buckets:
- taxable
- pre-tax
- roth

Each bucket has different rules based your age, the basis of your investments, and a couple other things.

It's possible to withdraw $50,000 from one of these buckets have a corresponding income of $50,000, minus $3,000, or any number in between.

So it's really up to you to chart a path on how to best achieve the desired paper income of $43,000. The possibilities are only constrained by how much money you have in each bucket, your knowledge of the rules, and your creativity. You decide how much money you make each year now.

But you are right that you should aim to always make over 138% of the FPL to avoid being kicked over to Medicaid, but you're in charge of your income destiny now. If it's December and it looks like you haven't "made" enough money this year, manufacture some income by selling some appreciated securities, doing Roth conversions, etc.

frugalor

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #2 on: October 20, 2020, 11:37:47 PM »
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?

Paul der Krake

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #3 on: October 20, 2020, 11:54:03 PM »
Yes, you are. Let's forget about the 401(k) and Roth for a second, and focus on the taxable portion only, maybe it will be make things clearer.

So you have 1 million bucks in a taxable account, great. What kind of investments are in there? If it's an S&P500 fund, you can expect roughly 2% of dividend payments per year, which on 1 million is $20,000.

Some funds are considered tax-efficient and never declare capital gains unless you decide to sell, but some do. Let's assume you have the kind that doesn't. So now you have $20,000 of income taken care of, and need to generate another $23,000 to hit your desired $43,000 income.

To manufacture those $23,000, you need to look at the tax lots available to you. You're looking to sell just enough that the delta between the price you paid at purchase time and the price you get a sell time amounts to the desired amount. If you have a security that has appreciated like crazy (maybe you bought Apple stock in 2002?), then nearly all of the sell price is going to be capital gains. If you have a security that has only appreciated a little bit, then you're going to need to sell a lot more of it. If you have a security that has lost money... well it can be useful for other purposes, but not manufacturing income. Find another one.

Makes sense?

frugalor

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #4 on: October 21, 2020, 12:13:38 AM »
Yes, it makes sense.  And it's how I think it works as well.  When I set up the investment portfolio, it will consist mostly the fidelity zero total market and fidelity zero large cap (s & p 500 equivalent) and maybe some of the other 2 zero funds (extended market and international).

I have heard that those funds are not that tax efficient, so maybe I'll actually get more gains and dividends from them.

But I think I have some ideas now.

Thanks!

bacchi

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #5 on: October 21, 2020, 08:30:57 AM »
You're probably doing this already but check out how different income levels affect your premiums up to the 400% FPL, which is ~$120,000 for a family of 5.

Having a MAGI of $75,000, due to Roth conversions, is not going to increase your premiums exorbitantly, for example.

seattlecyclone

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #6 on: October 21, 2020, 12:40:41 PM »
So it's really up to you to chart a path on how to best achieve the desired paper income of $43,000. The possibilities are only constrained by how much money you have in each bucket, your knowledge of the rules, and your creativity. You decide how much money you make each year now.

In any particular year, sure, the amount of income you realize is largely up to you. Make a habit of realizing an income vastly different from your spending and you may find that harder and harder to achieve as time goes on. I could probably have a MAGI of a million bucks next year if I converted all my retirement accounts to Roth and harvested all my capital gains all in one go, but I wouldn't be able to hit that number two years in a row. I could also have a MAGI pretty close to just the dividends from my taxable account if I pulled out Roth basis for most of our spending, but again there are only so many years I can do that before I run out of Roth basis and have no choice but to withdraw from savings buckets that will throw off some income. The trick is to pick a target that you can hit not just next year but the year after that and the year after that.

One thing to be particularly aware of in your planning is that the federal poverty level depends on household size. As your kids grow up and leave the nest, whatever multiple of the federal poverty level you aim to hit will be a lower amount than it was before. This will coincide with you being older and having higher health insurance premiums. If you front-load too many income-reduction strategies early on in FIRE, you may lose the flexibility to employ these strategies as much when your target number is lower and the benefit of having a low income may be higher.

Paul der Krake

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #7 on: October 21, 2020, 01:22:36 PM »


Yes, tread carefully when you find yourself at the margins of what's possible. The longer the retirement period the more flexible you should strive to be.

secondcor521

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #8 on: October 21, 2020, 03:14:56 PM »
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?

[Numbers added]

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?

[Letters added]

[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.

lhamo

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #9 on: October 21, 2020, 04:44:33 PM »
If you are in a state with expanded medicaid, you might want to actually try to find people who have used it before you decide whether or not to deliberately avoid it.  In my area of my state, it provides excellent coverage.  And your kids will be put on it even at pretty high income ranges, though there is a $20-30/month fee/kid for those earning over something like $60k/year for a family of four.

frugalor

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #10 on: October 21, 2020, 06:15:23 PM »
If you are in a state with expanded medicaid, you might want to actually try to find people who have used it before you decide whether or not to deliberately avoid it.  In my area of my state, it provides excellent coverage.  And your kids will be put on it even at pretty high income ranges, though there is a $20-30/month fee/kid for those earning over something like $60k/year for a family of four.

Medicaid will exclude people with 1m+ in taxable investment account, right?

Paul der Krake

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #11 on: October 21, 2020, 06:21:31 PM »
Depends on the state. Some have asset tests, some do not.

seattlecyclone

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #12 on: October 21, 2020, 06:50:14 PM »
If you are in a state with expanded medicaid, you might want to actually try to find people who have used it before you decide whether or not to deliberately avoid it.  In my area of my state, it provides excellent coverage.  And your kids will be put on it even at pretty high income ranges, though there is a $20-30/month fee/kid for those earning over something like $60k/year for a family of four.

Medicaid will exclude people with 1m+ in taxable investment account, right?

Part of the "expanded Medicaid" that states may optionally adopt as part of the ACA is the elimination of asset tests. If your state expanded Medicaid, there's no asset test.

There may still be estate recovery depending on your state. This provision allows the state to claw back the cost of Medicaid care from your estate after you and your spouse die. This is only allowed for care received after you turn 55.

frugalor

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #13 on: October 21, 2020, 07:35:59 PM »
Depends on the state. Some have asset tests, some do not.

I am in California

Paul der Krake

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #14 on: October 21, 2020, 10:06:22 PM »
Then it looks like you're in the clear.

https://www.healthinsurance.org/california-medicaid/

But keep tabs on things. Medicaid is one of those programs that is extremely complex because it tries to cover a lot of different use cases, and states try to limit costs on the parts they're on the hook for. And then there are just lazy legislatures who can't be bothered to fix things. People on Medicaid are some of the least influential voter constituencies out there, and their needs are rarely prioritized.

If you're going the Medicaid route, I suggest you research very carefully any implications, both current and future. My household made the decision to avoid it in no small part because of the complexity involved.

frugalor

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #15 on: October 21, 2020, 10:30:15 PM »
Then it looks like you're in the clear.

https://www.healthinsurance.org/california-medicaid/

But keep tabs on things. Medicaid is one of those programs that is extremely complex because it tries to cover a lot of different use cases, and states try to limit costs on the parts they're on the hook for. And then there are just lazy legislatures who can't be bothered to fix things. People on Medicaid are some of the least influential voter constituencies out there, and their needs are rarely prioritized.

If you're going the Medicaid route, I suggest you research very carefully any implications, both current and future. My household made the decision to avoid it in no small part because of the complexity involved.

Thanks for helping out!  I entered my info at https://www.coveredca.com/.  I entered 43K income.  2 adults are covered in the ACA plans, but 3 kids are in medicaid.  I have no idea what that means. 

seattlecyclone

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #16 on: October 21, 2020, 11:26:22 PM »
Then it looks like you're in the clear.

https://www.healthinsurance.org/california-medicaid/

But keep tabs on things. Medicaid is one of those programs that is extremely complex because it tries to cover a lot of different use cases, and states try to limit costs on the parts they're on the hook for. And then there are just lazy legislatures who can't be bothered to fix things. People on Medicaid are some of the least influential voter constituencies out there, and their needs are rarely prioritized.

If you're going the Medicaid route, I suggest you research very carefully any implications, both current and future. My household made the decision to avoid it in no small part because of the complexity involved.

Thanks for helping out!  I entered my info at https://www.coveredca.com/.  I entered 43K income.  2 adults are covered in the ACA plans, but 3 kids are in medicaid.  I have no idea what that means. 

It means you're in the in-between range of income where you make too much for the adults in your household to be on Medicaid but not enough to get the kids on the subsidized private plan with you. You would be free to enroll your kids in the private plan, but once they're offered Medicaid (or any other qualifying coverage) they aren't eligible for premium subsidies so you'll have to choose between paying full price for the marketplace plan or accepting the Medicaid coverage.

I don't know if the upper limit for kids varies by state; here in Washington that in-between range is roughly $42k-$97k for a family of five.

lhamo

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #17 on: October 22, 2020, 08:59:42 AM »
Again, strongly recommend you try to find some people in your community who have actually had experience with getting care -- at least for their kids -- under expanded medicaid.  In places where there is a robust healthcare system, like here in Seattle, it can be very good.  DD was having some concerning symptoms earlier this week but our PCP was booked up until November 4th and then could only offer a telehealth visit because of those symptoms.  I was able to get her a same-day appointment at the urgent care clinic at the local pediatric hospital (one of the best in the US).  No hassle (other than a slightly longer drive) or out of pocket cost to us.  Excellent care and follow up (DD is Covid-free and feeling much better).

maisymouser

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #18 on: October 22, 2020, 09:52:04 AM »
Nothing to add here other than thank you for posting this, I had similar questions even though I am far from trying this out.

jim555

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #19 on: October 22, 2020, 12:59:31 PM »
Then it looks like you're in the clear.

https://www.healthinsurance.org/california-medicaid/

But keep tabs on things. Medicaid is one of those programs that is extremely complex because it tries to cover a lot of different use cases, and states try to limit costs on the parts they're on the hook for. And then there are just lazy legislatures who can't be bothered to fix things. People on Medicaid are some of the least influential voter constituencies out there, and their needs are rarely prioritized.

If you're going the Medicaid route, I suggest you research very carefully any implications, both current and future. My household made the decision to avoid it in no small part because of the complexity involved.

Thanks for helping out!  I entered my info at https://www.coveredca.com/.  I entered 43K income.  2 adults are covered in the ACA plans, but 3 kids are in medicaid.  I have no idea what that means.
California Children's Medicaid (CHIP) goes up to a higher income level (266% FPL) since it is a different program, adult expansion goes up to 138% FPL. 

In NY managed care plans run Medicaid plans, so there is a set network for each plan.  For me the doctors are the same as what I had at work.  The best thing is you can't be surprise billed if you are in Medicaid.  In NY it is illegal to bill a Medicaid recipient. I had a provider try to bill me, came back at them citing the law, they got quiet and went away.
« Last Edit: October 22, 2020, 01:04:57 PM by jim555 »

Omy

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #20 on: October 26, 2020, 06:49:18 AM »
Related question: If I'm right on the upper edge of the subsidy cliff, can I sell some stocks with losses to offset rental and other income?

seattlecyclone

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #21 on: October 26, 2020, 10:19:21 AM »
Related question: If I'm right on the upper edge of the subsidy cliff, can I sell some stocks with losses to offset rental and other income?

Yes. Capital losses can offset capital gains in unlimited amounts, and you can claim the first $3k in net losses against other income.

dandarc

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #22 on: October 26, 2020, 10:25:55 AM »
Pay really close attention if you're anywhere near the premium tax credit cliff. I was looking at this for a family of 3 the other day - goes from like $1,000 per month to zero.

That's something that desperately needs a phase-out range, but until it has one, be super mindful if you're close to the cliff.

On stuff you can control:

Dividends are the least controllable form of income an index fund spits out. So if bonds, or other high-dividend funds, are part of your portfolio, make sure they are in your tax-advantaged accounts.

There are sometimes capital gains distributions, but you can avoid that largely by the funds you select. For example, VTSAX almost never has one due to their fund structure.

So if you choose the right funds, your capital gains tend to be within your control.

Omy

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #23 on: October 26, 2020, 04:19:40 PM »
Related question: If I'm right on the upper edge of the subsidy cliff, can I sell some stocks with losses to offset rental and other income?

Yes. Capital losses can offset capital gains in unlimited amounts, and you can claim the first $3k in net losses against other income.

Thanks for confirming. I'm also thinking I could make some repairs to my rentals next year to reduce income. And sell some old mutual funds this year that throw off capital gains so I will be in better shape next year when we go on the ACA exchange.

bmjohnson35

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #24 on: October 27, 2020, 11:27:24 AM »

I fired earlier this year and we are using the ACA.  I started collecting dividends from our mutual funds this year for the first time, since they will count toward our income limit anyways. 

Don't withdraw too much funds early in the year.  I was spot on with our targeted MAGI, but now rebalancing our investments this month would have caused us to exceed our target.  Not the end of the world, but I would have rebalanced them otherwise. I wish the tax laws allowed transfer between investments without realizing capital gains, but they don't.   

I am still working through the learning curve and next year it will be different than 2020.

Hopefully the ACA will survive the upcoming Supreme Court rulings.

You are ding the right thing, learn as much as possible before you FIRE.

BJ
   


sherr

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #25 on: October 28, 2020, 02:14:51 PM »
Don't withdraw too much funds early in the year.  I was spot on with our targeted MAGI, but now rebalancing our investments this month would have caused us to exceed our target.  Not the end of the world, but I would have rebalanced them otherwise. I wish the tax laws allowed transfer between investments without realizing capital gains, but they don't.     

One solution to this problem is to do all rebalancing inside your tax-advantaged accounts, IRAs and 401ks and whatnot. The balance of your whole portfolio is what really matters, not any one piece. Rebalancing inside a tax-advantaged account is not a capital gains-triggering event.

CCCA

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #26 on: October 28, 2020, 02:40:11 PM »
We've been shooting for an income of $75000 to $100,000 to avoid Medicaid in California. It seemed like a bunch of extra paperwork that we didn't want to deal with.  Much of our taxable income is long-term capital gains from our taxable account (we aren't withdrawing from retirement accounts) so it's just a matter of realizing gains as needed to fund our expenses and hit that window.

jim555

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #27 on: October 28, 2020, 06:26:40 PM »
We've been shooting for an income of $75000 to $100,000 to avoid Medicaid in California. It seemed like a bunch of extra paperwork that we didn't want to deal with.  Much of our taxable income is long-term capital gains from our taxable account (we aren't withdrawing from retirement accounts) so it's just a matter of realizing gains as needed to fund our expenses and hit that window.
Your numbers make no sense.  Household size of 10 is $73,251, and my chart doesn't go higher than that.  You have 12-15 people in your household?

Paul der Krake

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #28 on: October 28, 2020, 06:33:42 PM »
We've been shooting for an income of $75000 to $100,000 to avoid Medicaid in California. It seemed like a bunch of extra paperwork that we didn't want to deal with.  Much of our taxable income is long-term capital gains from our taxable account (we aren't withdrawing from retirement accounts) so it's just a matter of realizing gains as needed to fund our expenses and hit that window.
Your numbers make no sense.  Household size of 10 is $73,251, and my chart doesn't go higher than that.  You have 12-15 people in your household?
It's typically much higher with children if you don't want them on Medicaid. CHIP, like Medicaid, is state dependent so it will vary some.


frugalor

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #29 on: October 28, 2020, 07:31:54 PM »
We've been shooting for an income of $75000 to $100,000 to avoid Medicaid in California. It seemed like a bunch of extra paperwork that we didn't want to deal with.  Much of our taxable income is long-term capital gains from our taxable account (we aren't withdrawing from retirement accounts) so it's just a matter of realizing gains as needed to fund our expenses and hit that window.

Is the reason to avoid medicaid that the government will have a claim on the house?

CCCA

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #30 on: October 28, 2020, 07:53:00 PM »
We've been shooting for an income of $75000 to $100,000 to avoid Medicaid in California. It seemed like a bunch of extra paperwork that we didn't want to deal with.  Much of our taxable income is long-term capital gains from our taxable account (we aren't withdrawing from retirement accounts) so it's just a matter of realizing gains as needed to fund our expenses and hit that window.
Your numbers make no sense.  Household size of 10 is $73,251, and my chart doesn't go higher than that.  You have 12-15 people in your household?




Medicaid in California (Medi-cal) seems to kick for kids (we have 2) in under $70k or somewhere about there last time I checked.  But I will check again when I look at open enrollment next month.



« Last Edit: October 28, 2020, 07:57:30 PM by CCCA »

Sid Hoffman

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #31 on: October 28, 2020, 09:19:53 PM »
Hopefully the ACA will survive the upcoming Supreme Court rulings.

The supreme court only interprets laws, they don't get to make them. After the blue wave next week, we will see an entirely new healthcare system in 2021 or 2022 - they'll want to finish it before the next mid-term election especially if the senate is razor thin, like 51/49 or 50/50 where Harris has to cast the winning vote on every piece of legislation along with 100% of the Democrats in the senate. So the ACA won't matter. It will be superseded by the new healthcare law which I am hopeful is to simply remove the age restrictions from Medicare eligibility and the associated medicare supplement insurance plans. That one change alone to simply remove the age limit of a well-established law would transform healthcare in the US now and forever and couldn't be challenged in court because it's already an existing law.

jim555

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #32 on: October 28, 2020, 10:17:21 PM »
I have heard good things about CHIP, I don't know why you would want to avoid it.  In California CHIP goes up to 266% FPL.

bmjohnson35

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Re: Trying to understand how ACA work in relationship to investment income
« Reply #33 on: October 29, 2020, 09:54:31 AM »
We've been shooting for an income of $75000 to $100,000 to avoid Medicaid in California. It seemed like a bunch of extra paperwork that we didn't want to deal with.  Much of our taxable income is long-term capital gains from our taxable account (we aren't withdrawing from retirement accounts) so it's just a matter of realizing gains as needed to fund our expenses and hit that window.

Agreed. I did rebalance our 401k account.  I should have clarified that to the OP.