Planning income for 2017 ACA and surprising find.

[bilmar]

I have been retired for a couple of years now with expenses of about $30k yr and have been using IRA to Roth transfers to dial in a $30k  MAGI 'income' and have been getting subsidized healthcare based on the same number. This all made sense until I recently needed to use my plan for a $2500 test but had a $2800 deductible. I postponed the test until next year and started looking at plans closely with the goal of finding one that would cover the test.
With plenty of cash in the bank and money in trad IRA, I can choose any target income I like  between $12K  and $30K for a few years, making  up the difference to $30K in cash.
When I plugged in different incomes at Healthcare.gov I was surprised to see that the same plan number had dramatically different worth - beyond the obvious subsidized price!

for instance: at $30k MAGI  plan 1456 has deductible of $2800 and user max of $5200 but at $23K MAGI it becomes 1456B with deductible of zero and user max of $2000
Lowering MAGI to $17,500 it then becomes plan 1456C which is even better with deductible of zero, User max of $800 and everything else cheaper.

After a couple of hours on healthcare.gov I had the data I needed:

Best version of plan at MAGI $12K to $17,500, next level ( still good ) ends at MAGI $23k, anything above that costs me $2500 for my test

Taxes and Planning

I could report an income of $12K, and get the biggest subsidy or choose $23K with  a bigger Roth conversion  allowing me to convert an extra $11K essentially tax free for a loss of $1200 in subsidy vs lowest MAGI .

It appears to makes sense for me  to choose the upper end of the good plans ( $23K), get $1200 less in subsidy but bank a 'free' $11K Roth conversion that will reduce future taxes.

But what is the real worth of a Roth conversion? is it as simple as 15% of the amount ( because I live at $30k pa) or are there other factors to consider when actually using it later in life?

Thoughts?

Thanks
Bill

[seattlecyclone]

You're running into the "cost sharing" subsidies when you see plans get better at lower income levels. These subsidies apply only to silver plans, and only to people below 250% of the poverty line (though the subsidy for the 200-250% range isn't very significant).

The real worth of your Roth conversion is twofold. First, it locks in your current tax rate on that money: 15% plus the difference in ACA subsidies and any other tax credit phase-outs that may apply. This is good if you expect your marginal tax rate to be higher in the future, bad if you expect your marginal tax rate to be lower, and a neutral factor if you expect your marginal tax rate to stay about the same. The second benefit for people below 55 is that the amount you converted can be withdrawn free of tax or penalty in five years' time.

[Roland of Gilead]

Take the bird in the hand rather than the Roth in the bush.

Consider that the money you save on health insurance costs by having a lower MAGI will compound over the next 20 or more years so even if you have to pay tax on the gains, you probably will be well ahead of the Roth conversion you would have done.

We could pay about $5,000 more a year for medical insurance and convert maybe $10,000 to a Roth.  That is $5,000 that is gone, poof, no chance for those dollars to work for you.   Yes the Roth might grow to $30,000 by the time you pull it out tax free, but the $5,000 will have grown to $15,000.   Add that to the $30,000 you have in the traditional IRA and you are at $45,000.   Even paying 25% on that and you are better off than the tax free Roth by nearly $4,000.

[rahaparta]

Just curious, did you happen to compare it to plan 1604 ?

At the various tweaked MAGI levels, the subsidy and cost-sharing may be similar.

[bilmar]

Thanks for the comments,

I have not yet dived deep into different plans - I just used this one as an example.

Taking cash vs Roth is my key question so restating it  with round numbers:

If you had the choice of saving $1000   OR converting $10,000 to a Roth without incurring any taxes which would you choose and why?

[DutchGirl]

What will waiting two more months do to your health?

[bilmar]

Good point,
Waiting 2 months could be bad for some people -  but in my case  the test is not at all time critical.

[I'm a red panda]

What will waiting two more months do to your health?

This must be the same crystal ball that lets people time the markets.

[DutchGirl]

iowajes, come on...

Say someone has symptoms that could be colon cancer. Say: blood in the stools, losing weight, night sweats.
In that case, waiting 2-4 months for a colonscopy "because it will cost me less in 2017" can kill.

Or say someone has pain in their chest and shortness of breath when exercising, plus their father and mother died of heart disease at a young age.
In that case, waiting 2-4 months for that diagnostic testing for heart disease can kill, too.


As I understand from bilmar, this is not the case for his particular problem. A person should probably be able to guess whether a particular test is urgent or not. If you're not sure about the urgency, ask your doctor.