Take ACA Subsidy vs. Roth coversion???

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Near retirement
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Joined: Mon Oct 08, 2012 4:57 pm

Take ACA Subsidy vs. Roth coversion???

Post by Near retirement »

I am 60 years old and retired. Going forward, my unearned income will qualify me to a subsidy on the ACA health care exchange. I plan to delay SS until 70 unless something derails that plan.

Question: Between now and Medicare eligibility, would you advise taking the subsidy and delaying TIRA to Roth conversions until 65 OR beginning conversions at 61 and not using ACA subsidy?

Thanks.
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tfb
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Re: Take ACA Subsidy vs. Roth coversion???

Post by tfb »

Depends on how much you need to convert. If a lot, not enough to fit just between 65 and 70, you can convert some every year up to just under the 400% FPL line, or take a bigger bath in one year and none the other years. The subsidy basically creates a surcharge on marginal tax rate. See blog posts: Income Bunching Under Obamacare Premium Subsidy and Converting to Roth and Harvesting Capital Gains Under Obamacare Premium Subsidy.
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Topic Author
Near retirement
Posts: 122
Joined: Mon Oct 08, 2012 4:57 pm

Re: Take ACA Subsidy vs. Roth coversion???

Post by Near retirement »

tfb wrote:Depends on how much you need to convert. If a lot, not enough to fit just between 65 and 70, you can convert some every year up to just under the 400% FPL line, or take a bigger bath in one year and none the other years. The subsidy basically creates a surcharge on marginal tax rate. See blog posts: Income Bunching Under Obamacare Premium Subsidy and Converting to Roth and Harvesting Capital Gains Under Obamacare Premium Subsidy.
Thanks, tfb. I will read through these and post for more info if needed.
gerrym51
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Re: Take ACA Subsidy vs. Roth coversion???

Post by gerrym51 »

i faced a similiar situation a year ago. fiddle with my income to get subsidy-or not. remember there are 2 things. the subsidy is based on 2nd lowest silver plan-not the one you may want-and the closer you get to 400 percent the less valuable the subsidy is. i took a silver plan that was only the 6th lowest-and my subsidy since i was close to the 400 percent mark would have saved me 100 dollars of my 550. dollar premium. i would be jumping thru hoops and not using the valuable income space i had adjusting my income to make use of all of the standard tax deduction.

i decided to forego the subsidy period. :mrgreen:
randomguy
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Re: Take ACA Subsidy vs. Roth coversion???

Post by randomguy »

gerrym51 wrote:i faced a similiar situation a year ago. fiddle with my income to get subsidy-or not. remember there are 2 things. the subsidy is based on 2nd lowest silver plan-not the one you may want-and the closer you get to 400 percent the less valuable the subsidy is. i took a silver plan that was only the 6th lowest-and my subsidy since i was close to the 400 percent mark would have saved me 100 dollars of my 550. dollar premium. i would be jumping thru hoops and not using the valuable income space i had adjusting my income to make use of all of the standard tax deduction.

i decided to forego the subsidy period. :mrgreen:
You definitely need to run your numbers. For example, in my state if 2 60 years olds are making 400% of the FPL will have a premium of 1200/month and a subsidy of 700. 8400/yr would cover a lot of the taxes on ROTH conversions after medicare kicked in. Move the same couple to New York (one of the states that doesn't change rates based on age) and subsidy is like 70/month. In that case taking advantage of the lower tax rates on income and the time value of money between 60-65 makes skipping the subsidy to be pretty reasonable. Obviously as income drops taking the subsidy is more appealing.


It is very hard to figure out what the exact opportunity cost is of not doing the ROTH. In the first example passing up the subsidy costs you 8400/yr but it might save you 10k/yr in 10 years if your RMDs are taxed at a higher rate and SS taxation is less favorable. Figuring out what is a win requires doing a lot of math and making educated guesses.
gerrym51
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Re: Take ACA Subsidy vs. Roth coversion???

Post by gerrym51 »

randomguy wrote:
gerrym51 wrote:i faced a similiar situation a year ago. fiddle with my income to get subsidy-or not. remember there are 2 things. the subsidy is based on 2nd lowest silver plan-not the one you may want-and the closer you get to 400 percent the less valuable the subsidy is. i took a silver plan that was only the 6th lowest-and my subsidy since i was close to the 400 percent mark would have saved me 100 dollars of my 550. dollar premium. i would be jumping thru hoops and not using the valuable income space i had adjusting my income to make use of all of the standard tax deduction.

i decided to forego the subsidy period. :mrgreen:
You definitely need to run your numbers. For example, in my state if 2 60 years olds are making 400% of the FPL will have a premium of 1200/month and a subsidy of 700. 8400/yr would cover a lot of the taxes on ROTH conversions after medicare kicked in. Move the same couple to New York (one of the states that doesn't change rates based on age) and subsidy is like 70/month. In that case taking advantage of the lower tax rates on income and the time value of money between 60-65 makes skipping the subsidy to be pretty reasonable. Obviously as income drops taking the subsidy is more appealing.


It is very hard to figure out what the exact opportunity cost is of not doing the ROTH. In the first example passing up the subsidy costs you 8400/yr but it might save you 10k/yr in 10 years if your RMDs are taxed at a higher rate and SS taxation is less favorable. Figuring out what is a win requires doing a lot of math and making educated guesses.


i was not talking about roth conversion. i was talking about that depending on your income fiddling with it to get the subsidy is either negligible or not woth the effort in that getting the subsidy causes you to lose out in other areas. i have no intention of ever using ira roth conversion
randomguy
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Re: Take ACA Subsidy vs. Roth coversion???

Post by randomguy »

gerrym51 wrote:

i was not talking about roth conversion. i was talking about that depending on your income fiddling with it to get the subsidy is either negligible or not woth the effort in that getting the subsidy causes you to lose out in other areas. i have no intention of ever using ira roth conversion

OP was talking about ROTHs. The basic point is that for some people this is an 8k/yr (i.e. you make 399% of FPL versus 401%) difference for pretty small increase in income (ie. <2k) means that if you are going to be close to that number you need to figure out how to maximize your case. Even for pretty high income couples (i.e. you spend like 100k/yr) various bunching techniques and spending savings might result in significant net savings. It is just one more thing to think about when you are doing your planning.
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Flobes
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Re: Take ACA Subsidy vs. Roth coversion???

Post by Flobes »

To the OP: it depends.

It depends on what the ACA offers you, which depends on where you live.
It depends on how your portfolio is structured, and which pocket(s) you can draw living expenses from.
It depends on how much you have in tax-deferred accounts, and how tax-problematic your RMDs will be >70.5 age.

I suspended what had been annual Roth Conversions in order to maximize ACA benefits.

For 2014, my subsidy has been $1071/month. And Cost-Sharing benefits brought the deductible to $0 and maximum annual out of pocket to $500. Combined, saved more $18,000 in health care costs this year. A tidy sum, indeed!

63, early retired, I've paid a total of @$750 for an entire year of really excellent health care coverage. It's paid for everything -- hassle free!

The "sweet spot" is ACA MAGI between 138% FPL and 150% FPL, which maximizes both subsidies and cost-sharing benefits.
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