Withdrawing from a Roth Account for ACA Subsidy Reasons

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Ron Ronnerson
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Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by Ron Ronnerson » Sun Apr 01, 2018 4:16 pm

Edit: Deleted - Question has been sufficiently answered. Thanks to all who responded.
Last edited by Ron Ronnerson on Sun Apr 01, 2018 9:08 pm, edited 1 time in total.

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MP123
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by MP123 » Sun Apr 01, 2018 5:50 pm

How do you plan to avoid the 10% early withdrawal penalty? The "substantially equal periodic payments" method might work but might just cause more issues down the road. Without speculating about the future of ACA I'll just say that you might not want to be locked into having to take Roth withdrawals for the long term just to get a subsidy next year.

In your case (being so close to the 400% cliff) I would suggest an HSA compatible ACA plan so you could make a contribution to it and drop your income. I don't think an HSA would work along with your FSA though, not sure if that's optional from your employer or not.

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Watty
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by Watty » Sun Apr 01, 2018 6:15 pm

Some things to consider;
Ron Ronnerson wrote:
Sun Apr 01, 2018 4:16 pm
My employer contributes nothing toward health insurance and the lowest cost option I have available for purchase to cover just me is $8604/year ($717/month), an amount above what would is considered affordable.
That is almost certainly paid with pre tax dollars but any ACA premium would be paid in post tax dollars. Not paying your employer health insurance would likely raise your AGI(Check on this) so might then not qualify for the subsidy if it is $8604 higher.


The networks of ACA doctors may be very limited. When I retired I used COBRA to get my coverage through Blue Cross. When that ended and I went on an ACA policy I had an ACA Blue Cross option, but none of my doctors were in that plan.

If you are close to the cutoff point for a subsidy then some unexpected income or a small miscalculation could cause you to lose the entire subsidy. There have been a couple of threads by people that ran into this.

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dodecahedron
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by dodecahedron » Sun Apr 01, 2018 6:49 pm

MP123 wrote:
Sun Apr 01, 2018 5:50 pm
How do you plan to avoid the 10% early withdrawal penalty?
The OP said the plan was to withdraw Roth contributions. Contributions to a Roth can be withdrawn without tax or penalty at any time. As long as they avoid withdrawing the growth rather than the original amounts contributed, no penalties apply.

aum
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by aum » Sun Apr 01, 2018 6:53 pm

If your wife gets a part time job and can get paid on 1099 then you can deduct above the line Self Employed Insurance payment which will be your portion of ACA premium plus dental insurance you pay. So that 10K-15K she earns, after business expenses and SE Insurance payment deductions, you may not even need to withdraw from your Roth IRA. I think you can sure withdraw Roth IRA contribution(not earnings) made five years ago without any penalty without increasing your MAGI for ACA purpose.

HSA eligible HDHP plan with HSA account you can lower your MAGI by $6850 for family. I've been doing this for past three years.

You will have to pay double SS+Medicare tax(Employer portion) for 1099 business income but you can always negotiate that consulting rate before hand to include that in your rate.

curmudgeon
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by curmudgeon » Sun Apr 01, 2018 7:20 pm

"Yet Another ACA Hack"... I think it works, but I wouldn't talk about it too much around the office. When these things get popular and/or talked about, they can be targeted. In your case, it seems the main reason you can do it is because you are putting so much into retirement accounts (despite having a substantial pension).

I think your district will end up paying something like $3500/year penalty if you are getting an ACA subsidy (for not offering "affordable" insurance). If your tactic became common, they might limit or eliminate some of the 457b/403b options, or find another bottom-feeder insurance plan to offer with lower rates.

You will effectively be de-converting Roth to traditional IRA in this process. While it is possible (maybe even probable) that you will have a higher tax rate in retirement, the subsidy is so large, it would probably still be worth it. If you can, I might lean towards moving the Roth money into an HSA first instead of tIRA, as the HSA money at least has a good chance of not being taxed coming out.

A couple of other things you may have to watch out for: Your district open enrollment dates will almost certainly not line up with the ACA enrollments, so you may not know how the different options will interact when you are making your choice (though knowing the district rates before the ACA ones is better than the other way around). I don't know how the enrollment dates would interact (I don't think you qualify for mid-year ACA signup). Read up carefully on the "employer insurance not affordable" scenario to make sure there are not gotcha's to catch you (that stuff can get really messy). You might try doing a dummy tax return for this year to make sure that it all comes out OK (pretend you paid the premiums out-of-pocket and see if they show up in your refund). If you actually try to do this, I would try to find an experienced agent to help you sign up; the actual coveredCA enrollment website (as opposed to the "shop and compare") has plenty of pitfalls for the unwary.

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MP123
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by MP123 » Sun Apr 01, 2018 9:01 pm

dodecahedron wrote:
Sun Apr 01, 2018 6:49 pm
MP123 wrote:
Sun Apr 01, 2018 5:50 pm
How do you plan to avoid the 10% early withdrawal penalty?
The OP said the plan was to withdraw Roth contributions. Contributions to a Roth can be withdrawn without tax or penalty at any time. As long as they avoid withdrawing the growth rather than the original amounts contributed, no penalties apply.
Thanks, you're right. I misread and thought that income would be tapped too.

Chip
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Re: Withdrawing from a Roth Account for ACA Subsidy Reasons

Post by Chip » Mon Apr 02, 2018 3:38 am

Ron Ronnerson wrote:
Sun Apr 01, 2018 4:16 pm
Edit: Deleted - Question has been sufficiently answered. Thanks to all who responded.
Ron, how are people who have never read this thread going to understand it if you delete the original question?

May I suggest this is not a good thing to do?

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