Managing ACA income with a Vanguard Variable Annuity

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fsrph
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Managing ACA income with a Vanguard Variable Annuity

Post by fsrph » Sat Dec 01, 2018 3:10 pm

I'm income planning for qualifying for an ACA subsidy in 2019. I have a good amount of CDs in taxable (changed some bond holdings to CDs a few years ago). Between the CDs (about 30k per year), dividends and the rising yields of tax free bond funds I'm a few thousand dollars over the ACA cliff.

What I am considering is a variable annuity with some of the CD money. Generally variable annuities aren't favored in this community, I'm guessing that's because of their fees. But I see where Vanguard has a variable annuity with a 0.5% fee which doesn't seem to bad compared to other companies.
https://investor.vanguard.com/annuity/variable

I'm 59 years old and would like this annuity to defer income till I'm Medicare eligible at 65. Would this plan work? Any better ideas?

Francis
Last edited by fsrph on Tue Dec 04, 2018 12:55 pm, edited 1 time in total.
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NoblesvilleIN
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Re: Managing ACA income with a Variable Annuity

Post by NoblesvilleIN » Sat Dec 01, 2018 5:19 pm

Are you considering picking an HDHP? If so, you could put a few thousand in an HSA, reducing your MAGI. That is what I am planning for next year (my first on ACA) to keep us under the limit.

fsrph
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Re: Managing ACA income with a Variable Annuity

Post by fsrph » Sat Dec 01, 2018 6:07 pm

NoblesvilleIN wrote:
Sat Dec 01, 2018 5:19 pm
Are you considering picking an HDHP? If so, you could put a few thousand in an HSA, reducing your MAGI. That is what I am planning for next year (my first on ACA) to keep us under the limit.
That's a good suggestion. Thanks.That might work for one year. I'm thinking about the next six years till I hit Medicare age. If CD rates and bond yields rates keep rising I'll be considerably over the ACA cliff and I'm trying to address that. I know, it's sort of a good problem to have. From my reading it looks like a variable annuity could help. Was hoping so someone with a variable annuity could chime in on what the pitfalls are.

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie

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indexfundfan
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Re: Managing ACA income with a Variable Annuity

Post by indexfundfan » Sat Dec 01, 2018 6:35 pm

I don't have VA. But another option is to put some cash into I bonds. Interest is tax deferred and will not increase your MAGI (until redemption).
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Alan S.
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Re: Managing ACA income with a Variable Annuity

Post by Alan S. » Sat Dec 01, 2018 6:58 pm

A VA would include additional pitfalls if there is any chance you would need a distribution from it while still under the ACA.
Any distributions come first from gains which increases MAGI. The amount of gain or loss is of course not easily predictable in most VA sub accounts.

And any distributions in the first few years will also have a surrender fee schedule.

FBN2014
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Re: Managing ACA income with a Variable Annuity

Post by FBN2014 » Sun Dec 02, 2018 10:22 am

fsrph wrote:
Sat Dec 01, 2018 3:10 pm
I'm income planning for qualifying for an ACA subsidy in 2019. I have a good amount of CDs in taxable (changed some bond holdings to CDs a few years ago). Between the CDs (about 30k per year), dividends and the rising yields of tax free bond funds I'm a few thousand dollars over the ACA cliff.

What I am considering is a variable annuity with some of the CD money. Generally variable annuities aren't favored in this community, I'm guessing that's because of their fees. But I see where Vanguard has a variable annuity with a 0.5% fee which doesn't seem to bad compared to other companies.
https://investor.vanguard.com/annuity/variable

I'm 59 years old and would like this annuity to defer income till I'm Medicare eligible at 65. Would this plan work? Any better ideas?

Francis
I would look at the Jefferson National Monument Advisor VA. Very low fee at $20/month for administration services. There are no surrender charges so your money is 100% liquid from day one and you can choose from over 370 funds from all the major mutual fund companies. Vanguard and DFA funds are included with very low expense ratios. Jefferson National is owned by Nationwide insurance, a AAA rated insurance company.
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bberris
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Re: Managing ACA income with a Variable Annuity

Post by bberris » Mon Dec 03, 2018 7:32 am

Another possible plan is to change the CDs to lower yielding stock index funds in the taxable account, while changing to bonds in tax deferred account (so as to keep the same allocation).

In 2019, a couple over 55 can put 9,000 per year into HSAs with a compliant plan. Of course, you can withdraw tax free (and without adding to ACA income) to pay for dental, glasses, and deductibles.

yohac
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Re: Managing ACA income with a Variable Annuity

Post by yohac » Mon Dec 03, 2018 9:18 am

fsrph wrote:
Sat Dec 01, 2018 3:10 pm
What I am considering is a variable annuity with some of the CD money. Generally variable annuities aren't favored in this community, I'm guessing that's because of their fees.
I wouldn't put CD money in a variable annuity. That's adding risk to risk-free funds. A fixed deferred annuity *may* be more appropriate, although I would consider it a last resort.

All gains in a variable annuity are taxed as ordinary income, rather than the more favorable dividend or capital gains rates.

fsrph
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Re: Managing ACA income with a Variable Annuity

Post by fsrph » Tue Dec 04, 2018 11:38 am

yohac wrote:
Mon Dec 03, 2018 9:18 am
fsrph wrote:
Sat Dec 01, 2018 3:10 pm
What I am considering is a variable annuity with some of the CD money. Generally variable annuities aren't favored in this community, I'm guessing that's because of their fees.
I wouldn't put CD money in a variable annuity. That's adding risk to risk-free funds. A fixed deferred annuity *may* be more appropriate, although I would consider it a last resort.

All gains in a variable annuity are taxed as ordinary income, rather than the more favorable dividend or capital gains rates.
I'm not placing CDs in the annuity but rather the proceeds of matured CDs would be invested in a 35/65 fund. I probably have too much $$ in CDs. A lot of responses say distributions from the annuity are taxed as ordinary income. I understand that but isn't that the same as a 401k or a traditional IRA?

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie

fsrph
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Re: Managing ACA income with a Variable Annuity

Post by fsrph » Tue Dec 04, 2018 11:49 am

Alan S. wrote:
Sat Dec 01, 2018 6:58 pm
A VA would include additional pitfalls if there is any chance you would need a distribution from it while still under the ACA.
Any distributions come first from gains which increases MAGI. The amount of gain or loss is of course not easily predictable in most VA sub accounts.

And any distributions in the first few years will also have a surrender fee schedule.
Thanks for your reply. I don't anticipate needing withdrawals from the annuity for a very long time, probably never. My main reason for the annuity is tax deferment. I understand distributions increase MAGI but isn't that the same as a 401k or traditional IRA? I am trying to research variable annuities as I generally read they have a lot of associated fees. The only one I am comfortable with, so far, is Vanguards product. Roughly 0.5% total ER with no surrender fees.

Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie

Katietsu
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Re: Managing ACA income with a Variable Annuity

Post by Katietsu » Tue Dec 04, 2018 11:55 am

fsrph wrote:
Tue Dec 04, 2018 11:38 am
yohac wrote:
Mon Dec 03, 2018 9:18 am
fsrph wrote:
Sat Dec 01, 2018 3:10 pm
What I am considering is a variable annuity with some of the CD money. Generally variable annuities aren't favored in this community, I'm guessing that's because of their fees.
I wouldn't put CD money in a variable annuity. That's adding risk to risk-free funds. A fixed deferred annuity *may* be more appropriate, although I would consider it a last resort.

All gains in a variable annuity are taxed as ordinary income, rather than the more favorable dividend or capital gains rates.
I'm not placing CDs in the annuity but rather the proceeds of matured CDs would be invested in a 35/65 fund. I probably have too much $$ in CDs. A lot of responses say distributions from the annuity are taxed as ordinary income. I understand that but isn't that the same as a 401k or a traditional IRA?

Francis
With a 401k or traditional IRA, the benefit is usually that you do not pay taxes at the time the money is going into the account.

With a purchase of a stock in a taxable account, the benefit is the lower tax rate on capital gain and qualified dividends.

With stocks in a variable annuity, you get neither benefit.

Also, if you need to make any withdrawals before Medicare, your withdrawals are 100% taxable until all earnings are withdrawn. For ACA purposes, this makes it worse than any option IF you need access to this money while using ACA insurance. So, if you put $100,000 in a VA and you get a $15,000 gain over 4 years. Now you need $20,000. The $20,000 withdrawal will be $15,000 in taxable income and $5,000 in non taxable. Even with a no deductible contribution to an IRA, there would be a pro rata calculation for the taxable portion. And with a stock ETF, you could sell just what you need and pay tax only on the gain of those shares.

I do agree that VA’s in your situation might be a reasonable option. Just make sure you understand the details.

xenial
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Re: Managing ACA income with a Vanguard Variable Annuity

Post by xenial » Tue Dec 04, 2018 1:27 pm

I think the Vanguard Variable Annuity will work for the purpose of avoiding the ACA cliff. Also consider buying low-coupon US Treasury securities selling at a steep discount and maturing after Medicare kicks in. My understanding is that the market discount counts as ordinary income in the year you dispose of the security unless you elect otherwise. See IRS Pub 550.

Zero coupon bonds are unfortunately ineligible for the deferral, but something like the 1.5% Note maturing 8/15/26 could be useful.

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gasdoc
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Re: Managing ACA income with a Vanguard Variable Annuity

Post by gasdoc » Wed Dec 05, 2018 9:42 am

For those of us following the thread and not being familiar with the cutoffs, can someone please summarize the income limits and what counts toward income as far as ACA subsidies? Thanks in advance.

gasdoc

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Re: Managing ACA income with a Variable Annuity

Post by Dale_G » Wed Dec 05, 2018 10:44 am

Alan S. wrote:
Sat Dec 01, 2018 6:58 pm
... snip ... And any distributions in the first few years will also have a surrender fee schedule.
Vanguard annuities do not have surrender fees.

I bonds do make sense, but limitations on the purchase amount won't help the OP much. If the OP intends to use bonds in the VA I think the VA makes perfect sense. After the OP reaches medicare age, if he wants to retrieve the money, it can be annuitized for life or a fixed term of 5 to 20+ years and the payments be a prorated return of principal and income.

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fsrph
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Re: Managing ACA income with a Vanguard Variable Annuity

Post by fsrph » Wed Dec 05, 2018 5:18 pm

gasdoc wrote:
Wed Dec 05, 2018 9:42 am
For those of us following the thread and not being familiar with the cutoffs, can someone please summarize the income limits and what counts toward income as far as ACA subsidies? Thanks in advance.

gasdoc
The ACA uses MAGI for what your income is -http://www.healthreformbeyondthebasics. ... I_2018.png

The max MAGI income for a subsidy for 2019 is the 400% of FPL


Percent of Federal Poverty Level (FPL)
Household Size / 400%
1 $48,560
2 $65,840
3 $83,120
4. $100,400
5 $117,680
6 $134,960


Francis
"Success is getting what you want. Happiness is wanting what you get." | Dale Carnegie

Bruce T
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Re: Managing ACA income with a Vanguard Variable Annuity

Post by Bruce T » Wed Dec 05, 2018 5:33 pm

Regarding:
I would look at the Jefferson National Monument Advisor VA. Very low fee at $20/month for administration services. There are no surrender charges so your money is 100% liquid from day one and you can choose from over 370 funds from all the major mutual fund companies. Vanguard and DFA funds are included with very low expense ratios. Jefferson National is owned by Nationwide insurance, a AAA rated insurance company.
I have very similar needs for ACA MAGI income management as OP and was reviewing Vanguard vs. Jefferson National's (now Nationwide) flat fee structure. Other readers might want to be aware that while Vanguard and DFA funds are supported because Vanguard and DFA don't do a revenue share Nationwide tacks on 35 basis points to these fund expenses, bringing the expense level pretty close to Vanguards 0.5% level. They did say they waive the $20/month if you are only using the low cost funds (but that pales vs. the added .35% for any sizable AUM). The funds that have this added fee are indicated with an "L" (for low cost) on their fund list.

I also confirmed that the Nationwide product has zero insurance element to it (which is good to avoid unnecessary insurance costs) ... but at 0.5% Vanguard's VA has some built in insurance as well as some optional extras on value protection that some may value.

I have not drawn any conclusions (yet) as to whether Vanguard or Nationwide seems like the better VA option, but Nationwide's fund product offering is certainly quite broad (albeit w/ some high expense ratio options that most Bogleheads would likely eschew). I have also not concluded that a VA is the best option overall, but did see the $10K/year/SSN limitation on the IBond option as being too restricting (for me).

Hope this helps some!
Bruce

PS - I should add that:
a. despite Nationwide's marketing the Monument Advisors platform to RIAs, they say that they are happy to service the end consumer directly w/o any RIA involvement.
b. the Nationwide Sales Rep I dealt with was *very* helpful and forthcoming on useful information!
c. Nationwide also indicated that there were no intra-VA fund transfer restrictions or costs ... not that Bogleheads would day trade on a platform like this ... but if one were inclined ... :happy
d. Nationwide does have a $15K minimum initial investment requirement and can do cash deposit or annuity conversion but not in-kind transfers.
e. I also asked whether there might be any 2018 vs. 2019 considerations on deposits to the VA... the Nationwide rep suggested looking at post-tax funds that might be liquidated i.e. for taxable gains to date obviously (but I would fund VA via TLH sales on poor performing bond funds) ... but also for end of year capital gains recognition by funds (typically around Dec. 15?) her point being that buying an equivalent fund in the VA prior to that date could defer the regular income of such a recognition ... not sure about wash sale rules related to post-tax funds sale w/ TLH vs. comparable fund buy in a VA ... would need to understand that better, but expect there may be a wash sale issue to avoid.

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gasdoc
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Re: Managing ACA income with a Vanguard Variable Annuity

Post by gasdoc » Wed Dec 05, 2018 7:12 pm

fsrph wrote:
Wed Dec 05, 2018 5:18 pm
gasdoc wrote:
Wed Dec 05, 2018 9:42 am
For those of us following the thread and not being familiar with the cutoffs, can someone please summarize the income limits and what counts toward income as far as ACA subsidies? Thanks in advance.

gasdoc
The ACA uses MAGI for what your income is -http://www.healthreformbeyondthebasics. ... I_2018.png

The max MAGI income for a subsidy for 2019 is the 400% of FPL


Percent of Federal Poverty Level (FPL)
Household Size / 400%
1 $48,560
2 $65,840
3 $83,120
4. $100,400
5 $117,680
6 $134,960


Francis
Got it. Thank you.

gasdoc

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Watty
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Re: Managing ACA income with a Vanguard Variable Annuity

Post by Watty » Wed Dec 05, 2018 9:02 pm

It probably would not directly help you but one thing I have done is that I got a home equity line of credit.

I can use that to smooth out my income or have more options if I have a large unexpected expense.

In addition to the subsidy cliff it is also important to remember that the amount of the subsidy also varies with your income. It is a bit more complex but for me the income close to the cliff affects the amount of the subsidy by about 9.5%. That means that if I can reduce my income(as calculated) by $10,000 I will get an additional subsidy of around $950.

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