Rule of 55 403b Withdrawals effects on Obamacare subsidy?

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Homeby5
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Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by Homeby5 »

Hey guys,
Wife is getting ready to leave her job at the age of 56 and start drawing money from her 403b under the "age of 55" rule. She has enough money in her Roth investments to live until the age of 65 when she can get medicare. This means her MAGI will be nothing when it comes to taxes because of the Roth withdrawals. She plans on getting Obamacare and according to the calculator...her plans will basically be free because of the low amount of MAGI...even though she is drawing out a significant amount.

It seems too good to be true that money from Roth investments or let's say....equity from reverse mortgages, do not count towards MAGI when it comes to Obamacare subsidies. Am I missing something here? I don't want to be hit with a $1500 monthly health insurance expense that we haven't planned for.
Thanks
sailaway
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by sailaway »

There is a minimum MAGI for ACA subsidies. The actual numbers will depend on filing status.

Many early retirees actually need a balance of traditional (used for Roth conversions), Roth and taxable to keep MAGI in the sweet spot.
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David Jay
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by David Jay »

Homeby5 wrote: Thu Aug 13, 2020 7:53 amThis means her MAGI will be nothing when it comes to taxes because of the Roth withdrawals.
This language (“her MAGI”) suggests that she is filing separately, is that correct?

Because if you two are filing jointly then the MAGI that affects her ACA subsidy includes your income as well.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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dodecahedron
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by dodecahedron »

David Jay wrote: Thu Aug 13, 2020 8:32 am
Homeby5 wrote: Thu Aug 13, 2020 7:53 amThis means her MAGI will be nothing when it comes to taxes because of the Roth withdrawals.
This language (“her MAGI”) suggests that she is filing separately, is that correct?

Because if you two are filing jointly then the MAGI that affects her ACA subsidy includes your income as well.
With very narrow exceptions for domestic violence victims, married taxpayers who use MFS (¨filing separately¨) are ineligible for premium tax credits.

https://www.irs.gov/affordable-care-act ... the-basics

Assuming the exception does not apply, the OP and wife will need to file jointly (MFJ) and their joint MAGI will determine the applicable premium tax credits.
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David Jay
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by David Jay »

sailaway wrote: Thu Aug 13, 2020 8:25 amThere is a minimum MAGI for ACA subsidies. The actual numbers will depend on filing status.
The minimum is state-specific. If your state implemented the Medicaid Expansion, the limit is 138% of FPL (federal poverty level). Without the Medicaid Expansion, the limit is 100% of FPL.

Below this income level, you will qualify for Medicaid but not ACA.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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David Jay
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by David Jay »

dodecahedron wrote: Thu Aug 13, 2020 8:37 am
David Jay wrote: Thu Aug 13, 2020 8:32 am
Homeby5 wrote: Thu Aug 13, 2020 7:53 amThis means her MAGI will be nothing when it comes to taxes because of the Roth withdrawals.
This language (“her MAGI”) suggests that she is filing separately, is that correct?

Because if you two are filing jointly then the MAGI that affects her ACA subsidy includes your income as well.
With very narrow exceptions for domestic violence victims, married taxpayers who use MFS (¨filing separately¨) are ineligible for premium tax credits.

https://www.irs.gov/affordable-care-act ... the-basics

Assuming the exception does not apply, the OP and wife will need to file jointly (MFJ) and their joint MAGI will determine the applicable premium tax credits.
I learn something new every day on BH. :happy
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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dodecahedron
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by dodecahedron »

David Jay wrote: Thu Aug 13, 2020 8:39 am
dodecahedron wrote: Thu Aug 13, 2020 8:37 am
David Jay wrote: Thu Aug 13, 2020 8:32 am
Homeby5 wrote: Thu Aug 13, 2020 7:53 amThis means her MAGI will be nothing when it comes to taxes because of the Roth withdrawals.
This language (“her MAGI”) suggests that she is filing separately, is that correct?

Because if you two are filing jointly then the MAGI that affects her ACA subsidy includes your income as well.
With very narrow exceptions for domestic violence victims, married taxpayers who use MFS (¨filing separately¨) are ineligible for premium tax credits.

https://www.irs.gov/affordable-care-act ... the-basics

Assuming the exception does not apply, the OP and wife will need to file jointly (MFJ) and their joint MAGI will determine the applicable premium tax credits.
I learn something new every day on BH. :happy
There is a larger, broader rule worth learning from this example.

*Almost* always, if a provision in the tax code has income limits designed to restrict eligibility to low or low-moderate income taxpayers, MFS filers will be ineligible for it. Otherwise, it would be too easy for nonworking spouses or part-time employed spouses in high-income households due to high primary earner to circumvent the intention of the eligibility restriction.
Domadosolo
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by Domadosolo »

David Jay wrote: Thu Aug 13, 2020 8:39 am
dodecahedron wrote: Thu Aug 13, 2020 8:37 am
David Jay wrote: Thu Aug 13, 2020 8:32 am
Homeby5 wrote: Thu Aug 13, 2020 7:53 amThis means her MAGI will be nothing when it comes to taxes because of the Roth withdrawals.
This language (“her MAGI”) suggests that she is filing separately, is that correct?

Because if you two are filing jointly then the MAGI that affects her ACA subsidy includes your income as well.
With very narrow exceptions for domestic violence victims, married taxpayers who use MFS (¨filing separately¨) are ineligible for premium tax credits.

https://www.irs.gov/affordable-care-act ... the-basics

Assuming the exception does not apply, the OP and wife will need to file jointly (MFJ) and their joint MAGI will determine the applicable premium tax credits.
I learn something new every day on BH. :happy
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Homeby5
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by Homeby5 »

Hey guys...
No...we file jointly. When I mentioned MAGI...It's because the Obamacare website used MAGI figures to estimate subsidies.
I am not asking for the specific cut off numbers or for that matter....any specific numbers. I can figure that out on the website as I put in our info. What I am asking is am I missing something when it comes to the fact that Roth distributions or Home equity distributions don't count towards MAGI when it comes to getting Obamacare subsidies? The broker that sells Obamacare and the Obamacare website estimator tells me that my wife will basically get it for free...even though she plans on accessing a bunch of tax free money (Roth distributions). It just seems...I dunno....to good to be true and I want to make sure that there isn't something that I don't understand.
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dodecahedron
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by dodecahedron »

Homeby5 wrote: Thu Aug 13, 2020 9:27 am Hey guys...
No...we file jointly. When I mentioned MAGI...It's because the Obamacare website used MAGI figures to estimate subsidies.
I am not asking for the specific cut off numbers or for that matter....any specific numbers. I can figure that out on the website as I put in our info. What I am asking is am I missing something when it comes to the fact that Roth distributions or Home equity distributions don't count towards MAGI when it comes to getting Obamacare subsidies?
You are 100% correct. Neither Roth distributions nor home equity distributions is included in MAGI for Obamacare subsidies (¨Premium Tax Credits.¨)

The information here is authoritative:

https://www.healthcare.gov/income-and-h ... come/#magi

In general, if income is not part of your AGI, income is not part of your MAGI with only three significant exceptions:

-- ALL Social Security benefits are included in ACA MAGI, regardless of whether or not any are in your AGI
-- Any foreign income excluded from AGI gets added back into your ACA MAGI
-- Any muni-bond tax-exempt interest excluded from AGI gets added back into your ACA MAGI.

So if it is not included in your AGI and not included in the three exceptions above, it is not part of your ACA MAGI.
golf101
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by golf101 »

What you are going is exactly what my husband and I plan on doing for early retirement. We're loading up our Roth's now to be able to take those withdrawals to keep our income low to qualify for ACA credits. It didn't seem right when I first started looking at it, but that's the current rule, so I would definitely take advantage of that.
retire2022
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by retire2022 »

Op

I assume your employee healthcare is not covered at retirement?

Mine is as a state worker, the premiums is paid for with unused sick time, it will cover me from 60-65 until medicare. I suggest your spouse double check with Human Resources (Personnel) or the retirement plan.

In my state civil service job as a vested employee, one has to retire off of payroll directly into the retirement system in order to use sick time to pay for healthcare premiums.

good luck
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Homeby5
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by Homeby5 »

Thanks guys.
I guess we are good to go then!!!
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David Jay
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by David Jay »

Homeby5 wrote: Thu Aug 13, 2020 9:27 amWhat I am asking is am I missing something when it comes to the fact that Roth distributions or Home equity distributions don't count towards MAGI when it comes to getting Obamacare subsidies? The broker that sells Obamacare and the Obamacare website estimator tells me that my wife will basically get it for free...even though she plans on accessing a bunch of tax free money (Roth distributions). It just seems...I dunno....to good to be true and I want to make sure that there isn't something that I don't understand.
You understand correctly. Our ACA premium is $18 per month for the two of us, I have targeted taxable withdrawals for 250% FPL with a high deductible plan (I have HSA money to cover if needed).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
helloeveryone
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by helloeveryone »

David Jay wrote: Thu Aug 13, 2020 3:09 pm
Homeby5 wrote: Thu Aug 13, 2020 9:27 amWhat I am asking is am I missing something when it comes to the fact that Roth distributions or Home equity distributions don't count towards MAGI when it comes to getting Obamacare subsidies? The broker that sells Obamacare and the Obamacare website estimator tells me that my wife will basically get it for free...even though she plans on accessing a bunch of tax free money (Roth distributions). It just seems...I dunno....to good to be true and I want to make sure that there isn't something that I don't understand.
You understand correctly. Our ACA premium is $18 per month for the two of us, I have targeted taxable withdrawals for 250% FPL with a high deductible plan (I have HSA money to cover if needed).

Just to understand better - you target < $42,275 in AGI for a family of 2 to get the maximum subsidy and sign up for high deductible plan bc you have HSA Money?

So you just need to carefully make sure your don’t take out more than $42k plus standard deduction from your taxables, and make up the difference w roth money?

thk you! trying to understand all this well for 15 years from now 😂

so(https://help.ihealthagents.com/hc/en-us ... ty-Levels-)
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David Jay
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by David Jay »

helloeveryone wrote: Thu Aug 13, 2020 3:32 pm
David Jay wrote: Thu Aug 13, 2020 3:09 pm
Homeby5 wrote: Thu Aug 13, 2020 9:27 amWhat I am asking is am I missing something when it comes to the fact that Roth distributions or Home equity distributions don't count towards MAGI when it comes to getting Obamacare subsidies? The broker that sells Obamacare and the Obamacare website estimator tells me that my wife will basically get it for free...even though she plans on accessing a bunch of tax free money (Roth distributions). It just seems...I dunno....to good to be true and I want to make sure that there isn't something that I don't understand.
You understand correctly. Our ACA premium is $18 per month for the two of us, I have targeted taxable withdrawals for 250% FPL with a high deductible plan (I have HSA money to cover if needed).

Just to understand better - you target < $42,275 in AGI for a family of 2 to get the maximum subsidy and sign up for high deductible plan bc you have HSA Money?

So you just need to carefully make sure your don’t take out more than $42k plus standard deduction from your taxables, and make up the difference w roth money?

thk you! trying to understand all this well for 15 years from now 😂

so(https://help.ihealthagents.com/hc/en-us ... ty-Levels-)
That is not the maximum subsidy, I targeted 42,275 AGI because I have limited Roth funds and they need to last 3 years (to age 65). I mentally treat the policy as one of the old "catastrophic" policies - it will only come into play if something serious happens. Although with ACA you do get an annual physical at no charge.

If you get your MAGI down to 200% of FPL you can select a plan with a lower deductible ("Silver" plan) at essentially no cost. Just don't go below 138%/100% (depending on state) because you will not be allowed to have an ACA plan, you will have to go on Medicaid.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
marcopolo
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by marcopolo »

helloeveryone wrote: Thu Aug 13, 2020 3:32 pm
David Jay wrote: Thu Aug 13, 2020 3:09 pm
Homeby5 wrote: Thu Aug 13, 2020 9:27 amWhat I am asking is am I missing something when it comes to the fact that Roth distributions or Home equity distributions don't count towards MAGI when it comes to getting Obamacare subsidies? The broker that sells Obamacare and the Obamacare website estimator tells me that my wife will basically get it for free...even though she plans on accessing a bunch of tax free money (Roth distributions). It just seems...I dunno....to good to be true and I want to make sure that there isn't something that I don't understand.
You understand correctly. Our ACA premium is $18 per month for the two of us, I have targeted taxable withdrawals for 250% FPL with a high deductible plan (I have HSA money to cover if needed).

Just to understand better - you target < $42,275 in AGI for a family of 2 to get the maximum subsidy and sign up for high deductible plan bc you have HSA Money?

So you just need to carefully make sure your don’t take out more than $42k plus standard deduction from your taxables, and make up the difference w roth money?

thk you! trying to understand all this well for 15 years from now 😂

so(https://help.ihealthagents.com/hc/en-us ... ty-Levels-)
The MAGI used for calculating ACA subsidies is based on the income BEFORE and deductions (including and standard or itemized deductions). Income is reduced by by "above the line" deductions such as IRA contribution, Early withdrawal penalties, and a few other items.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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MP123
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Re: Rule of 55 403b Withdrawals effects on Obamacare subsidy?

Post by MP123 »

David Jay wrote: Thu Aug 13, 2020 5:42 pm If you get your MAGI down to 200% of FPL you can select a plan with a lower deductible ("Silver" plan) at essentially no cost. Just don't go below 138%/100% (depending on state) because you will not be allowed to have an ACA plan, you will have to go on Medicaid.
And most of the states that didn't expand their Medicaid programs don't allow non-disabled people to be on it. This can be a bad situation where your income is too low for ACA and you're not allowed on Medicaid.
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