Variable annuity and ACA subsidy

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Pocket Cruiser
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Variable annuity and ACA subsidy

Post by Pocket Cruiser » Sat Jan 13, 2018 2:29 pm

My parents are both 61 and retired with 1 dependant. Starting this year they are on the Obamacare bronze plan with a premium subsidy. Their projected AGI for 2018 is $75k. They have $300k in cash that needs to be invested. If they invested it in a taxable account, I could see a big problem with unanticipated capital gains and dividends pushing them over the income limit for receiving the premium subsidy.

Dad had talked about buying individual stocks that don't pay dividends. Besides the risks of owning individual stocks, there's the risk that companies could merge or have buybacks, etc., and throw off unanticipated income. I don't like that idea; losing the premium subsidy would be a big deal. It'd be about $30k they'd have to pay back at tax time.

I had mentioned to him that a variable annuity may be the answer to getting the cash invested. I was thinking they would keep the VA for the next 3 and a half years until they enroll in Medicare. Then, just cancel the annuity and move the funds back into their brokerage account, and instead of drawing from ira's that year, just live off the taxable gain that the cancelled VA world produce.

How does that plan sound to you guys? Are there any other tax deferred vehicles that they could utilize? They will be buying the maximum in series I-bonds, as well.

curmudgeon
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Re: Variable annuity and ACA subsidy

Post by curmudgeon » Sat Jan 13, 2018 2:39 pm

Pocket Cruiser wrote:
Sat Jan 13, 2018 2:29 pm
My parents are both 61 and retired with 1 dependant. Starting this year they are on the Obamacare bronze plan with a premium subsidy. Their projected AGI for 2018 is $75k. They have $300k in cash that needs to be invested. If they invested it in a taxable account, I could see a big problem with unanticipated capital gains and dividends pushing them over the income limit for receiving the premium subsidy.

Dad had talked about buying individual stocks that don't pay dividends. Besides the risks of owning individual stocks, there's the risk that companies could merge or have buybacks, etc., and throw off unanticipated income. I don't like that idea; losing the premium subsidy would be a big deal. It'd be about $30k they'd have to pay back at tax time.

I had mentioned to him that a variable annuity may be the answer to getting the cash invested. I was thinking they would keep the VA for the next 3 and a half years until they enroll in Medicare. Then, just cancel the annuity and move the funds back into their brokerage account, and instead of drawing from ira's that year, just live off the taxable gain that the cancelled VA world produce.

How does that plan sound to you guys? Are there any other tax deferred vehicles that they could utilize? They will be buying the maximum in series I-bonds, as well.
If they have an HSA plan, they can push money ($9K) into the HSA to reduce MAGI. Note that tax-exempt bond income is added back in for ACA MAGI (I don't play with I-bonds, so I don't know how they report interest).

for stocks, Berkshire Hathaway would be the most reliable for not generating taxable income; I don't think their business model is likely to change anytime soon.

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HueyLD
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Re: Variable annuity and ACA subsidy

Post by HueyLD » Sat Jan 13, 2018 2:40 pm

Surrender charge is one thing to pay attention to.

“If the investor withdraws money from a variable annuity within a certain period after a purchase payment (typically within six to eight years, but sometimes as long as 10 years), the insurance company will usually assess a type of sales charge known as a "surrender" charge. This charge is used to pay the investment representative's commission for selling the variable annuity. Generally, the surrender charge is a percentage of the amount withdrawn, and it declines gradually over a period of several years, known as the "surrender period".

For example, a 7% charge might apply in the first year after a purchase payment, 6% in the second year, 5% in the third year, and so on until the eighth year, when the surrender charge no longer applies. Often, contracts will allow the annuitant to withdraw part of the account value each year - 10% or 15% of the account value, for example - without paying a surrender charge.”

https://www.investopedia.com/exam-guide ... harges.asp

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Pocket Cruiser
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Re: Variable annuity and ACA subsidy

Post by Pocket Cruiser » Sat Jan 13, 2018 2:44 pm

Thanks Huey and curmudgeon. I hadn't thought about an HSA and I believe their bronze plan is a high deductible plan, so will look into that.

I should have mentioned they would get the VA from vanguard which I think had no surrender charges.

itstoomuch
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Re: Variable annuity and ACA subsidy

Post by itstoomuch » Sat Jan 13, 2018 3:02 pm

It's a viable plan.
I don't particularly like to put taxable into annuities. However, I do have a little taxable in VAs for long range planning and diversification. And I did have that taxable VA when I got ACA. Don't know if our VA's affected the ACA. My ACA subsidy wasn't much and I was very please to get ACA because I had a pre-existing condition.

Our VA's mostly IRA's and a little taxable $. All 100% equity and have a net CAGR of +9%. 2008-2012 purchases.

Shop, Shop, SHOP. It is important that you know the ramifications and the terms before hand.
Recommend that if you do use annuities: Ladder purchases in the smallest amounts and Ladder in time.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Variable annuity and ACA subsidy

Post by indexfundfan » Sat Jan 13, 2018 3:05 pm

Pocket Cruiser wrote:
Sat Jan 13, 2018 2:44 pm
Thanks Huey and curmudgeon. I hadn't thought about an HSA and I believe their bronze plan is a high deductible plan, so will look into that.
A high deductible plan is not necessarily a HSA-compatible plan. I'm afraid if they haven't bought with the intention to contribute to a HSA, they probably did not pick a HSA-compatible plan.

Other than BRK.B, some asset classes could pay lower dividends compared to total market funds, e.g. large cap growth (VUG 1.3%), small cap blend (IJR 1.3%). Also, some industry ETFs like biotech (XBI,IBB) pay even lower dividends (0.25%).

Forget about international or emerging funds, these have dividends in excess of 2%.
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HueyLD
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Re: Variable annuity and ACA subsidy

Post by HueyLD » Sat Jan 13, 2018 3:07 pm

For a relatively short time horizon and $30k a year, I think VVA is a fine choice.

Depending on your parents risk tolerance level, you may want to pick the funds carefully to minimize the risk of substantial decline when they are ready to take the money out.

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Mel Lindauer
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Re: Variable annuity and ACA subsidy

Post by Mel Lindauer » Sat Jan 13, 2018 3:26 pm

I Bonds were the first thing that came to mind as I read your OP. The interest isn't reported until they're redeemed, which could be anywhere from one to 30 years.
Best Regards - Mel | | Semper Fi

Moneybags1
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Re: Variable annuity and ACA subsidy

Post by Moneybags1 » Sat Jan 13, 2018 3:57 pm

Isn't I Bond purchases limited? I have this same dilemma, but too a lesser extent.. I do have a chunk in Vanguard's VA, it' cost a little more and the gains are taxed at current income when withdrawn, however you have until your 85 to do the tax planning and in state's like Florida, they are off limits to creditors and law suits. When I first called VG about VA's, the agent told me most of the interest in this product is from Doctors and Lawyers from Texas and Fl.. And as one the famous Boglehead's, posted to me some years ago, in the VA if the insurance company goes broke, you still own the assets, not the insurance company. It's an arrangement I can live with..

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Mel Lindauer
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Re: Variable annuity and ACA subsidy

Post by Mel Lindauer » Sat Jan 13, 2018 6:37 pm

Moneybags1 wrote:
Sat Jan 13, 2018 3:57 pm
Isn't I Bond purchases limited?
Yes, they're limited to 10K per SS# per year, so that could take care of $20K this year and another 10K per trust. While it's not going to take care of the interest from the entire $300k, it could help a bit if they also have one or more trusts. When you're trying to minimize income, every little bit helps.

Remember, even low-cost VAs are still more expensive than traditional retail accounts. Since I Bonds have no ongoing expenses, reducing the amount invested in a VA saves money.
Best Regards - Mel | | Semper Fi

Moneybags1
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Re: Variable annuity and ACA subsidy

Post by Moneybags1 » Sun Jan 14, 2018 4:59 am

Mel, you might have sold me on a $10k purchase.. The annual yield looks good, the fixed rate is terrible at .10%.. What are your thoughts on today's rates.. I remember you mentioned years ago how you backed the truck up to load up when they first came out.. LOL

Thanks
Mike

Nate79
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Re: Variable annuity and ACA subsidy

Post by Nate79 » Sun Jan 14, 2018 11:29 am

I would really advise to think long and hard about any decisions that could have a long term impact for something as politically impacted as ACA subsidies.

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Mel Lindauer
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Re: Variable annuity and ACA subsidy

Post by Mel Lindauer » Sun Jan 14, 2018 12:45 pm

Moneybags1 wrote:
Sun Jan 14, 2018 4:59 am
Mel, you might have sold me on a $10k purchase.. The annual yield looks good, the fixed rate is terrible at .10%.. What are your thoughts on today's rates.. I remember you mentioned years ago how you backed the truck up to load up when they first came out.. LOL

Thanks
Mike
While today's rates are nowhere near as attractive as "the good old days", the I Bonds' composite rates do compare favorably with many (most?) other risk-free options. And, unlike other risk-free options, they provide pre-tax guaranteed inflation protection AND also provide downside protection against possible DEflation.

They also provide tax-deferral (a factor in the OP's case) which can be used for shifting income from a current high tax bracket to a lower tax bracket at retirement, freedom from state and local taxation (a huge factor for those in high tax areas) and finally, they can be used tax-free for qualifying educational expenses.
Best Regards - Mel | | Semper Fi

Miss Emma
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Re: Fixed or variable annuity and ACA subsidy

Post by Miss Emma » Tue Apr 10, 2018 10:01 am

I'm 56 and insured through Obamacare, and I'm dealing with the Obamacare "cliff" (trying to keep MAGI below cutoff level so I can continue to receive subsidies). I'm a conservative investor, retired early, and will in the next couple of years need to find a way to defer some income so as not to fall off the cliff and have to pay full price Obamacare premiums. I'm considering a fixed deferred annuity for $100K or $200K to defer income until I hit 65 and Obamacare subsidies will no longer be an issue.
Since I'm retired, I have no earned income to defer by contributing to an IRA or 401(k). My current income is primarily taxable interest along with my husband's social security. My health insurance plan is an HDHP with an HSA and I contribute the full amount annually. By the way, I don't have to act immediately--this will only become an issue next year at the earliest.
Any ideas?
Thanks,
Miss Emma

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