Analysis of Impact of ACA Slope (For Roth Conversion)

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J295
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Analysis of Impact of ACA Slope (For Roth Conversion)

Post by J295 »

Here's my first run at analyzing the impact of the ACA slope for our family of two 62 y.o. We use the Bronze HD Plan, which has a cost in our state of $25k premium that is completely covered by the $31k PTC. This varies from state to state and I'm guessing our state is particularly expensive. Below show the impact of riding the slope (since cliff is gone this year and next). Will appreciate comments on any suggestions, errors, etc. in my methodology. Thank you.

Three examples, with MAGI of $68k, $120k and $170k (and $25k std deduction)

MAGI................68,000..........120,000........170,000
Eligible PTC.......31,000...........25,000..........22,000
Policy Premium....25,000..........25,000..........25,000
Net Cost..................0.................0............3,000
Taxable ............43,000...........95,000.........145,000
Fed Tax*..........…...... 0.............7,640.........18,640
State Tax*.................0............3,120...........6,720
Total Cost*................0............10,760........28,360

* The $43k is taxable income after standard deduction from AGI (68-25=43). Assumes Roth conversion to increase the MAGI (and does not use 0% LTCG up to the $106k taxable amount).
Last edited by J295 on Tue Oct 26, 2021 5:37 pm, edited 1 time in total.
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J295
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Re: Analysis of Impact of ACA Slope?

Post by J295 »

Bumping for the evening crowd. 😃
marcopolo
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by marcopolo »

J295 wrote: Tue Oct 26, 2021 12:22 pm Here's my first run at analyzing the impact of the ACA slope for our family of two 62 y.o. We use the Bronze HD Plan, which has a cost in our state of $25k premium that is completely covered by the $31k PTC. This varies from state to state and I'm guessing our state is particularly expensive. Below show the impact of riding the slope (since cliff is gone this year and next). Will appreciate comments on any suggestions, errors, etc. in my methodology. Thank you.

Three examples, with MAGI of $68k, $120k and $170k (and $25k std deduction)

MAGI................68,000..........120,000........170,000
Eligible PTC.......31,000...........25,000..........22,000
Policy Premium....25,000..........25,000..........25,000
Net Cost..................0.................0............3,000
Taxable ............43,000...........95,000.........145,000
Fed Tax*..........…...... 0.............7,640.........18,640
State Tax*.................0............3,120...........6,720
Total Cost*................0............10,760........28,360

* The $43k is taxable income after standard deduction from AGI (68-25=43). Assumes Roth conversion to increase the MAGI (and does not use 0% LTCG up to the $106k taxable amount).
Wow, the SLCSP in your area is well over $36k for two people?!?

I am a bit confused about your note in asterisk. I get where the $43k came from. I don't understand what you mean by the parenthetical phrase regarding 0% LTCG). How much of the $68k is Qual Div and/or LTCG? All of it, since you say tax is $0. Your state also has $0 tax on those?

Your eligible PTC calculations seem to be off a bit. Since all those values ar above 400% FPL, that should just be a straight line 8.5% decrease with MAGI.

I can't comment on the Tax figures without knowing how much of the $68k is qual div/LTCG.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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FiveK
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by FiveK »

Might be worth comparing with the approach described in Roth Conversion and Capital Gains On ACA Health Insurance.
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J295
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by J295 »

FiveK wrote: Wed Oct 27, 2021 12:57 am Might be worth comparing with the approach described in Roth Conversion and Capital Gains On ACA Health Insurance.
Thank you!
fdpo
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by fdpo »

My perhaps overly simplistic way of thinking about the impact of the ACA slope is that it is sort of equivalent to increasing my marginal tax rate by 8.5%.

My situation is maybe not so different from yours: family of 2, 63 years old, and trying to figure out how big a Roth conversion to do. Without a conversion, my MAGI is low, but when I eventually start taking RMDs it will kick me into a higher bracket, so if I were not on ACA I would take a big enough conversion now to fill up the 12% bracket. But since I am on ACA, it's as though my tax bracket is 12+8.5=20.5%. It's less obvious that I should fill up the 12% bracket, particularly since there are some tax credits that are lost as income increases. (E.g., NJ, where I live, has an additional ACA subsidy that drops from $200/mo to $100/mo when you exceed 400% FPL.) On the other hand, if you see tax rates increasing in the future the picture changes.

On the low end, I need to make sure I make enough of a conversion such that I get the max ACA subsidy. If my income is so low that my premium is more than covered by the subsidy (I'm also on Bronze), then I actually get a reduced subsidy since the subsidy can't be greater than the premium.

Hope this makes sense. Let me know if you see flaws in the reasoning.
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FiveK
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by FiveK »

fdpo, welcome to the forum.
fdpo wrote: Mon Dec 27, 2021 11:43 am My perhaps overly simplistic way of thinking about the impact of the ACA slope is that it is sort of equivalent to increasing my marginal tax rate by 8.5%.
Yes, for the applicable income range.

The article mentioned in the posts just previous to yours is worth considering.
furwut
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by furwut »

This year I let my MAGI increase to 411% of FPL. That allowed me to perform a larger then usual Roth conversion - marginally taxed up to 20.5% (12% + 8.5%) but not so much that my dividends and interest lost their 0% tax rate. $1 more Roth and the marginal tax rate jumps to 35.5% (12% + 8.5% + 15%).
PaulieLilly
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by PaulieLilly »

I took a similar approach to furwut and ended up converting ~$100k in 2021.
I created this chart (similar to the one referenced in the previous link) to help visualize my conversion options for my specifics ... both age 60, MFJ, ACA w/ HSA, only income is small amount of interest & QD's.
Image
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FiveK
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by FiveK »

PaulieLilly wrote: Tue Dec 28, 2021 2:29 pm I created this chart (similar to the one referenced in the previous link) to help visualize my conversion options for my specifics....
Excellent work!
furwut
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by furwut »

FiveK wrote: Tue Dec 28, 2021 2:50 pm
PaulieLilly wrote: Tue Dec 28, 2021 2:29 pm I created this chart (similar to the one referenced in the previous link) to help visualize my conversion options for my specifics....
Excellent work!
Love it too!
fdpo
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by fdpo »

FiveK wrote: Mon Dec 27, 2021 1:12 pm fdpo, welcome to the forum.
fdpo wrote: ↑Mon Dec 27, 2021 12:43 pm
My perhaps overly simplistic way of thinking about the impact of the ACA slope is that it is sort of equivalent to increasing my marginal tax rate by 8.5%.
Yes, for the applicable income range.

The article mentioned in the posts just previous to yours is worth considering.
Thanks. You are right. The graph is hugely helpful and the spreadsheet is a good double check on what my tax software is showing me. Looking at paulieLilley's chart, I am trying to decide between the ~$49K and ~100K conversion targets (my numbers are a bit different, but the graph shape is the same). Unfortunately for the 100K target, even though the marginal rate is 20.5% at 100K you have to "go through" that section of the curve where the marginal rate is close to 30%, so the average marginal rate between 49K and 100K is more than 20.5% (maybe 23-24% or so).

Another thing that surprised me is that even though I've paid close to $0 taxes in taxes this year and I paid $0 towards my premium, the spreadsheet and my tax software show that I get a refund when my income is low enough -- i.e., at my equivalent of the 50K mark. I was trying to understand how that is possible, and it looks like it is because New Jersey paid $200/mo of my APTC so the federal APTC was $200 less than my premium. Therefore, the IRS figures they can refund me part of my premium money even though I didn't pay any. Or at least that is my reading of the situation. Seems weird.
mnnice
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by mnnice »

Now if someone could figure out optimization with ACA, Roth conversion, long term capital gains, FAFSA, the EITC, and state income tax of my state of residence we would be on to something. :confused

Outstanding work I am just jealous that you really only have two or three “systems”(ACA and income taxes to optimize.) My “problem” has more variables and no clear cut best answer.
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by furwut »

mnnice wrote: Wed Dec 29, 2021 9:39 am Now if someone could figure out optimization with ACA, Roth conversion, long term capital gains, FAFSA, the EITC, and state income tax of my state of residence we would be on to something. :confused

Outstanding work I am just jealous that you really only have two or three “systems”(ACA and income taxes to optimize.) My “problem” has more variables and no clear cut best answer.
:happy Lately I've come to think all of this is by design. :twisted:
Jablean
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by Jablean »

I'm adding in current solo t-401k additions to the mix. Moving just slightly more in converted funds than new funds going in. First year with a solo, using Fidelity, so no Roth contributions. Mostly a way to clear out some taxable cash. I'll pay attention to the note above to use as much of the subsidy as possible and I can do that by adjusting my contribution.

We are a 60/64 couple with the 64 still working. I've been tracking that ACA cliff/slope for 5 years now and have always had something new thrown into the mix that I hope I've studied up on enough. Never know until tax time.
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FiveK
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by FiveK »

fdpo wrote: Wed Dec 29, 2021 8:40 am Unfortunately for the 100K target, even though the marginal rate is 20.5% at 100K you have to "go through" that section of the curve where the marginal rate is close to 30%, so the average marginal rate between 49K and 100K is more than 20.5% (maybe 23-24% or so).
That's a good point. Putting 49000 into cell P84 of that tool will show the cumulative (aka average marginal) rate for the conversion amounts starting at $49K.
fdpo
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by fdpo »

Putting 49000 into cell P84 of that tool will show the cumulative (aka average marginal) rate for the conversion amounts starting at $49K.
Thanks. Good to know.
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by Wannaretireearly »

PaulieLilly wrote: Tue Dec 28, 2021 2:29 pm I took a similar approach to furwut and ended up converting ~$100k in 2021.
I created this chart (similar to the one referenced in the previous link) to help visualize my conversion options for my specifics ... both age 60, MFJ, ACA w/ HSA, only income is small amount of interest & QD's.
Image
Nice job!
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JonnyBeRetired
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by JonnyBeRetired »

PaulieLilly wrote: Tue Dec 28, 2021 2:29 pm I took a similar approach to furwut and ended up converting ~$100k in 2021.
I created this chart (similar to the one referenced in the previous link) to help visualize my conversion options for my specifics ... both age 60, MFJ, ACA w/ HSA, only income is small amount of interest & QD's.
Image
Hi Paulie,
I’m trying to figure out Roth conversions for age 63 to 72 and see that IRMAA will factor into my decisions. I’m curious if you’ve created a similar chart that incorporates the various IRMAA thresholds? If so, I might print it out and frame it to keep me focused. :D
Jon
PaulieLilly
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by PaulieLilly »

I am far from an expert on using this spreadsheet. The beauty is it's quite easy to use and tailor to your specific situation(s). It's well worth your time to dive into it. I pasted in a generic example for MFJ, both age 63, no income, no health insurance ... you can see the IRMAA spikes.
Image
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FiveK
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by FiveK »

Might not be obvious at first glance: Roth Conversion and Capital Gains On ACA Health Insurance describes using the downloadable personal finance toolbox spreadsheet to generate these charts. Seems Excel is needed - Google Sheets, etc., don't appear to have the functionality.
JonnyBeRetired
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by JonnyBeRetired »

PaulieLilly wrote: Sat Apr 02, 2022 7:53 pm I am far from an expert on using this spreadsheet. The beauty is it's quite easy to use and tailor to your specific situation(s). It's well worth your time to dive into it. I pasted in a generic example for MFJ, both age 63, no income, no health insurance ... you can see the IRMAA spikes.
Thanks for the quick reply! I’ll go back to the spreadsheet to see if I can reproduce your example and then personalize it. Much appreciated.
Jon
JonnyBeRetired
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by JonnyBeRetired »

FiveK wrote: Sat Apr 02, 2022 8:01 pm Might not be obvious at first glance: Roth Conversion and Capital Gains On ACA Health Insurance describes using the downloadable personal finance toolbox spreadsheet to generate these charts. Seems Excel is needed - Google Sheets, etc., don't appear to have the functionality.
Thanks for the reference to the article. I’ll give it a read through and get back into the spreadsheet.
Jon
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by yobery »

PaulieLilly wrote: Tue Dec 28, 2021 2:29 pm I took a similar approach to furwut and ended up converting ~$100k in 2021.
I created this chart (similar to the one referenced in the previous link) to help visualize my conversion options for my specifics ... both age 60, MFJ, ACA w/ HSA, only income is small amount of interest & QD's.
Image
This chart is amazing.
yobery
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Re: Analysis of Impact of ACA Slope (For Roth Conversion)

Post by yobery »

FiveK wrote: Sat Apr 02, 2022 8:01 pm Might not be obvious at first glance: Roth Conversion and Capital Gains On ACA Health Insurance describes using the downloadable personal finance toolbox spreadsheet to generate these charts. Seems Excel is needed - Google Sheets, etc., don't appear to have the functionality.
Ahh too bad, GDOCS user here
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