Author Topic: ACA/Taxes in early retirement  (Read 1141 times)

SunnySky

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ACA/Taxes in early retirement
« on: June 29, 2020, 01:11:10 PM »
I know to pay $0 taxes in retirement I can do Roth conversions up to the standard deduction and capital gains in the 0% bracket.
What would my limits be for the above considering the ACA (single)?

gocurrycracker

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theupperwestmike

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Re: ACA/Taxes in early retirement
« Reply #2 on: November 24, 2020, 10:35:48 AM »
Has this math perhaps changed since the Tax Cuts and Jobs Act? We file jointly and the article says we'd pay 25%+ tax rate when we earn $35,000-$50,000 in combined income, qualified dividends, Roth Conversions, and capital gains - which has been the range of our earnings the past few years - yet TurboTax tells us we're paying a <5% effective rate when we file our federal taxes.

gocurrycracker

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Re: ACA/Taxes in early retirement
« Reply #3 on: November 24, 2020, 08:34:47 PM »
Has this math perhaps changed since the Tax Cuts and Jobs Act? We file jointly and the article says we'd pay 25%+ tax rate when we earn $35,000-$50,000 in combined income, qualified dividends, Roth Conversions, and capital gains - which has been the range of our earnings the past few years - yet TurboTax tells us we're paying a <5% effective rate when we file our federal taxes.

You are paying an effective tax rate of <5% on federal taxes. Your marginal rate is more like 25%... an extra $1 of earnings will increase your federal tax due by $0.10 and reduce your ACA subsidies by ~$0.15.

With the TCJA, the 15% tax bracket became the 12% tax bracket and exemptions were eliminated. How income impacts ACA subsidies remains the same. The linked article is still 99% accurate.

theupperwestmike

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Re: ACA/Taxes in early retirement
« Reply #4 on: November 27, 2020, 09:49:32 AM »
 ::) Of course, thank you GCC.

With about two decades until we're hit with RMDs and about $1M (today's dollars) in IRAs I'm going to continue to stick to an income in the range that offers those sweet sweet cost-sharing subsidies. As much as anything, because it seems the ACA and its form of tax credits and subsidies don't seem long for this world. If the Dems get their way, a public option or Medicare for All will be available. If the GOP gets its way, the ACA will be repealed and we'll likely be back to to the subsidy-less days before the ACA. In years under either of those scenarios, plus the 5 years that we'll be on Medicare but before RMDs have begun, I'm betting we can do the bulk of our Roth Conversions while staying within the 12% tax bracket. As we get closer to that time and it's looking like my prediction is wrong, we can crank out the Roth conversions, subsidies be damned.

Knowing the way I think, once a subsidy-based system is gone, I'll kick myself for not taking advantage of them while I had the chance.

Please poke holes in my thinking if warranted.

gocurrycracker

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Re: ACA/Taxes in early retirement
« Reply #5 on: November 28, 2020, 05:44:48 AM »
Seems reasonable - no poking warranted.

About 4 years ago there was some GOP discussion for an age based subsidy instead of an AGI based subsidy, so maybe not just a return to the good ole days. Unless there is also an asset test, that would be good news for Roth conversion fans. This was all before we were repeatedly promised a new plan "in 2 weeks" that never materialized. Whatever happens, planning for subsidy elimination is the safe bet.

Just one additional thing - the arrival of the RMD isn't necessarily a critical milestone. RMDs start small and don't really ramp quickly until after age 80... so you may have an extra decade of wiggle room. With zero growth (super simplified) - If you have $1 million at age 72 you would only be required to withdraw $40k or so. At age 80 its $50k. Both well under the top of the 12% bracket.