Hi there. I like your content. Just wanted to offer a thought/question about the information you presented from about 9:00 to 11:15. I don't think the interpretation of the table is right, that is I think adding the percentages shown at the bottom to your marginal federal tax rate to determine your effective marginal rate will understate the penalty. Here's why... Let's take as an example a family of 2 with a modified AGI of $34,480 (200% of the poverty line). According to publication 8962 this family would be expected to pay 2% of their MAGI toward the second lowest price silver plan, or $689.60. Now let's have them do a $2,000 Roth conversion. Now their MAGI will be $36,480 (212% of the poverty line). Now they are expected to pay 2.48% of their MAGI toward the second lowest price silver plan, or $904.70. The difference in medical subsidies is $215.10. Dividing $215.10 by $2,000 I come up with 10.8%. I think the penalty is more insidious than the table would imply because the percentage is not just applied to the incremental value of the additional MAGI but to every dollar up to that point. I'm open to being wrong, but since this affects me personally I'd like to understand why. Do you agree, disagree? Why?
Search for “case study spreadsheet” (use quotes) to find your answers via mmm forum. The tax implications are far more complex and worse than portrayed in this video.
As Darius below is alluding to, I believe the American Rescue Plan subsidy cliff support is extended through 2025 due to the IRA (Inflation Reduction Act)?
I did not realize that the deductible and out of pocket expenses go up if there is an increase in income. Something else I need to keep in mind as I plan for next year. Thank you.
I signed up for ACA 2023 individual in WA and I reported income of $33,500 and my insurance was $0, $2500 deductible, because there was Tax Credits $718 and Cascade Care Savings $108 (probably only in WA) that made up the difference. I probably could have gone up to $34839. I had to choose a Cascade Silver plan. My dental ranged from $10 - $37, but only the most expensive had dentists that were available and of higher rating.
My wife is currently working and providing our medical insurance. I have been doing Roth conversions in anticipation of her retiring when I turn 65. Now that I see that the cliff will reappear I am going to have to rethink things.
This might be a future topic but I have a question for those 64 and what happens the partial year for health insurance and Roth conversion tax consequences? I am currently on my last full year of Obamacare for 2022. I do Roth Conversions and live off my investments but stay below the $51,550 level. In April of 2023, I turn 65 and transition to Medicare from that point on. Is the income amount I submit prorated for the three months to determine my Obamacare Co-pay? What happens if I don't do my 2023 Roth Conversion until after April when I'm then on Medicare? Lastly, what would be a strategic maximum Modified Adjusted Income target for a single person in 2023 considering IRMA and Federal tax efficiency. (I want to stay below 24%) PS, I won't take Social Security until full retirement age of 66 and 8 months. (12/2024) PSS, Great Channel!
2nd Premium example should switch to an HSA eligible account since out of pocket capped and they can open an hsa account for further tax deductions. Works if you’re healthy and only need the insurance for catastrophic care
There is almost no way to make Roth conversions rational when you are on ACA. However, you can contribute to a Roth, and if you do a HDHP you can also contribute to an HSA. We did both last year and ended contributing about $16k. NOTE* that the subsidies are graduated by income, AND the plans have different deductibles. So it is way complicated. I looked at Roth conversion, and it wasn’t rational. We received over $15k in subsidies! So beware!!!! My understanding is that 2023 is the same as 2022.
I think it depends on your age. I’m thinking about starting my side gig now and quitting my job next year after this year’s annual bonus gets paid. I would be about 8 years from Medicare. Roth conversions now are far more valuable than ones taken 8 years in the future. Plus I will at least be able to pay no doubt stiff full-price Obamacare premiums and deductibles with pre-tax dollars. I figure that getting conversions done now is worth the short-term pain for a couple of years.
@@headlibrarian1996 Possibly, you would really have to run the numbers, depending on your age, income, filing status, and health. If you can get an HSA eligible plan(usually has lower premiums too)and expect few medical expenses, then you can contribute to an HSA which is even better than a Roth, and you can still contribute to your Roth. Depending on income the subsidies can be modest to huge, a couple hundred to $1000 or more per month. If you are married, it turns into a lot of savings up front, and a lot of contributions. Like I said, we were able to contribute about $9000 to HSA and $14000 to Roth, and get $15,000 in tax credits. Basically getting paid $15 k by the Gov to move $23k into tax free investments. If you have over $2 million in pretax accounts then perhaps it would make sense to be aggressive with conversions, below that I doubt it. We expect to do some conversions before I collect SS at 70, once I go on Medicare next year. Pay attention to the IRMAA penalties, we had to pay those for my wife. We have close to $130k in HSA money.
So for the deductible/out of pocket maximums..in the example you showed, could you price a plan for the $30K income level..then when December rolls around perform the ROTH conversion only if there had been minimal healthcare costs? Presumably you would be on the hook for the subsidy reduction of 300 a month for the past year...but you would have minimized the risk of a bad health year. i.e. you make the ROTH conversion decision each December with the benefit of hindsight of your medical bills for each year?
This is great 'thinking outside the box' idea. Thanks for sharing. You likely won't be able to use it every year but can in the last year you are aiming to receive the subsidy.
There is no reconciliation of cost sharing subsidies (which reduce deductibles and out of pocket max.) So if your income for the year ends up being higher than estimated, you don't have to go back and pay more for your medical expenses. However, you will normally have to pay more for your insurance premiums, which do get reconciled at tax time. On the other hand, if you report a change in income to the marketplace during the year, your deductible and out of pocket max will be adjusted going forward.
This analysis does not apply if you own a business (or 2% + Sub S shareholder). Because you can deduct healthcare expenses through the business and then take the self employeed healthcare deduction on SCh 1 form 1040. By paying the full cost up front, (rather than taking the Advance PTC) taking the deduction, then claiming the PTC on Form 8962. you may be able to get broke Uncle Sam to pay your insurance cost by a lower effective tax rate. I was able to save enough to then roll in $20 k in Roth conversions , stay in the 12% bracket and still get a PTC equal to what I would pay for an HSA Bronze plan premium rather then the SLCSP Also this analysis will work through the 2025 tax year under the American Rescue plan.
I didn't see you mention that if you qualified for unemployment insurance in 2021 your income is at 133% so this may be the year to convert quite a lot if you were on unemployment. can you confirm please, thanks.
Thanks for the enlightenment, it did not realize how much the math changed for 2021 and 2022 when considering the cost of Roth Conversions and having an A.C.A. plan, all your videos are very well thought out and helpful!
This is why I will make Conversions While working and still have Healthcare! I want to do $100k p year and not worry about premiums ect? Am 60, want to retire soon! Mite wait w yr to get er done by age 62? NOT 63 Medicare reach around!
Would like to see any update of this video, especially as it pertains to the cliff
Hi there. I like your content. Just wanted to offer a thought/question about the information you presented from about 9:00 to 11:15. I don't think the interpretation of the table is right, that is I think adding the percentages shown at the bottom to your marginal federal tax rate to determine your effective marginal rate will understate the penalty. Here's why... Let's take as an example a family of 2 with a modified AGI of $34,480 (200% of the poverty line). According to publication 8962 this family would be expected to pay 2% of their MAGI toward the second lowest price silver plan, or $689.60. Now let's have them do a $2,000 Roth conversion. Now their MAGI will be $36,480 (212% of the poverty line). Now they are expected to pay 2.48% of their MAGI toward the second lowest price silver plan, or $904.70. The difference in medical subsidies is $215.10. Dividing $215.10 by $2,000 I come up with 10.8%. I think the penalty is more insidious than the table would imply because the percentage is not just applied to the incremental value of the additional MAGI but to every dollar up to that point. I'm open to being wrong, but since this affects me personally I'd like to understand why. Do you agree, disagree? Why?
Search for “case study spreadsheet” (use quotes) to find your answers via mmm forum. The tax implications are far more complex and worse than portrayed in this video.
Are there any plans to update this video for 2023?
As Darius below is alluding to, I believe the American Rescue Plan subsidy cliff support is extended through 2025 due to the IRA (Inflation Reduction Act)?
I did not realize that the deductible and out of pocket expenses go up if there is an increase in income. Something else I need to keep in mind as I plan for next year. Thank you.
Yes, a lost subsidy hurts in more ways than one. Thanks!
Excellent content on a topic rarely discussed. Thanks !
Excellent video!
I signed up for ACA 2023 individual in WA and I reported income of $33,500 and my insurance was $0, $2500 deductible, because there was Tax Credits $718 and Cascade Care Savings $108 (probably only in WA) that made up the difference. I probably could have gone up to $34839. I had to choose a Cascade Silver plan.
My dental ranged from $10 - $37, but only the most expensive had dentists that were available and of higher rating.
My wife is currently working and providing our medical insurance. I have been doing Roth conversions in anticipation of her retiring when I turn 65. Now that I see that the cliff will reappear I am going to have to rethink things.
This might be a future topic but I have a question for those 64 and what happens the partial year for health insurance and Roth conversion tax consequences?
I am currently on my last full year of Obamacare for 2022. I do Roth Conversions and live off my investments but stay below the $51,550 level. In April of 2023, I turn 65 and transition to Medicare from that point on. Is the income amount I submit prorated for the three months to determine my Obamacare Co-pay?
What happens if I don't do my 2023 Roth Conversion until after April when I'm then on Medicare? Lastly, what would be a strategic maximum Modified Adjusted Income target for a single person in 2023 considering IRMA and Federal tax efficiency. (I want to stay below 24%) PS, I won't take Social Security until full retirement age of 66 and 8 months. (12/2024)
PSS, Great Channel!
2nd Premium example should switch to an HSA eligible account since out of pocket capped and they can open an hsa account for further tax deductions. Works if you’re healthy and only need the insurance for catastrophic care
There is almost no way to make Roth conversions rational when you are on ACA. However, you can contribute to a Roth, and if you do a HDHP you can also contribute to an HSA. We did both last year and ended contributing about $16k.
NOTE* that the subsidies are graduated by income, AND the plans have different deductibles. So it is way complicated.
I looked at Roth conversion, and it wasn’t rational. We received over $15k in subsidies!
So beware!!!!
My understanding is that 2023 is the same as 2022.
I think it depends on your age. I’m thinking about starting my side gig now and quitting my job next year after this year’s annual bonus gets paid. I would be about 8 years from Medicare. Roth conversions now are far more valuable than ones taken 8 years in the future. Plus I will at least be able to pay no doubt stiff full-price Obamacare premiums and deductibles with pre-tax dollars. I figure that getting conversions done now is worth the short-term pain for a couple of years.
@@headlibrarian1996 Possibly, you would really have to run the numbers, depending on your age, income, filing status, and health. If you can get an HSA eligible plan(usually has lower premiums too)and expect few medical expenses, then you can contribute to an HSA which is even better than a Roth, and you can still contribute to your Roth. Depending on income the subsidies can be modest to huge, a couple hundred to $1000 or more per month. If you are married, it turns into a lot of savings up front, and a lot of contributions.
Like I said, we were able to contribute about $9000 to HSA and $14000 to Roth, and get $15,000 in tax credits. Basically getting paid $15 k by the Gov to move $23k into tax free investments.
If you have over $2 million in pretax accounts then perhaps it would make sense to be aggressive with conversions, below that I doubt it.
We expect to do some conversions before I collect SS at 70, once I go on Medicare next year. Pay attention to the IRMAA penalties, we had to pay those for my wife.
We have close to $130k in HSA money.
So for the deductible/out of pocket maximums..in the example you showed, could you price a plan for the $30K income level..then when December rolls around perform the ROTH conversion only if there had been minimal healthcare costs? Presumably you would be on the hook for the subsidy reduction of 300 a month for the past year...but you would have minimized the risk of a bad health year. i.e. you make the ROTH conversion decision each December with the benefit of hindsight of your medical bills for each year?
This is great 'thinking outside the box' idea. Thanks for sharing. You likely won't be able to use it every year but can in the last year you are aiming to receive the subsidy.
There is no reconciliation of cost sharing subsidies (which reduce deductibles and out of pocket max.) So if your income for the year ends up being higher than estimated, you don't have to go back and pay more for your medical expenses. However, you will normally have to pay more for your insurance premiums, which do get reconciled at tax time. On the other hand, if you report a change in income to the marketplace during the year, your deductible and out of pocket max will be adjusted going forward.
9:17 These are levels for 2022 coverage.
This analysis does not apply if you own a business (or 2% + Sub S shareholder). Because you can deduct healthcare expenses through the business and then take the self employeed healthcare deduction on SCh 1 form 1040. By paying the full cost up front, (rather than taking the Advance PTC) taking the deduction, then claiming the PTC on Form 8962. you may be able to get broke Uncle Sam to pay your insurance cost by a lower effective tax rate. I was able to save enough to then roll in $20 k in Roth conversions , stay in the 12% bracket and still get a PTC equal to what I would pay for an HSA Bronze plan premium rather then the SLCSP Also this analysis will work through the 2025 tax year under the American Rescue plan.
I didn't see you mention that if you qualified for unemployment insurance in 2021 your income is at 133% so this may be the year to convert quite a lot if you were on unemployment. can you confirm please, thanks.
Great add on Rob. I 100% shouldn't have left this out. You are correct. Great loophole for this year!
Thanks for the enlightenment, it did not realize how much the math changed for 2021 and 2022 when considering the cost of Roth Conversions and having an A.C.A. plan, all your videos are very well thought out and helpful!
This is why I will make Conversions While working and still have Healthcare! I want to do $100k p year and not worry about premiums ect? Am 60, want to retire soon! Mite wait w yr to get er done by age 62? NOT 63 Medicare reach around!