Excellent topic! Retired and 59. Luckily, we have a sizeable brokerage account and about 750k trad ira. On ACA high deductible plan and pay 0 for health insurance. Switched investments inside IRA to SLOW growth to minimize RMDS later and brokerage account in high octane growth with cash. Plan to take 30k annually from IRA with standard deduction pay no or very little tax. Hopefully, by RMD years, IRA balance be manageable . Probably will do little conversions age 66 and 67 them get SS. Learned so much from this channel. Great work!
We both retired at 58. I'm 62 and my wife is 60. We pay around $300 per month for our ACA coverage, mainly because we are able to keep our reported income very low due to large cash reserves. There are possible pitfalls with every strategy. We are saving $20k per year right now. That's $20k guaranteed during our peak spending years rather than potential savings beginning at age 75. We will definitely have some RMD issues because my wife saved most of her money in her company 401k. Paying too much in taxes is certainly a bad thing, but if you have to have a financial problem in retirement, it needs to be your tax bracket.
This doesn't apply to me because I am already retired and old as dirt. Regardless, it was a good discussion and there is always something to learn, which I enjoy doing. Thanks for the content and have a great weekend. Larry, Central Valley, Ca.
eric, would you consider doing a video on pros and cons of doing roth conversions up to 12% possibly 22% while living off taxable bucket vs no conversions and availing of the 0% LTCGS and 15% instead for an early retiree living off a taxable bucket before drawing from retirement plans. might be too niche though.
Just came across your channel and watched this video - great content! There are a million Roth conversion videos on YT, but very few that consider the ACA subsidy impact. I'm currently going through this evaluation as a 56 year old retiree with a 60 year old spouse who is also retired. We have enough cash reserves to manage our AGI with the goal of never paying over 12% (or 15% starting in 2026). At $63k AGI we would pay no healthcare premium on a bronze plan. At $123k AGI, which is the top of the 12% MFJ tax bracket with the standard deduction in 2024, we would pay a $6,700 premium. Effectively, $6,700 for an additional $60k of AGI via a Roth conversion generates 11.2% additional Federal Tax ($6,700 / $60,000). Combined, that 12% + 11.2% = 23.2%. I'm undecided if on the best course of action, but leaning toward kicking the tax can down the road. Thoughts???
I’m in a very similar situation. I am keeping my MAGI low enough to qualify for heavy ACA subsidies until my wife and I are on Medicare in 8 and 5 years respectively while roth converting much smaller amounts (25-30k per year) until then. Claiming SS at age 67/70 in 10 years. Once on Medicare, will look at a combination of drawing from our IRA and/or Roth converting to manage RMDs at 75 and beyond. There are great benefits to trying to keep taxable income below the first capital gains/qualified bracket and pay 0% tax on that income. If it works for you.
@@PH-md8xp thanks for your comment. I’m gonna run the analysis on taking SSI later instead of age 62. Based on how SSI taxes are calculated I anticipate paying no tax on SSI (about $30k) for 4 years while keeping MAGI low enough for heavy subsidies. Convert $30k to Roth or collect 100% tax free SSI for 4 years, hmmm?
Where are you getting 10 years of cash from? I've been trying to encourage friends to get this cash from a cash-out refinanced mortgage, like I did. But, I've convinced none of them. I'm in year 10 of my 13 year plan of Roth conversions. Good luck!
Great video topic. I know a lot of people are probably thinking about this decision but haven't actually run the numbers to see that giving up some part of the subsidy is still the right decision long term.
Great explanation! Love how you get in the weeds on this, since in this case it's really the only way to make an accurate assessment. One question though - what kind of return rate are you typically assuming for the future tax graph projections? When I do this by hand, it looks like the decisions are (as one would probably expect) highly variable on this one factor. I tend to do projects on a conservative 3% real rate at which point Roth conversions aren't critical, but when I go to (say) 5% real then Roth conversions do make a lot of sense. I'd love to understand how you handle uncertainty in these projections. Thanks again for the video!
Great Job, Eric making people think about this. When my wife and I retired early in 2018 we had this exact situation as she was 60 and I was 54. We had investment money to live on but how to have affordable healthcare and convert down the $2 mil in IRA. Best solution for us was to move to Mexico. Healthcare was now cheap (and good), and it allowed us to Roth convert $200K a year. Cost of living was also cheaper and my wife could afford to flyback several times a year to the States to see her grandchildren. Is it the a perfect solution, no, as it requires one to be willing adapt to a different culture. Six year later we are still doing Roth conversions to a level that we just stay under the IRMAA torpedo for my wife. One day we may return to the States but for now this is a great plan for us.
@@johnyjsl9219 Sold the house and most of the “stuff” that you fill it up with. The house had been a good location while working but it was too big for two people and was not where we would want to retire. Also keeping the house would have obligated us to continue and pay Colorado state taxes on the Roth conversions.
@@KenHodge-x9h I've thought about moving overseas too for a few years, but spouse is against it. Even though financially I think it would make sense (imagine all those ROTH conversions!), she fears the hassle factor, the unknown lifestyle at the foreign country and being separated from our kids.
This video is a fine description of a method that can be used for analysis, but I know from my experience of a context where it breaks: I bought HD Bronze plans during our ACA years. The lower premium cost compared to a Silver plan let me raise the ordinary taxable portion of my AGI without raising my out of pocket ACA contribution. This higher AGI in turn raised my Fed taxes, which is not shown in the graph. By the way, I'm ill in bed today so I took your challenge and recreated the commercial software you show in Google Sheets. I'm only a moderately competent hobbyist Spreadsheeter, so it is not a difficult task.
i never applied for ACA as i found the income constraints too limiting. so i am doing roth conversions without issues as i live on my taxable bucket in early retirement and self pay for health insurance. one thing i considered though is to do private health insurance one year during which you do roth conversions as well as liquidate assets thus generating ltcgs and alternate the yr after with ACA and coast on the liquidated assets and just generate enough income to qualify for ACA. i never did do it as i am worried about any potential gaps in medical care caused by such a strategy.( might be ok for all i know).
The way I am dealing with this issue, I retired at 62 from a 6-figure job, was to take a much lower paying job as long as it supplied company sponsored health care for me and my wife. This kept me off of ACA insurance. I then took my 401K and decided to convert it to a Roth over the long haul, by reaching 73 I will have converted all of it to a Roth (still staying under the IMRAA limits for each year). No RMDs for me. In about a year my wife, 3 years younger, will be able to take Medicare and I will sign up for Medicare at that time. Once my wife and I are on Medicare, I will stop working.
Interesting video and confirms what I'm planning on doing with early retirement. Keep income in the 12% income tax bracket which works out to approximately a 20% marginal tax rate on Roth conversions after taking into account reduction in ACA subsidies. If the cliff comes back then we will dial that down so I'll convert enough to be at 400% of FPL.
Thanks for the video! It would be good to have an example for someone with a much larger pre-tax balance where it becomes necessary to convert up to the 24% bracket. This would help in seeing the impact on the marginal tax bracket when there is other income such as qualified dividends and LTCGs that would be pushed from 0% to 18.8% including NIIT, and also additional 3.8% NIIT on any interest from bank accounts and bonds, which can be of significance in the current high rate environment. This could make a conversion assumed to be at 24% much higher than that. Add the loss of ACA subsidy and the conversion would actually be taxed at 30%+ rather than the assumed 24%! Is there a rule of thumb on what initial pre-tax balance (e.g., $700k-1M ?) should be considered for topping off the 24% tax bracket with conversions if you still have 10-15 years before RMDs kick in?
When showing the comparison of premiums for the same ACA plan with and without subsidies, why would the deductible and out-of-pocket maximum be different if it is exactly the same plan???
I don't expect to be able to retire until 65, but I'm still interested in this topic because I might get lucky in the market and wind up exiting earlier, you never know. It can be overwhelming trying to navigate all of the different factors that determine how financially successful your retirement turns out to be. Hiring a fee only advisor to could be the right call for some, but it's likely not going to be worth it for people like me who have a more modest portfolio. Those people are likely trying to figure everything out for themselves.
Thanks for the video. I'm wondering if anyone can comment on (my) specific case where wife is older and receiving Social Security and Medicare. Are the income thresholds and percent of income stay the same since only calculating one person's subsidy? Does Medicare premium paid count towards household premium expense limit? Is the Social Security portion deducted for Medicare included in calculating MAGI? Thanks.
Yes, I got hit with IRMAA for tax years 2018 & 2019, because I did Roth conversions. I was unaware of IRMAA, at the time. I've got a plan in place to avoid it permanently, now.
Yes, it is assessed year to year. Where it becomes a bit nastier is when you have RMDs that are pushing you into an IRMAA level. Because RMDs tend to grow with age, it can be a continuous problem. You can't really convert out of the problem at that point because you will hit additional IRMAA levels.
I think trying to plan to this level of detail, this many years in advance, is a waste of time. Too much is subject to arbitrary change once you look more than a year or two ahead. Right now: TCJA rates and inflation relief rates. Promised: No taxes on Roth distributions, IRMAA Anything else? Roll the dice and take your chances Right now the market has been doing well so I have post-tax money. If I didn't, I might make a different plan, but for now I'm doing Roth conversions and skipping ACA subsidies.
To play devil's advocate, if you prioritize Roth Conversions over ACA subsidies, aren't you leaning into more uncertainty/unknowns? ACA subsidy is a guaranteed savings right now. Roth Conversions are a potential savings in the future based on a number of unknown variables.
@@SafeguardWealthManagement Indeed the "save now" is a valid consideration. People need to lay out all the pro/con for each choice and pick the winner. Other factor for me that I don't see discussed, is buying simplicity. Roth conversion now, before rolling out 401k, gets rid of IRA basis to eliminate future tracking/reporting. Hard decisions!
Roth should be first since it’s after tax and most are in a lower income bracket at the start of their career. HSA should should only be after 401k match contribution limit. If company matches up to 6% the put in 6%. When in higher bracket consider moving away from Roth until age 50.
This is precisely why it is sooooooooo valuable to have employer-sponsored health coverage prior to 65; I've got coverage for my entire family starting at age 44 when I'll retire early and will be systematically converting huge swathes of pre-tax accounts to Roth over the next 20-25 years with no penalties or loss of subsidies
I hope that works for you. Make contingency plans, just in case, as the time gets closer. I was thinking the same way, and my employer at the time cancelled their retiree health plan less than 3 years before I qualified to keep it (they invented a 'credit' system based on years of age and years of work, and I did not have enough 'points').
@@Sylvan_dBMine is similar too. Despite nearly 30 years with the company my ‘benefit’ is a few hundred off the cost of the employer plan - which is more than the open market. It essentially saves me $0.
To all you gamblers out there, if you get W2-G from gambling winnings, this is counted as reported income even though you are likely to offset this income with losses itemized on your Schedule A. So, if you have 80k of winnings, forget ACA even though you will offset this on your tax returns with 80k losses. Screwed if you like to play the casinos.
No, but you’ll likely need 25k plus for the 5 year visa or risk being unable to gain entry while playing the tourist/education visa game. At least in a country like Mexico you can get permanent residency based on your net worth instead of how much you spend within the country.
Looking forward, Trump will raise tarrifs 10% across the board, but lower income tax by X. I am hoping at my income, roughly 120K in married income, that my taxes disappear to 0 or go down by at least 50%. Roth loses benefit to what Trump may do.
@@larryjones9773 I’m not so sure. Americans spend like congress and would just carry the debt. Tariffs are a way that everyone pays down the national debt instead of the billionaire class
@@cutehumor Google 'Can Trump replace income taxes with tariffs?' Warren Buffett's lifetime tax rate is less than 1%. I suspect your top tax rate is higher.
Excellent topic! Retired and 59. Luckily, we have a sizeable brokerage account and about 750k trad ira. On ACA high deductible plan and pay 0 for health insurance. Switched investments inside IRA to SLOW growth to minimize RMDS later and brokerage account in high octane growth with cash. Plan to take 30k annually from IRA with standard deduction pay no or very little tax. Hopefully, by RMD years, IRA balance be manageable . Probably will do little conversions age 66 and 67 them get SS. Learned so much from this channel. Great work!
Isn’t capital gains from your brokerage still considered part of MAGI for subsidy?
@MrTamm2001 we have a good sum in cash which we only pay interest on . Contribute to HSA to max and get a 10k deduction which brings our income lower
We both retired at 58. I'm 62 and my wife is 60.
We pay around $300 per month for our ACA coverage, mainly because we are able to keep our reported income very low due to large cash reserves. There are possible pitfalls with every strategy. We are saving $20k per year right now. That's $20k guaranteed during our peak spending years rather than potential savings beginning at age 75.
We will definitely have some RMD issues because my wife saved most of her money in her company 401k.
Paying too much in taxes is certainly a bad thing, but if you have to have a financial problem in retirement, it needs to be your tax bracket.
This doesn't apply to me because I am already retired and old as dirt. Regardless, it was a good discussion and there is always something to learn, which I enjoy doing. Thanks for the content and have a great weekend. Larry, Central Valley, Ca.
eric, would you consider doing a video on pros and cons of doing roth conversions up to 12% possibly 22% while living off taxable bucket vs no conversions and availing of the 0% LTCGS and 15% instead for an early retiree living off a taxable bucket before drawing from retirement plans. might be too niche though.
Just came across your channel and watched this video - great content! There are a million Roth conversion videos on YT, but very few that consider the ACA subsidy impact. I'm currently going through this evaluation as a 56 year old retiree with a 60 year old spouse who is also retired. We have enough cash reserves to manage our AGI with the goal of never paying over 12% (or 15% starting in 2026). At $63k AGI we would pay no healthcare premium on a bronze plan. At $123k AGI, which is the top of the 12% MFJ tax bracket with the standard deduction in 2024, we would pay a $6,700 premium. Effectively, $6,700 for an additional $60k of AGI via a Roth conversion generates 11.2% additional Federal Tax ($6,700 / $60,000). Combined, that 12% + 11.2% = 23.2%. I'm undecided if on the best course of action, but leaning toward kicking the tax can down the road. Thoughts???
You will have 10 years from age 65 until your RMD age to Roth convert.
I’m in a very similar situation. I am keeping my MAGI low enough to qualify for heavy ACA subsidies until my wife and I are on Medicare in 8 and 5 years respectively while roth converting much smaller amounts (25-30k per year) until then. Claiming SS at age 67/70 in 10 years. Once on Medicare, will look at a combination of drawing from our IRA and/or Roth converting to manage RMDs at 75 and beyond. There are great benefits to trying to keep taxable income below the first capital gains/qualified bracket and pay 0% tax on that income. If it works for you.
@@PH-md8xp thanks for your comment. I’m gonna run the analysis on taking SSI later instead of age 62. Based on how SSI taxes are calculated I anticipate paying no tax on SSI (about $30k) for 4 years while keeping MAGI low enough for heavy subsidies. Convert $30k to Roth or collect 100% tax free SSI for 4 years, hmmm?
We are doing Roth conversion while on COBRA the first 18 months and then use cash to bridge for 10 years to get ACA subsidy.
Where are you getting 10 years of cash from? I've been trying to encourage friends to get this cash from a cash-out refinanced mortgage, like I did. But, I've convinced none of them. I'm in year 10 of my 13 year plan of Roth conversions. Good luck!
Great video topic. I know a lot of people are probably thinking about this decision but haven't actually run the numbers to see that giving up some part of the subsidy is still the right decision long term.
Great explanation! Love how you get in the weeds on this, since in this case it's really the only way to make an accurate assessment. One question though - what kind of return rate are you typically assuming for the future tax graph projections? When I do this by hand, it looks like the decisions are (as one would probably expect) highly variable on this one factor. I tend to do projects on a conservative 3% real rate at which point Roth conversions aren't critical, but when I go to (say) 5% real then Roth conversions do make a lot of sense. I'd love to understand how you handle uncertainty in these projections. Thanks again for the video!
Great Job, Eric making people think about this. When my wife and I retired early in 2018 we had this exact situation as she was 60 and I was 54. We had investment money to live on but how to have affordable healthcare and convert down the $2 mil in IRA. Best solution for us was to move to Mexico. Healthcare was now cheap (and good), and it allowed us to Roth convert $200K a year. Cost of living was also cheaper and my wife could afford to flyback several times a year to the States to see her grandchildren. Is it the a perfect solution, no, as it requires one to be willing adapt to a different culture. Six year later we are still doing Roth conversions to a level that we just stay under the IRMAA torpedo for my wife. One day we may return to the States but for now this is a great plan for us.
What about your USA house?
@@johnyjsl9219 Sold the house and most of the “stuff” that you fill it up with. The house had been a good location while working but it was too big for two people and was not where we would want to retire. Also keeping the house would have obligated us to continue and pay Colorado state taxes on the Roth conversions.
@@KenHodge-x9h I've thought about moving overseas too for a few years, but spouse is against it. Even though financially I think it would make sense (imagine all those ROTH conversions!), she fears the hassle factor, the unknown lifestyle at the foreign country and being separated from our kids.
This video is a fine description of a method that can be used for analysis, but I know from my experience of a context where it breaks:
I bought HD Bronze plans during our ACA years. The lower premium cost compared to a Silver plan let me raise the ordinary taxable portion of my AGI without raising my out of pocket ACA contribution. This higher AGI in turn raised my Fed taxes, which is not shown in the graph.
By the way, I'm ill in bed today so I took your challenge and recreated the commercial software you show in Google Sheets. I'm only a moderately competent hobbyist Spreadsheeter, so it is not a difficult task.
Great vid Eric! Very interesting and this is why I hired you guys to help manage these ever changing tax laws and the impacts to my great life!
i never applied for ACA as i found the income constraints too limiting. so i am doing roth conversions without issues as i live on my taxable bucket in early retirement and self pay for health insurance. one thing i considered though is to do private health insurance one year during which you do roth conversions as well as liquidate assets thus generating ltcgs and alternate the yr after with ACA and coast on the liquidated assets and just generate enough income to qualify for ACA. i never did do it as i am worried about any potential gaps in medical care caused by such a strategy.( might be ok for all i know).
The way I am dealing with this issue, I retired at 62 from a 6-figure job, was to take a much lower paying job as long as it supplied company sponsored health care for me and my wife. This kept me off of ACA insurance. I then took my 401K and decided to convert it to a Roth over the long haul, by reaching 73 I will have converted all of it to a Roth (still staying under the IMRAA limits for each year). No RMDs for me. In about a year my wife, 3 years younger, will be able to take Medicare and I will sign up for Medicare at that time. Once my wife and I are on Medicare, I will stop working.
Interesting video and confirms what I'm planning on doing with early retirement. Keep income in the 12% income tax bracket which works out to approximately a 20% marginal tax rate on Roth conversions after taking into account reduction in ACA subsidies. If the cliff comes back then we will dial that down so I'll convert enough to be at 400% of FPL.
Thanks for the video! It would be good to have an example for someone with a much larger pre-tax balance where it becomes necessary to convert up to the 24% bracket. This would help in seeing the impact on the marginal tax bracket when there is other income such as qualified dividends and LTCGs that would be pushed from 0% to 18.8% including NIIT, and also additional 3.8% NIIT on any interest from bank accounts and bonds, which can be of significance in the current high rate environment. This could make a conversion assumed to be at 24% much higher than that. Add the loss of ACA subsidy and the conversion would actually be taxed at 30%+ rather than the assumed 24%! Is there a rule of thumb on what initial pre-tax balance (e.g., $700k-1M ?) should be considered for topping off the 24% tax bracket with conversions if you still have 10-15 years before RMDs kick in?
When showing the comparison of premiums for the same ACA plan with and without subsidies, why would the deductible and out-of-pocket maximum be different if it is exactly the same plan???
How about a video discussing financial aid vs Roth conversions?
I don't expect to be able to retire until 65, but I'm still interested in this topic because I might get lucky in the market and wind up exiting earlier, you never know. It can be overwhelming trying to navigate all of the different factors that determine how financially successful your retirement turns out to be. Hiring a fee only advisor to could be the right call for some, but it's likely not going to be worth it for people like me who have a more modest portfolio. Those people are likely trying to figure everything out for themselves.
Thanks for the video. I'm wondering if anyone can comment on (my) specific case where wife is older and receiving Social Security and Medicare. Are the income thresholds and percent of income stay the same since only calculating one person's subsidy? Does Medicare premium paid count towards household premium expense limit? Is the Social Security portion deducted for Medicare included in calculating MAGI? Thanks.
I'm struggling understanding the 14.04% result at the 12:00 minute mark. Anyone know the actual calculation used to obtain that result?
You are taking out 20,000 extra but have an extra 2808 in Healthcare costs due to a reduction in subsidy. 2808/20,000 = 14.04%
@@chris_harvey Ah, okay, I figured it was simple, but I was trying to overcomplicate it....Appreciate it!
IRMAA can drop back down after your income drops, correct? People are treating IRMAA as if it is a death sentence.
Yes, I got hit with IRMAA for tax years 2018 & 2019, because I did Roth conversions. I was unaware of IRMAA, at the time. I've got a plan in place to avoid it permanently, now.
Yes, it is assessed year to year. Where it becomes a bit nastier is when you have RMDs that are pushing you into an IRMAA level. Because RMDs tend to grow with age, it can be a continuous problem. You can't really convert out of the problem at that point because you will hit additional IRMAA levels.
I think trying to plan to this level of detail, this many years in advance, is a waste of time. Too much is subject to arbitrary change once you look more than a year or two ahead.
Right now: TCJA rates and inflation relief rates.
Promised: No taxes on Roth distributions, IRMAA
Anything else? Roll the dice and take your chances
Right now the market has been doing well so I have post-tax money. If I didn't, I might make a different plan, but for now I'm doing Roth conversions and skipping ACA subsidies.
Eric said in another video that one should rerun the numbers every year.
To play devil's advocate, if you prioritize Roth Conversions over ACA subsidies, aren't you leaning into more uncertainty/unknowns? ACA subsidy is a guaranteed savings right now. Roth Conversions are a potential savings in the future based on a number of unknown variables.
@@SafeguardWealthManagement Indeed the "save now" is a valid consideration. People need to lay out all the pro/con for each choice and pick the winner.
Other factor for me that I don't see discussed, is buying simplicity. Roth conversion now, before rolling out 401k, gets rid of IRA basis to eliminate future tracking/reporting.
Hard decisions!
Roth should be first since it’s after tax and most are in a lower income bracket at the start of their career.
HSA should should only be after 401k match contribution limit. If company matches up to 6% the put in 6%.
When in higher bracket consider moving away from Roth until age 50.
That was good.
This is precisely why it is sooooooooo valuable to have employer-sponsored health coverage prior to 65; I've got coverage for my entire family starting at age 44 when I'll retire early and will be systematically converting huge swathes of pre-tax accounts to Roth over the next 20-25 years with no penalties or loss of subsidies
I hope that works for you. Make contingency plans, just in case, as the time gets closer. I was thinking the same way, and my employer at the time cancelled their retiree health plan less than 3 years before I qualified to keep it (they invented a 'credit' system based on years of age and years of work, and I did not have enough 'points').
@@Sylvan_dBMine is similar too. Despite nearly 30 years with the company my ‘benefit’ is a few hundred off the cost of the employer plan - which is more than the open market. It essentially saves me $0.
How much will your employer-sponsored health insurance cost you?
To all you gamblers out there, if you get W2-G from gambling winnings, this is counted as reported income even though you are likely to offset this income with losses itemized on your Schedule A. So, if you have 80k of winnings, forget ACA even though you will offset this on your tax returns with 80k losses. Screwed if you like to play the casinos.
Retire in Thailand and you won’t need a fortune for Health Care
No, but you’ll likely need 25k plus for the 5 year visa or risk being unable to gain entry while playing the tourist/education visa game.
At least in a country like Mexico you can get permanent residency based on your net worth instead of how much you spend within the country.
Looking forward, Trump will raise tarrifs 10% across the board, but lower income tax by X. I am hoping at my income, roughly 120K in married income, that my taxes disappear to 0 or go down by at least 50%. Roth loses benefit to what Trump may do.
That won’t happen with divided congress
Trump tariffs would be regressive and harm economic growth.
@@larryjones9773 I’m not so sure. Americans spend like congress and would just carry the debt. Tariffs are a way that everyone pays down the national debt instead of the billionaire class
@@cutehumor Google 'Can Trump replace income taxes with tariffs?'
Warren Buffett's lifetime tax rate is less than 1%. I suspect your top tax rate is higher.