Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

How To Compare Roth Conversions v. ACA Subsidy Planning When Retiring Early

• Ari Taublieb, CFP®, MBA • Episode 180

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Unlock the secret to affording healthcare in retirement, especially if you've decided to leave the workforce early. This episode features Cole from Move Health, who joins us to unravel the intertwining of healthcare subsidies and Roth conversions, so you can discover how to navigate these waters for a secure financial future. We promise to equip you with strategies to manipulate your modified adjusted gross income to maximize government subsidies on ACA plans, and we'll tackle the nuances of Roth conversions to soften the blow of future taxes. It's all about the artful balancing act that keeps your hard-earned dollars where they belong – in your pocket.

Facing the music of healthcare costs in retirement doesn't have to be a solo act. With expert guidance from Cole, we illuminate how to manage Medicare Part B and D premiums, and that dreaded IRMAA surcharge, all while juggling the boon of advanced premium tax credits. High-income earners, don't despair! We'll show that sometimes higher costs like IRMAA are just another verse in your financial symphony. This discussion goes beyond simple dollars and cents; it's about orchestrating a retirement plan that sings in harmony with your healthcare needs and your wallet. Tune in and empower yourself to retire with a plan that hits all the right notes.

Create Your Custom Early Retirement Strategy Here

Get access to the same software I use for my clients and join the Early Retirement Academy here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

Health insurance is confusing, and if you've been with your company for a very long time or you've always had a company providing health insurance, it becomes scary when you retire early and you're wondering how much is it gonna cost? How do I think through that? That's exactly what we went over last week in my episode with Lindia where we talked about how much is it gonna cost, what are your different options, how to think through that. Today is part two of a two-part series where we're now bringing on Cole, one of the co-founders of Move Health, to absolutely take that same dive, but to go even deeper, specifically regarding Roth conversions and how those connect to ACA planning, and so what I wanna even preface today's episode with is a lot of you are going what on earth did you just say? So what I mean by that, a lot of you probably know, but for those that don't, when I even first started this podcast, I noticed there was a lot of people leaving money on the table, and so it's very rare that people need to work with us and you guys will laugh, but a lot of advisors send me emails like, hey, would you stop saying that on your podcast, cause it's kind of hurting my business. I'm like I don't care, it just depends what stage of life you're in and what experience you're looking for when it comes to an advisor. So I'm one of the weird advisors that say everyone doesn't need one, it just depends.

Speaker 1:

Now, when you retire early, you have an opportunity. You can say, oh my gosh, this is so awesome. My income's really low because I no longer have my wages, so not paying a lot in taxes, and maybe I've got this brokerage account I call it the superhero that you can live off of. Okay, that's really cool. And some people just stop there and I'll say don't stop there. That's when I want you to actually take it up a notch and say well, what if we could intentionally pay a little bit in taxes today to avoid paying a lot in the future? And then, as all that money's growing, it's growing tax-free and people go oh, that's pretty cool.

Speaker 1:

That's the premise of a Roth conversion, and when you retire early, it can make a lot of sense to do this. But what we always have to go and understand is okay, if we do that, well, doesn't that change our income? Yes, it does. When you do this Roth conversion, it increases your income, and if you do that too much or even too little. It messes around with your health insurance subsidy. So for a lot of you, you have the opportunity to prioritize one or the other. You can say, yep, if my, for example, health insurance is 500 bucks a month, I could you're telling me intentionally keep my income low and maybe get 450 bucks a month from the government, meaning I'm only paying 50,. You absolutely can. And that's something we want to consider and almost weigh that not even almost. We want to weigh that against Roth conversions and see, hey, what's going to put the most dollars in our pocket over the next 10, 15, 20 plus years, versus just in a single year. And so today is us taking a much deeper dive into that.

Speaker 1:

I know this is a two to three minute preface before we hop into the episode, but it's important to understand what we're going to be going into today, because for some of you you're going, hey, is this even going to apply to me? For some of you it won't, and for some of you I don't want you to listen to this. If you're going, nope, it's already a no brainer for me. I should do Roth conversions, I shouldn't take advantage of subsidies. Oh well, great, maybe this isn't the episode for you. Others of you are going whoa, whoa, whoa. I didn't even know this was an option. You're telling me I can massage my income to get money from the government. Yeah, yeah, this is for me. And then you go, wait a second, I'm still going to get hit with those required minimum distributions later. So maybe this is a strategy to help minimize that. Maybe there's a middle ground here. And, as you all can imagine, I am all.

Speaker 1:

A lot of people will say, yeah, it depends, yes, it depends. But let me also give you guidance. So in financial planning, it's very easy for advisors, as I see it, to just say, yeah, it depends, kind of figure it out. It's yeah, figure it out, but let me help you along the way. And so some of you will laugh at this one as well. But I went to a doctor there's a few months ago and I said hey, doc, that sounded great. I think you think that sounded great. I don't know what you just said, so try again in English, please. That's what I'm hoping this episode's going to come across as we go. Wow, I've really got clarity as to why people don't convert this amount and the kind of mistakes that most people make, because if you convert too much, it's not good, you're overpaying taxes. If you don't convert enough, you're leaving money on the table.

Speaker 1:

So today is about understanding that balance, and this is specifically for an early retirement. So if you're not looking for this content, please, I do not want you to have to listen to me talk about stuff that doesn't apply to you. So I try to bring on people that are exactly in your sweet spot, in the range between, on average, 45 to 65, going. Hey, I want to make sure I'm optimizing this. So hopefully you guys love this episode as much as I loved recording it, and let's have some fun. Oh and, by the way, for those that don't know, from last week, I put an ebook together with this team at Move Health, cole and Lindy. Check that out if you want specifically more information on how to work with them or just more guidance on an early retirement. That's a free ebook. Go ahead and check that out and let's hop into the episode.

Speaker 1:

So, those that were on last week and you are here in the podcast. You've got a good sense of okay, how soon should I start looking into healthcare? What are the different things that are going to maybe change my income. Maybe I should do Roth conversions. But wait a second, I'm just trying to retire early. There's so much to this. It becomes overwhelming quickly. We are not going to let it.

Speaker 1:

So last week was that level one, today is that level two, and I rarely have guests on the podcast, so I thought why don't I go crazy and have back to back guests? So today I've got Cole on the show and Cole is a rock star. Who's going to really make sure you guys understand that level two of how do I connect the dots of do I do Roth conversions, tax gain harvesting, what are those tax techniques? And how do those talk to health care? Because so many advisors aren't even doing health care guidance. Very few are taking it to that next level and going OK, what are those pro level strategies? And this is an Ozark stuff, guys, like the Netflix show, this is legal stuff here. I just want to make sure you guys are not missing out on anything. Just leave it on the table unnecessarily.

Speaker 1:

So, with that being said, I'm going to start with my basic Roth conversion analogy that a lot of you know, and I use this cauliflower example being a silly one, but it makes a stick for you guys, and you all have an option, a lot of you. Let's assume, hypothetically, you're 58 and you go I'm going to retire early. Well, you could retire early and you could say, oh my gosh, where's income going to come from the IRAs, roth IRAs? Well, not 59 and a half yet. There's a lot to this. So also, let's make it even simpler. Let's assume you're 60 and you can start pulling from your IRA if you want to. When you do that, that's going to increase your income.

Speaker 1:

So some people go, hey, are there other things I should do? And sometimes there is. And what we're going to be talking about specifically today is what if you are 60? Going, yep, I'm going to have to navigate health care somehow until 65. At the same time, I also know that I'm going to get hit later with required minimum distributions.

Speaker 1:

And so I do this silly analogy to say you have an option. You can say this is awesome, I'm 60. I want to keep my income as low as possible. I've got a brokerage account or cash that I can live on, and you can do that and you could have your income literally be zero. You're literally going to eat no vegetables, no cauliflower.

Speaker 1:

Or you could say wait a second, if I don't do any of this in the future, I think I'm going to have to eat a lot of cauliflower, and you will. You might even be forced to eat so much You're like, can I just have some steak or pasta or something else? And so we invite our clients to go. What if we intentionally go pay a little bit in taxes during these years where our income is low? That way in the future we're not forced to only eat cauliflower. And there's a real, real intense kind of juggling act here between tax planning and health care, and coal is going to help us really understand in greater detail how all these connect. So before we get into the real fun, Cole, do you mind just kind of introducing what, once again, is that affordable care act? How has that changed health care? How does that talk to conversions? All that goes to.

Speaker 2:

Yeah, of course, ari. Thanks for having me. You know it is. It is so interesting.

Speaker 2:

A lot of times, clients that are in that early retirement phase don't understand that where their distributions and retirement come from actually have a pretty significant impact on their health care costs. And so, you know, what I wanted to give a quick disclaimer on is that we're going to talk about only affordable care act marketplace plans. Those are the only ones that really have this tax implication piece via advanced premium tax credits and subsidies, and so we're only going to talk about those. But I'll jump into just a brief history on the affordable care act. So the affordable care act was written into law by the Obama administration in 2010 and was put into action in 2014. It was the largest piece of health care legislation ever passed, bar none period, full stop. It was huge, it was a really big deal, and so, all of that to be said, the affordable care act had sweeping changes in the health care space, but one of the biggest pieces for early retirees is this segment called the affordable care act marketplace, which is a place where you can go to buy affordable care act compliant plans, and you know, to boil that down, it essentially means that you can enroll into a plan that is guaranteed issue, meaning if you have preexisting conditions or if you have anything along those lines major health conditions or prescription meds you take affordable care at, compliant plans by law are required to cover those.

Speaker 2:

And so you know it made big changes for these early retirees that said, hey, I want to retire, I'm not 65 yet how do I get there? You know that use case that we lined out and kind of 101, now we're in 201. But you know that use case of what do I do for that gap between 58 and 65? And so we work a lot with clients between the age of 55 and 64, helping them to really navigate this unique tool that you can leverage with advanced premium tax credits on the ACA marketplace, things along those lines.

Speaker 1:

Amazing and it's very common, because I know a lot of you listeners are going. You're telling me the government might give me money and that would pay for my health care. That's really cool and our jobs always to go. It certainly could be very cool where maybe they're paying for everything, but if we don't look at some other strategies, you're going to be hit with a way bigger tax bill in the future. So sometimes we actually have to say, hey, government, please don't give me money. I actually don't want to pay you kind of the most over my lifetime rather than just in a single year. How do you even start comparing this whole sub-stevers conversion conversation?

Speaker 2:

Yeah, it's certainly a conversation that begins as you start the retirement planning process. You have to be able to say, hey, I'm thinking about, I've got money in these different places, I've got a lot tied up in a 401k or an IRA and I'm thinking about converting that to a Roth so I can pay less taxes in the future. It really comes to weighing the now versus the future, right, and so, ari, I'm not the financial advisor here, I'm the health insurance guy and so I let you be the expert in that space. But what we know is that there are very real implications to keeping your modified adjusted gross income in these kind of gap years prior to 65 low in order to take advantage of as many of those advanced premium tax credits as possible.

Speaker 2:

Giving a quick explainer on it would be like to treat it as a sliding scale.

Speaker 2:

So it's like a spectrum the way these advanced premium tax credits work. The lower that you're modified adjusted gross income goes, the higher that advanced premium tax credit or subsidy becomes, and vice versa. So, as you start weighing the conversation as we give a couple of use cases, it might be something along the lines of if you've got someone who's pretty high income in retirement and they're not going to qualify for a lot of advanced premium tax credits or subsidies on the marketplace. Maybe that Roth conversion makes a lot of sense right now because it's going to save them a lot more money in the future. Vice versa, if you have someone that's on the lower end of the spectrum and they've got a very low modified adjusted gross income, it might end up hurting them more now to pay the higher health insurance premium and receive less of those tax credits than it would be worth in the savings in the future when they don't have to take as many RMDs. So hopefully that's a good explainer of that. Ari, I think that was beautiful what you just said.

Speaker 1:

I'd reiterate that. And then we can always go. Well, what if we retire at $60,000 or $63,000? Technically, I still view that as early, but wait a second. If we retire at $63,000, well, we don't have any many years to start to do some of this stuff. So what I would hope an advisor would come to all of you with is hey, you're thinking about retiring at $58,000. What if it was $55,000? And if we're retiring earlier? Wait a second. That gives us more time to maybe look into these different strategies. Because if we're doing effective conversions, well, maybe you do all these awesome conversions before even social security or a pension or rental income gets turned on, and that's that next level here. So Anything comes to mind, cole, in terms of best cases. You've seen pro strategies people have used where it's yeah, you know what? I was charged $600 a month and the government gave me 400 in subsidies and I was able to use the rest and do other conversions. Any pro strategies or pro tips that you've seen just over your time doing this?

Speaker 2:

Yeah, great question. So the answer with anything in finance or insurance is almost always it depends, right, and it's highly, highly variable, on a unique situation. And so, like I kind of reiterated earlier, or like I mentioned earlier, I should say, you know, it really depends on the unique situation. If somebody is, you know, high income in retirement they are, you know, they're a quarter million dollars or more a year and they're doing well for themselves, the advanced premium tax credit is usually not going to play a factor for those folks. And so, if we're talking about really high income folks in retirement, probably not going to play a factor. Now, if you've got folks that are driving their income low on purpose in order to take advantage of advanced premium tax credits, they're keeping their MAGI really low a lot of times. That makes a lot of sense for them. Hey, you know, make those rollovers happen, pay less taxes in the future. But what we do need to always realize is that when you do one of those Roth conversions, that it ends up contributing to your MAGI and it's going to raise your advanced premium tax credits or lower them, excuse me, reduce the amount and it's going to actually increase your health insurance premiums. So an important thing to consider. Certainly you know.

Speaker 2:

Another thing that we see often when people are in pursuit of, you know, ultimate health care, optimization is, you will see someone that drives their modified adjusted gross income actually too low, right. So they get themselves where they're showing zero dollars in MAGI and, like you mentioned, when they show that that little bit, the government goes hey, you don't qualify for tax credits, you make too little. You should actually be on Medicaid, which is a low income state based program. So, all that to be said, you don't want to drive your income too low, but you can have it at a certain threshold where you're paying very little for your health insurance, and then you can kind of pepper in those Roth conversions within it. That might increase your health insurance premiums a little bit and lower those advanced premium tax credits, but it's still you're eating a little bit of cauliflower at a time rather than a whole bunch.

Speaker 1:

So amazing and I think it's really common for people. They'll come to me and they'll go. Already I already did Roth conversions, you know. They'll say with a little attitude I'll say, hey, I wish you did nothing, because now we have to fix the mistake of you converting too much and now you don't get any tax credits versus other people come and they go. Yeah, I'm not going to do anything, I'm going to keep my income at zero. And then it's the mistake that you just heard Any other mistakes that are common where you see people go. You know what? When I'm on Medicare, do I still do conversions? How does that impact my health care? Anything kind of after 65 even if a lot of you listening right now aren't near that maybe helpful just to go. Yep, got it, I won't have to worry about it. That yeah.

Speaker 2:

So we know most of the early retirees, if we think about it, between that 55 and 64 window and and most of us, we hope turn 65 at some point in our life, and so you know that medicare conversation is an important piece as well, and you know, listen, we could do a full week of podcasts on medicare only and everything that goes into that. But one of the things that's a key differentiator about medicare is, once you turn 65 and make that transition, your income your modified adjust to gross income typically has a lot less to do with the cost of your health care. Then it does when you are pre 65, and so in the pre 65 world If you remember, those advanced premium tax credits are in play. Health insurance premiums are really expensive because in 2014 they made health coverage guaranteed issue and so carriers went we need to rate everybody up and put them in the highest risk pool, and so that took place in 2014, made health insurance premiums really expensive.

Speaker 2:

But medicare has been around since the 60s and so when you get to you know medicare age, you turn 65. That might have also be a good time to consider doing some of those Roth conversions, because it's gonna have a significantly lower impact on the cost of your health care. You know, like I said, we could do a full, full week on Irma alone for medicare. It might contribute to Irma, things along those lines, but even those are negligible in comparison.

Speaker 1:

The impact of losing advanced premium tax credits on the marketplace Amazing and so a lot of people go, yeah, I'm gonna do this conversion, this is awesome. And then two years later They've got this medicare premium increase and people go, what's going on here? Well, if you're doing awesome Roth conversions, years later you might see an increase in your medicare premiums going hey, what's going on here? So there's a lot to navigate. Specifically regarding medicare and Irma, do you mind just briefly going over kind of how that Irma surcharges are calculated? What does that even mean? Who is Irma?

Speaker 2:

Yeah. So the joke that I always make you get to use the cauliflower joke, the one I always get to make is you know who is Irma? It's not a hurricane, it's not your grandma. It is the income related monthly adjusted amount. And essentially what Irma is and what it means is that if you made, you know it takes 20 from from you know, for 2024, this year.

Speaker 2:

If it looks at 2022's income and says hey, you made more than $149,000 as a married couple filing jointly, we're actually going to increase your medicare part B premium. You know the medicare part B premium is around $175 right now. It increases your medicare part B premium. It also adds a surcharge to your medicare part D and essentially what that is is hey, you did really well for yourself. We're going to charge you a little bit more because you have the means to pay for it.

Speaker 2:

And so you know, even as we, as we talk about health care optimization and retirement, you know taking advantage of advanced premium tax credits on the marketplace pre 65 is an important aspect to consider. Also, when you're doing Roth conversions pre 65, what are the implications when you turn 65? If you converted a quarter million dollars in 2022? You're gonna have an Irma in 2024, and so some of those things are an important piece, and so a lot of times clients don't realize the impact that they've made. You kind of alluded to it, ari, of saying man, I'm glad that you did those Roth conversions, but we might have to go and do a little bit of undoing In order to make it so that your, your health care costs aren't wildly expensive. Now, sometimes Irma in the medicare space is totally unavoidable. It's just expensive. You're a high-income earner. That's a part of life. Vice versa, same thing on the on the advanced premium tax credit side in pre 65 world love it.

Speaker 1:

I had one client once say Ari, it just make sure I have this right? Is? It almost like when I'm going into the airport and I want to bring water in and they just won't let me? And so here I am, I'm in there. But there's kind of a cool way and they use these this example, not me and they said, hey, I know I could go buy water in there, but it's like six bucks for a bottle. What I could do it's just bring an empty water bottle and then they'll have some fill-up station.

Speaker 1:

I go, it's close to that where you can start to massage it. Sometimes it's what you said. It's you know what your bag got lost. It got checked, someone stole it. You've got to go buy water. And sometimes it's better to go buy water and still can not just quench your thirst, but for health purposes, do that versus what some people go. Oh my god, I just got to avoid Irma surcharges to whatever degree. You don't want to do that.

Speaker 1:

In the same way, a Chowd of a client once came to me and said hey, are I thinking about declining this bonus? I said why? They said well, you know what. It's gonna put me in a higher tax bracket. I go yeah, and it's gonna be a net positive to you. Still, they go, oh, yeah. So it's kind of you. Part of my job is to say, hey, here are things not to worry about, some stuff's not avoidable, and then here's some stuff that we can massage. So, cole, this was exactly what I wanted to hear and I think everyone's going to take a ton of value from it. I know we went over it in the last episode, but I want to make sure people understand it again. What is it that's so unique about your team and how you guys help people navigate this whole healthcare world?

Speaker 2:

Yeah, that's exactly right. Thanks for having me, ari, it's been awesome. I love talking about this, you know, nerding out about how health and wealth kind of work together. You know and that's a lot of what we do every single day Move health partners. We serve clients and advisors across the country to help them meet and plan around unique healthcare planning needs, and so we've got a really niche focus serving early retirees, kind of in that 55 to 64 window, and so it's great that we get to be on the show with you. It's a, you know, a big deal for us. And then, beyond just that, helping those early retirees also make that transition to Medicare. And so our goal in life and our goal is move health partners is to help people quit their jobs confidently and to make their next move in life with confidence, and so that's what we do.

Speaker 2:

So we at our core, are an agency, and so we contract with a lot of different insurance carriers and we go all the way from you know, hey, I'm concerned about health insurance and retirement to. I'm enrolled in the plan. I feel empowered in what I've got. I know how it works. I now understand what Medicare looks like for me in a couple of years as well. I'm excited to continue to work with my move health partners team member that I got to meet. They were awesome, so we take them all the way from. I've got questions I'm concerned to simple, clear, understood. This is what we do for our health insurance plan and retirement.

Speaker 1:

Amazing and I recommend everyone. If you're thinking about healthcare you've got some questions. Maybe you're even years out from retirement going hey, this is something I should start thinking about. This is the team that I would go to and I don't say that lightly and I think a lot of you know this and I've shared this in previous episodes. But sometimes a mattress company will reach out to me and say, hey, we'll give you a mattress and you can. Can you promote on the show? I'm like no, like I don't have anyone on the show unless I think it's really, really helpful. And if your financial strategy looks great but you're worried about health or you don't feel like you're actually going to be able to do all the hiking and traveling you want to do, then that's a problem as well. So, cole, seriously thank you for coming on the show and I hope everyone gets to use your guidance Of course Appreciate it, Ari.

Speaker 2:

Thanks so much.

Speaker 1:

Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go to my website, early retirement podcastcom. That's early retirement podcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.