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Should I Prioritize Roth Conversions or Health Insurance Subsidies? · Retirement Answers

• 0:02
  Jacob: Should we think about health insurance subsidies or should we do Roth conversions? And many people who retire before 65 have to figure this out. If you don't retire at 65 or later, you're not Medicare age or eligible. Therefore, you have to figure out your health insurance situation before that time. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions.
• 0:26
  If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey, friends, and welcome back to another episode of the Retirement Answers Podcast. My name is Jacob Duke.
• 0:50
  I'm your host as always. Today's episode is gonna be really good, number one, for the topic that we're talking about, But number two is because this is the very first episode that I'm actually doing a video portion or a video component of. So if you'd like to watch that or if you didn't even know I had a YouTube channel, you can go check out my YouTube channel where I've got obviously the podcast uploaded, but other videos as well. It's linked down below and you can just go check it out there if that's what you prefer. So today we're talking about the the preference or what should we prioritize?
• 1:19
  Should we think about health insurance subsidies or should we do Roth conversions? And the reason for this question is because many people who retire before 65 have to figure this out. If you don't retire at 65 or later, you're not Medicare age or eligible. Therefore, you have to figure out your health insurance situation before that time. Now, some people have the benefit of an employer who's gonna continue paying for their health insurance until he gets to 65.
• 1:45
  Others are going to retire, between, you know, 63 and 65. Therefore they could use COBRA for the majority of that time, which is their current health plan, but they're gonna pay 100, up to 102% of that premium. So the premiums are increased, but you get to stay on the same health plan. Or you could go and find a private plan on the open marketplace. Now, the hard part about health insurance before 65, is that all of it is gonna be expensive.
• 2:10
  There's no cheap way to go. But there are some different ways to lower those premiums. The primary one is the Affordable Care Act, the ACA. If you are under a certain income level, you can actually have a reduced premium through subsidies that are offered through the federal government. So we're gonna talk through what those levels are in terms of how much income you can have and still get a subsidy.
• 2:31
  But we're also gonna talk through the fact that this is a really hard decision for many because if you have a large tax deferred balance such as a four zero one k or an IRA, you're gonna have to decide, is it worth saving money on health care premiums? Or should I be doing Roth conversions during my gap years, which are is the big time for you to do tax planning? Or should I not do conversions and just delay that into the future and and and save money on the health care premium? So that's what we're gonna talk through today. But before we jump in, I wanted to highlight this week's listen review.
• 2:58
  It comes in from Complex Made Simple, and they give the show five stars and say, Jacob's podcast is extremely detailed and concise. He helps articulate important retirement planning topics and is always thorough in his explanation of complex financial topics. So thank you for that review. It means a lot to hear that, it's been impactful and valuable for you. If you're like this and you're like, hey, Jacob, this is a great podcast.
• 3:20
  I'm really glad that you're sharing this information. Please leave a written review there on Apple Podcasts or subscribe to the YouTube channel, leave a comment. It helps me out and it helps other people find the show. Okay, let's go ahead and jump into the topic this week. We're gonna be figuring out the answer to which should I prioritize, health insurance subsidies, or should I think about Roth conversions?
• 3:40
  Okay, so to kind of set the stage a little bit here and give you some context of what the issue is around this, as many people who retire before 65 is they've got to figure out your health insurance, situation. And if you find a good health plan, well, you still have to pay really high premiums for that. Now, like I mentioned earlier, you can have the Affordable Care Act or ACA subsidies, which will help reduce the amount of premiums. But the catch is, you've got to have a low income. So what is a low income and what do you have to have to qualify?
• 4:06
  Well, in 2024, if you're a one person household, you can earn up to $58,320 this year and still qualify for subsidies on your healthcare insurance premiums. Now, that's up to 400% of the poverty line. So that's what that number is. Now, between there and lower, you could get a higher subsidy. So, depending on where you fall in your income range in relation to the poverty line, that will indicate how much of a subsidy you can get.
• 4:36
  Just know that if you're a one person household and you're earning $58.03 $20 or less that shows up on your tax return, if that's how much is there or less, then you get to have at least some subsidy. For a two person household in 2024, it is $78.08 $80. So you have to be under those income amounts in order to qualify for a subsidy. Obviously, the lower income you have, the higher the subsidy can be. So those are important numbers to know.
• 5:04
  Now, one of the most important things to know in this is that there's a cliff involved. So much like IRMAA, if you go a dollar over the IRMAA income limit, you're gonna pay the higher premiums on Medicare. Traditionally, these ACA subsidies have a cliff as well. Meaning, if you go $1 over that cliff, you're not gonna qualify for any subsidies. So that's traditionally how it's been done.
• 5:22
  But currently, in 2024 and 2025, under the inflation reduction act, that cliff is temporarily paused, meaning that cliff does not apply. But what will happen there is as your income increases, you are capped at eight and a half percent of your income. That's the most that you will pay for your health insurance premiums is 8 and a half percent of your income. So if you're over the 400% of the poverty line that I just described a second ago, you will have a a cap in terms of percentage percentage of your income. But if you have a really high income, you could still be paying more than you would like.
• 5:51
  So just know that these two years, 2024 and 2025, that cliff is not in place. But in 2026, the cliff is coming back into play. So whenever we're thinking about all this, we're planning for it, we're trying to figure out the best plan for you and your retirement, don't base all of your decisions based on the current legislation. I'll probably think about it in regards to what will be in 2026, meaning that cliff is gonna be probably reinstated. So use this inflation reduction act provision to your advantage if you're in retirement trying to lower your health insurance premiums right now this year and next year.
• 6:20
  But just know that for the majority of our conversation today, think about the cliff actually being there and how you can plan for it moving forward into the future. So I just wanted to make sure we clarify that before we move on. Now, the the second part of this and the hard part is is if you have a lot of tax deferred money now you might be like, Jacob, well, what is a lot? Like, what is a lot of tax money that can mean a 100,000 to one person and 3,000,000 to another person? But for me, kind of think of it this way.
• 6:42
  If you've got under $500,000 of tax deferred or pre tax assets like a four zero one ks or an IRA, then I wouldn't worry so much about doing tax planning on the Roth conversion side of things because your RMDs are likely never gonna be too high. It depends on your age, depends on the growth rate of your account, things like that. But your RMDs are likely never gonna be too high, so that you must be doing Roth conversions to help mitigate your taxes in the future. If you have between 500,000 and a million dollars, you're kinda in that maybe range. Maybe it would be beneficial for you to do Roth conversions or maybe it wouldn't be.
• 7:14
  Now, if you're above a million dollars, you probably need to do some tax planning and Roth conversions will probably be in your future or a part of your plan. So it just really depends on where you fall in these ranges. Now, these are kind of the general rule of thumbs that I like to use as a starting place. Not everyone has to follow them nor should everyone follow them. I would say that this is where you should start and then adapt based on your specific needs or desires as you go.
• 7:37
  So the question is, is Roth conversions on one hand, or should I do, no Roth conversions to keep my income low to save on premiums? So that's the question we're trying to figure out. Now, we've got to do a few things to figure out which one is best for you, which which way to go is best you. And there might be a way to do both. So we're gonna check that out in a second.
• 7:54
  But the first thing we've gotta figure out is are RMDs going to be a problem for me in the future? Now, does a problem mean? Well, an RMD in and of itself is not a problem. In fact, most people are gonna have RMDs and you probably want an RMD, and I'm going explain why in a second. Now, do I mean by an RMD being a problem?
• 8:13
  Well, what I mean by that is if you have a tax deferred account right now, and then you will have that obviously into the future. If it grows from this point in time into the future, and then you get to 73 or 75, depending on your age, you will have to take requirement distributions at that point. So the question is, is it cheaper to pay taxes now to take money out of those accounts via distributions to live on or Roth conversions, or will you have to pay taxes at a higher rate in the future? Now Jacob, how would this play out? Well, right now being, let's say you retire at 60, well, you've got no income if you retire because you don't have social security yet.
• 8:48
  You don't have any other pensions yet. Like there's nothing coming in the door. The only way you can create income on a taxable basis for yourself is to distribute money from your IRA or your four zero one ks. Now, with that said, let's say in the future at 75, whenever you've got a million dollars now, you could have upwards of 2,000,000 or more dollars in the future. What you're going do at that point is you're going to say, hey, I've got social security, I might have a pension, now I have to throw RMDs on top of that, and that's going to push me into higher tax brackets.
• 9:17
  So, you could use the ten, twelve, or even the 22% tax bracket now versus you'd be in the 24% or beyond brackets in the future. So that's the difference, you have to figure out are RMDs gonna push me into higher tax brackets in the future or not? And if so, that means Roth conversions could be an optimal thing for you to do in these what we call gap years. The time between whenever you retire and whenever your social security begins. So that's the first thing we've got to figure out.
• 9:43
  We've got to determine are RMDs going to be an issue? If they are, we've got to figure out how much of an issue they're gonna be, and then be able to back into what we need to do now from a tax planning standpoint to determine how much of a Roth conversion we need to do, or when we need to do those Roth conversions. So how do I like to figure this out? Well, I like to use a software to help project forward. Hey, what are my account balances potentially gonna be in the future?
• 10:04
  That way I know, hey, this is how much it's gonna be, whether I've got a million now and I've got 2,000,000 or 3,000,000 later, or maybe I have 3,000,000 now and I will have $67,000,000 later. So it really depends on your growth rate over time or how much you expect your accounts to grow. And then also depends on how old you are. Because if you're 60 or 55, whenever you retire, you've got a long runway until RMDs kick in. So if you don't do any planning before then, it's gonna double or triple by the time you get to RMD age versus if you're 64, it's a little bit different because you're closer to RMD age.
• 10:33
  Or if you're 67, obviously you would be a Medicare age, so the healthcare subsidy wouldn't matter as much. You have some other questions to answer there on the Roth conversion side of things. But we've got to figure out and plan and project forward. Hey, what could my exposure be? Like what could the risk be?
• 10:49
  And then we'll go from there. So that's the first thing is we got to figure out are RMDs going to be a problem or not? And if they are, we've gotta figure out how to do the Roth conversions well. If they're not gonna be a problem, that allows us to potentially say no Roth conversions. Instead, we're gonna do healthcare subsidies and keep our income low so that we don't have to pay more on the healthcare otherwise than we have to.
• 11:09
  So that's the first point. If your RMDs are going to be minimal or not an issue in the future, then I would probably prioritize the healthcare insurance subsidies. That way you don't pay as much on the health insurance premiums in the early stages of retirement. Now, if you are gonna have high RMDs in the future, then you have to figure out what that tax liability could be. Most of the time, if you've got a million, million and 0.5, 2,000,000 or more dollars in those tax deferred accounts and you're young, meaning 60, between 60 and 65, you're going to have probably a higher potential gain of doing the conversions and letting that money grow tax free and saving on taxes in the future than you would if you saved on health care insurance premiums right now.
• 11:49
  Here's why. If your health insurance premium is about $1,000 let's say every single month, and you can get a subsidy and that lowers down to 500. Well, you're saving $6,000 a year, which means if you do that for five years, that's $30,000 If we do a Roth conversion and we can save upwards of a 100 or more thousand dollars over the rest of your life, that far outweighs the savings you would have by reducing your income and not paying as much on the premium. So it really depends on your preference, but we have to look at the math and look at the numbers as well to see which might be the best option. Now, the second thing we wanna evaluate here is the question of, could I do both?
• 12:24
  Like, could I do save on subsidies right now and get those subsidies here before '65? And then could I do Roth conversions after '65 and ultimately save taxes in the future? That might be possible. But again, that goes back to how much you have in tax deferred accounts and whether or not you should be doing conversions now to get that tax savings started. So could you do both?
• 12:44
  Well, maybe. Here's what that might look like. Let's say you've got a million dollars in a tax deferred account and you're trying to figure out whether or not you should do Roth conversions. Well, it could be something like this. Let's say from 60 to 65, I'm going to keep my income low below that subsidy level so that I get the subsidies on my health insurance premiums and I have to pay less there.
• 13:02
  And then once I turn 65, I can then do Roth conversions while I'm still perhaps delaying my social security, and then I can begin saving taxes in the future by doing those conversions. So you could get the best of both worlds if you do it that way. Now the key there, whenever you're converting around Medicare and things like that, have to watch out for IRMA. Again, I don't say that IRMA is the only thing we have to avoid and watch out for. It's just something to make sure that we're aware of.
• 13:24
  If we're trying to stay under the Irma limit, let's make sure we don't go over that, whenever doing conversion. So you could do, no conversions in before you get to 65, you could do conversions after 65 until RMD age. And so you kind of get the best of both worlds. Again, there's no one size fits all here, and you're gonna have to figure that out for your situation specifically and what your plans are. But you could do both.
• 13:46
  You could do no conversions until 65 and then the conversions after 65 up to either social security, whenever you take that or all the way up to your RMD age at 73 or 75. So that's number two is maybe there's a way for you to do both. The third thing that we've got to look at is are you charitably inclined? And you might be like, well, what does being charitable have to do anything with Roth conversions or health insurance subsidies? Well, if you are charitably inclined, and you're gonna be giving more than a couple $100 every year to a charity, and you're actually given substantially to charities, what you could do is, what's called a QCD once your RMDs come into play.
• 14:22
  So a QCD stands for qualified charitable distribution, and you can do up to $100,000 per year per person. So that'd be $200,000 per married couple. And so what you can do is you can say instead of my RMD being sent to me and paying taxes on it, I can then do a QCD instead and send whatever my RMD would have been to the charity or church of my choice. Now, happens there is you don't have to pay income taxes and the charity actually gets to receive more money. So you get to accomplish both of those things at the same time.
• 14:52
  Now, why might that be important or play a factor here? Well, let's say that your RMD is gonna be 25,000 whenever you turn 75. But you're already planning to give $15,000 to a church or charity. So, year you're giving $15,000 away. Well, whenever you get to 75 and your RMD is expected to be $25,000 and you're already going be giving 15, that means your RMD is now only 10 because you can do a QCD for the 15 you're already going to give, which means you only pay income taxes on the 10 that's left over.
• 15:22
  Obviously, you can do this at any scale up to those QCD maximums I already mentioned, but just know that your RMD might end up being less than you think if you implement some of these strategies and you're charitably inclined. So how does that play into the decision to maybe not do conversions before 65 kind of in this gap window? It might be because your RMDs are not going to be huge now that you're doing a QCD as well as an RMD at the same time, which means maybe you can get the best of both worlds going back to number two. You can do the subsidies before '65 and keep your health insurance premiums low by not doing conversions. And then later on, you could maybe do some small conversions between '65 and '75.
• 15:58
  And then once '75 rolls around, the majority of your RMD could be, met by the QCD, which means you don't pay taxes on that either. So that's maybe a way to do next level tax planning is to say, I am charitable, now don't do just give away money because you want to avoid taxes here. If you're already charitable, you're already going to be doing this no matter what. That's whenever you can use that QCD to your advantage and ultimately lower your RMDs, which means that gives you the opportunity to not do conversions and keep your health insurance premiums lower before 65. The fourth thing here is that many people are trying to do planning for the next generation and help them save on taxes or leave them without this huge tax bill to inherit.
• 16:38
  And so maybe Roth conversions to save money for your kids in the future might be more important than the health insurance savings you could have before 65. That's something that's a personal preference and it could be evaluated. But just know that if you decide that, health insurance premiums and paying a higher amount every month is not necessarily a problem and you'd rather save your kids or grandkids more money in the future by having them pay less taxes whenever they receive your accounts. That's a preference, but it's an option. So whenever you think about it that way, what's more important to you, you can evaluate that and determine what's best for you.
• 17:09
  So these are kind of the things that I would be thinking about if I were trying to determine, hey, what's the best way to evaluate which I should prioritize? Whether it be health insurance premiums or reducing those through the ACA subsidies, or should I be doing Roth conversions? I would say that it depends on how much money you have in tax deferred accounts, And then also these other factors. Maybe you could do both just at different times or delay your Roth conversions until after 65. Maybe you have QCD opportunities or charitable opportunities in the future, which means your RMDs will be a lot lower.
• 17:39
  You gotta figure out, hey, are my RMDs even gonna be a problem? They might not be a problem because you wanna use up those lower tax brackets if you can. And so maybe doing Roth conversions could be detrimental to you if you're not in the right situation to do them. So all this factors into the decision of keeping your income below the 400% of the poverty line or not for those subsidies, or maybe you should be doing Roth conversions now because you have a large tax deferred balance and it's only gonna keep growing into the future. So I hope this helps you evaluate what the best plan or option for you might be.
• 18:09
  But at the end of the day, just know this, you've got to be planning for these things and having a plan for both now, but also, every stage of retirement is important and valuable to you so that you're confident as you move into these retirement years. So if you have a question, feel free to email me. It should be linked down below. Also, if you're on YouTube, leave a comment. Would love to hear your feedback or if there's something else, that you'd like to hear more about.
• 18:30
  Anyways, thank you so much for tuning into this week's episode of Retirement Answers. We will see you next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show.
• 18:51
  Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.