Spouse and I both 58, and trying to keep income low for ACA purposes. To that end, planning on withdrawing only from taxable account for several years.
When I run the withdrawal optimization, it suggests taking money from an IRA. I assume, perhaps incorrectly, this is because any withdrawal up to the standard deduction would be tax free. Of course, doing so would affect ACA PTCs.
Does the withdrawal optimization algorithm take into account the reduction in PTCs? Wondering if I should ignore the suggestion to use IRA money next year.
Thanks.
it does consider ACA, but with a few caveats. You need to make sure you filled out the inputs correctly or it will decide you are not eligible -
Under Build-Scenario Assumptions, make sure the you've entered a retirement date and that is prior to when you want to use ACA. Also, on Build-Expenses-Healthcare, there are little checkboxes under a heading "Assume ACA Insurance if Eligible". Make sure you check those for the appropriate time periods.
Also, realize that the optimizer only checks ordinary income tax brackets. It may be that going to a lower FPL could be better than the default of Unlimited, so once you run the optimizer, you can try selecting a different value for the FPL to see if you can find a better case. Same for other factors, the IRMAA tiers and tax brackets line up differently for everyone, depending on dividends, after running the optimizer, you should play with IRMAA tiers and whether to stay below the LTCG taxation to see if you can do better. Keep in mind that there is often a broad range of conversions that get you to about the same place, so it's quite possible the optimizer will recommend large conversions that make small gains - it may be technically best, but there are a lot of assumptions that go into the calculation, so you may not want to convert quite that much for whatever reason.
Beyond a certain amount in tax deferred, the math and therefore the program is going to favor Roth Conversions instead of chasing ACA premium credits, particularly if only one of you is eligible.
Beyond a certain amount in tax deferred, the math and therefore the program is going to favor Roth Conversions instead of chasing ACA premium credits, particularly if only one of you is eligible.
^^ That would very much also depend on the premium credit amount, and the Roth conversion cost with or without the ACA credit. I gave up $10k per person in ACA credit to Roth convert in 2024.
An example to show how I am sorting out the ACA loss cost: Without a Roth conversion, my Fed and State taxes are close enough to zero, so here I ascribe all the taxes to the Roth conversion. in 2024 I converted $350k, and ended up with a mAGI of $412k. My total state and Fed taxes are $100k. However, since the Roth conversion took away $10k of ACA credit, my real conversion cost is $110k and the conversion tax rate is 110/350. Had there been two people on ACA, the conversion cost would have been $120k and the conversion tax rate, 120/350
For someone converting a smaller Roth amount, the loss of the ACA subsidy can pretty easily add 10% to the Roth conversion tax rate.
Somewhat tangentially, the above is why a person would want to minimize as much as possible AGI income in a Roth conversion year not from the conversion itself. It spreads the credit loss over a larger conversion amount. You have to tell Pralana to calculate accordingly, which means paying taxes and living off a post tax account.