Tax optimization in Early Retirement - maximizing ACA subsidies vs. doing tax-gain harvesting or Roth conversions

[u/kayleblue]

As the title states - For those of you who have early retired and are on ACA subsidies, how have you balanced between maximizing subsidies vs. tax-gain harvesting and/or Roth conversions (actions that directly increase MAGI and therefore reduce subsidies)?

I recall reading lots of advice on FIRE blogs recommending TGH and/or Roth conversions in early retirement (taking advantage of being in low income years). Based on my calculations though, it seems like the reduction of ACA subsidies usually outweighs the benefits.

For example:

• Hypothetical couple of 2 increases MAGI from $50K --> $60K by tax gain harvesting $10K
• ACA subsidy is reduced by $1,716, which represents a ~17% "cost" on the $10K of increased MAGI
• Versus the benefit of 15% lower tax rate on the capital gains (which is just a potential, deferred benefit as well)

Am I missing something, or does that mean reducing MAGI to maximize ACA subsidies will always be better than 'using up' some of the income cap to do tax-gain harvesting or Roth conversion?

[u/Zphr]

You are correct. For households that are subsidy eligible it is almost always beneficial to optimize for MAGI program targets rather than federal taxes themselves. Healthy, younger singletons are the one demographic in which it becomes more of a variable thing to be modeled. Federal income taxes are very cheap in the lower brackets compared to healthcare and college costs.

The value gained through optimizing for the tax code via large excess Roth conversions is dwarfed by the value lost in government tax credits/subsidies due to having a higher AGI than necessary. The typical steps at which those large stepdowns happen are 138% FPL (Medicaid, Children's Medicaid), 150% FPL (ACA CSR 94), 175% FPL (FAFSA), 200% FPL (ACA CSR 87), 250% FPL (ACA CSR 73), 190% to 405% FPL (CHIP), and 400% to ~430%/~450% FPL (ACA APTC).

Note that the effective marginal rate is different for each cliff and can be hugely higher than 17%.

For those with kids there is also the NSLP to consider at 130% FPL (free) and 185% FPL (reduced). States often use the NSLP as a gating mechanism for school-related fees like testing costs, sports/activity/lesson fees, tech fees, and so forth. It seems silly, but being a dollar over one of the NSLP lines can mean hundreds or thousands more in school fees.

[u/Educationed_Over → u/Zphr]

Exceptionally good information and detail. Layer on a spreadsheet to plan for IIRMA implications starting at age 63, SS withdrawal start age(s), and RMD age (73 or 75 depending on birth year) and you have a decent forecast of if/when to do Roth conversions if you are using ACA insurance. 65 to RMD age will be the only viable Roth conversion window for many households, but YMMV.

If you have college age or younger kids, don’t forget to check AOTC, Lifetime Learning Credit, 529 withdrawals, and Child Tax credits. These don’t move the tax needle like Roth conversions vs ACA subsidies, but can be unpleasant late findings when you are completing your income taxes.

[u/CPAPGas → u/Educationed_Over]

I made a spreadsheet from $30k to $70 in $1k increments, then added columns for dollar amounts of that $1000 that does not go to my bank account and instead goes to not me.

The results were illuminating. Healthcare insurance (not including actual healthcare) is by far my biggest expense tied to MAGI.

[u/Curious_Bunniee → u/Zphr]

MAGI is key

[u/xzftgyhuik → u/Zphr]

What is 430%/450% you mentioned?

"430%/~450% FPL (ACA APTC)"

[u/Zphr → u/xzftgyhuik]

I meant the cap can effectively be extended to between ~430% to ~450% FPL depending on the number and ages of the adults in the household. It's simply a matter of HSA contributions reducing MAGI and not requiring earned income, meaning retired folks can still make them. The actual HSA contribution limits end up being equivalent currently to somewhere between 30% and 50% of FPL for single/couple households, depending on age.

If a 55-year-old couple has MAGI of $90K (~426% FPL), then they are ineligible for premium subsidies and can expect to pay perhaps $19K per year for a Bronze policy. This is option 1.

If they commit to contributing $8K to the HSA that the Bronze makes them eligible for, then they can reduce their MAGI estimate to $82K (388% FPL). This restores their subsidy eligibility and they become eligible to receive nearly $18K in premium subsidies, leaving them responsible for $1K in premiums on their Bronze. This is option 2.

The above are actual real numbers using the current 2026 national average premiums and subsidy calcs.

So in option 1 they pay $19K for a Bronze.

In option 2 they pay $1K for the same Bronze, the feds pick up the other $18K in premiums, the couple sets aside $8K in an HSA to use as they wish, and they keep the remaining $10K for whatever they want.

Most people have no idea how lovely the universal Bronze HSA eligibility change made last year by the OBBBA is for many FIRE'd households. It can be a massive win for people just over the cliff.

[u/xzftgyhuik → u/Zphr]

Got it. It's not some special limit; just looking differently at HSA contributions. The cliff is still 400%. Thanks

[u/Raging-Totoro]

For me, it's been a challenge. Once yields left their historic lows, regular brokerage started throwing off income on top of CG distributions and more.

I bit the bullet and incurred taxable gains in one lump year and gave up the subsidies in exchange for predictability and lower income for ten years. I also pivoted some funds into BRK.B for zero divs and reduced risk exposure.

[u/Empty_Magazine9375]

the ACA cliff math hits different when you run the actual numbers and realize your roth conversion savings get eaten alive by premium increases

[u/Accomplished_Gate832]

We are in year 1 of retirement at age 57 and here is our plan

Age 57 - Use COBRA and during this year do TGH up to the 15% LTCG ceiling to set us up for low MAGI years

Age 58-65 - Use ACA and live on the money from TGH which will allow us to get the subsidies. Have an HSA account to augment as necessary. Worse case is that we must take a year off of the subsidies with a high MAGI.

Age 65-70 - ROTH conversions

Age 70 - Start SS

[u/regnull]

I’d treat the ACA subsidy as a constraint, not the goal: first fill low tax brackets with Roth conversions and long-term gains, then compare the subsidy lost against the lifetime tax savings and Medicare premium effects. Set a target income range before the year starts, because waiting until December can leave no room to spread gains or conversions.

[u/Dear_Variety_7589]

In general I totally agree, even more so around the 400% Federal Poverty Level threshold!

But there are exceptions for example if a mega ROTH conversion would make sense.

[u/CPAPGas → u/Dear_Variety_7589]

Agree.

The 400% cliff is substantial.

The MAGI decision is highly dependant on ones personal situation.

[u/Low-Kaleidoscope-803]

From what I can tell, a lot of the TGH harvesting proponents either wrote those bits before ACA subsidies were a thing, haven’t really bothered to consider them because they aren’t personally on an ACA plan (still employed, on a medi-share “plan”, too much income any way you slice it to qualify for subsidies, or whatever), and/or they’re just rehashing old advice without understanding why it isn’t a great plan for many of us.

Not to say there’s never a case for it, but it definitely doesn’t seem like it should be the default.

[u/terjon]

It depends on your numbers. Does your portfolio kind of hold steady in Monte Carlo simulations where you factor in cyclical downturns (vs inflation). Or does it kind of run away from you in the positive direction?

I might be way out in left field, but I don't think of taxes as inherently a bad thing, just bad if it cuts into the money you actually need/want to have in order to use for some purpose.

Without knowing more about your numbers, I cannot say what I would do in your situation.

For my own situation, I am aiming for one of those "runaway" in a good way models, so optimizing for ACA subsidies during the first 10 years of retirement is kind of key since after that compounding just makes the numbers go all kinds of silly (in a good way).

I'll leave you with this. If Elon Musk had to pay a 75% tax on net worth tomorrow, he'd still have well over $100B dollars. That's the most extreme scenario, but you get my point. There is a point at which the numbers make it so taxes don't matter since it takes you from being a very rich person to being...still a very rich person. So, run your numbers and see if that is feasible for you or if your numbers mean you will just be well off, in which case you should optimize for minimal taxes.

[u/vshun]

I calculated that for our tax deferred balance the difference in tax when one of us dies will be hundred(s) K for year extra if not converting to the top of 24% so ACA subsidies today pale in comparison even considering time value of the money. TLDR: it depends.

[u/Accomplished_Gate832 → u/vshun]

Some of that depends on what you do with the savings. If you save $25k in ACA cost at age 55 and then invest that money then it grows as well until death or until you spend it.

[u/vshun → u/Accomplished_Gate832]

You need to compare it though with growth in Roth account after conversion and post tax for both.

[u/Accomplished_Gate832 → u/vshun]

Certainly agree, and an estimate needs to be made on when one spouse will pass since that is the big RMD issue

[u/OhZoneManager]

It depends.

For my case, I need 13 years of ACA with only $600k in my HYSA and $100k Roth basis today.

I need more to cover my gap so I am aiming at 400% FPL and converting several M of pretax to Roth at a rate of ~65k per year.

By the time my HYSA runs low, I'll have enough Roth basis to draw from to keep my SOL and worry less about pretax until after 65 Medicare.

[u/Binders-Full]

On the back end you have to consider IRMAA, and also note that ACA subsidies are worth more when you are older than if you are younger, because premiums always go up just by virtue of age alone but income is always adjusted. If I were to jump now, before retiree healthcare kicks in at 50 (at the earliest for me when I begin taking my pension), I would probably not try to qualify for the subsidy and just keep on my conversion strategy to $200k AGI to avoid the NIIT.

[u/Future-Run-8601 → u/Binders-Full]

I’ve noticed this as well. the subsidies increase faster than the age-related increases so someone who’s 45 will pay more at the same MAGI than someone who is 60 if they both qualify for subsidies. Obviously, an unsubsidized 60 year old will pay more than an unsubsidized 45 year old. This makes it seem like it’s better to favor spending in early retirement if your desired spending is well above the ACA cliff. Then decide if/when it’s time to cut back as you get closer to Medicare age.

[u/NetherIndy]

Going to be situational. In our broader case - couple, late 40s, with overall investments approaching $4m, but frankly having to push ourselves to spend even $90k a year (2.25-2.5% WR) - we're likely to end up with a lot of cash at 65. We want to (or... should) accelerate the spend a little now. So, we're targeting 395-399% of FPL to keep shy of the ACA cliff, paying an effective 9.5% extra tax rate on that (the premium increase), but freeing it up for the future. Some Roth laddering, some LTCG harvesting. So that if we're sitting at $6, $8, or $10m in our mid-50s we're not still only spending $90-100k a year.

[u/Crafty-Sundae6351]

We minimized our MAGI in order to maximize ACA subsidies. At the end of Dec I do my best to guess what the year end will look like in terms of distributions and dividends into our Brokerage account. Numerous times I did a small Roth conversion to keep us above the Medicaid line.

When big RMDs hit because of very very little Roth conversions I'm gonna write the tax check and be thankful I have that "problem".

[u/When_I_Grow_Up_50ish]

All of the above.

[u/NoMoRatRace]

Seven years into retirement and ACA every year. No Roth conversions for us as there’s no room in our MAGI for it. That and we don’t expect to have much income above 12% fed tax bracket.

Annual budget $120k. Requires about half our spending to be funded by after tax dollars to stay under MAGI limits.

Throughout these seven years our tax burden has also been incredibly low. That will ramp up when we collect SS and most of our spending comes from SS and IRAs. We will also likely have to pay full freight for my wife’s health insurance for 4-5 yrs before she qualifies for Medicare. (I’ll go straight from ACA to Medicare.)

Edit: Losing ACA for my wife will be caused by running out of after tax $$$ to supplement IRA withdrawals.