The Essential Guide to Maximizing ACA Subsidies through Capital Gains Harvesting and Roth Conversions

The Affordable Care Act (ACA) offers valuable subsidies to individuals and families that meet certain income requirements. To qualify, your Modified Adjusted Gross Income (MAGI) must fall within specific ranges, which can be challenging for those with substantial investment portfolios.

ACA Subsidy Eligibility

ACA subsidies are available for households with MAGIs below a certain percentage of the Federal Poverty Level (FPL). For 2024, the upper limit for premium tax credits (PTCs) is 149% FPL. To optimize your subsidy eligibility, you should aim to keep your MAGI within this limit.

Capital Gains Harvesting vs. Roth Conversions

Two effective strategies for managing MAGI are capital gains harvesting (TGH) and Roth conversions (t->r).

Capital Gains Harvesting involves selling assets that have appreciated in value and replacing them with similar assets to increase the cost basis. This generates long-term capital gains, which are taxed at a lower rate than ordinary income.
Roth Conversions involve transferring funds from a pre-tax account (e.g., 401k) to a Roth IRA. Roth conversions are not taxed immediately, but qualified withdrawals in retirement are tax-free.

Determining the Optimal Strategy

The choice between TGH and t->r depends on several factors, including:

Marginal tax rates
RMDs (required minimum distributions)
Asset allocation
Risk tolerance

It’s essential to analyze these factors carefully and model different scenarios to determine the best approach for your situation.

Example Case

Consider an individual with the following financial profile:

MAGI target: 149% FPL ($21,724)
Dividend income: $12,000
Loss carryover: $3,000
Remaining MAGI: $5,600

Step 1: Convert Pre-tax Contributions

To reach the MAGI target, a t->r conversion of $5,600 makes sense since it will be tax-free.

Step 2: Fill Remaining Gap

To fill the remaining $7,124 gap to reach 149% FPL, the individual can sell assets in their taxable brokerage account.

Step 3: Specifying Shares for Sale

Using a brokerage with specific identification (spec-id), the individual can choose which shares to sell. By selecting shares with a high cost basis, they can minimize the taxable capital gains.

Conclusion

Managing MAGI for ACA eligibility can be complex, but by carefully considering TGH and t->r strategies, you can optimize your subsidy benefits. It’s crucial to evaluate your individual situation, model different scenarios, and seek professional guidance if needed. By following these steps, you can maximize your ACA subsidies while preserving your financial security.

Note: It’s important to consult with a licensed agent for personalized advice and assistance in navigating the ACA subsidy process.