Harry Sit's Blog, page 25

Buy More I Bonds at TreasuryDirect in a Revocable Living Trust

One limitation of buying I Bonds is the annual purchase limit. Each person can buy a maximum of $10,000 per calendar year as the primary owner. If you see I Bonds as an investment, it’s true you can’t dump $500,000 into I Bonds in one shot. However, if you see I Bonds as another account, the $10,000/person limit is higher than the annual contribution limit for an IRA. You never hear people say you shouldn’t bother contributing to an IRA because the limit is only $6,000 or $7,000 per year. People go to great lengths to contribute to their IRA with a backdoor Roth.

In addition, if you have a trust, you can buy another $10,000 per year under the name of the trust. A lawyer created a revocable living trust for us back in 2018 (see Will and Trust Through Employer Legal Plan). It was surprisingly easy when I opened an account for the trust at TreasuryDirect last month. It took only 15 minutes to open a new trust account and buy another $10,000 of I Bonds.

Registration Name

TreasuryDirect has instructions for opening an entity account. A trust account is one type of entity accounts. The instructions look complicated but it’s not that bad if you read closely. The most tricky part is the name for the trust account. For a revocable living trust, they want the registration to include both the trustee and the grantor even if the names are the same.

My wife and I have a joint trust. We are both trustees and grantors. So the name of our registration becomes:

Person A or Person B, Trustees, [Name of the Trust] U/A with Person A and Person B dated [Month Date, Year]

The instructions include a list of approved abbreviations. “U/A” stands of Under Agreement. They allow 150 characters in the registration. Although the registration looks long and redundant, it fits within 150 characters.

Tax ID

A revocable living trust typically uses the grantor’s Social Security Number as its Tax ID. The trust account at TreasuryDirect can still use the grantor’s Social Security Number even though the grantor also has a personal account with TreasuryDirect under the same Social Security Number.

Email Address

The trustee acts as the manager of the trust account. TreasuryDirect wants an email address for sending one-time passwords and notifications. You can use the same email address if you also have a personal account at TreasuryDirect.

Bank Account

The new trust account needs a linked bank account. The bank account doesn’t have to be under the name of the trust. It can be the same personal bank account linked to the grantor’s personal account at TreasuryDirect.

Between the personal account and the trust account, the Tax ID, the email address, and the linked bank account can all be the same. The account number and the account type are different.

TreasuryDirect doesn’t do any random deposits to verify the bank account. You can enter an order to buy as soon as you create the trust account. Make sure you give the correct bank account. If the debit bounces, your account will be locked and it’ll take effort to unlock it.

Separate Trusts

We have one joint trust because we live in a community property state. It’s not uncommon for a couple to have separate trusts. If you have two trusts, you can open a separate account for each trust and buy another $10,000 of I Bonds every year in each account.

Create Trust by Software

If you don’t have a trust and you don’t otherwise need one, you can still create a trust just to buy more I Bonds. It may not be worth it if you have to go to a lawyer but if you make it really simple, you can do it with software. Quicken Willmaker & Trust 2021 by Nolo Press sells for only $39 on Amazon. Many public libraries carry this book-and-software combo or a previous edition. You can also find free living trust templates online, although I trust Nolo Press more.

One person isn’t limited to having only one trust either. If you don’t mind the trouble, nothing stops you from creating seven trusts with different names that hold only I Bonds. Once you have the software, you can create one trust or seven trusts.

Transfer from Personal Account

A trust can’t be the second owner or the beneficiary of the I Bonds in a personal account (see I Bonds Beneficiary vs Second Owner in TreasuryDirect). If you’d like to put everything into the trust, it’s possible to transfer bonds in your personal account to the trust account, but it can’t be done online. You will need to fill out FS Form 5511 and sign it before a certifying officer at a financial institution. The certifying officer must sign and apply their signature guarantee stamp or medallion stamp. We did this at Bank of America to replace paper bonds stolen by burglars. It requires extra work but it’s doable.

It isn’t taxable when you transfer personal assets to your own revocable living trust.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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I Bonds Beneficiary vs Second Owner in TreasuryDirect

When you have retirement accounts with a private financial institution, you can designate beneficiaries for the account. Some financial institutions also allow Pay On Death (POD) or Transfer On Death (TOD) designations for non-retirement accounts. After reading the previous post How To Grant Transact Right on I Bonds to the Second Owner, someone asked whether it’s easier and better to set up the I Bonds in TreasuryDirect with a beneficiary as opposed to a second owner.

One difference between TreasuryDirect and other financial institutions is that the beneficiaries and the second owners in TreasuryDirect are set at the holdings level, not at the account level. Theoretically, within the same account, you can hold some I Bonds without any second owner or beneficiary, some I Bonds with Person A as the second owner, some I Bonds with Person B as the second owner, some other I Bonds with Person C as the beneficiary, and yet another set of I Bonds with Person D as the beneficiary, and so on. Even though you may not need this much granularity, you can’t simply set a second owner or beneficiary for the entire account.

After you die, your second owners and/or beneficiaries need to contact TreasuryDirect by phone or email, effectively saying:

The owner of this account died. I’m the [second owner or beneficiary] of some bonds in the account. Please give those bonds to me.

If your beneficiary has their own TreasuryDirect account, you can let the beneficiary see which I Bonds they’re a beneficiary of by granting them View rights on those I Bonds. The process to grant View rights to the beneficiary is the same as the process to grant Transact rights to the second owner, as I showed in the previous post. You also have to do it bond by bond.

Whether you should set up your I Bonds with a beneficiary versus a second owner depends on whether you want to let someone transact on those bonds on your behalf when you’re still living. A beneficiary can only be granted View rights. A second owner can be granted either View or Transact rights. In a sense, the second owner with Transact rights is like a beneficiary plus a power of attorney. The second owner with only View rights can’t do anything more than a beneficiary.

BeneficiarySecond OwnerSet on each bondYesYesReceive bonds after your deathYesYesCan be granted View rightsYesYesCan be granted Transact rightsNoYes

As the primary owner of the I Bonds, you can change the arrangement at will. You can add or remove a beneficiary or a second owner at any time. If you started with a beneficiary and now you want a second owner, you can remove the beneficiary and add a second owner. If you started with a second owner and now you want to downgrade to a beneficiary, you can revoke the Transact rights or remove the second owner altogether and add a beneficiary. It’s all up to the primary owner.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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How To Grant Transact Right on I Bonds to the Second Owner

The recent upticks in inflation made Series I Savings Bonds (“I Bonds”) the best bonds you can buy, if only you can buy more of them. Because they’re indexed to inflation, if inflation goes to 20%, I Bonds will earn 20%. Other than getting I Bonds using your tax refund, the only way to buy them is through the federal government’s website TreasuryDirect.

My wife and I have been buying I Bonds through TreasuryDirect for many years now. When we buy, we always give both our names and our social security numbers: a primary owner WITH a second owner. I’m the primary owner and my wife is the second owner of the bonds I buy in my account. She’s the primary owner and I’m the second owner of the bonds she buys in her account.

I only learned recently that when you’re the second owner of the electronic I Bonds issued through TreasuryDirect, you don’t automatically see those bonds in your account. The bonds have the second owner’s name and Social Security Number in the registration but they’re not automatically matched to the second owner’s TreasuryDirect account. By default, only the primary owner sees the bonds and can redeem the bonds. If the second owner wants to see them or redeem them, the primary owner has to specifically grant View or Transact rights on those bonds to the second owner’s account.

TreasuryDirect describes how to do this in an FAQ: How do I grant View and Transact Rights to securities held in my TreasuryDirect account? Unfortunately, the rights are granted at the level of each bond in the account, not at the account level as a whole. Because we already own multiple bonds, we had to go through the steps one bond at a time in our respective accounts. We also have to remember to go through these steps every time we buy a new bond.

ManageDirect

After logging into TreasuryDirect, go to ManageDirect, and then click on Assign View or Transact rights under Manage My Securities.

Grant Transact Rights

Select one of the bonds in your account.

If you put a second owner on the bond at the time of purchase, the second owner’s name and Social Security Number will show up automatically. You need to enter the second owner’s TreasuryDirect account number. If you choose “View rights only” the second owner can only see the bond but can’t redeem it. If you choose “Transact rights” the second owner can both see and redeem the bond.

After you grant the rights for one bond, you go back to the list of your bonds, choose another bond, and repeat. There’s no way to grant rights to multiple bonds in one pass. The list doesn’t show you which bonds you have already granted rights and which bonds you haven’t. You’ll have to remember your progress and pick the next bond.

Shared Securities

After the primary owner grants View or Transact rights to you as the second owner, you still don’t see those bonds in the same view as the bonds of which you’re the primary owner. To see the bonds on which you’ve been granted rights, go to ManageDirect, and then find the links under “Manage My Shared Securities” on the right. The “Access securities” link gives you a list of the bonds you were granted rights to see. If you’d like to redeem a bond, use the “Redeem a security” link.

Another quirk in TreasuryDirect is that the primary owner can revoke the rights or remove the second owner altogether at any time. It’s something to be aware of if your relationship with the other owner changes.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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How To Grant Transact Right on I Bonds in TreasuryDirect

The recent upticks in inflation made Series I Savings Bonds (“I Bonds”) the best bonds you can buy, if only you can buy more of them. Because they’re indexed to inflation, if inflation goes to 20%, I Bonds will earn 20%. Other than getting I Bonds using your tax refund, the only way to buy them is through the federal government’s website TreasuryDirect.

My wife and I have been buying I Bonds through TreasuryDirect for many years now. When we buy, we always give both our names and our social security numbers: a primary owner WITH a second owner. I’m the primary owner and my wife is the second owner of the bonds I buy in my account. She’s the primary owner and I’m the second owner of the bonds she buys in her account.

I only learned recently that when you’re the second owner of the electronic I Bonds issued through TreasuryDirect, you don’t automatically see those bonds in your account. The bonds have the second owner’s name and Social Security Number in the registration but they’re not automatically matched to the second owner’s TreasuryDirect account. By default, only the primary owner sees the bonds and can redeem the bonds. If the second owner wants to see them or redeem them, the primary owner has to specifically grant View or Transact rights to the second owner’s account.

TreasuryDirect describes how to do this in an FAQ: How do I grant View and Transact Rights to securities held in my TreasuryDirect account? Unfortunately, the rights are granted at the level of each bond in the account, not at the account level as a whole. Because we already own multiple bonds, we had to go through the steps one bond at a time in our respective accounts. We also have to remember to go through these steps every time we buy a new bond.

ManageDirect

After logging into TreasuryDirect, go to ManageDirect, and then click on Assign View or Transact rights under Manage My Securities.

Grant Transact Rights

Select one of the bonds in your account.

If you put a second owner on the bond at the time of purchase, the second owner’s name and Social Security Number will show up automatically. You need to enter the second owner’s TreasuryDirect account number. If you choose “View rights only” the second owner can only see the bonds but can’t redeem them. If you choose “Transact rights” the second owner can both see and redeem the bond.

After you grant the rights for one bond, you go back to the list of your bonds, choose another bond, and repeat. There’s no way to grant rights to multiple bonds in one pass. The list doesn’t show you which bonds you have already granted rights and which bonds you haven’t. You’ll have to remember your progress and pick the next bond.

Shared Securities

After the primary owner grants View or Transact rights to you as the second owner, you still don’t see those bonds in the same view as the bonds on which you’re the primary owner. To see the bonds on which you’ve been granted rights, go to ManageDirect, and then find the links under “Manage My Shared Securities” on the right. The “Access securities” link gives you a list of the bonds you were granted rights to see. If you’d like to redeem a bond, use the “Redeem a security” link.

Another quirk in TreasuryDirect is that the primary owner can revoke the rights or remove the second owner altogether at any time. It’s something to be aware of if your relationship with the other owner changes.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Xfinity Mobile and Spectrum Mobile Bring Your Own Budget Phone

Consumer Reports had a good article on cell phone services through cable companies: Why Cell Phone Service From Your Cable Company May Make Sense. I’ve been getting cell phone service from the cable company for several years now. I can confirm the services work well for my needs at a low cost.

Xfinity Mobile

When I lived in California, the cable company in the area was Comcast. Comcast uses the brand Xfinity for its services. I used Xfinity Internet for home Internet and Xfinity Mobile for mobile.

The underlying services for Xfinity Mobile are carried on the Verizon network, which has good coverage. Xfinity Mobile has two plans: a By-the-Gig plan and an unlimited plan. Both plans include unlimited calls and texts. The difference is only in mobile data.

The By-the-Gig plan is the best when you don’t use much mobile data because you’re on WiFi all the time. You pay $15 per GB of mobile data shared by all lines in your household. If you have five lines and the five lines use 1 GB of mobile data combined when you turn off mobile data and only use WiFi, you pay $15/month, averaging only $3/month per line plus taxes. You don’t have to choose how much data you’ll use beforehand. If you normally use 1 GB but you used 2 GB in a month, you will pay another $15 for the extra GB for that one month before dropping down to $15 again in the following month.

The unlimited plan is the best when you use a lot of mobile data out and about. You pay $45/month for one line, $40/month per line for two lines, $33/month per line for three lines, or $30/month per line for four lines.

If you have a mix of heavy mobile data users and light mobile data users in your household, you can put some lines on the By-the-Gig plan and some lines on the unlimited plan. If you have some months of heavy use mixed with some months of light use, you can switch to the unlimited plan when you expect heavy use and switch back to the By-the-Gig plan when you’re back to light use.

Spectrum Mobile

After I moved to Nevada, the cable company here is Charter. Charter uses the brand Spectrum for its services. I’m using Spectrum Internet and Spectrum Mobile.

Spectrum Mobile is similar to Xfinity Mobile. It also uses Verizon’s network. It also has a By-the-Gig plan and an unlimited plan. The By-the-Gig plan charges $14 per GB of mobile data, taxes included. The unlimited plan charges $45/month per line with no multi-line discount.

Another difference is that the minimum in Xfinity Mobile’s By-the-Gig plan is 1 GB shared among all lines while Spectrum Mobile’s minimum is 1 GB per line. If you have five lines on Xfinity Mobile and the five lines combined only use 1 GB of mobile data, you pay $15/month plus taxes for all five lines. If you have five lines on Spectrum Mobile, you’ll have to pay minimum $14/month per line, which comes to $70/month for all five lines.

Spectrum Mobile isn’t as good as Xfinity Mobile due to its higher minimum in the By-the-Gig plan and the lack of multi-line discount in the unlimited plan. I’m thinking of switching to a different provider.

Bring Your Own Device (BYOD)

When I started with Xfinity Mobile, the catch was that you had to buy a phone from them. I bought a cheap phone from them for $1 when they had a sale. I didn’t have to use their cheap phone because once you have it, you can just take the SIM card out and put it in any other unlocked phone that works on the Verizon network.

Both Xfinity Mobile and Spectrum Mobile now let you bring your own devices but they limit them to iPhones, Samsung Galaxy phones, and Google Pixel phones. Before they send you a SIM card, they ask you to provide the IMEI number of your phone, from which they can tell which brand it is. If it’s not an iPhone, a Samsung Galaxy, or a Google Pixel phone, they won’t give you a SIM card unless you buy a phone from them.

This is only a business decision, not a technical limitation. Other unlocked phones that work on the Verizon network will also work once you get the SIM card. So you just need the IMEI number of an iPhone, a Samsung Galaxy, or a Google Pixel phone to request the SIM card. It can be an old phone of those three brands that you no longer use. Or you can ask a friend or a family member who has a phone of those brands. After you pass the initial screening and you get the SIM card, you can put the SIM card in a different phone and it will work as long as your phone is unlocked and it supports the Verizon network. My inexpensive Moto G works just fine.

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The Best Broker For a Custodial Roth IRA For Your Kid

The age of majority is 18 in most states in the U.S. Kids under 18 are allowed to work for pay but they aren’t allowed to open an account with a financial institution unless an adult is either a joint owner or a custodian. This is because kids under 18 can’t legally sign a contract and agree to the terms.

When a kid works for pay, the kid is eligible to contribute to a Roth IRA based on their earnings, up to the kid’s income from their job or the annual Roth IRA contribution limit, whichever is less.

The money doesn’t have to literally come from the kid. If the kid spent their money on something else, a parent can open a Roth IRA for the kid and fund the Roth IRA with the parent’s money. It’ll be the same as the kid contributed their income to the Roth IRA and the parent gave the kid money to spend on something else.

However, an IRA by definition has only one owner; there’s no joint IRA. Because the kid under 18 can’t open the account themselves, an adult has to do it as the custodian. This type of account is called a custodial Roth IRA. The kid is the owner. The adult is the custodian. When the kid becomes an adult, the account turns into a regular Roth IRA.

A custodial Roth IRA is different from a UGMA/UTMA account. Earnings in a custodial Roth IRA are tax free. Earnings in a UGMA/UTMA account are still taxable. But funding a custodial IRA has an upper limit up to lesser of the kid’s work income or the annual contribution limit. If the kid doesn’t work for pay, you can’t fund a custodial Roth IRA. A UGMA/UTMA account doesn’t have such limit.

Vanguard, Fidelity, and Schwab all offer custodial Roth IRAs.

Vanguard

[Hat tip to reader always_gone in comment #14 for how to do it online.]

With Vanguard, after you log in, click on Forms in the top menu. The more intuitive “Open an Account” menu item doesn’t work for custodial IRAs.

Expand the second item in the list – “Open or Transfer a Retirement Account.” Click on “Open personal IRA” and then “Open or upgrade a retirement account.”

You will answer a series of questions from there. The critical part is in Step 3, where you choose to have a minor as the owner of the new Roth IRA.

You will DocuSign a form after you answer all the questions.

Buying an all-in-one Vanguard Target Retirement Fund requires a $1,000 minimum investment. You can buy ETFs with less money but because you can buy only whole shares, it’s not as easy to invest small amounts. Vanguard charges a $20 annual maintenance fee for small accounts but it can be waived if you sign up for e-delivery of statements and documents.

Fidelity

You can open a custodial Roth IRA at Fidelity online with no minimum balance and no annual maintenance fee. A Fidelity Freedom Index Fund would be a good all-in-one option. It doesn’t require any minimum investment. See Fidelity Freedom Index Funds: Hidden Gems For Your IRA and 401k.

Charles Schwab

Charles Schwab also offers a custodial Roth IRA with no minimum balance and no annual maintenance fee. They ask you to download a paper application and mail it in. A Schwab Target Index Fund would be a good all-in-one option there. The minimum investment into a Schwab Target Index Fund is only $1. See Schwab Target Index Funds: Hidden Gems For Your IRA and 401k.

***

If your kids work, seize the opportunity to open a custodial Roth IRA for them. Among these three brokers, I would choose Fidelity, because they make it easy to open an account online and you can invest in an all-in-one fund with no minimum investment and no annual maintenance fee.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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How to Open a Trust Account at Interactive Brokers (IBKR)

Interactive Brokers (IBKR or “IB”) is an online broker used by many active traders. Unlike other typical brokers for retail investors (Fidelity, Schwab, Vanguard, E*Trade, etc.), Interactive Brokers offers more avenues not needed by the typical retail investors, such as trading options, futures, and on international exchanges. However, one of their features appealing to me as a non-trader is the low margin rates. Using margin means borrowing against your portfolio. While traders use margin to add leverage to their trading, which increases both the risk and the potential payoff, long-term investors can use margin only for short-term cash needs.

Under the “IBKR Pro” pricing plan, the interest rate charged for the first $100k in a margin loan is 1.57%. The rate for borrowing the next $900k is only 1.07%. Say you have some investments in a taxable account with large unrealized capital gains. When you need cash, instead of selling your investments and triggering capital gains, you can borrow at these low rates to bridge a short gap. You repay the loan with money from other sources at a later time (delayed financing, real estate sale, matured CDs, etc.). If you only borrow a small amount, say less than 10% of your portfolio, and only for a short period, your risk of getting liquidated when the market goes down is very low.

I wanted to move an account to Interactive Brokers to gain access to the low margin rates. Because my source account is under the name of a revocable living trust, I needed to open the new account at Interactive Brokers as a trust account as well. When I tried, I had a hard time figuring out how to open a trust account. I finally found the way. I’m putting it here in case others run into the same difficulties.

When you go to Interactive Brokers’ website, you see a red “Open Account” button on the top right. Don’t go there when you’re trying to open a trust account.

You also see a prominent link on the homepage. Don’t go there either when you’re trying to open a trust account. After you click on either button and create an email and password, the account types in the application are limited to only:

IndividualJointRetirementCustodian

There’s no option to create a trust account.

Instead, use the menu on the top left. Click on “For Individuals” and then “Individual, Joint or IRA.”

You see a bar of icons in the middle of the next page. Click on the last one “Open Account.”

Now, finally, click on the red button at the bottom instead of the one at the top to open a trust account.

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ACA Premium Subsidy Cliff Turns Into a Slope In 2021 and 2022

[Completely rewritten with changes from the American Rescue Plan Act of 2021.]

I have been buying health insurance on an exchange under the Affordable Care Act (ACA) since 2018. Before the ACA, getting health care coverage was one of the biggest challenges for becoming self-employed. Forget about the cost — just getting a policy was a challenge by itself. ACA changed all that. Now self-employed people and others who don’t get health insurance through their jobs can buy health insurance on the exchange.

Not only are you able to buy health insurance, but the coverage is also made affordable by the premium subsidy in the form of a tax credit. How much tax credit you get is calculated off of your modified adjusted gross income (MAGI) relative to the Federal Poverty Level (FPL) for your household size.

Your MAGI for the purpose of ACA is basically:

your gross income;minus pre-tax deductions from paychecks (401k, FSA, …)minus above-the-line deductions, for example: pre-tax traditional IRA contributionsHSA contributions1/2 of self-employment taxpre-tax contribution to SEP-IRA, solo 401k, or other retirement plansself-employed health insurance deductionstudent loan interest deduction plus tax-exempt muni bond interest;plus untaxed Social Security benefits

Wages, interest, dividends, capital gains, pension, withdrawals from pre-tax traditional 401k and IRAs, money you convert from Traditional to Roth accounts all go into MAGI. Otherwise-not-taxed muni bond interest and Social Security benefits also count in MAGI.

400% FPL Cliff Converted To a Slope

Your tax credit goes down as your income increases. Up through the year 2020, the tax credit drops to zero when your MAGI goes above 400% of FPL. If your MAGI is $1 above 400% FPL, you pay the full premium with zero tax credit. People had to be very careful in tracking their income to make sure it doesn’t go over the cliff.

For a household of a single person in the lower 48 states, that cutoff was just shy of $50,000 in 2020. For a household of two people in the lower 48 states, the cutoff was $67,640 in 2020. See Federal Poverty Levels (FPL) For Affordable Care Act for where 400% of FPL is at for your household size.

Now thanks to the American Rescue Plan Act of 2021 (also known as President Biden’s COVID stimulus package), for two years only — 2021 and 2022 — this cliff becomes a slope. The tax credit will continue to drop as your income increases but it won’t suddenly drop to zero when your income goes $1 over the cliff.

The chart above shows the ACA premium tax credit at different income levels for a household of two people in the lower 48 states where the second lowest cost Silver plan costs $1,000/month. The blue line is for 2020. The orange line is for 2021. The gap between the two lines represents the change between 2020 and 2021. The new law also increased the tax credit before the old cliff but the increase was much more significant after that point. The tax credit was zero at $70,000 income in 2020, but it will be about $500/month in 2021.

Because health insurance premium is higher for older folks and health insurance costs more in some areas of the country, the tax credit is also higher for someone older with the same MAGI and in areas where health insurance is more expensive.

Not having to watch out for the cliff is a huge relief to people closer to the edge of the old cliff, but the new law is only effective for two years in 2021 and 2022. Unless another law extends it, the cliff will come back in 2023.

Re-Enroll for 2021

If you didn’t buy an ACA policy on the exchange because you didn’t qualify for a subsidy when you enrolled for 2021, it’s time to move onto the exchange now. You only get the subsidy if you buy your policy on the exchange.

If you already enrolled for 2021 on the exchange, you can edit your application and choose the same plan or a different plan now. That will trigger the recalculation of your subsidies. If you chose a free Bronze plan when you enrolled initially, maybe a Silver plan doesn’t cost much more now with the subsidy increase. Or maybe you’ll decide to convert some money from a Traditional IRA to Roth and use the subsidy increase to partially offset the tax on the Roth conversion.

It’s better if you take the initiative and force the recalculation now. If you don’t, some exchanges will recalculate the subsidy for everyone at a later time. You’ll have to wait longer that way. If your exchange doesn’t automatically recalculate for everyone, you still have another chance to claim the higher subsidy when you file your taxes next year.

Subsidy Repayment Waived in 2020

Besides turning a subsidy cliff into a slope, the American Rescue Plan also made some other temporary changes. If you received an Advance Premium Tax Credit in 2020 based on your income estimate at the time of your enrollment and it turned out that your income in 2020 was higher than you originally estimated, you aren’t required to pay back any difference between the subsidy you already received and what the subsidy should’ve been based on your actual income. This repayment waiver applies only to 2020.

There’s no income limit for this waiver of subsidy repayment. If you estimated your income at $30,000 when you enrolled for 2020 and your income turned out to be $300,000 (maybe from trading GameStop or crypto?), you will still keep 100% of the subsidy as if your income was $30,000.

Although there may be some good intentions, the implementation of the repayment waiver is horrible. This helps people who estimated their income really low when they enrolled. You simply lose out if you were more accurate in your estimate.

Unemployment In 2021

The American Rescue Plan also said for anyone who receives at least one week of unemployment benefits in 2021, they’re treated as if their income is 133% of FPL, which qualifies them for a free Silver plan, regardless of their actual income in 2021.

There’s no income limit for this special deal. If you receive one week of unemployment in 2021, even if you go on to earn $3 million during the year, you will still receive a free Silver plan as if you’re poor. Again, although there may be some good intentions, the implementation is just horrible. It practically encourages everyone on an ACA plan to get unemployed for a week in 2021.

When the Cliff Comes Back

The ACA subsidy cliff is scheduled to come back in 2023. People will have to manage their income and watch out for the cliff again. The most critical part is to project your income before the end of the year and not realize income willy-nilly before you do the projection. If you find yourself close to the cliff before you realize income, you can still adjust. Many people are caught by surprise only when they do their taxes in the following year. Your options are much more limited after the year is over.

Fortunately, it’s relatively easier to stay under the cliff for those who rely on an investment portfolio for income. When you are before 59-1/2, you are primarily spending money from your taxable accounts. A large part of the money withdrawn is your own savings; the rest is interest, dividends, and capital gains. Spending your own savings isn’t income. If you withdraw $60k to live on, your MAGI isn’t $60k. It’s probably less than $30k.

When you supplement your income with part-time self-employment, you still have the option to contribute to pre-tax traditional 401k, IRA, and HSA. Those pre-tax contributions lower your MAGI, which helps you stay under the 400% FPL cliff when necessary.

100% and 138% FPL Cliff

There is another cliff on the low side, although that one is easily overcome if you have retirement accounts.

In order to qualify for a premium subsidy for buying health insurance from the exchange, you must have income above 100% FPL. In states that expanded Medicaid to 138% FPL, you must also not qualify for Medicaid, which means you must have MAGI above 138% FPL.

These are checked only at the time of enrollment. Once you get in, you’re not punished if your income unexpectedly ends up below 100% or 138% of FPL. If you see your income next year is at risk of falling below 100% or 138% FPL when you enroll, tell the exchange you’re planning to convert some money from your Traditional 401k or Traditional IRA to Roth. That’ll raise your income.

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2020 2021 2022 ACA Health Insurance Premium Tax Credit Percentages

If you buy health insurance from healthcare.gov or a state-run ACA exchange, up through the year 2020, whether you qualify for a premium tax credit is determined by your income relative to the Federal Poverty Level (FPL). You didn’t qualify for a premium tax credit if your income was above 400% of FPL. That was a hard cutoff. See Stay Off the ACA Premium Subsidy Cliff.

The American Rescue Plan Act of 2021 (also known as President Biden’s $1.9 trillion stimulus package) removed the hard cutoff at 400% of FPL in 2021 and 2022. Now, how much credit you qualify for is determined by a sliding scale. The government says based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. After you pay that amount, the government will take care of the rest. If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings. If you pick a more expensive policy than the second lowest-cost Silver plan, you pay 100% of the difference.

That sliding scale is called the Applicable Percentage Table. The American Rescue Plan Act of 2021 lowered the numbers significantly in 2021 and 2022 from previous years. For example, in 2020, people with income between 250% and 300% of the Federal Poverty Level were expected to pay between 8.29% and 9.78% of their income toward a second lowest-cost Silver plan in their area. It changed it to a sliding scale between 4% and 6% in 2021 and 2022.

Here are the numbers for different income levels in 2020, 2021, and 2022:

Income20202021 and 2022< 133% FPL2.06%0%< 150% FPL3.09% – 4.12%0%< 200% FPL4.12% – 6.49%0% – 2%< 250% FPL6.49% – 8.29%2% – 4%< 300% FPL8.29% – 9.78%4% – 6%<= 400% FPL9.78%6% – 8.5%> 400% FPLnot eligible8.5%

Source: IRS Rev. Proc. 2019-29, American Rescue Plan Act of 2021

As you see from the table above, the changes between 2020 and 2021 are quite substantial. The percentage of income the government expects you to pay toward a second lowest-cost Silver plan depends on your income relative to the Federal Poverty Level. To calculate where your income falls relative to the Federal Poverty Line, please see Federal Poverty Levels (FPL) For Affordable Care Act (ACA).

If your income is low, they expect you to pay a low percentage of your low income. As your income goes higher, they expect you to pay a higher percentage of your higher income. The higher percentage applies not just to the additional income but to your entire income. A higher income times a higher percentage is much more than a lower income times a lower percentage. For example, a household of two in the lower 48 states is expected to pay 3.28% of their income when their 2021 income is $40,000. If they increase their income to $50,000, they are expected to pay 5.60% of their income. The increase of their expected contribution toward ACA health insurance, and the corresponding decrease in their premium tax credit will be:

$50,000 * 5.60% – $40,000 * 3.28% = $1,488

This represents 15% of the $10,000 increase in their income. For a married couple, the effect of paying 15% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward federal income tax. It makes the effective marginal tax rate on the additional $10,000 income 27%, not 12%. Normally it’s a good idea to consider Roth conversion or harvesting tax gains in the 12% tax bracket, but those moves become much less attractive when you receive a premium subsidy for the ACA health insurance. For a helpful tool that can calculate this effect, please see Tax Calculator With ACA Health Insurance Subsidy.

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Covid Retirement Account Withdrawal in TurboTax and H&R Block

When the COVID pandemic hit and unemployment soared in 2020, Congress passed the CARES Act, which gave special tax treatment for eligible withdrawals from retirement accounts. The usual 10% penalty on early withdrawals before age 59-1/2 is waived. The withdrawals can be treated as spreading over three years, and no income tax will be owed if the withdrawal is repaid in three years. To be eligible, the withdrawals must have taken place between January 1, 2020 and December 30, 2020 (not December 31), and the total withdrawals must not exceed $100,000. An eligible withdrawal is called a coronavirus-related distribution (CRD).

Maybe you took the offer because you had to supplement your income. Maybe you took the opportunity to move $100,000 from the expensive retirement plan through your employer to your IRA. By now you should have received a 1099-R for your retirement account withdrawal. The 1099-R itself doesn’t say anything special about it being a coronavirus-related distribution. You’ll get the special tax treatment only if you do something different on your tax return. Tax software such as TurboTax and H&R Block can do it perfectly fine. Here’s how. We’ll use these two examples:

Example A: You were affected by the COVID-19 pandemic and you withdrew $30,000 from your workplace retirement plan between January 1, 2020 and December 30, 2020. It qualifies as a coronavirus-related distribution. You’d like to spread the withdrawal on your tax return over the next three years.

Example B: Same as Example A except you already repaid the withdrawal in full by putting the money into your IRA. You should owe no tax on it.

TurboTax

TurboTax has a place for all 1099-R’s. You enter the 1099-R into TurboTax as usual under Federal Taxes -> Wages & Income -> IRA, 401(k), Pension Plan Withdrawals (1099-R).

Right after you enter the 1099-R, TurboTax asks you whether it was a coronavirus-related distribution. You answer it was due to COVID-19.

100% of the withdrawal was a COVID-19 distribution in our example. If you had a mix of COVID and non-COVID distribution during the year, you break it down in the software.

TurboTax checks additional eligibility, including the date of the withdrawal and how you were affected by COVID.

Now it asks you whether you repaid the withdrawal. We didn’t repay in our Example A. We repaid all of it in our Example B. Choose the option that applies to you.

If you didn’t repay, you can spread the distribution on your tax return over three years, which is the default. If you’d like to forego the spreading option and add it all to 2020, check that small box at the bottom.

After you go through the interview, you can check your tax form to see if the software did it correctly. Click on Forms on the top right and then find “Form 1040” in the left navigation pane. Scroll down to find Line 5. The gross amount shows up on Line 5a. If you chose to spread the withdrawal over three years, 1/3 of it shows up on Line 5b. If you already repaid the withdrawal in full, Line 5b should show 0.

You see this is quite straightforward in TurboTax. You don’t need a tax professional for this at all.

H&R Block Software

It takes more work to do the same in H&R Block software. We’ll use the same examples.

Enter the 1099-R you received for your withdrawal under Federal -> Income -> IRA and Pension Income (Form 1099-R). There’s nothing unusual here.

When it asks you which exception applies to your distribution, choose the last option for “no exceptions.” COVID-19 withdrawal is an exception but it’s not one of the exceptions listed here.

Although it says it looks like you’ll have a penalty, don’t freak out, because it says that coronavirus-related distributions are handled in a different part of the software later.

Continue with the rest of your interview in the software until you reach Federal -> Taxes -> Miscellaneous Taxes and Deferrals. Or you can jump ahead to that point now.

Choose ‘Yes’ when it asks you about COVID withdrawals.

Here H&R Block software asks you to read the instructions and fill out a tax form yourself. That’s lazy. The point of using tax software is that you won’t have to mess with tax forms directly.

The “Show Form” it talks about is under the “Next” button. After you click on that one, there’s another “Whole Form” button, which expands the form.

Example A – Withdrawal spread over three years

For our Example A, where you withdrew $30,000 from a workplace retirement plan and you’d like to spread it over three years, you only need to complete the parts called out in the red boxes. Check a box on the top to say it’s related to COVID. Enter the date of the earliest withdrawal and the gross withdrawal amount in Line 1, column b. If you withdrew from a pre-tax IRA, not from a workplace retirement plan, enter the date and the amount on Line 2 instead of Line 1. Click on “Hide Form” when you’re done.

Now you can check how much you’re taxed on this withdrawal. Click on the Forms button in the top menu bar and then open “Form 1040 and Schedule 1-3.” Scroll down the Line 5. Line 5b shows you’re taxed only on $10,000 instead of $30,000.

Example B – Full Repayment

For our Example B, where you withdrew $30,000 from a workplace retirement plan and you repaid it in full, in addition to filling out the same fields as in Example A, scroll down to Line 9 and Line 10. Enter the amount of your repayment on Line 10. If that represents 100% of your withdrawal, also check the box on Line 9 and be done with it. If you only made a partial repayment, leave the box in Line 9 unchecked. The difference between 1/3 of your withdrawal and your repayment will be taxable in 2020. If you repaid more than 1/3 of your withdrawal, the taxable amount in 2020 is zero.

Now you can verify you’re not taxed after you repaid all of it. Click on the Forms button in the top menu bar and then open “Form 1040 and Schedule 1-3.” Scroll down the Line 5. Line 5b shows that the taxable amount is $0.

There you have it. It’s a little more complicated in H&R Block software but it’s still not that difficult.

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