How Is My Income Calculated for ACA Plans?

September 30, 2024 7:46 AM

I won't have a job come 2025 so I'm going to need an ACA plan. I have personal investment, rollover IRA, Roth IRA and 401k accounts, and a personal savings account. On the ACA site you have to enter your expected income - which affects your tax credit - and this page says, for Investment Income: "Include expected interest and dividends earned on investments, including tax-exempt interest". Like, all of it? Including interest on my 401k which I've been growing most of my life but can't realistically use yet because I'm not old enough?

Bonus question: if my income does include interest from all my accounts, how do I predict this and - e.g. if this year's unexpected performance of the markets is repeated in 2025 (or goes the opposite way) - what happens if I get it significantly wrong?

posted by my log does not judge to Work & Money (13 answers total)

No, tax-exempt doesn't refer to interest received in your retirement accounts. Some specific types of investments yield tax-exempt interest, for instance municipal bonds - that's the kind of thing the healthcare.gov doc is talking about.

Also note that in this context "interest" does not mean "increase in the value of your investments" - if e.g. you own shares of a mutual fund or stock, and those shares double in value, that's not interest, that's unrealized capital gain. You may know this already but I'm just calling it out since most people do not earn much/any "interest" in their 401ks because assets in a 401k are usually in non-interest-bearing investments.

If you significantly underestimate, you may end up in a situation where you owe more at the end of the year/tax time because your premium is based on subsidies that you did not actually qualify for. To guard against this, you may want to keep some/all of that unexpected extra income in reserve in order to pay any potential shortfall.

If you significantly overestimate, you may get money back because you qualified for subsidies but did not take advantage of them during the year.
posted by mskyle at 8:07 AM on September 30

As far as your savings go, only the "income" that you pay taxes on for that year counts. So if you have a HYSA and earn $700 in interest (something you would get a 1099 for) that would count. Retirement funds don't count unless you have a withdrawal or rollover. You can just look at last year's taxes and see which accounts generated 1099s and that should help. Your estimated income will almost certainly be different from what your actual income turns out to be, but that gets sorted out when you do your taxes, either you have to pay back some of the credit, or you get extra credit back if you overestimated your income. For several years now I've been unemployed but generate "income" by rolling over about $20k a year from my traditional to Roth IRA which creates a taxable event for ACA purposes, making my premiums almost nothing. (I live in a state where you have to have $X of income to qualify for a subsidy, if you make nothing you also get nothing, so this is my work around.)
posted by storminator7 at 8:09 AM on September 30

For "tax-exempt interest" they are referring to income from tax-exempt sources in taxable accounts. Practically, this means things like municipal bonds, which you can hold in taxable accounts but aren't treated as taxable income when it comes to actually figuring out what income tax you owe.

The ACA (like many other programs) is based on MAGI, which is not the number you ultimately pay taxes on. It's used in other areas (how much tax you pay on social security income, eligibility for IRA deductions / contributions, childcare credits, etc.) to compute what sort of benefits you may eligible for. It's a mechanism for politicians to filter out those with higher (non-wage) incomes from social programs without necessarily making them pay taxes on that income.
posted by ayerarcturus at 8:11 AM on September 30

Seconding that interest and dividends are only the things you expect to be paid out to you in 2025, but not those in your 401k account as those are not paid to you yet. This is because you're trying to estimate your household income and they're reminding you to include things like a dividend payout/reinvestment that is still taxable but doesn't end up in your bank account. Your 401k gains are not part of your household income.
posted by soelo at 8:13 AM on September 30

I'm also on an ACA plan and making income from investments. You pay based on your estimated income, then adjust when filing your taxes to either pay more or get money back. The only thing I know of that might be a problem for certain plans is eligibility—if your income is outside of a certain range, you may be forced to switch plans at some point. In California, making little enough to qualify you for Medi-Cal disqualifies you from ACA plans, for example.
posted by panic at 8:15 AM on September 30

Thanks everyone for these answers so far. Just to confirm: the minimum income to get an ACA tax credit in my state is $21K, so it sounds like my problem will be that I won't have enough, rather than too much.
posted by my log does not judge at 8:53 AM on September 30

Not an answer to your question, and this only helps if you currently have employer health insurance, but it's worth at least checking how much COBRA coverage will be. It's often expensive, but depending on your needs it can be cheaper than buying your own policy on the exchange. It was in my case, by a factor of two! And of course it was nice not to change networks. It typically only lasts 18 months though, so it may not be a long term solution.
posted by caek at 9:00 AM on September 30

Be sure to check out storminator's strategy of rolling over money from a regular IRA to a Roth IRA which creates taxable income in the year that you do the rollover. It does mean paying taxes on the converted amount now, instead of waiting to be taxed when you pull it out in retirement but (a) your tax rate is unlikely to lower in retirement compared to a year with no income and (b) you can factor in the money saved on health insurance.

Also, if you really won't have the minimum income, do you qualify for expanded Medicaid in your state?
posted by metahawk at 9:13 AM on September 30

@metahawk/ storminator7: please forgive my ignorance - are we saying I would instruct my investment bank to roll over $21K from my rollover IRA to my Roth, and that'd be it?
posted by my log does not judge at 9:27 AM on September 30

If you're hovering around the cutoff for qualifying to get Advance Payments of the Premium Tax Credit, then you may qualify for Medicaid in your state, which should be free. If you estimate that you will make more than that cutoff, then it's likely you will qualify for a tax credit that will bring your premium to somewhere between $0-$25/month. You should enroll in a Silver-tier plan, as you will be eligible for Cost-Sharing Reductions with lower co-pays and co-insurance, which are only provided to Silver plans.

If your income changes during the year, you can update your estimated income on healthcare.gov and the Marketplace will adjust how much Tax Credit you receive so that you won't have to pay more when you file your taxes.
posted by Theiform at 9:30 AM on September 30

metahawk/storminator said "rollover" which is probably what I would said too, but I think the technical term is a Roth *conversion* - here's Fidelity's page about it, probably with more income than you require: Roth IRA conversion: 7 things to know.
posted by mskyle at 9:30 AM on September 30

"the minimum income to get an ACA tax credit in my state is $21K, so it sounds like my problem will be that I won't have enough, rather than too much."

At least in my state, that means your ACA application gets forwarded automatically to the right department which follows up later to help figure out if you're eligible for medicare--there's a little bureaucracy but it all gets sorted out.

Keep in mind that if you expect your expenses to be more than your income, and if you don't have sufficient cash in your savings account to cover the gap, then you'll be selling some of your investments, which will generate capital gains.

I'm in a similar situation and had to estimate income for last year's ACA application, so I: 1) estimated interest and dividend income by looking at the previous year's tax returns, 2) estimated expenses based on last year's expenses plus some expected house projects, 3) figured out how much I'd likely have to spend to cover the difference, 4) looked up unrealized capital gains using tools at my brokerage (vanguard in this case) and used that to estimate capital gains.

The result is a bit of a wild guess and I'm not yet sure how close I came....

It was the first time I'd gone through that and frankly I found it really stressful, but in the end my family has health insurance, it's fine, and I think as long as you've made a good-faith effort, you've done your part.
posted by bfields at 2:28 PM on September 30

If you won't make enough for a tax credit, you should qualify for Medicaid, unless your state is one of the ten that didn't expand Medicaid for low-income people. I was afraid of Medicaid after briefly having had an ACA plan and then employer-sponsored private insurance, but it turned out to be great in Pennsylvania and in Massachusetts. I am now back on an employer-sponsored plan and I miss Medicaid.
posted by needs more cowbell at 4:09 PM on September 30