I converted some IRA funds to a Roth account last year. I am now trying to determine whether this amount needs to be counted for determining the amount of the subsidy I am entitled to on my ACA coverage.
All taxable conversions need to be accounted for. So assuming the conversion was taxable (I do believe this sort is; but verify yourself), then yes it impacts the subsidy.
I converted part of an IRA to a Roth IRA this year. I am aware I have to pay taxes on the amount transferred to the Roth, on my 1040.
However, I don’t understand why this money that I am rolling over to a Roth, counts towards my income for the ACA? It isn’t income: it is still in savings.
Please help!
In general, anytime you would have to pay taxes on money you are shifting around (any time you have taxable income) it counts toward your MAGI income (Modified AGI). Your MAGI income is what the ACA’s tax credits are based on. So there are ways to end up owing back tax credits if you shift around retirement account money or take money out of your retirement account.
I realize that reality of that answer isn’t fun to deal with, and instead can be beyond frustrating… but unfortunately retirement accounts and assistance programs don’t always play nice together, and this is one such example. That said, you could try seeing a tax professional for assistance to see if they could give you specific advice on how to handle this (I don’t think reversing the conversion is on the table, but here is an article on it for example https://turbotax.intuit.com/tax-tips/investments-and-taxes/reversing-a-roth-ira-conversion/L0yVOfwyZ).
The five year rule does not matter if over 59 1/2. Also original Roth contributions are not taxable whether within 5 years or not. So the second to last sentence is not correctly phrased.
If I want to convert a regular IRA to a Roth IRA, I know this would be considered income and I would have to pay taxes on it. But, since I am not actually withdrawing the money, would this count as income when applying for NYS of Health?
In general, if you owe taxes on it, then it gets counted toward MAGI. Unfortunately the retirement account rules are a little complicated in terms of MAGI. I would have to dig up documents and confirm specifics here. But the general rule should apply. That is, “if it is taxable, it counts toward MAGI.”
Might want to ping an accountant (or the ones handling your IRA) on this one. Meanwhile, I’ll put it in my notes as something we need to research more.
In general: Funding a Roth IRA doesn’t affect ACA assistance, because you pay taxes and then fund the account. Meanwhile, funding a 401k does, as taxes are deferred. Assistance is based on MAGI income, so most taxable income counts and most non-taxable (in that year) income doesn’t. On the other end, taking money out of a Roth is tax free (so it doesn’t affect ACA assistance) and taking money out of a 401k isn’t tax free (so it does affect ACA assistance).
With that said, taxable withdrawals from any account do affect ACA assistance, so in the case where your IRA withdrawals are taxable, the above generalities don’t apply.
It is generally worth reading the official IRS documentation or getting help from an accountant due to the complexities, but this is the general rule.
I received a k1 from a former employer, which I had a 5% partnership interest in. Total distributions received in 2016 were $12,200…but they are showing long term capital gains of $86,000. I also received a 1099R from a Roth IRA distribution (taxes were already paid, but I was under 59 and had 10% withheld). Actual income received was $62,978 (which includes the $12,200 mentioned above) before any mortgage deductions. Yet Turbotax is showing total income for 2016
$157,442 as they are counting the $62,978 + $86,000 k1 lt capital gains as income.
I believe Turbotax is miscalculating the totals and the above figures should not be considered as actual income. My fear is we will lose our ACA credits based on this miscalculation. Your advice is much appreciated.
Capital gains income is part of your MAGI/AGI. They are just taxed differently, in some respects (short term gains essentially are ordinary income, but you file a different form and follow some unique rules, long term gains are taxed at a lower rate… but they both factor into ACA assistance).
You should not be getting credits if you have that much in TAXABLE capital gains onto of your ordinary income (if these gains were in a 401k, it would be different, as they wouldn’t be taxable).
Yes, from my understanding, converting to a Roth does increase MAGI. The rule of thumb that “if you pay taxes on it” “it increases MAGI” works well for IRAs, 401ks, HSAs, etc. I haven’t heard of a loophole. Imagine being able to avoid a MAGI increase and taxes by funneling money from an IRA or 401k to a Roth. That would be nuts! Can’t imagine it being the case.
I converted a portion of an IRA to a ROTH, got a 1099-r with a TAXABLE amount of $23,000 and a distribution code of 2. This was offset by about a $4,000 loss on my startup business and some other incidentals leaving me with about $20,000 for line 37 of my 1040 (MAGI). (https://obamacarefacts.com/modified-adjusted-gross-income-magi/).
I am not a tax specialist, but as I understand it, this clears the 133% poverty lower limit of Obamacare (at least in Covered California), and qualifies for a tax credit of almost the entire premium of Obamacare.
Not only that, but the IRA money to Roth is taxed at a very low rate for folks without much income in a particular year, laid off, retired early, etc. that didn’t make money that year and can be done in December, when you would know.
Additionally, the profits on the any such Roth investments are all clear after the 1st Roth account reaches age 5.
I converted a portion of an IRA to a ROTH last year, got a 1099-r with a TAXABLE amount of $23,000 with a distribution code of 2. This was offset by about a $4,000 loss on my startup business on my 1040 along with some other incidentals leaving me with about $20,000 for line 37 of my 1040 (MAGI). (https://obamacarefacts.com/modified-adjusted-gross-income-magi/).
I am not a tax specialist, but as I understand it, this clears the 133% poverty lower income threshold of Obamacare (at least in Covered California), and qualifies for a tax credit of almost the entire premium of Obamacare. In California, you can get this credit paid up front to BlueSheild to offset almost the entire monthly premium.
Not only that, but the IRA money to Roth converted is taxed at a very low rate for folks without much income in a particular year due to being laid off, retired early, etc. and can be done in December, when you would know what your income for the year was going to be. Then, not only the principle, but the profits on the any such Roth investments are all clear after the 1st Roth account reaches age 5 years old.
Obamacare and the tax code are pretty badly done, but I take the tax credits given me and am mandated to Obamacare. The Roth was almost magic in the way things seem to be setup to mitigate the bottom line.
I converted a portion of an IRA to a ROTH last year, got a 1099-r with a TAXABLE amount of $23,000 with a distribution code of 2. This was offset by about a $4,000 loss on my startup business on my 1040 along with some other incidentals leaving me with about $20,000 for line 37 of my 1040 (MAGI). (https://obamacarefacts.com/modified-adjusted-gross-income-magi/).
I am not a tax specialist, but as I understand it, this clears the 133% poverty lower income threshold of Obamacare (at least in Covered California), and qualifies for a tax credit of almost the entire premium of Obamacare. In California, you can get this credit paid up front to BlueSheild to offset almost the entire monthly premium.
Not only that, but the IRA money to Roth converted is taxed at a very low rate for folks without much income in a particular year due to being laid off, retired early, etc. and can be done in December, when you would know what your income for the year was going to be. Then, not only the principle, but the profits on the any such Roth investments are all clear after the 1st Roth account reaches age 5 years old.
Obamacare and the tax code are pretty badly done, but I take the tax credits given me and am mandated to Obamacare. The Roth was almost magic in the way things seem to be setup to mitigate the bottom line.
This answer makes it clear that qualified distributions from Roth IRAs are not included in MAGI, and are, therefore, not included for ACA subsidy purposes. However, based on the logic that qualified distributions are not included in MAGI because they are not taxable, the last sentence appears to be incorrect. I think that it should say, “All other Roth IRA withdrawals that are taxable would count toward MAGI.” (This would acknowledge that some Roth IRA distributions that are not qualified distributions are also NOT taxable when distributed — because they are simply the distribution of non-deductible contributions.) I think that the next-to-the-last word in the last sentence should be “distributions,” not deductions.
Roth contributions don’t affect MAGI because you are paying taxes on the money (it’s already claimed) and then putting it in the Roth. Taking it out of a Roth IRA generally doesn’t affect MAGI either. Traditional 401k you count the money in and out as MAGI. https://investor.vanguard.com/ira/roth-vs-traditional-ira
True I think, but Roth Conversions do. So, if you have a low income year or just need more money on line 37 of 1040 to clear the lower limit for Obamacare, many can convert a Roth from an IRA to do just that.
If i understand this, I could play the game of living off my roth distributions, show my MAGI as being very low and get a large subsidy for obamacare? And, could potentially show my MAGI as being zero and get it almost entirely paid for.
ObamaCareFacts is a free informational site. It's privately owned, and is not owned, operated, or endorsed by the US federal government or state governments. Our contributors have over a decade of experience writing about health insurance. However, we do not offer professional official legal, tax, or medical advice. See: Legal Information and Cookie Policy. For more on our company, learn About ObamaCareFacts.com or Contact us.
Judith Mola
Great delivery. Outstanding arguments. Keep up the amazing work.|
Corrinne Zipfel
Helpful info. Lucky me I found your website accidentally, and I am shocked why this coincidence didn’t came about earlier! I bookmarked it.|
Marx Guidry
Your means of telling all in this paragraph is actually nice, all be capable of effortlessly understand it, Thanks a lot.|
John M Holden
I converted some IRA funds to a Roth account last year. I am now trying to determine whether this amount needs to be counted for determining the amount of the subsidy I am entitled to on my ACA coverage.
ObamaCareFacts.com
All taxable conversions need to be accounted for. So assuming the conversion was taxable (I do believe this sort is; but verify yourself), then yes it impacts the subsidy.
karla price
I converted part of an IRA to a Roth IRA this year. I am aware I have to pay taxes on the amount transferred to the Roth, on my 1040.
However, I don’t understand why this money that I am rolling over to a Roth, counts towards my income for the ACA? It isn’t income: it is still in savings.
Please help!
ObamaCareFacts.com
In general, anytime you would have to pay taxes on money you are shifting around (any time you have taxable income) it counts toward your MAGI income (Modified AGI). Your MAGI income is what the ACA’s tax credits are based on. So there are ways to end up owing back tax credits if you shift around retirement account money or take money out of your retirement account.
I realize that reality of that answer isn’t fun to deal with, and instead can be beyond frustrating… but unfortunately retirement accounts and assistance programs don’t always play nice together, and this is one such example. That said, you could try seeing a tax professional for assistance to see if they could give you specific advice on how to handle this (I don’t think reversing the conversion is on the table, but here is an article on it for example https://turbotax.intuit.com/tax-tips/investments-and-taxes/reversing-a-roth-ira-conversion/L0yVOfwyZ).
Gregg
The five year rule does not matter if over 59 1/2. Also original Roth contributions are not taxable whether within 5 years or not. So the second to last sentence is not correctly phrased.
ObamaCareFacts.com
Thank you for pointing that out.
Janice
If I want to convert a regular IRA to a Roth IRA, I know this would be considered income and I would have to pay taxes on it. But, since I am not actually withdrawing the money, would this count as income when applying for NYS of Health?
ObamaCareFacts.com
In general, if you owe taxes on it, then it gets counted toward MAGI. Unfortunately the retirement account rules are a little complicated in terms of MAGI. I would have to dig up documents and confirm specifics here. But the general rule should apply. That is, “if it is taxable, it counts toward MAGI.”
Might want to ping an accountant (or the ones handling your IRA) on this one. Meanwhile, I’ll put it in my notes as something we need to research more.
Wayne seckerson
If I opened a roth ira in 2017 will this lower my income for healthcare obamcare
ObamaCareFacts.com
In general: Funding a Roth IRA doesn’t affect ACA assistance, because you pay taxes and then fund the account. Meanwhile, funding a 401k does, as taxes are deferred. Assistance is based on MAGI income, so most taxable income counts and most non-taxable (in that year) income doesn’t. On the other end, taking money out of a Roth is tax free (so it doesn’t affect ACA assistance) and taking money out of a 401k isn’t tax free (so it does affect ACA assistance).
With that said, taxable withdrawals from any account do affect ACA assistance, so in the case where your IRA withdrawals are taxable, the above generalities don’t apply.
It is generally worth reading the official IRS documentation or getting help from an accountant due to the complexities, but this is the general rule.
Cory Belkov
I received a k1 from a former employer, which I had a 5% partnership interest in. Total distributions received in 2016 were $12,200…but they are showing long term capital gains of $86,000. I also received a 1099R from a Roth IRA distribution (taxes were already paid, but I was under 59 and had 10% withheld). Actual income received was $62,978 (which includes the $12,200 mentioned above) before any mortgage deductions. Yet Turbotax is showing total income for 2016
$157,442 as they are counting the $62,978 + $86,000 k1 lt capital gains as income.
I believe Turbotax is miscalculating the totals and the above figures should not be considered as actual income. My fear is we will lose our ACA credits based on this miscalculation. Your advice is much appreciated.
ObamaCareFacts.com
Capital gains income is part of your MAGI/AGI. They are just taxed differently, in some respects (short term gains essentially are ordinary income, but you file a different form and follow some unique rules, long term gains are taxed at a lower rate… but they both factor into ACA assistance).
You should not be getting credits if you have that much in TAXABLE capital gains onto of your ordinary income (if these gains were in a 401k, it would be different, as they wouldn’t be taxable).
CW
Conversion of IRA to Roth results in taxable income. Is this included in MAGI?
ObamaCareFacts.com
Yes, from my understanding, converting to a Roth does increase MAGI. The rule of thumb that “if you pay taxes on it” “it increases MAGI” works well for IRAs, 401ks, HSAs, etc. I haven’t heard of a loophole. Imagine being able to avoid a MAGI increase and taxes by funneling money from an IRA or 401k to a Roth. That would be nuts! Can’t imagine it being the case.
xJohn
I converted a portion of an IRA to a ROTH, got a 1099-r with a TAXABLE amount of $23,000 and a distribution code of 2. This was offset by about a $4,000 loss on my startup business and some other incidentals leaving me with about $20,000 for line 37 of my 1040 (MAGI). (https://obamacarefacts.com/modified-adjusted-gross-income-magi/).
I am not a tax specialist, but as I understand it, this clears the 133% poverty lower limit of Obamacare (at least in Covered California), and qualifies for a tax credit of almost the entire premium of Obamacare.
Not only that, but the IRA money to Roth is taxed at a very low rate for folks without much income in a particular year, laid off, retired early, etc. that didn’t make money that year and can be done in December, when you would know.
Additionally, the profits on the any such Roth investments are all clear after the 1st Roth account reaches age 5.
xjohn
I converted a portion of an IRA to a ROTH last year, got a 1099-r with a TAXABLE amount of $23,000 with a distribution code of 2. This was offset by about a $4,000 loss on my startup business on my 1040 along with some other incidentals leaving me with about $20,000 for line 37 of my 1040 (MAGI). (https://obamacarefacts.com/modified-adjusted-gross-income-magi/).
I am not a tax specialist, but as I understand it, this clears the 133% poverty lower income threshold of Obamacare (at least in Covered California), and qualifies for a tax credit of almost the entire premium of Obamacare. In California, you can get this credit paid up front to BlueSheild to offset almost the entire monthly premium.
Not only that, but the IRA money to Roth converted is taxed at a very low rate for folks without much income in a particular year due to being laid off, retired early, etc. and can be done in December, when you would know what your income for the year was going to be. Then, not only the principle, but the profits on the any such Roth investments are all clear after the 1st Roth account reaches age 5 years old.
Obamacare and the tax code are pretty badly done, but I take the tax credits given me and am mandated to Obamacare. The Roth was almost magic in the way things seem to be setup to mitigate the bottom line.
xjohnsmith
I converted a portion of an IRA to a ROTH last year, got a 1099-r with a TAXABLE amount of $23,000 with a distribution code of 2. This was offset by about a $4,000 loss on my startup business on my 1040 along with some other incidentals leaving me with about $20,000 for line 37 of my 1040 (MAGI). (https://obamacarefacts.com/modified-adjusted-gross-income-magi/).
I am not a tax specialist, but as I understand it, this clears the 133% poverty lower income threshold of Obamacare (at least in Covered California), and qualifies for a tax credit of almost the entire premium of Obamacare. In California, you can get this credit paid up front to BlueSheild to offset almost the entire monthly premium.
Not only that, but the IRA money to Roth converted is taxed at a very low rate for folks without much income in a particular year due to being laid off, retired early, etc. and can be done in December, when you would know what your income for the year was going to be. Then, not only the principle, but the profits on the any such Roth investments are all clear after the 1st Roth account reaches age 5 years old.
Obamacare and the tax code are pretty badly done, but I take the tax credits given me and am mandated to Obamacare. The Roth was almost magic in the way things seem to be setup to mitigate the bottom line.
Patty Mullen
Are 529 distributions counted toward MAGI
Ed Mink
This answer makes it clear that qualified distributions from Roth IRAs are not included in MAGI, and are, therefore, not included for ACA subsidy purposes. However, based on the logic that qualified distributions are not included in MAGI because they are not taxable, the last sentence appears to be incorrect. I think that it should say, “All other Roth IRA withdrawals that are taxable would count toward MAGI.” (This would acknowledge that some Roth IRA distributions that are not qualified distributions are also NOT taxable when distributed — because they are simply the distribution of non-deductible contributions.) I think that the next-to-the-last word in the last sentence should be “distributions,” not deductions.
ObamaCareFacts.com
You are right, I made the change.
Bill Stein
Does contributing to a Roth IRA count towards MAGI?
ObamaCareFacts.com
Roth contributions don’t affect MAGI because you are paying taxes on the money (it’s already claimed) and then putting it in the Roth. Taking it out of a Roth IRA generally doesn’t affect MAGI either. Traditional 401k you count the money in and out as MAGI. https://investor.vanguard.com/ira/roth-vs-traditional-ira
Jef
True I think, but Roth Conversions do. So, if you have a low income year or just need more money on line 37 of 1040 to clear the lower limit for Obamacare, many can convert a Roth from an IRA to do just that.
Joe
If i understand this, I could play the game of living off my roth distributions, show my MAGI as being very low and get a large subsidy for obamacare? And, could potentially show my MAGI as being zero and get it almost entirely paid for.
Terence Flynn
sounds correct….but who has enough in their ROTH to live off of?…plus at social security age, medicare kicks in and ACA is out.
Right?