Caution for those receiving Premium Tax Credits: AVOID CASHING IN IRAs

The new federal law providing public financial relief during the corona virus pandemic also brings some serious hidden risks for people who receive public financial assistance with their health insurance coverage. Since health insurance would be unaffordable to many people without financial assistance from Medicaid or the Advance Premium Tax Credits, any change that threatens these benefits must be a top priority in financial planning during this pandemic crisis.

Remember that the number of people affected by this scenario is rising rapidly. Those who were formerly covered by employer-provided health insurance and are now unemployed and collecting unemployment compensation may need to consider this issue for the first time. A poorly informed person might take an emergency withdrawal at the time of their layoff and then later find the need to apply to the Marketplace for public health insurance.

The new federal law makes it easier to take early withdrawal money from your retirement plan and lowers the potential tax for doing so. Some financial advisers are picking up on this new possibility and advising clients to take advantage of this new law. Yesterday I heard a twist on the theme: a financial adviser proposed that a client to make a conversion of an IRA to a Roth IRA. Let’s be clear on this: any type of new taxable transaction will negatively impact your cost of health coverage. Medicaid recipients may no longer be eligible for their free coverage, depending on state law. Those receiving the Advance Premium Tax Credit through their state or federal Health Insurance Marketplace will find their health insurance coverage will be more expensive if they incur a higher gross taxable income. Current law requires a recipient of the Premium Tax Credit to report their increase in modified gross taxable income to the Marketplace for recalculation of their monthly premium cost. There is no exception in the law for transactions die to the pandemic. In many cases, I suspect this would be disastrous to the household budget.

More information on this topic is available in IRS Publication 17 and this IRS web page.  This web page by Center on Budget and Policy Priorities is also useful.

In general, the consensus of financial advisers is that you should not take early distributions from a retirement plan unless it is a last resort. The basic strategy of tax planners like me is “defer, defer, defer, avoid” when it comes to reducing clients’ tax bills. But in this case we are talking about something more important than tax planning. We are talking about the ability to maintain health coverage.

Moreover, this scenario of conflicting and potentially disastrous advice underscored the need to be working with a qualified and experienced crisis management adviser. A traditional financial adviser with a narrow focus is not appropriate when we need to consider the wider range of crisis management and long term financial recovery strategy.

I’d like to hear from you if you are considering a withdrawal or taxable conversion from your retirement plan and are concerned with the cost of your health insurance.


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