Summary: Taking a $12k distribution from an (inherited) IRA this year has a nice 10% income tax rate, but effectively additional 14% "tax" due to Healthcare Marketplace (not advanced) premium tax credit reduction, so 24% total. Any way to avoid this?
I have a somewhat complex situation, but am trying to understand how best to structure distributions from an inherited IRA to save most on taxes. I'll bullet out my situation:
- My mother died in Fall 2015, I was beneficiary on two annuity contracts (as were my two older sisters, who took their money as lump sums in 2015).
- One is an IRA, with about $12,600 in it. It gets a guaranteed 3% fixed interest. I have to pay taxes on distributions in the years I take them.
- The other is a "non-qualified" (NQ here for short) account, with about $3,400 in it. It has 87.3% in a fixed 3% interest and 12.2% in an "ultrashort bond fund, apparently like a money market/low risk fund). I was told by the rep anything under $3,460 is non-taxable to me.
- I had until then end of 2016 to make my instructions known other than a lump sum and around 12/15/16, I instructed the annuity company to turn the IRA into a "Continued Required Minimum Distribution" IRA in my name and send me 2016's required minimum distribution (~$325; I'm 46) minus a healthy 30% taxes, and to put the NQ money on a "Five Year Deferral" plan. This has been done.
- 2016 has been a low income year for my wife and me, by a wide margin. I estimate our income to be right around $22,300, of which $9,280 is earned income, with the rest interest and unemployment. This puts us in the 10% federal tax bracket. (Our 2016 federal tax should be merely $180.)
- We also had health insurance through a Marketplace plan, and received a Premium Tax Credit--not an Advanced Premium Tax Credit--we chose to pay the full $642/mo each month for the 11 months we had health insurance in 2016, but our Premium Tax Credit is essentially that whole amount, so we expect about $7k back at tax refund time from this.
- We are not planning to have more super-low-income years! My wife almost took a lucrative job and it's not inconceivable that she could get one again soon and that combined we could take in anything from $50k to $150k. Or, it's of course possible we'll have another $20k year (though we are going to try to get back on track).
- I purposely only took the RMD for 2016 because I figured if I increase my income with this distribution, it will reduce my Premium Tax Credit on my health insurance. The whole $16k would bump me to have my credit recalculated as about $1,800/yr less than it was (though see second question below). That's not good. And so I only took the $325 RMD for 2016.
HOWEVER, it occurred to me after this that even if we made $22k + $12.6k of the IRA = ~$34.6k with the personal exemptions and standard deductions we would still be in the 10% tax bracket. And since we don't plan on staying in that tax bracket (if we can help it), it might make sense to take all the money now, when I know we had a low income year. The IRA money would be taxed at only 10%!...
...BUT, we will then get a smaller tax refund from the Marketplace health insurance plan, because our income will be more than we had estimated at the start of the year. We will "lose" ~$1,800 in tax credit if I've figured it correctly (which I'm not sure I have). $1,800 is 14.2% of the IRA amount. So the IRA "really" will be effectively taxed at 10% + 14.2% = 24.2%. Whoops.
(Apparently--and I'd love confirmation on this--had I elected to get an Advanced Premium Tax Credit, they cap repayment at $600 if your income is $32,00 or less, so we could have just took a 10k distribution and then paid 10% + $600 (6%) = 16%. Darn! I got some perks putting the insurance payments on credit cards, including 50k airline miles, but I probably could have done that in other ways, and so this is like an $800 (24%-16% = 8% of 10k) mistake!!)
I still have time to take more money for 2016: I can request more of this money by fax in the remaining days this week, and they process it same day and it counts for 2016.
So, my question is: what should I do? Should I take more than the RMD ($325) from the IRA for 2016? If so, how much more, and why? Is there something else I should be doing?
Also, does the NQ money, which I was told I don't have to pay taxes on, is not included as part of my taxable income on my tax return, right? That means I can really take it any year as good as any other?