HSA account

[Mulligan]

Not to be picky, but you meant treat, right?

I was thrown into confusion for a few seconds there.

PS. I did have a typo myself in the above short post, but fixed it up quickly. However, I am sure some readers caught it before I saw it.

I believe he meant "triple threat". It's an old football terminology from the "wishbone offense" days. But you definitely understand the meaning which is all that matters, as to me it is also a triple treat too!

 

[NW-Bound]

Thanks for the explanation!

As I have stated often, I know nothing about spectator or competitive sports.

 

[kaneohe]

Not to be picky, but you meant treat, right?

Since it's almost Halloween, I guess it could be............but I guess I was thinking of threat as in running, passing, and?? kicking??.....not as threat to you but to opponent.

 

[pb4uski]

Couldn't you just put the money in HSA, turn around and take it out immediately and use it for medical expenses? You would get to take that HSA amount off of your income resulting in a reduction in AGI.

Even if you are using IRA money, it still would benefit you. In effect you would be withdrawing money from your IRA and not pay any taxes on it.

Am I missing something?

Sounds like it would work as long as your qualified medical expenses were equal to or more than your IRA withdrawal. Could be a backdoor way of avoiding the medical expense deduction limitation.

 

[kaneohe]

Couldn't you just put the money in HSA, turn around and take it out immediately and use it for medical expenses? You would get to take that HSA amount off of your income resulting in a reduction in AGI.

Even if you are using IRA money, it still would benefit you. In effect you would be withdrawing money from your IRA and not pay any taxes on it.

Am I missing something?

sounds good to me.......might not want to overdo till you get near 65 since non-qualified early distributions have a 20% penalty in addition to tax.
....but no RMDs is my understanding unlike TIRAs.

 

[47]

I wasn't even thinking of matching the IRA withdrawal $ for $. I was talking about just offsetting the actual medical expenses for each year -- and my comment was -- to the extent that money comes from IRA, it would be like a tax free withdrawal. Katsmeow already mentioned that he was tapping the IRA- hopefully without penalty.

But if you have money already in the HSA account, and if you have past documented medical expenses that could be tapped, then you can even take more than that year's medical expenses. That way you can tap your HSA account *instead* of IRA, and that would of course be tax free. For that you don't really need to participate in a HSA that year.

If you don't contribute to HSA in the year you participate in a HSA plan, that opportunity is forever lost.

 

[RunningBum]

We have had an HSA policy for the past couple of years because it is way cheaper than the other option we had.

That said - I don't use the HSA part of it. The reason is that we max out our family out of pocket each year (mostly due to some meds our kids take). HSA accounts always seemed more advantageous to me for people who weren't going to be using the money in the HSA for years. In our case we are already withdrawing from DH's IRA (he is retired for 3 years now) so contributing to an HSA would mean withdrawing more money from the IRA and paying taxes on it just so we could then put it in the HSA.

Fund the HSA from wherever the funds for those out of pocket expenses are coming from, then pay those expenses from your HSA.

While it's true that it's more advantageous to let the HSA grow tax free, you still get a very nice tax credit just for funding the HSA, even if you turn around and immediately withdraw it.

 

[bamsphd]

I have not had an HSA in the past. However, now that I'm retired I'm trying to figure out how to balance 0% capital gains, Traditional to Roth conversions, Affordable Care Act subsidies for 2014, and COBRA benefits.

But the real cool part of HSA is that it reduces your AGI directly in 1040 line 38.

On the plus side, it appears that because an HSA contribution reduces your AGI, it could change one's Affordable Care Act subsidy, or alternatively potentially make corresponding Traditional withdrawals/Roth-conversions tax free. (I still need to research how it plays with 0% capital gains.)

On the downside, hassles, paperwork and fees. I was initially enthralled by the save your receipts for decades approach. However, I've long since stopped reinvesting dividends in taxable accounts to avoid the specific identification hassles of lots of tiny tax lots. I also don't want to leave my wife a pile of medical receipts. So I assume I would pay medical expenses immediately from the HSA. That means my HSA balance is likely to remain small, which makes the fees less tolerable. It looks like even http://www.hsaadministrators.info would charge more than $45/year in fees. Which on the one hand seems reasonable for the services provided, on the other it seems like a pretty high expense ratio if the HSA never grows.

I have not yet decided if I will open an HSA account in 2014. Let the thread continue!

 

[ziggy29]

On the plus side, it appears that because an HSA contribution reduces your AGI, it could change one's Affordable Care Act subsidy, or alternatively potentially make corresponding Traditional withdrawals/Roth-conversions tax free. (I still need to research how it plays with 0% capital gains.)

Yes. HSA contributions and 401k/403b defined contributions reduce your MAGI. Traditional IRA contributions, even if tax-deductible, do not.

As far as I can tell, LTCG at the 0% rate are not included in MAGI but at the 15% rate or higher, they are.

 

[47]

Yes. HSA contributions and 401k/403b defined contributions reduce your MAGI. Traditional IRA contributions, even if tax-deductible, do not.

As far as I can tell, LTCG at the 0% rate are not included in MAGI but at the 15% rate or higher, they are.

LTCG *are* definitely included in your MAGI, 0% rate or otherwise. That's one of the most painful aspects of this whole thing for me. It's free, but it's expensive.

Because of all the shenanigans possible to reduce your taxable income, they went straight for the jugular and based this thing on MAGI. The 0% tax rate calculation for LTCG appears only while calculating the tax. In the first page of 1040, qualified dividend, LTCG all are lumped in with ordinary income.

Tough.

 

[walkinwood]

As far as I can tell, LTCG at the 0% rate are not included in MAGI but at the 15% rate or higher, they are.

I found this at fairmark

Q: Are capital gains included in AGI?
A: Yes. For example, if you have a $20,000 capital gain, it will increase your AGI (and your modified AGI) by $20,000. This is true even for long-term capital gains that are subject to special tax rates.

 

[RunningBum]

Couldn't tell if bam's question had to do with 0% cap gains and the ACA (correctly answered in the two posts above) or HSA and 0% cap gains. If it's the latter, an HSA deduction gives you room for another $3250 of 0% cap gains or dividends. Remember that the 0% rate isn't unlimited. Once you pop the 15% cap including those, any cap gains or divs above that get taxed at 15%.

 

[ziggy29]

Ah, I stand corrected, it would seem. I saw something from a couple of what seemed to be reasonably reliable sources that seemed to indicate otherwise.

 

[travelover]

Fund the HSA from wherever the funds for those out of pocket expenses are coming from, then pay those expenses from your HSA................

This is what I've done for years with my Patelco account. Basically it is just a checking account. The money I put in is counted as my HSA contribution. The checks I write are counted as distributions. I pay a monthly fee of $2, Patelco sends me a yearly a statement of contributions and withdrawals and I keep the receipts in a folder and do a yearly spread sheet as a scorecard, in case I'm ever audited. As I'm in the 25% tax bracket, it is like getting 25% off on all medical and dental expenses.

Lately I have kicked up the contributions and started investing in their available Vanguard accounts. I'll let these contributions grow until I'm 65, then deplete the fund eventually with Medicare premiums.

 

[Katsmeow]

I wasn't even thinking of matching the IRA withdrawal $ for $. I was talking about just offsetting the actual medical expenses for each year -- and my comment was -- to the extent that money comes from IRA, it would be like a tax free withdrawal. Katsmeow already mentioned that he was tapping the IRA- hopefully without penalty.

A minor point. Katsmeow is not a he.

On a more substantive point, Katsmeow's husband is 66 to withdraws from the IRA without penalty.

In response to some of the other comments, I guess I could make an HSA contribution (DH is on Medicare so can't do so) and then spend it that year. However, when I looked at it I felt there were a lot of complexities involved. And, it was easy to go wrong and a lot of paperwork maintenance for just not a lot of value in our situation.

 

[47]

What this subsidy does is effectively increase the marginal tax rate by 6.3% to 9.5% for everyone between 200% FPL and 400% FPL. To reduce the sting it gives you a cash grant somewhat inversely proportional to the income.

Above 400% FPL it is untouched. Under 200% it's complicated.

 

[Cedar]

Yes. HSA contributions and 401k/403b defined contributions reduce your MAGI. Traditional IRA contributions, even if tax-deductible, do not.

My understanding is that contributions to Traditional IRA's reduce your MAGI
Am I getting this wrong?

 

[ziggy29]

My understanding is that contributions to Traditional IRA's reduce your MAGI
Am I getting this wrong?

I'm pretty sure you are.

TIRA contributions reduce AGI but not MAGI. On the other hand, 401K and 403B contributions appear to reduce MAGI. Which means if we start dancing close to 300% of FPL next year, we're going to have to crank up DW's contribution to her 403B plan as it's really going to be the only way we can do it short of foregoing additional income.

 

[pb4uski]

I don't think so Ziggy. O-MAGI = AGI + tax-exempt foreign earned income + tax-exempt SS + tax-exempt muni income so if a tIRA contribution is deductible it would reduce both AGI and in turn, O-MAGI.

 

[kaneohe]

I have not had an HSA in the past. .......................)

On the downside, hassles, paperwork and fees. .................. That means my HSA balance is likely to remain small, which makes the fees less tolerable. It looks like even Health Savings Account - HSA Administrators would charge more than $45/year in fees.

Many (or at least some) credit unions do it for free......Alliant, for one.

 

[Cedar]

I don't think so Ziggy. O-MAGI = AGI + tax-exempt foreign earned income + tax-exempt SS + tax-exempt muni income so if a tIRA contribution is deductible it would reduce both AGI and in turn, O-MAGI.

That is how I have always understood it that Traditional IRA will reduce the MAGI. Here is a graph that I think explains the deduction:
ttp://laborcenter.berkeley.edu/healthcare/MAGI_summary13.pdf

 

[47]

I don't think so Ziggy. O-MAGI = AGI + tax-exempt foreign earned income + tax-exempt SS + tax-exempt muni income so if a tIRA contribution is deductible it would reduce both AGI and in turn, O-MAGI.

I don't know what the O stands for in your formula.

But Ziggy is right. I had known this -- then forgot about it -- remembered it -- then forgot about it again -- now I will etch this in my memory.

Deductible IRA's are ADDED BACK to AGI to get MAGI for ACA purposes.

=================================

Edited as below:

I think it is time to forget about it again. Deductible IRA does seem to reduce MAGI.

There is so much misinformation about this I don't know what to believe at this time. I'd seen the link provided by Cedar and it is a reputable one. But there are countless others which are clearly telling otherwise. So I am filing this under 99% confirmed.

 

[ziggy29]

Note to Ziggy.. shouldn't you be maxing out on 401(k) any way!

I got laid off in April. Our income is probably going to be around $40K in 2013. There's not a lot of room left for it, but the only plan like that we have now is my wife's 403B (she's currently putting 6% in, just to keep it a habit), and if we need to keep MAGI under 300% of FPL for ACA purposes, that's where we'll have to operate. But for a household of two, 300% of FPL is about $46K so we should be good.

Before I was laid off I was maxing out my 401K, two Roth IRAs and my HSA. Those days are gone (and I'm not sorry about it)....

 

[MichaelB]

The IRS agrees with pb4uski.

Modified adjusted gross income is the adjusted gross income on your federal income tax return plus any excluded foreign income, nontaxable Social Security benefits (including tier 1 railroad retirement benefits), and tax-exempt interest received or accrued during the taxable year. It does not include Supplemental Security Income (SSI).

From the IRS here Questions and Answers on the Premium Tax Credit

 

[youbet]

What if you'd already deducted them as medical expenses on your tax return? That would be double-dipping.

Not if you live in Illinois and have the right political connections.