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Make HSA Contribution if Not Paying Tax?
Old 01-07-2008, 02:29 PM   #1
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Make HSA Contribution if Not Paying Tax?

What with living off taxable funds, and education-related tax credits we pay little or no tax these days.

So, should I still make a $2900 HSA contribution for 2008? That is, there's no benefit from a tax deduction, but the money will grow tax free.
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Old 01-07-2008, 02:43 PM   #2
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I'm thinking yes, you should make the contribution since you'll be able to use this money to pay for medical expenses tax free - including for payment of Medicare supplement premiums should once you turn 65, right? I'd look at it as a 'medical Roth IRA'.
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Old 01-07-2008, 02:56 PM   #3
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Quote:
you'll be able to use this money to pay for medical expenses tax free
Yes, but the tax-free part comes in the year that I deduct it, and since I'll not be paying any tax for 2008, the money is tax-free anyway. IOW, the tax savings is in the year I make the contribution, not in the year I use the money, and since I'm not paying taxes now anyway, there's much less benefit.

I used to think "Even if I pay low taxes now, I'll use the HSA money when I'm withdrawing from IRAs, and I'll be in a higher tax bracket." But of course your tax bracket when you use your money is irrelevant.

Makes sense?
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Old 01-07-2008, 03:12 PM   #4
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Makes sense, yes.

I was referring to the growth of that $2,900 over the next 10+ years til you are 65. Only in a HSA will those earnings be tax free when you use the money for medical payments later on, right? If you keep the $2,900 in a taxable account you'll have to pay tax on those earnings. Unless you can continue paying no taxes until you turn 65, which I suspect is going to be difficult to do...even for you!
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Old 01-07-2008, 03:24 PM   #5
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Originally Posted by TromboneAl View Post
Yes, but the tax-free part comes in the year that I deduct it, and since I'll not be paying any tax for 2008, the money is tax-free anyway. IOW, the tax savings is in the year I make the contribution, not in the year I use the money, and since I'm not paying taxes now anyway, there's much less benefit.

I used to think "Even if I pay low taxes now, I'll use the HSA money when I'm withdrawing from IRAs, and I'll be in a higher tax bracket." But of course your tax bracket when you use your money is irrelevant.

Makes sense?
You've lost me on this one. First, if you can contribute on a pretax basis from earnings, instead of taking an above the line deduction, would that effectively make a difference? Secondly, isn't the tax free compounding of the contribution enough of an incentive to make it worthwhile? And finally, isn't it better to use tax sheltered income for medical expenses than taxable income for the same expenses, unless when you draw on the taxable income, at any bracket, you won't pay any taxes?
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Old 01-07-2008, 03:25 PM   #6
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My understanding is that you can make the 2008 contribution up until April 15, 2009. Would that allow you to take the deduction in 2009, or would it still be considered having been made in 2008 for deduction purposes?
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Old 01-08-2008, 09:05 AM   #7
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Since I have not done it yet, I may find a gotcha, but I plan to fund my HSA from my IRA. I am beyond 59.5 so I figure this is doable and a way to move money that would be taxed in the future into a tax free bucket. I am moving money already to a Roth to max out the 15% tax bracket and figure the HSA would be in addition to that.

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Old 01-08-2008, 09:22 AM   #8
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Originally Posted by Jeb-NY View Post
Since I have not done it yet, I may find a gotcha, but I plan to fund my HSA from my IRA. I am beyond 59.5 so I figure this is doable and a way to move money that would be taxed in the future into a tax free bucket.
I'm doing exactly that and haven't run into any issues, at least not yet. Al's question is about the wisdom of moving taxable savings (non-IRA) money into his HSA. Not as good a deal as what you are planning, but I still think it's worth doing for the reasons I stated earlier.
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Old 01-08-2008, 09:32 AM   #9
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I thought this was a one shot deal to move IRA funds into an HSA. That's what my HDHP/HSA plan documents say and that what most of the literature I've read says as well. IRA to health account transfers make little sense - MarketWatch
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Old 01-08-2008, 09:40 AM   #10
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I thought this was a one shot deal to move IRA funds into an HSA. That's what my HDHP/HSA plan documents say and that what most of the literature I've read says as well. IRA to health account transfers make little sense - MarketWatch
As a direct transfer, yes, it is a one-shot deal. However, what JebNY and I are talking about doing to fund our HSA is discussed in this paragraph:

Americans who are HSA eligible but are don't have enough cash outside of their IRA might also consider using the QHSFAD. However, if the person is over age 591/2, Choate says that person can simply take the distribution from the IRA, deposit the cash into a checking account and then write a check to the HSA. "This," says Choate, "would have in most cases exactly the same tax effects as a QHSFAD." And best of all, the person doesn't have to worry about the 12-month rule.
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Old 01-08-2008, 10:18 AM   #11
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Thanks, guys. That's pretty much what I was thinking (take the deduction).

Quote:
You've lost me on this one. First, if you can contribute on a pretax basis from earnings, instead of taking an above the line deduction, would that effectively make a difference?
Well, since I pretty much ain't got no earnings, it doesn't make a difference.

Quote:
Secondly, isn't the tax free compounding of the contribution enough of an incentive to make it worthwhile?
Yes, probably. But I won't be paying much tax for the next 5 years (age 54 now).

Quote:
And finally, isn't it better to use tax sheltered income for medical expenses than taxable income for the same expenses, unless when you draw on the taxable income, at any bracket, you won't pay any taxes?
I don't think so. To ignore the tax-free compounding, imagine that I use money market accounts that pay 0% interest:

Scenario 1: I make a $2900 HSA contribution today, and get no decrease in taxes, since I have essentially no earnings and get education tax credits. In the year 2018, I'm in the 60% tax bracket. I go to the doctor for a cold, and it costs $2900. I use my HSA money to pay the doctor.

Scenario 2: I make no HSA contribution, I just put the money in my wonderful money market account. In the year 2018, I'm in the 60% tax bracket. I go to the doctor for a cold, and it costs $2900. I use my $2900 to pay the doctor.

The point is, that considering those scenarios, which ignore tax-free compounding, there is no benefit to making an HSA contribution. Your tax situation when you withdraw the money is irrelevant.

However, I agree that the benefits of tax-free compounding make a difference.
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Old 01-08-2008, 04:20 PM   #12
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Consider fund expenses... Many HSA accounts have higher expenses than you would pay if you just bought vanguard funds instead. It could very well be that the higher expenses in the HSA overwhelm the advantages of tax free compounding.

If you were to hold the money in the HSA for say 30 years it might be worth it, but I suspect for 10 years it's not going to be worth it. I'd say leave it out of the HSA so you have more control over the money.
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