Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Revelation of the day?
Old 04-07-2012, 03:41 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,411
Revelation of the day?

I was sketching out my taxes for 2012, my first full year of retirement, and realized that my HSA contributions for the year will allow me to make an additional Roth conversions of equal amount without incurring any tax.

So if I take $8,150 of taxable funds and transfer them to my HSA, it will allow me to make an additional $8,150 of tIRA>Roth conversions. So at the end of the year, I have an additional $16,300 of tax-free money.

Is this right? I think so, but a part of me feels like it is too good to be true or double-dipping.
__________________

__________________
pb4uski is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-07-2012, 04:30 PM   #2
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,086
Quote:
Originally Posted by pb4uski View Post
I was sketching out my taxes for 2012, my first full year of retirement, and realized that my HSA contributions for the year will allow me to make an additional Roth conversions of equal amount without incurring any tax.

So if I take $8,150 of taxable funds and transfer them to my HSA, it will allow me to make an additional $8,150 of tIRA>Roth conversions. So at the end of the year, I have an additional $16,300 of tax-free money.

Is this right? I think so, but a part of me feels like it is too good to be true or double-dipping.
I'm not eligible for an HSA, but when working, all my HI premiums and my voluntary contributions to my FSA were taken off the top, reducing my gross income, so it certainly sounds reasonable to expect similar with an HSA.

If your tax software says so, then it is correct.
__________________

__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 04-07-2012, 04:43 PM   #3
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Seems good per this info:

2012 HSA Contribution Limits


"
2012 HSA Limits for Contributions

2012 HSA Limit for Individual Coverage

The 2012 maximum annual amount that can be contributed to an HSA is $3,100 for an individual, up $50 from $3,050 in 2011.
2012 HSA Limits for Family Coverage

The 2012 maximum annual amount that can be contributed to an HSA is $6,250 for families, up $100 from $6,150 in 2011.
2012 HSA Limits for Catch-Up Contributions

Persons over age 55 are entitled to an additional annual catch-up contribution of $1,000 in 2012—a number that unchanged from 2011."

Didn't see anything that said it had to be earned income or anything, so it looks good in theory. I'm hoping to do something similar when DW finally decides to join me and I can't leech off her insurance. Same thing goes for any deduction you can find when you're trying to convert up to the top of the tax bracket.
__________________
Animorph is offline   Reply With Quote
Old 04-07-2012, 10:50 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,197
Yes, that's how it works. We converted 32,000 to a Roth and only paid $978 in taxes. Seems too good to be true.
__________________
Al
TromboneAl is offline   Reply With Quote
Old 04-08-2012, 08:43 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,411
Quote:
Originally Posted by TromboneAl View Post
Yes, that's how it works. We converted 32,000 to a Roth and only paid $978 in taxes. Seems too good to be true.
I love America.
__________________
pb4uski is offline   Reply With Quote
Old 04-08-2012, 12:25 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by TromboneAl View Post
Yes, that's how it works. We converted 32,000 to a Roth and only paid $978 in taxes. Seems too good to be true.

And we have to keep telling people not to contribute/convert to Roth's at a 25%-28% marginal tax rate!
__________________
Animorph is offline   Reply With Quote
Old 04-08-2012, 12:33 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,411
Quote:
Originally Posted by Animorph View Post
And we have to keep telling people not to contribute/convert to Roth's at a 25%-28% marginal tax rate!
Convert I can understand and fully agree with.

Contribute I don't quite get. When I was w*rking once I've maxed out my tax-deferred alternatives (401k, 403b, HSA, etc.) taxes will be paid at 25-28% on that incremental income anyway, so it seemed sensible to me to max out my Roth to the extent that i could and then divert any leftover to taxable investments. Was I missing something?
__________________
pb4uski is offline   Reply With Quote
Old 04-08-2012, 12:49 PM   #8
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,086
Quote:
Originally Posted by pb4uski View Post
Convert I can understand and fully agree with.

Contribute I don't quite get. When I was w*rking once I've maxed out my tax-deferred alternatives (401k, 403b, HSA, etc.) taxes will be paid at 25-28% on that incremental income anyway, so it seemed sensible to me to max out my Roth to the extent that i could and then divert any leftover to taxable investments. Was I missing something?
I wasn't eligible for Roths or deductible IRAs while working, but I made non-deductible IRA contributions anyway. May as well have the future gains tax deferred even if the contributions are after tax. As it happens I was able to convert the tIRA to a ROTH when I ER'ed, so the gains were taxed at a lower rate. If I was still working today I would do backdoor ROTH contributions.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 04-08-2012, 03:04 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by pb4uski View Post
Convert I can understand and fully agree with.

Contribute I don't quite get. When I was w*rking once I've maxed out my tax-deferred alternatives (401k, 403b, HSA, etc.) taxes will be paid at 25-28% on that incremental income anyway, so it seemed sensible to me to max out my Roth to the extent that i could and then divert any leftover to taxable investments. Was I missing something?

No, I was unclear. Don't contribute to Roth when you have 401k/IRA pre-tax opportunities available and a high marginal tax rate. Such as deciding between traditional 401k and Roth 401k.

Until the backdoor Roth contribution, I wasn't able to contribute to a Roth. But I think anyone who can contribute and would otherwise be placing that money in a taxable account should definitely go with the Roth. That was a pretty clear choice.
__________________
Animorph is offline   Reply With Quote
Old 04-11-2012, 10:08 AM   #10
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 2,676
Quote:
Originally Posted by TromboneAl View Post
Yes, that's how it works. We converted 32,000 to a Roth and only paid $978 in taxes. Seems too good to be true.
In ER, our overall effective tax rates are so small that I wonder if an HSA even makes sense. It would make sense if HSA & non-HSA plans were identical, but a quick look at ehealthinsurance.com shows that isn't the case.

I'll have to study our medical expenses & premiums this year, and see if it will save us money.
__________________
walkinwood is offline   Reply With Quote
Old 04-11-2012, 10:39 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,197
Quote:
Originally Posted by walkinwood

In ER, our overall effective tax rates are so small that I wonder if an HSA even makes sense. It would make sense if HSA & non-HSA plans were identical, but a quick look at ehealthinsurance.com shows that isn't the case.

I'll have to study our medical expenses & premiums this year, and see if it will save us money.
The hsa and non-hsa plans were pretty much the same for me - hsa was better, in fact, even without the tax stuff. I figure I save about $400 in taxes each year, and will get a no-RMD "IRA" when I'm 65.
__________________
Al
TromboneAl is offline   Reply With Quote
Old 04-11-2012, 11:03 AM   #12
Full time employment: Posting here.
Coolius's Avatar
 
Join Date: May 2010
Posts: 682
T-Al, forgive my ignorance, but what is a "no-RMD" IRA? I thought that when one reaches the 70 1/2 age, one MUST withdraw a RMD that is computed based on the IRA balance, and I do not recall any kind of IRA balance cutoff to avoid the RMD.

Update: Ah, I think I got what you were saying -- the HSA account after 65 acts like a "no-RMD" IRA, as there are no minimum withdrawal rules on it. After 65, one can withdraw for any reason and just have to pay the regular tax. Am I correct?
__________________
Coolius is offline   Reply With Quote
Old 04-11-2012, 11:06 AM   #13
Moderator
ziggy29's Avatar
 
Join Date: Oct 2005
Location: Texas
Posts: 15,612
Quote:
Originally Posted by Coolius View Post
T-Al, forgive my ignorance, but what is a "no-RMD" IRA? I thought that when one reaches the 70 1/2 age, one MUST withdraw a RMD that is computed based on the IRA balance, and I do not recall any kind of IRA balance cutoff to avoid the RMD.
I think what T-Al means is that once you turn 65, an HSA can essentially be used just like a *conventional* IRA (Roths are a different animal, also with no RMDs), but without the RMDs of the TIRA. It's not an IRA per se, but after you turn 65 it more or less quacks like a duck.

In other words, if you don't tap your HSA before 65 and want to use it to supplement retirement income, it works just like a conventional IRA, with the exception that there is no RMD because it's *not* an IRA.

(Actually, one other difference is that if you still have earned income at age 65+, you can still contribute to a conventional or Roth IRA but not an HSA. But if you are retired with no earned income this distinction is a non-issue.)
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)

RIP to Reemy, my avatar dog (2003 - 9/16/2017)
ziggy29 is offline   Reply With Quote
Old 04-11-2012, 11:06 AM   #14
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,424
Quote:
Originally Posted by Coolius View Post
T-Al, forgive my ignorance, but what is a "no-RMD" IRA? I thought that when one reaches the 70 1/2 age, one MUST withdraw a RMD that is computed based on the IRA balance, and I do not recall any kind of IRA balance cutoff to avoid the RMD.
ROTH IRA are not subject to RMDs.
__________________
MichaelB is offline   Reply With Quote
Old 04-11-2012, 11:30 AM   #15
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 2,676
Do you have investment choices in an HSA?
__________________
walkinwood is offline   Reply With Quote
Old 04-11-2012, 12:27 PM   #16
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,078
Quote:
Originally Posted by walkinwood View Post
Do you have investment choices in an HSA?
Yes, but the choices depend on who you use to administer your HSA account. I went with HSA Administrators due to relatively low cost and the fact they offer a choice of 22 Vanguard funds.
__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Old 04-11-2012, 05:11 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,411
Quote:
Originally Posted by TromboneAl View Post
The hsa and non-hsa plans were pretty much the same for me - hsa was better, in fact, even without the tax stuff. I figure I save about $400 in taxes each year, and will get a no-RMD "IRA" when I'm 65.
+1

I have viewed my HSA as simply another opportunity to invest tax-free like a Roth and I have not as of yet paid my health care costs from the HSA. Loose plan is to contribute the max until 65, let it grow and then pay for health care costs, nursing home care if needed and LTC insurance from the HSA later in life.

The gravy is that the HSA deduction allows me to make bigger tIRA>Roth conversions now.
__________________
pb4uski is offline   Reply With Quote
Old 04-11-2012, 09:44 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
TromboneAl's Avatar
 
Join Date: Jun 2006
Posts: 11,197
Quote:
Originally Posted by Coolius View Post
Update: Ah, I think I got what you were saying -- the HSA account after 65 acts like a "no-RMD" IRA, as there are no minimum withdrawal rules on it. After 65, one can withdraw for any reason and just have to pay the regular tax. Am I correct?
Yes, that's right.

I'm really impress with HSAAdministrators. I call them on the phone and a real person answers right away, and that person is intelligent and knowledgeable. It's weird.
__________________
TromboneAl is offline   Reply With Quote
Old 04-11-2012, 10:24 PM   #19
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,086
Quote:
Originally Posted by TromboneAl View Post
I'm really impress with HSAAdministrators. I call them on the phone and a real person answers right away, and that person is intelligent and knowledgeable. It's weird.
Either that, or you'd had a few meds before you called
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is online now   Reply With Quote
Old 04-12-2012, 04:46 PM   #20
Thinks s/he gets paid by the post
Finance Dave's Avatar
 
Join Date: Mar 2007
Posts: 1,046
Quote:
Originally Posted by pb4uski View Post
I was sketching out my taxes for 2012, my first full year of retirement, and realized that my HSA contributions for the year will allow me to make an additional Roth conversions of equal amount without incurring any tax.

So if I take $8,150 of taxable funds and transfer them to my HSA, it will allow me to make an additional $8,150 of tIRA>Roth conversions. So at the end of the year, I have an additional $16,300 of tax-free money.

Is this right? I think so, but a part of me feels like it is too good to be true or double-dipping.
Ok I need some help here...can someone please explain this in a bit more detail?

I understand that you can contribute to an HSA tax-deferred, and use it on health care costs without paying taxes...up to the max (which I think is about $3,100)....but there a couple things I don't get in the post above.

1) What is magical about the $8,150? Where did that come from? Can someone provide a link? Is that a max for HSA contributions or something?

2) Is the fact that the OP is (actually will be) in the year of retirement relevant to the entire discussion? Is there something magical about that one year?

3) This quote confuses me "my HSA contributions for the year will allow me to make an additional Roth conversions of equal amount without incurring any tax." I didn't know there was a rule about additional Roth conversions related to HSA contributions...is there a link on this?

I need to learn more on this topic. We have been maxing our HSAs annually, and not using them when we have medical costs...so we are essentially using them to gain an additional tax-free investment...but it seems there may be more that I'm missing.

Dave

Edit: Just found this...which answers my question #1. I was not aware of this...but I'm only 50 so that's why.

"If you are age 55 or older, your contribution limit is increased by $1,000. If you are married filing jointly and both you and your spouse are over age 55 and are not enrolled in Medicare, the total contribution limit is increased to $8,150."

Given that, do you have to have "earned" income to contribute to the HSA? I'm wondering if after we FIRE we can do this to lower our taxes...essentially converting the 401k (which will be rolled to a TIRA upon FIRE) to a "Roth-like" investment.
__________________

__________________
"Live every day as if it were your last, and one day you'll be right" - unknown
Finance Dave is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Revelation of the day? pb4uski FIRE and Money 25 04-12-2012 07:02 PM
If you don't respond to a rude comment, does the commenter "win"? Amethyst Other topics 32 04-12-2012 05:30 AM
Anyone used "Happy Feet" Insoles? Are they worth the $$? Amethyst Other topics 6 04-08-2012 10:16 AM
Anybody here watching the Masters? pb4uski Other topics 6 04-07-2012 09:04 PM

 

 
All times are GMT -6. The time now is 05:08 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.