Money musical chairs

[karen1972]

So my plan is to take $3500 (from taxable account) and put it into my HSA
Then convert an extra $3500 from my traditional IRA to my ROTH IRA.

My understanding is that then those 2 will cancel each other out (tax deduction for HSA vs. taxable income for conversion), so no tax cost to me and then I just converted $7000 from two taxable accounts to two non-taxable accounts.

That seems too good to be true, but the HSA has funny rules since you don't have to have earned income to contribute, so is there a flaw in my plan?

 

[bingybear]

Assuming you have a HSA compatible health insurance and you either have a family plan or are using catch up provisions, I would think it would be fine.

I believe individuals are limited to $3400 in 2017 before catch up provisions for the HSA contribution. So $3500 could cost you a penalty and have to withdraw overage.
If you are 55+ you could do more $ with catch up provisions.

 

[RunningBum]

Yes, this is fine (as long as the amounts are right as bingybear pointed out).


It's really 2 transactions. If you have an HSA eligible plan, you can contribute to the HSA and get the tax break on that.


Separately, you can choose to convert some or all of your tIRA to a Roth. That event is taxable.


If you choose to make the 2 transactions the same amount, the taxable event cancels out the tax break for a net 0, while getting your money into more tax-favorable places.


That HSA plan didn't come for free. You pay premiums on it (perhaps subsidized). It has a high deductible so you'll pay a lot of medical costs out of your pocket before the insurance starts paying.

 

[karen1972]

That HSA plan didn't come for free. You pay premiums on it (perhaps subsidized). It has a high deductible so you'll pay a lot of medical costs out of your pocket before the insurance starts paying.

Yes I'll fix the dollar amounts as 2018 is $3450 for single.

The HSA plan is $2800 less than the non-HSA plan, so I have that money to go towards deductibles ...obviously there is a donut hole where I could pay more with the HSA plan; however, if you use the low/medium/high estimates they provide, the HSA plan actually is cheaper in every case due to co-pays that don't count towards deductible in the non-HSA plan. Thus the odds are in my favor the HSA will end up cheaper and the difference in premiums almost pays to fund the HSA contribution.

 

[RunningBum]

Right, HSA sounds like an almost sure winner for you. I was just pointing out that it isn't quite a case of shuffling some money around to more favorable accounts for free. There is a cost to you, even though you were probably going to get health insurance anyway and this may be the best option for you.


It's not that often that something that sounds almost too good to be true really is legit!