Considering HSA This Year - My Assumptions Right?

[RunningBum]

There is a national service that might interest folks. I came across the reference on mr money mustache which I also occasionally reference with regard to FIRE.

https://www.mrmoneymustache.com/2020/11/09/direct-primary-care/

direct primary care locations
https://mapper.dpcfrontier.com/

medical cost sharing, voluntary
https://sedera.com/sedera-faqs-2020/

The interesting part is Sedera. Its a voluntary cost sharing effort across all members. If you add together my DPC cost of 75-100, and the Sedera cost sharing at 300, for less than 5K per year you have coverage over all but the most gruesome expenses. Pharma would be an add on, but most of that is aided by competitive script discounters.

I'm 57, I would imagine this would be around150-200 for younger folks. Covers all but a tiny fraction of the risk. Compared to 21k/year for corporate subsidized HC cost, without deductibles and such and paying premium insurance prices, this is a great deal

What does this have to do with HSA policies? Start your own thread. It's allowed.

 

[MBSC]

3. QFHD. This is your idea, and you're correct, there apparently is no addition to MAGI for this. It's not clear whether you get a deduction for the HSA "contribution" using a QFHD. This idea differs from #2 that you won't be adding any new funds into your tax-free universe, but whether this is a bug or a feature depends on your circumstances.

There is no HSA deduction with this method.

The once-in-a-lifetime restriction makes it sound like an opportunity you shouldn’t miss. Actually it’s practically useless.

No Tax Deduction

The transfer from your IRA to your HSA is not taxable, but you also lose the tax deduction you otherwise would get if you contribute normally. As a result, compared to just contributing normally, doing the transfer raises your AGI. Raising your AGI increases your taxes.

If you have other money you can use to make a contribution to your HSA, just use your other money. You lower your AGI and you reduce your taxes.

Details and additional information: https://thefinancebuff.com/one-time-transfer-from-ira-to-hsa-forget-about-it.html

Instructions for IRS Form 8889

Figuring Your HSA Deduction

Line 10

Enter on line 10 any qualified HSA funding distribution made during the year. This is a distribution from your traditional IRA or Roth IRA to your HSA in a direct trustee-to-trustee transfer. This qualified HSA funding distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA.

You can make only one qualified HSA funding distribution during your lifetime.

Source: https://www.irs.gov/pub/irs-pdf/i8889.pdf

 

[bobandsherry]

There is no HSA deduction with this method.


The once-in-a-lifetime restriction makes it sound like an opportunity you shouldn’t miss. Actually it’s practically useless.

No Tax Deduction

The transfer from your IRA to your HSA is not taxable, but you also lose the tax deduction you otherwise would get if you contribute normally. As a result, compared to just contributing normally, doing the transfer raises your AGI. Raising your AGI increases your taxes.

If you have other money you can use to make a contribution to your HSA, just use your other money. You lower your AGI and you reduce your taxes.

This qualified HSA funding distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA.

Maybe I'm confused, won't be the first time and definitely won't be the last. But if this isn't included in income then not sure how it increase AGI. It seems to accomplish the same thing as IRA Distribution/Transfer, a net zero to the taxable income line. Maybe I'm missing the subtle difference.

It definitely would be a once in a lifetime opportunity if they allowed the transfer, didn't record as taxable AND let me take the HSA deduction - we can wish, right? LOL

Only benefit I see is I could tap into the IRA now to do funding, leaving my other investments. But yeah, I'm not sure how this is a once in a lifetime opportunity, other than you can only do it once. I only mentioned it as one person mentioned can only do a distribution from IRA after 59.5, so this gives an opportunity to tap into that before that. Is that compelling enough reason, I don't know but that is why I'm trying to understand what, if any, benefit there may be to doing that.

I guess if someone didn't have other funds this would be a way to fund it immediately so that you had use of the funds right away for reimbursement. But so far that's the only benefit I've come up with. But I'm still trying to get this bit of cranial grey matter to think through the details.

Appreciate your comments.

 

[audreyh1]

Raises your AGI because you don’t get the HSA deduction? “compared to contributing normally”

I would only consider doing it if I needed HSA funds to pay medical bills right away, and didn’t have sufficient taxable funds to fund the HSA.

 

[bobandsherry]

I use the reduction in AGI from my HSA contribution to convert that much more to my Roth IRA. If you don't need an IRA distribution to fund your contribution, this makes more sense to me because I'd rather have that money in my Roth than my taxable account.

Edit: somehow I missed that 2Cor suggested the exact same thing. I agree with that, and the explanation in the post above mine.

You know, just when I think I understand you go and toss in another consideration.... LOL But I think I understand what you are saying... doing what you suggest is then a trade off of the increased subsidy. Using my example dropping my MAGI from $68K to $61K, which would result in $1,104 savings.

By maxing your Roth contribution you then forgive this $1,104 savings. Aren't you then just paying the tax now ($1,104) to move money to your Roth? Maybe in the long run it works out as you then let the investment grow on a tax free basis. Something I'll have to model. Thanks for making my head hurt a little bit more on a Friday night

 

[RunningBum]

You know, just when I think I understand you go and toss in another consideration.... LOL But I think I understand what you are saying... doing what you suggest is then a trade off of the increased subsidy. Using my example dropping my MAGI from $68K to $61K, which would result in $1,104 savings.

By maxing your Roth contribution you then forgive this $1,104 savings. Aren't you then just paying the tax now ($1,104) to move money to your Roth? Maybe in the long run it works out as you then let the investment grow on a tax free basis. Something I'll have to model. Thanks for making my head hurt a little bit more on a Friday night

I think of them as separate decisions. Does an HSA plan/contribution make sense? Separately, do I want to do Roth conversions, and how much? The "how much" may be influenced by the HSA contribution, so there is some tie in.

Let's take it as a given that you'll be doing the HSA contribution.

Many people do Roth conversions up to the ACA cliff, or up to the top of a certain tax bracket. If you're already doing a Roth conversion, you've decided that the tax paid now is offset by the tax free growth, and avoiding possibly higher tax rates in the future.

The income reduction you get with the HSA contribution just makes a little more room in the same space you were already using. So while you might see it as giving up the $1104 tax savings you were getting, another view is that you are paying $1104 to convert that money now rather than paying higher taxes later.

Here's an example where you wouldn't convert the same amount that you put in your HSA. Suppose that without the HSA, you'd be $3200 over the subsidy cliff. But when you do the HSA contribution, you are now $4000 away from the cliff. If you then decided to do a Roth conversion, you would only convert $4000, not the full $7200. Of course you would leave some safety buffer, but it shows that you would treat them as separate decisions.

I have a spreadsheet each year to figure out how to manage income for the ACA subsidy, and for estimated taxes. When I have an HSA plan, I subtract my contribution from the income number in January when I make the contribution. Throughout the year I add in income. Near the end of the year I figure out how much, if any, Roth conversions I can do. So while my HSA contribution and Roth conversion amount is related, they are separated by 11 months.

 

[bobandsherry]

I think of them as separate decisions. Does an HSA plan/contribution make sense? Separately, do I want to do Roth conversions, and how much? The "how much" may be influenced by the HSA contribution, so there is some tie in.

Agree it's standalone planning and not decision on HSA or not. I got my answer on the HSA. Appreciate the insights and feedback from you and others.