End of year strategy for IRA / HSA / taxes

[BrianB]

I'm looking for feedback on my idea to get funding into my HSA, avoid penalties, and avoid quarterly estimated payments.

Background:
- We are over age 55, have no W-2 income, and have an HSA compatible HDHP. Our income consists of a small pension, taxable investment income, and IRA withdrawals. Standard deduction only.
- Projecting ahead our 2018 total income will be $37000, plus any IRA distributions we take between now and 12/31. Target total income is $40000.
- Our estimated tax liability for 2018 is $1600 Federal and $1000 State, based on $40000 total income.
- We have not made any estimated tax payments.

My plan:
- Take a $10000 IRA distribution with 16% ($1600) Federal withholding and 10% ($1000) State withholding and 74% ($7400) net to us. Total income = $47000. The withholding on our distribution should meet our tax liabilities and avoid any penalty for underpayment / lack of quarterly payments.
- Contribute $7000 of that net to our HSA, reducing our total income to $40000. The deduction for the HSA contribution effectively turns most of the taxable IRA distribution into non-taxable HSA money (assuming we use it for medical expenses).
The $400 remaining will pay for a few extras in the Holiday season, or maybe a nice night out to celebrate [-]surviving another year[/-] my financial acumen.

Will this work? It almost seems too good to be true. Any other ideas I should consider?

Brian

 

[RunningBum]

You're over 55, but are you 59.5? If not, how are you avoiding the early withdrawal penalty? There are provisions for taking from a 401K, but not a tIRA, as I understand it.

I would find a way to fund the HSA in almost any case, but I don't know if the math works to take the early withdrawal penalty.

 

[BrianB]

Yes, I am over 59.5 years. DW is not yet.

 

[audreyh1]

If you have the funds to contribute to an HSA, and have the compatible health insurance plan, it’s a great tax break, lowering the adjusted AGI and MAGI.

 

[RunningBum]

OK. Yes, taking money out of your IRA and putting it in your HSA essentially tax free is a very good idea.

Also, you have a lot of room to take 0% LTCGs. I would use that up, unless you are keeping your income low for ACA cost sharing. Another option might be to convert some of your IRA to a Roth at 12% if SS and RMDs will put you in a higher bracket later.

 

[BrianB]

Audrey1: Yes, and the ability to use IRA distributions (taxable) for HSA contributions (deductible, even without earned income) seems to be overlooked and a great way to save on taxes!

 

[BrianB]

RunningBum: Yes we are keeping our income limited for ACA purposes (although I hesitate to say this as some here have issues with that strategy)

 

[pb4uski]

Looks good to me as long as the tIRA distribution is from your tIRA.

 

[Stormy Kromer]

Looks exactly like what I plan on doing when I turn 59.5.

Like it was mentioned above, you have a lot of room to take some long term CG at the 0% Federal rate. I see you're from MN, the state taxes long term CG as ordinary income. Many retirees in MN are paying more in state income tax than Federal.

 

[RetireAge50]

This is amazing, thanks for the post/reminder. I just chose a HSA plan for next year and plan to fund the account using some tax deferred money my wife had as a teacher (available to us penalty free at any age). No tax ever, nice!

 

[karen1972]

Yes, this is a great little tax break which feels like double dipping, but is not. I funded mine through LTCGs and used the HSA credit for some side income/roth conversions so a win/win.