Revelation of the day?

[pb4uski]

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.

 

[Alan]

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.

 

[Animorph]

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.

 

[TromboneAl]

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.

 

[pb4uski]

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.

 

[Animorph]

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!

 

[pb4uski]

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?

 

[Alan]

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.

 

[Animorph]

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.

 

[walkinwood]

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.

 

[TromboneAl]

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.

 

[Coolius]

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?

 

[ziggy29]

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.)

 

[MichaelB]

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.

 

[walkinwood]

Do you have investment choices in an HSA?

 

[REWahoo]

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.

 

[pb4uski]

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.

 

[TromboneAl]

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.

 

[Alan]

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

 

[Finance Dave]

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.

 

[Coolius]

FD,

I do not think that "earned income" is a requirement for contributing to a HSA.

If I am wrong, then I will need to file an amended 1040X for 2010....

 

[TromboneAl]

No, you need not have earned income to contribute to the HSA.

No, there is nothing magical about the year of retirement.

The quote (3) means this: if you convert $1K to a Roth, you will have to pay tax on it. That is, it is treated as income. If you also contribute $1K to an HSA, then it will offset the conversion, so that you effectively pay no tax on it. That is, they a related only in that the conversion increases your taxable income and the contribution decreases it.

 

[Mulligan]

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.

You probably know this, but keep all your medical receipts as there is no time limit on when you can claim them from your HSA. 15 years from now you may want to use some of this money tax free by claiming old medical bills. Also HSA money can be used to pay medicare premiums. That ultimately is my goal for my HSA.

 

[Finance Dave]

No, you need not have earned income to contribute to the HSA.

No, there is nothing magical about the year of retirement.

The quote (3) means this: if you convert $1K to a Roth, you will have to pay tax on it. That is, it is treated as income. If you also contribute $1K to an HSA, then it will offset the conversion, so that you effectively pay no tax on it. That is, they a related only in that the conversion increases your taxable income and the contribution decreases it.

Thanks!

Ok, so let me see if I have this right. If we were going to max out our HSAs annually regardless, then the discussion about conversion from a TIRA to a Roth is moot?

However, if we normally did not contribute to an HSA, but wanted to shield some income from taxes, you're saying the strategy would be to use the HSA contribution to offset the taxable event of the TIRA to Roth conversion...right?

That makes sense...I guess since we always plan to max out HSAs this is not something I really thought of. The only thing I may want to do in 2013 is increase DW's HSA amount because she turns 55 next year.

 

[Finance Dave]

You probably know this, but keep all your medical receipts as there is no time limit on when you can claim them from your HSA. 15 years from now you may want to use some of this money tax free by claiming old medical bills. Also HSA money can be used to pay medicare premiums. That ultimately is my goal for my HSA.

I knew the first part, but not about using it to pay Medicare...thanks for the tip.

I'm learning that I've focused too much on what currently affects my situation...and now that DW is approaching 55...and I'll be there in about 5 years....I need to start considering and learning about these things now.

This board has been great in that regard...thanks everyone!