by Jean Miller | Accounting News, News, Newsletter, Retirement Savings, Uncategorized
Health Savings Accounts (HSAs) are well-regarded tools for managing healthcare expenses, but the advantages of HSAs extend beyond the scope of medical bills. In this article, we’ll explore how these tax-advantaged accounts can offer a range of benefits and opportunities outside of qualified medical expenses.
Triple Tax Benefits
Contributions to an HSA are tax-deductible, which effectively reduces your taxable income. Furthermore, the funds in an HSA grow tax-free, and when money is withdrawn for qualified medical expenses, it remains tax-free. This triple tax benefit creates a powerful savings engine.
Retirement Savings
The main objective of an HSA is to save for medical expenses, but it can also be used to save and invest for retirement income. At age 65 you are able to withdraw money from your HSA for any reason and avoid the typical 20% early withdrawal penalty for non-medical expenses. While you will owe income tax on these withdrawals, having the option of using those funds penalty-free gives you some flexibility and financial cushion in retirement.
Investment Opportunities
When you contribute to your HSA, those funds remain tax-advantaged and can be invested in various assets such as stocks, bonds, mutual funds, or ETFs. Overtime, your HSA can grow into a substantial financial asset, earning a solid return on investment and enhancing your financial security in retirement. Furthermore, unlike other retirement accounts such as 401(k)s and IRAs, HSAs do not require Required Minimum Distributions (RMDs) once you hit a certain age (currently age 73). This flexibility makes HSAs an appealing option for individuals who wants to continue to let their money grow and compound.
Portability
An HSA is portable, meaning it remains with you even if you change employers or retire. This flexibility allows you to continue growing your account balance over the years to use for future healthcare expenses, even if your employment situation changes.
Education Expenses
HSAs can be used to cover qualified education expenses without penalty, including tuition, fees, books, supplies, and required equipment. This extends to the account holder’s spouse and dependents at eligible educational institutions. Note that certain expenses, such as room and board, don’t apply, and individual HSA providers may have differing rules and requirements. If you use funds from an HSA account to pay for eligible education expenses, be sure to keep receipts and records in case of an audit.
Wealth Transfer
If you’re a high-net-worth individual or you simply make enough income elsewhere to not need to use your HSA, you can let it grow and compound, and leave it to a beneficiary. If the beneficiary is your spouse, they can continue using the HSA as if it were their own account. If the beneficiary is someone other than your spouse, like a child, they will need to take a taxable distribution from the account.
by Jean Miller | Accounting News, News, Tax, Tax Planning, Tax Planning - Individual
Americans are no strangers to seeking out ways to legally minimize their tax burdens. Fortunately, there are several financial tools available that can help taxpayers slash their tax liability. In this article, we explore how these tools help you optimize your tax planning and maximize tax savings.
Pre-Tax Contributions to Retirement Plans
One of the most effective ways to reduce taxable income while securing your financial future at the same time is through pre-tax contributions to retirement plans. Traditional Individual Retirement Accounts (IRAs) and employer-sponsored 401(k)s allow taxpayers to contribute a portion of their income before it’s adjusted for taxes. Subsequently, your taxable income decreases, which lowers your immediate tax liability. Furthermore, you can defer taxes on these contributions until you withdraw the funds during retirement, allowing your investments to grow tax-deferred over the years.
Roth IRAs for Tax-Free Growth
Roth IRA contributions are made with after-tax dollars, meaning they do not reduce your taxable income in the year they are made. However, the growth and withdrawals from a Roth IRA are generally tax-free during retirement. This is different from a traditional IRA, which offers upfront tax benefits. Choosing between the two depends on individual circumstances and your current and projected future tax brackets.
Health Savings Accounts (HSAs)
HSAs are a tax-advantaged savings option for individuals with high-deductible health insurance plans. Contributions to HSAs are tax-deductible, and qualified medical expenses can be withdrawn tax-free. They also have no “use-it-or-lose-it” rule, meaning the funds can roll over from year to year. This makes an HSA an excellent long-term savings and tax-reduction tool. Additionally, after age 65, if the funds are used for non-medical expenses, they can be treated similarly to a traditional IRA, subject to regular income tax but without any penalty.
Tax Credits
Tax credits provide a dollar-for-dollar minimization in tax liability, making them a highly valuable tool for taxpayers. Some common tax credits include the Earned Income Tax Credit (EITC), Child Tax Credit, and education-related credits like the Lifetime Learning Credit and the American Opportunity Credit. Qualification and the amount of tax credits differ based on aspects such as income, family size, and educational expenses. Taking advantage of these credits can substantially shrink your tax bill or even result in a refund.
Charitable Contributions
Contributions to eligible charities can be itemized deductions, reducing taxable income. In order to claim the deduction, make sure the charity qualifies under the IRS guidelines, and keep detailed records of your donations. You can also donate appreciated assets, such as stocks or real estate to avoid capital gains and reap additional tax advantages.
Flexible Spending Accounts
Through an employer-sponsored FSA, employees can set aside pre-tax dollars for qualified medical expenses and dependent care expenses. This reduces taxable income and therefor reduces tax liability. Note that it’s important to plan FSA contributions thoughtfully. Unlike an HSA account, any unused funds remaining in an FSA by the end of the year may be forfeited.
by Jean Miller | Accounting News, News, Retirement, Retirement Savings
Retirement planning involves careful consideration of various financial strategies, and while traditional retirement accounts such as 401(k)s and IRAs are still go-to options, the Health Savings Account (HSA) is becoming a valuable retirement tool. Here’s why.
What is an HSA?
A Health Savings Account (HSA) is a tax-advantaged savings account that allows individuals to set aside funds especially for medical expenses. It is intended to work jointly with a high-deductible health plan (HDHP), which is a type of health insurance plan with lower premiums but higher deductibles compared to traditional health insurance plans. Though it was originally designed to help individuals cover medical expenses, the HSAs has evolved to offer unique advantages that make it an increasingly attractive option for saving for retirement.
An Increase in Maximum Contributions
The IRS recently announced the largest-ever increase in maximum contributions to HSA accounts. In 2024, the maximum HSA contribution will be $4,150 for an individual (up from $3,850) and $8,300 for a family (up from $7,750). Add to this the bonus $1,000 individuals over 55 can contribute, and the maximum contributions are $5,150 for individuals and $10,300 for couples.
Triple-Tax Advantage
Contributions made to HSAs are tax-deductible, meaning that individuals can lower their taxable income by the amount contributed. Additionally, earnings on the funds within the account grow tax-free. Finally, withdraws from an HSA for qualified medical expenses are also tax-free.
Long-Term Savings Potential
Unlike flexible spending accounts (FSAs), which typically must be used by the end of the year, HSAs offer an opportunity for long-term growth as they are not subject to an annual deadline for spending. HSA funds can be invested in stocks and other securities, potentially allowing for higher returns over time. Because of this, individuals can accumulate substantial savings in HSAs to supplement their retirement income.
Medicare Premium Payments
HSA funds can be used to pay for Medicare premiums, including Medicare Part B, Part D, and Medicare Advantage premiums, deductibles, copays, and coinsurance. By utilizing HSA funds for these expenses, individuals can free up their retirement savings in other accounts, such as 401(k)s or IRAs, for other essential expenses or investments.
Healthcare Costs in Retirement
HSAs can serve as a dedicated savings tool for healthcare costs in retirement. Savers can build up a substantial nest egg dedicated specifically to healthcare expenses – including premiums, deductibles, and other out-of-pocket costs – by maximizing contributions to their HSAs during their years in the workforce.
Flexibility and Portability
Unlike traditional retirement accounts that have required minimum distributions (RMDs) starting at age 72, HSAs do not have RMDs. This allows individuals to retain control over their funds and decide when and how they want to use them. Additionally, HSAs are portable, meaning they move with the account holder from job to job, in between employment, or even into retirement. This provides individuals with consistent access to savings.
As healthcare costs continue to rise, individuals who incorporate HSAs into their retirement planning strategy can bolster their financial security and ensure they are well-prepared for any healthcare expenses in their golden years.
by Pete McAllister | Accounting News, News, Retirement, Retirement Savings, Tax Planning, Tax Planning - Individual
A key approach to minimizing taxes, especially as you near retirement, is to implement tax planning strategies that can help you save money and maximize your retirement savings. Here are some tax-efficient strategies to consider.
Contribute to Tax Advantage Retirement Accounts
When you contribute to a retirement account such as a 401(k), IRA, and Roth IRA, you can lower your taxable income in the year you make the contribution. With a traditional 401(k), you defer income taxes on contributions and earnings, which means you won’t pay taxes on them until you withdraw the funds in retirement. With a Roth IRA, your contributions are made after taxes and your earnings may be withdrawn tax-free in retirement.
Utilize Catch-Up Contributions
Workers over the age of 50 are eligible for an additional tax break when they make catch-up contributions to retirement accounts. In 2023 individuals can contribute an additional $1,000 to an IRA (up to $7,500 in total). For 401(k) plans, individuals can contribute an additional $7,500 for a total tax-deductible contribution of as much as $30,000. Catch-up contributions help to save more for retirement and reduce taxable income.
Consider a Health Savings Account
A Health Savings Account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. If you have a high-deductible health plan, you may be able to contribute to an HSA. The contributions are tax-deductible, the earnings grow tax-free, and you can withdraw the funds tax-free in retirement to pay for qualified medical expenses.
Make Use of the Saver’s Credit
In order to be eligible for the saver’s credit in 2023, you must contribute to a 401(k) or IRA and earn up to $36,500 for individuals, $54,7500 for heads of household, and $73,000 for married couples. You can claim the saver’s credit on retirement account contributions of up to $2,000 ($4,000 for couples). Depending on your income, it is worth between 10% and 50% of the amount contributed (bigger credits go to lower-income savers). The saver’s credit may be claimed in addition to the tax deduction for traditional retirement account contribution.
Refrain from Triggering the Early Withdrawal Penalty
You could be subject to a 10% tax penalty if you make IRA withdrawals before age 59 ½ and 401(k) withdrawals before age 55. The penalty may be avoided for certain specific purchases such as:
- Up to $10,000 for a first home purchase
- College costs
- Extensive health care costs
- Health insurance following a layoff from your job
If a Roth IRA is at least five years old, you may be able to withdraw funds that you contributed, but not the earnings, without prompting the early withdrawal penalty.
Don’t Sleep on Required Minimum Distributions
After age 73, savers are generally required to take required minimum distributions (RMDs) from IRAs and 401(k)s, and income tax will be owed on each distribution. Should you withdraw the incorrect amount, you could be subject to a 25% penalty of the amount that should have been withdrawn. This is in addition to the income tax due. However, if you act quickly to amend the error, that penalty could drop to 10%. Your first RMD is due by April 1 of the year after you turn 73. All following distributions must be taken by Dec. 31 each year in order to avoid the penalty.
Put Off 401(k) Withdrawals if You’re Still Employed
If you are still employed in your 70s and beyond, you may be able to delay withdrawals from your 401(k) account until your retirement (provided you don’t own more than 5% of the company sponsoring the retirement plan). Just be aware that after age 75, you will still be required to take RMDs from IRAs and 401(k)s associated with previous jobs in order to avoid the 25% tax penalty.
Plan Your Withdrawals
When you start withdrawing funds from your retirement accounts, plan in a way that minimizes taxes. For instance, you can withdraw funds from taxable accounts first to avoid triggering taxes on Social Security benefits. During your 60s, you can take penalty-free withdrawals from your retirement accounts without being required to take distributions each year. You can also take advantage of tax-efficient withdrawal strategies, such as the bucket approach, which involves dividing your assets into different buckets based on when you plan to use them.
by Jean Miller | Accounting News, Healthcare, News, Tax, Tax Planning - Individual, Tax Preparation - Individual
Established in 2003, HSAs allow individuals with high-deductible health plans to pay for current healthcare expenses and save for future healthcare expenses on a tax-favored basis. Money is deposited pre-tax, it grows tax-free, and is distributed tax-free as long as the funds are used for qualified health care expenses. Aside from the obvious benefit of tax savings, below is a breakdown of advantages and disadvantages of HSAs to help you determine if it’s a good fit for you.
Advantages
- Most HSAs come with a debit card to make paying for prescriptions and other expenses easy. Bills can be paid over the phone with this debit card, and you can access cash at an ATM.
- Long lasting and portable. If you change health insurance plans, change jobs, or enter retirement, funds left in your HSA remain available for use. They can be used for qualified medical expenses and continue to grow tax free.
- Roll-over funds. Unlike FSAs (Flexible Spending Accounts), any money left in an HSA at the end of the year automatically rolls over to the next year.
- In addition to personal contributions to your HSA, your employer and anyone else may contribute, and the recipient of the contribution receives the tax deduction for the amount contributed.
Disadvantages
- High deductible requirement. Although you pay less in monthly premiums, you are responsible for all healthcare costs until the deductible is met.
- Unexpected healthcare expenses. It’s possible that healthcare costs could exceed your HSA savings.
- Savings ambition. The desire to save money versus the necessity for healthcare when you need it could set up an internal struggle.
- Recordkeeping. This time-consuming task is a necessity as you’ll have to keep receipts and prove that withdrawals were used for eligible healthcare expenses.
- Taxes and penalties. Withdrawing funds for non-qualified expenses before age 65 results in a 20 percent penalty and taxes owed; after age 65 you’ll pay taxes but no penalty.
- Fees. Some HSAs charge monthly maintenance or per-transaction fees, though typically not high. Sometimes if a certain minimum balance is maintained, these fees can be waived.
