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 Furthermore, the funds in an HSA grow tax-free, and when money is withdrawn for qualified medical expenses, it remains tax-free.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 Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, Healthcare, News, Retirement, Tax Planning - Individual, Tax Preparation - Individual
As the clock winds down to the end of the year, there are a few last-minute money moves to make in order to lower your tax bill.
Maximize Your 401(k) and HSA Contributions
While tax deductible contributions can be made to traditional and Roth IRA accounts until April 15 of 2020, the deadline for 401(k)s and HSA accounts is December 31 of this year. You can contribute up to $19,000 to a 401(k), 403(b), most 457 plans, and federal Thrift Savings Plans (plus $6,000 in catch-up contributions for those who are 50 or older). As for HSA accounts, the maximum contribution for 2019 is $3,500 for individuals and $7,000 for family coverage. And if you’re 55 or older you can contribute an additional $1,000.
Start Thinking About Retirement Contributions for 2020
Retirement contributions to 401(k)s have increased for 2020. Individuals can contribute $19,500 next year, and those 50 or older can contribute an additional $6,500. If you prefer to spread out your contributions evenly throughout the year, you’ll need to adjust your monthly contribution amounts by January.
Take Advantage of Your Flexible Spending Account
Funds in a flexible spending account revert back to the employer if not spent within the calendar year. Some companies might provide a grace period extending into the new year, but others end reimbursements on December 31.
Prevent Taxes on an RMD with Charitable Donations
After seniors reach age 70 ½ they must take a required minimum distribution each year from their retirement accounts (an exception to this rule is a Roth IRA account). Seniors who aren’t dependent on this money for living expenses should consider having it sent directly from the retirement account to a charity as a qualified charitable distribution, effectively preventing the money from becoming taxable income.
Consider a Roth Conversion
Because withdrawals from traditional IRAs are taxed in retirement while distributions from Roth IRAs are tax-free, you might think about converting some funds from a traditional IRA to a Roth IRA. Just be sure this move doesn’t tip you into the next tax bracket. You’ll need to pay taxes on the initial conversion, but the money will then grow tax-free in the Roth IRA.
Take Stock of Losses
Sell any losses in stocks for a deduction of up to $3,000, but be aware that purchasing the same or a substantially similar stock within 30 days of the sale would violate the wash-sale rule. If that happens your capital loss would be deferred until you sell the new shares.
Meet with a Tax Advisor
If you’re unsure whether or not you’re ending the year in a favorable tax bracket, check in with an advisor who can identify actionable steps to reduce taxable income through retirement contributions or itemized deductions.
by Stephen Reed | Construction, Healthcare, News, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
The end of 2018 is quickly approaching, but there are a few key money moves you should make before the new year, especially in light of the Tax Cuts and Jobs Act. The higher standard deduction means more Americans will ditch itemizing their 2018 federal tax returns.
That means you should probably focus on year-end tax strategies that first lower taxable income, rather than maximize tax deductions. Here are a few key items to tackle before the ball drops on the new year.
Take Stock of Losses
If you follow the stock market, you know that the last few months have been volatile, so there’s a good chance that some of your investments have become losses. That might sound bad, but any losses that are in a taxable account, such as an investment account, bank account, or money market mutual fund, can be sold to offset other taxable investment gains in the same year. Furthermore, if your losses exceed your gains, you can apply up to $3,000 to offset ordinary taxable income from this year.
Max Out Retirement Savings
As close as possible, that is. The more money you put into your 401(k), the more financial security you’ll have in the long run, but a lot of these contributions also reduce your taxable income. At this point you probably only have one or two more paychecks from which to have funds withheld, but even a few hundred dollars more can provide some near-term tax relief as well as bolster your retirement savings.
Fund Your HSA
You have until the 2018 tax-filing deadline to fully fund your health saving account (HSA) in order to get a bigger deduction. The maximum limits are:
- Individuals: $3,450
- Families: $6,900
- 55 or older: an additional $1,000 catch-up contribution
These accounts can roll over indefinitely, so they’re a smart way to save for future medical expenses. HSAs also have a triple tax benefit: contributions are tax-deductible (even if you don’t itemize), earned interest is tax-free, and withdrawals are tax-free as long as they’re used to pay for qualified medical expenses.
Use Up Your FSA
The funds in a flexible spending account typically don’t roll over to the next calendar year. However, some employers allow $500 to carry over into the new year or grant employees until March to spend FSA funds. Even so, now is a good time to use the pretax dollars for doctor appointments, flu shots, and even some “everyday” drugstore items, such as non-prescription reading glasses, contact lenses and solutions, and reading glasses.
Maximize Deductions
If you’re wondering whether you should itemize your 2018 tax returns or take the standard deduction, here are a few last things to keep in mind:
- Medical treatment: If you spend more than 7.5 percent of your adjusted gross income this year on medical expenses, you can deduct those costs.
- Property taxes: If you paid less than the $10,000 limit for state and local taxes, your state may allow you to prepay 2019 property taxes. This way you’ll get the most from the state and local taxes deduction.
- Mortgage Interest: Provided you’re not near the cap on the mortgage interest deduction, which is $750,000 after the new tax law, you can make your January mortgage payment in December to boost the amount of interest you paid during the 2018 tax year.
- Charitable donations: If you routinely give to charities, double up on contributions and make your 2019 donation before year’s end. If you put the double donation into a donor advised fund, which is like a charitable investment account, you’re eligible to take an immediate tax deduction. That means you can take the deduction for 2018 while your funds are invested for tax-free growth, allowing you to make distributions to charity next year or beyond.
