This. Also, an HSA essentially turns into an IRA at retirement (i.e. you can take distributions penalty free). If you’re young and healthy HSA’s are the way to go. If you’re married and planning on having kids, it’s probably not a great idea. Pregnancy costs a lot of money.
Agreed.
An HSA is kinda like an IRA, but you have to use the money for “qualified medical expenses”.
Hi, so sorry. I meant flexible spending account (FSA), not HSA. Who here contributes to their FSA and how do they think about contributions? FSA is the one that doesn’t roll over year after year, whereas the HSA does, correct?
In theory, the only medical costs you can use HSA funds for are those that are deductible on Schedule A of your 1040 anyway.
“Deductible medical expenses are amounts paid for the diagnosis, mitigation, treatment, prevention of disease, or for the purpose of affecting the body’s structure or function.” The costs of nursing, insurance payments, and transportation to/from the medical facility is also deductible.
So what does this include? It includes Numi’s contacts and eyeglasses. It also includes LASIK surgery. But it doesn’t include cleaning solution, because it’s non-prescription.
Similarly, any of Woody’s smoking cessation programs or prescribed medicine to alleviate nicotine withdrawal symptoms are deductible. OTC patches and gum are NOT deductible.
It covers legal abortions and procedures designed to prevent pregnancy. It also covers procedures designed to facilitate pregnancy (but only if you’re not fertile).
If you attend a medical conference because you suffer from a chronic disease, the costs (and transportation) are deductible.
Marijuana, even if prescribed by a doctor and legally procured in your state, is NOT deductible. (A departure from the “IRS follows state law” thing.)
You can deduct the cost of “service animals used in mental health therapy”, whatever that means.
Oddly enough, you can deduct the costs of a sex-change operation! However, Turd CANNOT deduct the costs of his wife’s breast augmentation, because it is “cosmetic”. (But it would be deductible if it’s "necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality or a personal injury.)
No, you cannot deduct “expenses merely beneficial to an individual’s general health” (like a gym membership).
Not after you turn 65.
FSA’s used to be pretty useful. A few years ago you could use the funds to buy OTC meds, so if you had a couple/few hundred dollars left at the end of the year you could go to Costco and stock up on pills/cough syrup. Then Obama changed the rules and dorked up FSA rules. Now they’re much more strict; no more OTC meds.
I used to have an HRA with an FSA. I’d contribute enough to my FSA to cover the meds I knew my family would need plus a couple trips to the doctor. Then my company switched to an HSA and I’m much happier.
True dat, dog!
No doubt? I’ll have to look into this as a way to evade the tax man!
I just got my HSA, but are both contributions and distributions tax free? Thought I read that in the sales literature. The whole plan document is sitting in my to do pile at home…
I think you meant “avoid” the tax man. Avoiding taxes is legal. Evading taxes is illegal.
Contributions are deductible, and distributions are excludable from gross income. Yes, you get the best of both worlds!
I believe the orginal idea of splitting the contribution is within the 401(k) plan itself. My plan allows us to split our contribution between a traditional 401(k) and a Roth 401(k). To my knowledge, there is no income limitation on the Roth portion because it is within the 401(k) plan.
Wait, wait, wait…I don’t think that’s correct, but you’re the tax guy. I was under the impression an HSA acts like a traditional IRA (or 401k) once you turn 65? Pretax going in, taxed coming out.
Thanks for the clarifications Greenman72 – very helpful
Going in - I don’t see anything that says that discusses “age 65”. However, Code Section 223(b)(7) says there’s no deduction for an HSA contribution for any month an individual is eligible for and enrolled in Medicare.
Coming out - This is what RIA Federal Tax Handbook says. “Distributions from an HSA that are used to pay for qualified medical expenses are excludable from gross income (a.k.a. not taxable). Distributions NOT used for qualified medical expenses are subject to tax, they are also subject to an additional 20% for distributions reported on Form 8853 unless made after the individual attains age 65, dies, or becomes disabled.”
I don’t know if that means that 65+ folks are subject to the tax but not the penalty, or not subject to either.
CCH’s Master Tax Guide says “Distributions not so used are subject to income tax and a 20% additional tax, unless made after the beneficiary reaches age 65, dies or becomes disabled.”
I read this as “anybody over age 65 can take distributions tax-free”.
I still don’t see anything that suggests that a 65+ person is pretax. It only says that you can’t contribute to an HSA if you’re enrolled in Medicare.
Hey Greenman,
Can’t you get around the Roth income limitations by doing Roth conversions? I am above the income threshhold and connot directly contribute to a Roth, but was planning on exploring this option with my tax accountant and seeing what the impact would be. I know a lot of people who work in family offices who are bombarded with roth converstions at the end of each year just for this purpose.
You’re right–there’s no income limitation on Roth 401k’s. (I’ve never been given the option to contribute to a Roth 401k, so I forget about them.)
_ Did you know? _ Roth IRA’s are NOT subject to RMD (required minimum distributions). But Roth 401k’s ARE subject to RMD.
Yes, you can. “Taxpayers, including marrieds filing separately, may convert amounts in a Traditional IRA to amounts in a Roth IRA without regard to their modified adjusted gross income or filing status.”
However, make sure that you’re not artificially pushing your income up into a higher tax bracket. It wouldn’t make sense to pay 35% tax to save 15% later.
Why can a person contribute to a Traditional and then convert it to a Roth, but not contribute to the Roth directly? I have absolutely no idea.
I did not know that. I plan to take monster distributions when I retire though. If I run out of money, I’ll just rob banks until I get caught and then live off the tax payers in nice comfy prison. I don’t think anyone will be interested in my sagging old behind at that point.
Just adjusted my future contributions to shift more toward ROTH. Put in more money while my taxes are cheaper. Thanks for the good discussion.
You understand, H.I.? If this works out, it’s just the beginning of a spree to cover the entire southwest proper. And we keep going until we can retire. Or we get caught.
Either way, we’re fixed for life.