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.
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Because Uncle Sam wants his money, but he also wants to make sure you have money for retirement.
^The whole thing makes no sense.
Let’s assume I’m in the 25% tax bracket. To make a $1,000 contribution, I have to make $1,333 in wages.
If I contribute $1000 to my Roth IRA, then I am contributing after-tax money, and Uncle Sam already has $333 of my money. And my “after-tax” value of my Roth IRA is $1,000.
If I contribute $1,333 to my Traditional IRA, then I get a tax dedution of $333. The “after-tax” value of my Traditional is $1,000. Uncle Sam is entitled to $333 of my money when I take it out.
If I convert my $1,333 traditional to a Roth, then I have to pay $333 to Uncle Sam today. Sure, my portfolio is $333 higher, but my wallet is $333 lower.
Either way, I have $1,000 in after-tax money, and Uncle Sam has $333.
Personally, the smartest thing for the government to do would be to outlaw the Roth, and raise the traditional IRA limits to $100,000 per year. Then when people start taking the money out of their accounts, the government can really get a hand on their dime. But for some reason, politicians don’t want to raise the limit on IRA’s. You know–don’t want to give the rich any handouts or anything.
So, lemmee git dis straight.
I can contribute to my HSA with PRETAX dollars, use the principle and earnings all the while for medical expenses TAX EXEMPT, then when I’m eligable for Medicare, take the principle and earnings out for any reason, TAX EXEMPT.
^That’s the way the law reads.
No, that’s unfortunately not the case.
- Additional tax. There is an additional 20% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Report the additional tax in the total on Form 1040, line 60, or Form 1040NR, line 59, and enter “HSA” and the amount on the dotted line next to that line. Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.
So when I’m 65, distributions are tax free for anything?
There is no ADDITIONAL tax, not there is no tax. So, if you are not 65 or disabled (or dead), and you withdraw from the HSA for non qualified spending, you pay a penalty of 20% on top of income tax. If you are 65, disabled or dead, your withdrawals are not subject to the 20% penalty (“additional tax”) but are still subject to income tax.
“If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax.”
http://www.irs.gov/publications/p969/ar02.html#en_US_2012_publink1000204081
Yeah, I thought that the 65 thing was what CvM meant.
Once I read the IRS pub and not the cheater books, it looks like non-medical distributions are subject to income tax, but not the additional 20%, after you turn 65.
Not that it really matters, though. Most 65 year-olds have significant medical expenses.
HSAs are the greatest. Employer contribution of approx $6,000 per year. I have never spent a dime of it. It grows tax free (we have it custodied at a bank that allows individual stock purchases), then when I turn 65 I can pay for all my medical expenses. I will have a nice chunk of change in 10 years.
Plus, as was mentioned before, people who have to spend their own money make different decisions on their medical care. Insurance should be for protection from catastrophic events, not visits to the doc for an upset tummy.
WHAT?!?!
Greenman, is there an optimal tax-advantaged way to manage a SEP IRA? I was able to contribute to a Roth IRA while I was in business school and had diminished earnings power, but those days are long gone. My current employer makes retirement plan contributions via SEP IRA so wondering if there is a “best way” to handle this or if I just have to pay taxes on my gains in the future.
Double WHAT?!?!? Your employer contributes to your HSA?!?!? Are they hiring.
Anyone else annoyed by the monthly service charge on their HSA?
Not that I know of. About the only thing I know to do is convert to Roth in those years when your income is low. Just make sure that you’re fully vested, or that there’s no other strange penalties for withdrawing the money.
Question for you–are you an “employee” or a “contractor”? That is, do you get a W-2 every year, or do they give you a 1099?
My former employer did too, but it was only about $650/year. The monthly fee was waived on the HSA as long as your health insurance was active, but they were going to ding me $5/month once I no longer had the health insurance attached to it.
I get dinged $3/month no matter what. I realize it’s small, but still bothers me when I look at my statement and see “Interest Earned - $0.37” “Adminstration Fee - $3.00”. Note - I don’t maintain a large enough balance to invest it, will look to change that in the coming years.
Mine contributes $1,000 and starting next year they’ll also match up to $1,000 in 529 contributions. That’s huge.
I’m an employee at a small (in terms of headcount) but prominent (in terms of assets) hedge fund
It is a super high deductible plan. First $6,400 of medical expenses is supposed to be paid by funds in my HSA, so that is what my employer contributes. But I pay all my medical bills with after tax dollars, so the HSA gets bigger every year. Plus portfolio gains tax free. Really, I am the poster child for why some politicians threaten to kill them.
Yeah, the contribution is nice, but it is all just part of the comp package, right? You can’t really compartmentalize all the different aspects of your compensation. I believe they called it “mental accounting” at L3.
Okay. I know that a lot of “employees” only get a small paycheck (so they’re eligible for benefits), but the majority of their compensation is via 1099 compensation. If this were the case, I would consider a workaround to reduce SE taxes, but I don’t think it would work in your situation.
BTW, I just checked and I get soaked $5 per month fee. What a rip.