Author Topic: HSA or IRA  (Read 314 times)

WootWoot

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HSA or IRA
« on: February 06, 2019, 01:15:21 PM »
Hi folks:  My husband and I are in the 12% tax bracket. Last year, and this year, we've got about $15,000 in interest income, which means I will owe taxes if I don't find a way to offset the bill.

Last year, I also had the same situation. I put about $9K into IRAs for both spouse and myself. We ended up getting a refund of $1000 and change. This year, for some odd reason, I played around with the tax software and despite a theoretical maxing out of both IRAs, I still owe $1,000. I can't quite figure that out--I didn't earn THAT much more between last year and this year. I only get about a 3% raise every year, and I raised my 403(B) contributions in 2018.

That said, I have an FSA at work. I lowball my contributions to it, b/c I don't want to put too much into it and use it. For the past seven years, we've run out of FSA money about halfway through the fiscal year. So my husband thinks it is a good idea to get an HSA. I am pretty sure we qualify (we  have a high deductible health insurance plan on the ACA). I just discovered that you have to start taking money out of the HSA when you turn 65. Spouse is 62; I am 54.

Questions:

1. Any clue why I still owe $1,000 to the IRS this year?
2. Is there an advantage to the HSA over the IRA? I should add that spouse has no SSI coming to him until I retire way down the road, as he never made enough money. He has a small (very small) IRA.
3. Am I better off putting more into my FSA this year, so that I don't face another tax bill in 2020? (Again, I'll have another $15,000 in interest income for 2019.)

Could use some advice here.

Thank you!

MustacheAndaHalf

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Re: HSA or IRA
« Reply #1 on: February 06, 2019, 09:15:33 PM »
Last year you could contribute up to $5,500 each to an IRA, and this year it's $6,000 each.  Although between you and your spouse you contributed $9,000 last year ($4,500 each), you could have contributed a combined $11,000.  And this year you can contribute up to $12,000 combined.  (Either spouse can be working, as long as your total income exceeds your total contributions to your IRAs).

With an HSA, you can make withdrawals for medical expenses and never pay tax on the money:  You contribute pre-tax dollars (deductible contributions), and you aren't taxed when you pay for a medical expense.  After age 65, you can withdraw money for any reason and pay taxes (before age 65, you also pay a penalty).

Traditional IRAs are similar: a penalty before age 65, and taxable withdrawals at age 65.  There's no skipping taxes with medical expenses, but you can convert to a Roth IRA.  If you time that right, you could fill up the 10% or 12% tax bracket with a Roth conversion, and tax this money at 10-12% (maybe slightly less if you have room in your standard deduction).

One additional idea, though: do you have enough stock investments?  Dividends from stock funds (like VTSAX, Vanguard Total Stock Market) are taxed at a lower rate.  So are sales of stock that has been held 366 days or more.  If you're in the 12% ordinary income tax bracket, you're also in the 0% long-term capital gains / dividends bracket.  So if instead of ordinary income, you got dividends, you'd pay 0% instead of 12%.  Stocks are more risky than whatever is giving you interest income, but it's worth considering if you don't have enough invested in equities.  Maybe consider buying some index funds in a taxable brokerage account, if it fits with your savings goals / retirement plans.
« Last Edit: February 06, 2019, 09:17:35 PM by MustacheAndaHalf »

ixtap

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Re: HSA or IRA
« Reply #2 on: February 06, 2019, 09:50:32 PM »
Hi folks:  My husband and I are in the 12% tax bracket. Last year, and this year, we've got about $15,000 in interest income, which means I will owe taxes if I don't find a way to offset the bill.

Last year, I also had the same situation. I put about $9K into IRAs for both spouse and myself. We ended up getting a refund of $1000 and change. This year, for some odd reason, I played around with the tax software and despite a theoretical maxing out of both IRAs, I still owe $1,000. I can't quite figure that out--I didn't earn THAT much more between last year and this year. I only get about a 3% raise every year, and I raised my 403(B) contributions in 2018.

That said, I have an FSA at work. I lowball my contributions to it, b/c I don't want to put too much into it and use it. For the past seven years, we've run out of FSA money about halfway through the fiscal year. So my husband thinks it is a good idea to get an HSA. I am pretty sure we qualify (we  have a high deductible health insurance plan on the ACA). I just discovered that you have to start taking money out of the HSA when you turn 65. Spouse is 62; I am 54.

Questions:

1. Any clue why I still owe $1,000 to the IRS this year?
2. Is there an advantage to the HSA over the IRA? I should add that spouse has no SSI coming to him until I retire way down the road, as he never made enough money. He has a small (very small) IRA.
3. Am I better off putting more into my FSA this year, so that I don't face another tax bill in 2020? (Again, I'll have another $15,000 in interest income for 2019.)

Could use some advice here.

Thank you!

1. What is the difference in the actual tax burden from year to year? The withholding tables changed, so many people are finding that their refunds are smaller, or even that they owe money, but until you compare the total tax from year to year, we can't tell you if the problem is where you are putting your money or how taxes are being withheld on your w2 wages.


WootWoot

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Re: HSA or IRA
« Reply #3 on: February 07, 2019, 01:20:15 PM »
Thanks for your replies.

As it turns out, a simple arithmetic error resulted in the $1,000 tax bill. I'm actually getting a very small refund.

Thanks for explaining about the HSAs and IRAs. I do not do much with stocks--I tend to play it pretty safe as I'm terrified of losing money. I do realize that my returns are less that way.
The interest income actually came from savings bonds, which were given to me by a relative who bought them for me when I was much younger. I don't know if there's a way around paying interest on something like that, other than putting the interest income away in an IRA or HSA. I understand you can do it with higher education costs, but we have no plans for that.

Thanks again!