HSA, FSA, roth 401k questions

[Trying2bFrugal]

We are very slow, didnt do right or correct time on investments and started learning the money, tax and investments. So look at us as money idiots.

1. I paid HSA $4000 (on a HSA plan) on Dec 29th, but the money got in to HSA account on Jan 2nd. The 2023 tax form doesnt show that in contribution. Am i not going to get this credited for 2023?

2. Employer didnt deduct the premiums on health insurance for last year. I am not sure if that was glitch or intentional, but i didnt asked them as it was on my favor. I did had full year coverage and got coverage letter from insurance for tax. Is there anything I would get in tax complication apart from pre-tax deductions? Before you say anything, I am a contractor with that employer for 11 years and he eats 30% of my paycheck (a lot more complicated to discuss here on why), and the $6000 premium is nothing much from money he makes from my pay check on a year.

3. My wife's employer give her an option for Roth 401k. She puts 15k on traditional 401k and I put down 18k on mine. At the moment, thats what we could afford. She contribute $100/mo on it (she/me didnt knew what it was when we started last year).
When do roth401k usage is needed?

4. Dependent FSA - 2023 wife contributed $5000/yr (5 yo kid, school fee). Next year, kid will go to kinder garden. So we think, we should open a 529 plan and save some money here. But there are chances we may not retire here or move out of Michigan in next 10 years. 50% chance. Is investing in 529 a good choice or is there something like roth IRA for kid? or what is the best strategy to save the excess (like $200-300 a month) for kid? Is there anything I could use FSA when kid goes to kindergarden?

5. HSA - One question here. Wife had a surgery last year and we met all deductible and above (about 7000 to be paid out of pocket). I was reading the forum and for what i understood, i thought i should pay them using credit card now and claim from HSA later? How long that window open to claim down years from now? or should be on same plan year? What kind of documentation I should keep? Digital or paper?

6. Wife has about $4500 on her old employer 401k. How do i get that into her current 401k account?

7. Right now my investments are on Vanguard index (Large cap 50%, small cap 20%, mid cap 30%) as i know i had very bad luck chasing any stocks. Even good stocks, i buy at bad time. So i just put them this way. Not sure if they are the best way. A friend said market is hot and anytime could crash 10-15%. Should i move all the money to bond?

8.Wife is planning to change work. If she does, will we be able to get the 401k money transferred to her new employer 401k or how should we maintain?

[MDM]

1. HSA contributions for a tax year may be made until April 15 of the next calendar year.

2. Is your W-2 box 1 number correct?

3. Didn't see a question there.

4. Consider the Investment Order suggestions, including "Similar to "put on your own oxygen mask before assisting others," do consider funding your own retirement before funding 529 plans for children's college costs."

5. See How to use the plan for the first question, and other parts of that article for the others.

6. She talks with her current 401k provider to find out
a) if the current plan will allow an incoming rollover, and if it does
b) what the current plan requires for that to happen.

7. See What if You Only Invested at Market Peaks?  The choice is yours.

8. She talks with her new 401k provider to find out
a) if the new plan will allow an incoming rollover, and if it does
b) what the new plan requires for that to happen.
Of course, she first compares the plan options to ensure the new plan isn't worse than the current plan.  If it is, she leaves the money in the current plan if they allow that.

[Sanitary Stache]

Regarding rolling over old 401k plans after leaving a job. I have always rolled these into my IRA where I can buy the index fund that I want.

 I also enjoy JL Collin’s stock series. https://jlcollinsnh.com/stock-series/

[index]

Regarding rolling over old 401k plans after leaving a job. I have always rolled these into my IRA where I can buy the index fund that I want.

 I also enjoy JL Collin’s stock series. https://jlcollinsnh.com/stock-series/

In my experience, you should always roll into your new 401k. If you get to an income level where you must do a backdoor Roth, you will need to either convert your traditional IRA money to Roth IRAs and take a huge tax hit or roll the IRA's into your 401k if possible.

[Sanitary Stache]

Regarding rolling over old 401k plans after leaving a job. I have always rolled these into my IRA where I can buy the index fund that I want.

 I also enjoy JL Collin’s stock series. https://jlcollinsnh.com/stock-series/

In my experience, you should always roll into your new 401k. If you get to an income level where you must do a backdoor Roth, you will need to either convert your traditional IRA money to Roth IRAs and take a huge tax hit or roll the IRA's into your 401k if possible.

Interesting consideration. I have never thought we would reach those income heights (>218,000) or thought about the additional tax complications. I have always assumed my retirement income would be in the same or lower tax bracket than we are in now so considered traditional to be the more valuable path. I don’t really know though and could end up with a higher salary or a lot of money in retirement, MPP.

Don’t you have the option of converting part of a traditional ITA to Roth each year? No requirement to do a complete conversion? 

[seattlecyclone]

Don’t you have the option of converting part of a traditional ITA to Roth each year? No requirement to do a complete conversion? 

Sure, a partial conversion is always an option. The problem with this for the backdoor Roth is that the partial conversion is prorated between pre-tax and post-tax amounts. So you can add $6k after-tax to your $200k IRA, and convert $6k (or whatever other amount you want), but you'll be paying tax on almost all of that conversion. Not something you generally want to do when you're in a high enough bracket to worry about the backdoor Roth! Compare that to if you had kept your $200k in an employer plan, you have an empty traditional IRA before putting in your $6k after-tax, and you can do the conversion step tax-free.

[Sanitary Stache]

Don’t you have the option of converting part of a traditional ITA to Roth each year? No requirement to do a complete conversion? 

Sure, a partial conversion is always an option. The problem with this for the backdoor Roth is that the partial conversion is prorated between pre-tax and post-tax amounts. So you can add $6k after-tax to your $200k IRA, and convert $6k (or whatever other amount you want), but you'll be paying tax on almost all of that conversion. Not something you generally want to do when you're in a high enough bracket to worry about the backdoor Roth! Compare that to if you had kept your $200k in an employer plan, you have an empty traditional IRA before putting in your $6k after-tax, and you can do the conversion step tax-free.

I understand traditional IRA contributions to be pre-tax.  Why/how would I add $6k ($6.5K for 2023) after-tax to a traditional IRA?  I am thinking of the Roth conversion as $6k pre-tax addition, $6k conversion to roth, then tax on the converted $6k?  Is that wrong?

Would I only pay more taxes if the amount I converted (and was therefore taxed on) was greater than the $6k? What is the benefit of having a zero balance in the tIRA?

Sorry to derail the thread a little on this topic @Trying2bFrugal I don't know what your income is, so not sure if the discussion is relevant to you at this point.  This tax optimization stuff is intriguing to me, even though it doesn't apply to me now and probably never will (but you never know).

I have had some terrible employer 401k options where the cheapest fund came with a fee 10X Vanguard's total stock market index.  I was very happy to get out of it.

[seattlecyclone]

I understand traditional IRA contributions to be pre-tax.

They're often pre-tax, yes. After-tax is also an option. It's the only traditional IRA option if your income is too high to deduct contributions. After-tax IRA is usually not a great choice for long-term investments because the growth in an IRA will eventually be taxed as regular income, compared to lower capital gains rates if you leave your after-tax money out of an IRA.

Why/how would I add $6k ($6.5K for 2023) after-tax to a traditional IRA?

Why: you make too much money to deduct an IRA contribution or make a Roth IRA contribution, and you want to do the "backdoor Roth" contribution. Although there's an income limit to move money directly from your checking account to your Roth IRA, there's no income limit to make after-tax traditional IRA contributions, and no income limit to convert money from traditional IRA to Roth IRA. Combine these two and you have a way to get money into a Roth IRA even at a very high income.

The one big gotcha in this is that the conversion step is prorated between pre-tax and after-tax amounts. So if you have any pre-tax money at all in an IRA, the backdoor isn't really available to you.

How: instead of claiming a deduction for the contribution on Line 20 of Schedule 1, you would fill out Part I of Form 8606 to declare the contribution as non-deductible.

I am thinking of the Roth conversion as $6k pre-tax addition, $6k conversion to roth, then tax on the converted $6k?  Is that wrong?

You only pay tax on a Roth conversion for money that was pre-tax to begin with. If your IRA is 100% after-tax money, none of the conversion is taxable. But if you have a big pre-tax balance to begin with, and you add a small amount of after-tax money, then your conversion will be mostly taxable.

Would I only pay more taxes if the amount I converted (and was therefore taxed on) was greater than the $6k? What is the benefit of having a zero balance in the tIRA?

See above. The primary motivation to do an after-tax IRA contribution is to immediately turn around and convert to Roth. If you have pre-tax money in the IRA already, a Roth conversion means paying tax on that money. Move the pre-tax money to a 401(k) where it won't contribute to this calculation and you can do a Roth conversion with only the after-tax amounts where no additional tax will be owed.

[Sanitary Stache]

Thanks for the extra thorough explanation!  I did not know that there were rules about determining if an IRA contribution was tax deductible or not. 

I now understand why having the initial money in an IRA would effect the backdoor roth process.