[HN Gopher] Tax Advantaged Accounts
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Tax Advantaged Accounts
Author : auc
Score : 27 points
Date : 2022-02-21 14:22 UTC (8 hours ago)
(HTM) web link (andrewucho.com)
(TXT) w3m dump (andrewucho.com)
| treebog wrote:
| One important note for residents of California and New Jersey: if
| you live in one of these states you must pay _state tax_ on HSA
| contributions and gains, the same as if it were a regular taxable
| account. Your HSA is still tax-advantaged at the federal level
| though
| NAHWheatCracker wrote:
| I didn't realize my Roth IRA contributions limits are curtailed
| starting at ~$125k income.
|
| My income is around that, although I guess I wouldn't hit the
| limit due to maxing my 401K.
|
| What would happen if I contributed too much to an IRA one year?
| Would I have to pay a penalty during tax season? Would I get the
| difference back in cash?
| auc wrote:
| https://www.investopedia.com/articles/retirement/04/042804.a...
|
| "If you contributed to a Roth when you made too much to qualify
| --or if you contributed more than you're allowed to either IRA
| --you've made an excess contribution. That contribution is
| subject to a 6% tax penalty"
| auc wrote:
| You can completely avoid this by doing a backdoor roth ira
| though.
| senkora wrote:
| Note that congress is interested in closing this however:
|
| https://www.fool.com/investing/2022/01/21/you-can-still-
| do-a...
| auc wrote:
| Yes, the BBB plan would close the backdoor loophole, but
| that's if it passes and it would be closed 10 years from
| now.
| senkora wrote:
| I'd welcome that, but it's new information to me and I
| can't find confirmation of it. The sources I find all say
| it could potentially be banned retroactive to the start
| of this year.
| auc wrote:
| Actually, it seem you are right. If BBB passed, they
| would close the loophole at end of year.
|
| The 10 year rule applies to a traditional -> roth
| conversion to high income earners.
| senkora wrote:
| This is a really good article and I highly recommend reading
| through it. It collects a lot of great info in one place.
| PopAlongKid wrote:
| But it has several errors/omissions. I understand it is meant
| to be a high-level overview, but that still means what is
| included should be accurate. I'll contact the author as he asks
| at the site, but want to mention the items here because I don't
| know how long site updates may take. Plus, I'm sure that here
| I'll get feedback on whether my input itself is flawed!
|
| Terminology: in the tax preparation industry, "pre-tax" and
| "post-tax" usually only refer to _contributions_ (not account
| types) that are or are not (respectively) excluded from current
| income. _Earnings_ in the account over time are either tax-free
| or tax-deferred (depends on account type and what the
| distributions of said earnings are eventually used for), and
| _distributions_ are either taxable (possibly with penalty), or
| tax-free.
|
| _HSA_ - these are indeed like a Traditional IRA "on
| steroids", but calling it "a pre-tax account that is only
| allowed to spend money on healthcare related items" is
| incorrect. Distributions from HSAs can be spent on _anything_ ,
| but they are taxed as ordinary income if not spent on medical
| expenses. Also, before age 65, distributions not spent on
| medical expenses receive a 20% penalty as well as regular tax.
| So, at age 65, it essentially turns into a regular Trad. IRA
| (distributions are taxable), except if you want, you can pay
| your Medicare premiums and other health expenses tax-free from
| the HSA.
|
| An HSA can either be through an employer or opened directly by
| the individual. If there are other tax-advantaged employer
| health expense arrangements (or Medicare coverage),
| contributions to HSAs maybe limited. I have known of the
| benefits of HSAs for years but always felt the employer subsidy
| for non-HDHP insurance coverage was a better deal; however if
| you don't have employer insurance coverage, HSAs are probably
| the best way to go. See IRS Publication 969 for more details.
|
| _401k_ - "No access until minimum age 55". But what's worse,
| there is essentially no access at all while you are still
| employed with that employer, in other words you can't take
| _any_ money out unless the plan allows it (and most don 't),
| even if you are willing to pay tax & penalty. (There may be a
| loan option, but that is a bad idea for several reasons).
|
| "For self-employed people, I would look into a SIMPLE 401K. "
| For self-employed people with no employees of their own, a solo
| 401k (401k with only the owner as a member) allow for much
| higher contribution levels than SEP-IRA, especially at lower
| profit levels.
|
| _IRA_ - "with an income of $140k, one cannot make ANY
| contribution, at least directly. " False. With even a little
| earned income, _any_ taxpayer can make a contribution to a
| Trad. IRA no matter their total income (AGI). What the income
| limit pertains to is the deductibility of contributions to
| Trad. IRA (pre-tax or post-tax). And there is also an income
| limit that prevents any contributions to a Roth IRA at all.
| Until recently there was an age 70.5 cut-off on making
| contributions.
|
| " IRAs do not allow access until minimum age 59.5" -- well they
| do, but with a 10% penalty (other than a few exceptions for
| special purposes). One feature not many understand is that at
| any age, you can convert money from Trad. IRA to Roth, pay the
| tax, and then after five years you can take that money out
| penalty-free from the Roth. So if you can afford to pay the tax
| now and wait five years, you can get some or all of your money
| out of your IRA at any age without penalty.
|
| _Section 529 plans aka QTP_ - "One can switch beneficiaries
| tax free up to $70k (double for couples) by "front-loading" or
| "superfunding", although there are federal gift tax
| consequences". This is really mixing up several different
| things. First, it is extremely unlikely that anyone would end
| up paying any gift tax on contributions to a 529 plan, although
| there may a tax reporting requirement (Form 706). Also,
| switching beneficiaries does not have anything to do with a
| $70K limit. What is being referred to is that one can
| contribute up to five year's worth of gifts all at once, each
| under the annual reporting threshhold for gifts, instead of
| having to spread the contributions out over five years to avoid
| reporting (and again, even with reporting, it is extremely
| unlikely any gift tax would be owed).
| auc wrote:
| Yes, I am the writer of this. Thanks for the pointers!
|
| About the "pre-tax" and "post-tax" terminology, you are
| right, I should change "post-tax" to refer to when
| distributions are tax-free. I had to keep the table to a
| certain width, so had to come up with short terminology.
|
| I think calling an HSA a "a pre-tax account that is only
| allowed to spend money on healthcare related items", because
| that's how the government refers to it.
| https://www.treasury.gov/resource-
| center/faqs/Taxes/Pages/He... "Health Savings Accounts (HSAs)
| were created in 2003 so that individuals covered by high-
| deductible health plans could receive tax-preferred treatment
| of money saved for medical expenses". The rest of your point
| on HSAs stand though.
|
| IRA - "with an income of $140k, one cannot make ANY
| contribution, at least directly." Yes, this was a typo, meant
| it specifically only for Roth.
|
| "One feature not many understand is that at any age, you can
| convert money from Trad. IRA to Roth, pay the tax" I briefly
| mention this in the post, but left out details for brevity
| sake.
|
| "So if you can afford to pay the tax now and wait five years,
| you can get some or all of your money out of your IRA at any
| age without penalty." I do not think this is correct in the
| normal case. You must be 59.5 years of age unless you qualify
| for an exception. Also, you wouldn't want to take this money
| out early anyway unless you direly needed to.
|
| For your 529 point, I only hinted at this and could've worded
| it better, but switching beneficiaries and the $70k limit is
| relevant if you have a 529 for an unborn child that you are
| accumulating. I'll reword this.
| tradertef wrote:
| Please note: Solo 401k = Individual 401k.
| nablags wrote:
| Interesting information, but I wish there was an easier way to
| keep track of this stuff
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