Health Savings Accounts

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johnw
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Health Savings Accounts

I know it seems ridiculous to worry about saving money for health care bills that are not paid for by insurance either through a flex account or a health savings account with Mills solving all of our problems with expanded Medicare Medicaid.
When you reach 65 and apply for Medicare if you drop your current insurance you can no longer contribute to a HSA Or FLEX account. IMHO the HSA is the better option because you can roll it and it is portable.
After you actually retire you can not contribute to either , because they must be part of an employer sponsor insurance plan.
Those are the facts as I understand them, but I do have a question.
Why should a person who is retired and collecting SS and or distributions from a pension or 401K plan and possibly be working some , be denied the ability to reduce their tax liability and off set their health care costs? Why shouldn't they be able to put tax free money into a HSA and use that ,money to pay for their gap insurance?
This seems like something that is simple and would help many people offset both taxes and health care costs.

Am I missing something or should the government just be allowed to squeeze you until the very end?

Tom C
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Medigap insurance is

Medigap insurance is relatively cheap, so it doesn't make that much of a difference.

The whole health insurance thing a mess anyway.

johnw
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to me the bigger question is

to me the bigger question is why that you have retired should you be denied the right to take advantage of lowering your tax liability.
HSA accounts can be left to heirs as well. So the current amount you can defer to a HSA is $4450 if you could do that for 10-15 years after you retire without digging into it to deep it's a nice chunk of tax free change to leave ….

JackStrawFromWichita
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Expanded Medicaid coverage

Expanded Medicaid coverage goes up from 100% of the poverty level to 138% of the poverty level ($16,753/year for an individual, $34,638 for a family of 4). I seriously doubt that people in those income levels could afford medical insurance premiums plus survive on what’s left over. It would add about 70,000 people in Maine.

Correct on the HSA. At 65 one can no longer contribute. I recall there was some movement toward allowing 65+ to contribute when the 2017 Tax Cuts and Jobs Act (TCJA) was being written but it never made it to the final bill. I’m not really sure why and wish that I can continue to contribute to mine in a few years when I hit 65.

Moving Forward
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That's a great question,

That's a great question, johnw, and I'm curious how the IRS would answer it.

expat
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I seriously doubt that people

I seriously doubt that people in those income levels could afford medical insurance premiums plus survive on what’s left over.

At that income level, under the ACA, a silver plan can be purchased for less than $20 per month.

Watcher
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One thing that bothers me.

One thing that bothers me. If you make a withdrawal from your IRA or 401k, you pay ordinary income tax on all of the withdrawal. Sure, part of the money withdrawn was pre-tax contributions and is, in fact, ordinary income which was deferred. The largest portion however, is capital gains. The IRS does not allow it to be taxed as capital gains.....

johnw
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Watcher good point. It would

Watcher good point. It would be easy enough to separate the principal deposit from the earnings ,but how would they determine that on each withdrawal ? As a percent of the withdrawal?

JackStrawFromWichita
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"That's a great question,

"That's a great question, johnw, and I'm curious how the IRS would answer it."

Ahhh, it isn't their call. The IRS doesn't make tax law, congress does and the president signs it into law.

Toolsmith
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Not how it works, Jack.

Not how it works, Jack.

The interpretation of law is everything. This is done via the bureaucratic rulemaking process and the courts - plus, in this case, the tax courts.

This is why entrenched, unelected bureaucrats are so powerful. Also why Obama's last-minute conversion of political appointees into the civil service was such a grotesque abuse, hiding political operatives within the supposedly non-political bureaucracy to act as a "resistance". I suspect it has set a bad precedent for the future.

JackStrawFromWichita
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Not here. The IRS doesn’t

Not here. The IRS doesn’t make law and it is clearly stated in 26 US Code § Section 223 (7): “The limitation under this subsection for any month with respect to an individual shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter.”

That has to be changed by congress and signed by the president.

Toolsmith
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That section refers to the

That section refers to the deduction for the contributions to an HSA.

So, not deductible... but can I continue to put money into the HSA as a kind of savings plan?

JackStrawFromWichita
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No.

No.

(b) Limitations
(1) IN GENERAL
The amount allowable as a deduction under subsection (a) to an individual for the taxable year shall not exceed the sum of the monthly limitations for months during such taxable year that the individual is an eligible individual.

So if your deduction allowable is $0 then the limitation of your contribution is also $0.

JackStrawFromWichita
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At that income level, under

At that income level, under the ACA, a silver plan can be purchased for less than $20 per month.

Your $20 example is taking an extreme outlier and extrapolating it to the whole.

For 2018 the 2017 poverty levels are used in the calculation.

Individual: 100%=$12,060,138%=$16,643.
Family of 4: 100%=$24,600, 138%=$33,948.

A t 100% of the poverty level one is required to pay 2.01% of their income and at 138%, 3.32% of their income.

Individual @100%=$20/month.
Individual @138%=$46/month.
Family of 4 @100%=$41/month.
Family of 4 @138%=$94/month.

And up, up up from there…

anonymous_coward
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@Watcher: "One thing that

@Watcher: "One thing that bothers me. If you make a withdrawal from your IRA or 401k, you pay ordinary income tax on all of the withdrawal. Sure, part of the money withdrawn was pre-tax contributions and is, in fact, ordinary income which was deferred. The largest portion however, is capital gains. The IRS does not allow it to be taxed as capital gains....."

The gain from allowing those gains to compound without being taxed is pretty huge. Of course, you could get the same thing by just buying an S&P 500 ETF and never selling it until you retire.

Economike
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anon -

anon -

A minor point, perhaps. Dividends (or other income) paid through equities held by an EFT are taxable on an annual basis.

You're right about the gain accruing from tax-deferred status of IRAs. I suspect it's much greater than similar holdings in currently taxable accounts.

Ugenetoo
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As I have stated many times

As I have stated many times before, insurance is the problem.

Health Insurance Hustle

Why Your Health Insurer Doesn’t Care About Your Big Bills
Patients may think their insurers are fighting on their behalf for the best prices. But saving patients money is often not their top priority. Just ask Michael Frank.

https://www.propublica.org/article/why-your-health-insurer-does-not-care...

Many more articles in this series at: https://www.propublica.org/series/the-health-insurance-hustle

anonymous_coward
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@Economike: "A minor point,

@Economike: "A minor point, perhaps. Dividends (or other income) paid through equities held by an EFT are taxable on an annual basis."

Oh good catch.

"You're right about the gain accruing from tax-deferred status of IRAs. I suspect it's much greater than similar holdings in currently taxable accounts."

It's also worth noting that for most amateur traders, the less often you trade, the better you do, even with today's inexpensive commissions.

JackStrawFromWichita
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Assumptions:

Assumptions:

1. Fully taxable earnings of $10,000.
2. Tax rate=30%.
3. Annual investment return=10%.

Scenario A:

Earn the $10,000, pay 30% tax, invest $7,000 @ 10% annually but since it’s fully taxable then the net annual return is 7%.

After 10 years have $13,770.

Scenario B:

Put the $10,000 into a tax deferred account (401(k), traditional IRA etc.), invest at a 10% annual return.

After 10 years have $25,937.

Then pay the 30% tax netting out $18,156.

That’s correct if everything is taxed as ordinary income but some types of income receive tax preferences like qualified dividends and long-term capital gains but all distributions from the tax deferred accounts are treated as ordinary income. So, if one puts assets into the tax deferred account that kick off tax preference income the comparison might not be as good as it appears above. If one has the wherewithal to allocate between taxable and tax deferred accounts then assets that kick off qualified dividends and long-term capital gains (equity) might be best in taxable accounts and assets that kick off fully ordinary income (bonds) in tax deferred accounts.

Economike
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Jack -

Jack -

Thanks for the example.

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