Tax Management in Retirement Requires Tax Management During the Contribution Period

Health Savings Accounts are the most under utilized tax advantaged funding vehicle available for tax-deductible contributions up to $3,550 for individuals, $7,100 married couples and an additional $1,000 for those over age 55. The IRS also allows a one-time maximum tax-free transfer of $7,100, (or $8,100 if you’re age 55 or older), once in your lifetime from an IRA to an HSA account. Keep in mind that you can’t transfer and make an annual contribution in the same tax year. The tax-free distributions from the HSA account can only be used for medical expenses and insurance premiums for long-term care, disability, medical and Medicare. One huge benefit is the ability to use your HSA account at any time. There’s no waiting until age 59½ like other qualified retirement accounts. The distributions are tax-free and are not includable in the provisional income test for Social Security. The odds are that you will use this account throughout your lifetime for medical expenses and related insurance premiums.

Roth IRAs are not tax deductible, but they accumulate tax deferred and distributions are tax-free and are not includable in the provisional income test for Social Security benefit taxation. The maximum annual contribution for individuals is $6,000; those over age 50 can contribute an additional $1,000. Roth IRAs have income thresholds where contributions are phased out based on modified adjusted gross income: individuals’ range is from $124,000 to $139,000 and married couples phase out range is between $196,000 to $206,000. There are no required minimum distributions at age 70½, so you can delay taking constructive receipt until later on in life. Most of America’s middle class are not in a high effective tax bracket and do not receive an employer’s contribution match, so Roth’s could be an alternative to traditional IRAs under that scenario. Another aspect of Roth IRAs that could have economic value is converting traditional IRAs to Roth IRAs, i.e. changing the taxable to tax-free, but you don’t want the additional income to push you into a higher tax bracket, so you may need several years to amortize the conversion to minimize excessive taxation on the transfer.  HSA accounts and Roth IRAs are excellent funding vehicles to design a tax-free retirement plan.