Well mathematically you certainly do get the best benefit that way but to me it’s not worth the hassle of saving the receipts and documentation.
My personal school of thought is to max out the HSA contribution, use the HSA for valid medical expenses as you go and save whatever you’re not using. I don’t want the hassle of keeping the receipts. And a taxable distribution later is worse than a non-taxable distribution now.
But certainly an HSA can mathematically be no worse than a traditional IRA. That’s basically your worst-case scenario… that it ends up being like a traditional IRA. But if you have any out of pocket medical expenses then it’s better than a traditional IRA.
Oh…I reread your post and now understand your comment better.
Yes, I can see how it’s value as a savings account is overrated…there’s no way I’m going to hold on to receipts for years and years…but, also as @twig93 pointed out, the worst case scenario is that, if you hold it to retirement, it’s like an IRA.
Oh, and I’ll add that it’s a broad definition of “medical” that includes Rx, dental, vision, hearing aids, long term care… most of us who live to 70 or beyond will need something that qualifies.
I’m not sure I follow. I’m probably missing something. I just rolled over traditional 401k into a ROTH 401k. I will pay more taxes next year as a result. But in retirement, I’ll have the same account I would have had ($$ → $$ , same investments) but I won’t have to pay taxes on it in retirement when I won’t have my employment income source.
If you didn’t spend the taxes now you could invest the money instead and you would theoretically have more money in retirement to pay for the taxes in the future.
One strategy is that if you have a low income year due to maybe a job change or a disability or other leave of absence and/or your retirement fund takes a dive (such as in 2008 when people derisively referred to their 401Ks as 201Ks because they were about half as big) then you pay the taxes that year. When you’re either in an unusually low bracket or the amount you’re paying tax on is unusually low.
But it sounds like you are in a higher tax income bracket now than what you anticipate when retired, in which case the tax burden will be less if you pay it after you retire.
In my original post, this was my first point. That’s nice in theory, but generally doesn’t happen.
But even if it did. If I took that tax money and invested it outside of retirement accounts, I would then have to pay taxes on the income from those investments. I think I still lose out.
Yes. I granted this in my original post. I will be in the same or a lower tax bracket in retirement (ignoring potential increases or decreases in overall tax rates / brackets). So I know I’m losing that part of the battle. I still don’t think it overcomes my other points. Even with the higher tax bracket now, I can better afford to pay X in taxes today instead of Y(<X) in taxes in retirement when I won’t have an active income.
Yes if you’re maxing out the contributions such that you simply get to save more by investing in a Roth account.
If it’s a question of saving $X in a traditional account or (1 - R) * X in a Roth account where R is your marginal tax rate then it comes out the same either way if R doesn’t change from now to retirement.
But if you’re bumping up against the max, as many actuaries are, then Roth wins out by letting you save more.
Has anyone else heard of a deal where if you reach a certain salary cap, an employee sponsered 401k plan will not actually let you contribute the maximum to your 401k? IE, now being capped at a 5% contribution?
Presumably the difference could be put into a non-company sponsered 401k to reach the actual annual 22.5k dollar limit.
Ok this is good info. I didn’t even know this was a thing. Based on the salary limits that define HCEs in the ADP test I would’ve thought I would’ve read about this on here already somewhere. This is where alternatives like IRAs, brokerage, etc. become more relevant I guess.
I could see making the switch from NHCE to HCE mid-year after already contributing more than the plan limit on HCEs being an issue.
It would probably be in your SPD or they might have an administrative policy where they just inform HCEs since you are pretty much able to discriminate against HCEs all you want. Either you are an HCE or you aren’t for the year. Generally if you made more than $135,000 in 2022 you’re an HCE for 2023, if you make more than $150K in 2023 you will be an HCE in 2024. The company can make a top-paid group election that might make some higher earners NHCEs but that’s typically only applicable in smaller plans where there a lot of high paid employees. The only way to go from NHCE to HCE mid year is if you become a more than 5% owner during the year either directly or indirectly.
HCEs are determined by prior year compensation so a change in compensation this year won’t effect this year’s status. I forget when the IRS changed this, probably EGTTRA back in 2002. But it allows you to know who your HCEs are for the coming year so you can do year end planning without finding a surprise HCE that throws off your testing due to a year end bonus or something like that.
The way I read the rules the 5% rule stock counting towards the threshold would include the holdings of family members. Even so I expect that membership in the HCE group from stock ownership is heavily in very small companies.
If 60% or more of plan assets belong to HCEs then the plan could come under restrictions which could result in limiting the contributions of HCEs.
Yeah there are rules about stock attribution and they are slightly different for HCE determinations and Controlled group determinations. And yes it’s a lot more common in the small and micro plan arenas.
The 60% is to key, not HCE and is known as top heavy. Often a lot of over lap between HCE and Key in small plans and almost exclusively a small plan issue. But it doesn’t limit what HCEs can get, just requires potentially additional contributions for non keys.