Question about contributions to retirement account and HSA account

[Basith]

Hello!

I have 3 questions related to retirement account and HSA accounts.

(1) I used to have an employer provided 401k account for retirement contributions but since I switched jobs, my present employer does not provide contributions or have retirement plans. So, I am in the process of getting an individual IRA account. I want to know if I can contribute money to my individual IRA account using after tax dollars from my pay check? If I can, can I deduct the total money contributed to my individual IRA account from taxes?

(2) Same question as 1 above but I have my own private health care insurance with HSA not through my employer. I want to know if I can contribute after-tax dollars from my paycheck into that HSA and be eligible for a tax deductible when I file taxes? 

(3) Can I use my HSA account to pay for my wife's care if she is not in my current health insurance plan and she has her own plan without an HSA in the same insurance company as mine? If I can't, then if she was in the same health insurance plan as I, can I use my HSA account to pay for her care?

[Rangers44]

Hi Basith!

Great questions!

1) You can only contribute funds to a Traditional or ROTH IRA with after tax funds. While you may be eligible to claim an income tax deduction from contributing funds to a Traditional IRA, you can only contribute to an existing or open account up $6,000 or $7,000 if you are age 50 or older.

https://www.irs.gov/retirement-plans/plan-participant-employee/2022-ira-contribution-and-deduction-l...

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-li...

2) Yes, again, regarding HSA contribution with after-tax funds, as long as you don’t go over the limit for that given tax year.

Read further:

What are the benefits of an HSA?

You may enjoy several benefits from having an HSA.

• You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
• Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• The contributions remain in your account until you use them.
• The interest or other earnings on the assets in the account are tax free.
• Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
• An HSA is “portable.” It stays with you if you change employers or leave the work force.

https://www.irs.gov/publications/p969

3) And, yes, you can use your HSA account to pay for the medical benefits of a spouse as long as they are for qualified medical expenses.

Read further:

https://ttlc.intuit.com/community/tax-credits-deductions/discussion/can-a-wife-use-her-hsa-to-pay-fo...

I hope this is helpful to you.

[AR_CPA]

Hello Basith,

Hope you're doing great and liking your new job!

1.  Yes, you can roll over your retirement funds from your former employer into an IRA.  It is better to do a direct transfer rollover instead of getting a check in your name.  Just do a trustee-to-trustee direct transfer, this way you will not be subject to the 20% withholding. 

Yes, you can contribute to an IRA as long as you have earned income (subject to contribution amount limitations).  I may be deducted from your gross income provided you're not an active participant in an employer plan during the year.  Roth contributions are always with after-tax money. 

2.  In order to contribute to a Health Savings Account, you have to have a High Deductible Health Insurance Plan.  You may call your insurance company and ask them if your policy is HDHP.  

3.  If your policy is a family policy then yes, your HSA account can be used for any member of your family. 

Hope it helps.

[Basith]

For number 1, I am confused are you saying that I can only open a traditional IRA when I am 50 or older? I don't believe that makes sense but please confirm. What is more tax friendly in the long run to have a traditional IRA or a roth IRA account?

Another question I have is, I had a main principal home purchased in mid 2019 and I was living in it for about 10 months and I moved out and had the property rented to the present day. The property is now an investment property and since I have not lived in it for 2 years out of the 5 from today, if I sell it today would I be subjected to the capital gains tax on the profits gained if we jointly file taxes and our income is less than $80,800 for this year? Is this income referring to the AGI or gross  income? How Do I avoid paying capital gains tax on the sale if at all possible?

Thank you very much!

[Rangers44]

Sorry for the confusion Basith

Those ages imply that if you are OLDER than 50, you can contribute more.

The tax friendly part really comes down to your personal belief that if you believe income tax rates will be higher by the time you retire, the strategy is to contribute after-tax funds now into a ROTH, because as long are you keep those funds in the ROTH IRA account for a minimum of 5 year and are older  than 59 1/2, you will never be taxed on any earnings the account accrues.

Secondly, if you had funds in a 401K Rollover or Traditional IRA account, you can perform a back-door roth by liquidating the needed funds from either types of accounts, pay the income tax now using current rates and allow the new ROTH IRA to grow at a similar if not fast pace and be tax free going forward.

With regard to the sale of the previously lived-in, investment property, there are alternatives to living in the home for the entire 2 out of the last 5 years, and would be best to file as Married Filing Joint to give you the chance to claim a larger exclusion, if possible.

But eligibilility is only available if for:

a) Change of place of employment

b) Health reasons

c) Other unforeseen circumstances, as specified by the IRS

If you meet any of the above, you would compute the eligible amount of exclusion by dividing 10 months over 24 multiplied by $500000, when filing as Married Filing Joint.

The result would be your exclusion, ONLY if you meet one of the 3 exceptions above.

[Basith]

Ok can you please explain this statement from the IRS website regarding capital gains? The link is here, Topic No. 409 Capital Gains and Losses | Internal Revenue Service (irs.gov)

Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er).

Thanks

[Rangers44]

Hi Basith,

The rule is very clear.

You must first assume the Standard Deduction or Itemized Deductions have been subtracted from your Total Income or Adjusted Gross Income.

Every dollar above that amount is taxable.

Once you know what your taxable income is (e.g. Wage $60,000 less Standard Deduction $12950 = Taxable Income $47050), the tax rate would be assessed on the following:

$0 Taxable Income up to $40400 Taxable Income would be subject to 0% Income Tax

In this example all all excess income totaling $7050 would be subject to 10%

In addition, there is an additional tax surcharge called the Net Investment Income Tax of 3.80% if any excess income are greater than:

$200,000, if Single or Head of Household

$250,000, if Married Filing Joint

$125,000, if Married Filing Separate

[Basith]

Ok,

Let's say I sell my investment property this year and the net profit is approximately $100,000. How much would be my taxes if our combined taxable income from all wages is less than $80,800 for married filing joint?

Thanks!

[AR_CPA]

What this means is that if you are in the 10 or 15 percent tax bracket then your long-term capital gains will be taxed at 0%