Bristle Software Consultant Tips

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Table of Contents:
  1. HSAs (Health Savings Accounts)
  2. Roth IRAs
  3. Real Estate Tax is deductible without itemizing
  4. Technology Job Trends (moved to Career Tips page)
    1. Technology Job Trends 3/18/2010
    2. Technology Job Trends 11/4/2014
Details of Tips:
  1. HSAs (Health Savings Accounts)

    Original Version: 3/5/2006
    Last Updated: 3/1/2016

    An HSA (Health Savings Account) is very different and much better than an FSA (Flexible Spending Account).

    An HSA is like an IRA, but for medical expenses as well as retirement.  The basic idea is to save money to pay future medical expenses tax-free, or to use tax-deferred after retirement.  The US law permitting this went into effect in 2004.  You can open such an account at any bank and start putting money into it, up to the following limits:

    *  Before 2007, these amounts were further limited to the amount of your HDHP insurance deductible.  See details below.

    Like an IRA:

    1. It remains your money year after year (unlike an FSA, where you have to "use it or lose it" each year).

    2. It is tax-deferred (or tax free, see below), even if you don't itemize deductions on your federal tax return.

    3. The growth is also tax-deferred (or tax-free).

    4. You can keep accumulating as you go from job to job and/or insurance company to insurance company.

    5. If you don't need the money for medical expenses, you can take it out at any time, to spend on anything.  You pay the tax when you withdraw it for non-medical expenses, plus a 10% penalty.
      [Update: Starting in 2011, the penalty goes up to 20%.]

    6. You can take money out to spend on anything after age 65.  You pay the tax when you withdraw it for non-medical expenses (no penalty).

    7. You can roll over larger amounts from other similar plans.  For an HSA, this means you can roll over from other HSA plans, or from Archer MSA plans (but not from IRAs, HRAs or FSAs, except for the two once-in-a-lifetime options described below).

    8. You can put the money in any time before April 15 of the next year.  Therefore, you can put all of the money in Jan 1 (to start growing tax-deferred ASAP), or all of it Apr 15 of the next year (after you know how much your actual medical expenses for the year were, though you have to open the plan before incurring the expenses).  Or anything in between, in single or multiple deposits.

    9. When you die, your spouse can treat your HSA as if it had always been their own, with no change in tax status.

    10. When you die, your non-spouse beneficiary pays tax on the inherited balance.

    Unlike an IRA:

    1. You can take the money out tax-free at any time to pay medical expenses.  This is not just tax-deferred, like an IRA.  It is tax-free!

      This is true for medical expenses of you, your spouse, or any of your dependents, even if they weren't your spouse or dependent when you made the contributions.  Therefore, you can save for future medical expenses of future kids, or for your spouse before you get married, or for your parents or other people before they become your dependents.

      This is true even if you are no longer eligible to make contributions to an HSA at the time you make the withdrawal, because you have a low-deductible insurance plan (see discussion of high deductible insurance plans below), or are not insured, or whatever.  For example, you can make contributions while you are in any of the following situations:

      1. Can afford to have a high deductible (while young, healthy, etc.)

      2. Cannot afford the high premiums of a low deductible plan

      3. Do not yet have a better plan:
            - Not yet married to someone who has a better plan
            - Not yet working for a company with a better plan
            - etc.

      4. Can afford to pay insurance premiums.

      Later, you can withdraw the money to pay medical expenses when you are in the opposite situation:

      1. Are older, less healthy, etc.

      2. Can afford a high premiums of a low deductible plan, but want to pay even the low deductible expenses tax-free.

      3. Finally have a better plan:
            - Finally married to someone who has a better plan
            - Finally working for a company with a better plan
            - etc.

      4. Cannot afford to pay insurance premiums at all (if you are really broke).

      You keep the records personally about what the money was spent on.  You don't have to justify each expense to the bank as you make the withdrawal.  Just keep it honest, in case you get audited.
      [Update: Starting it 2011, non-prescription pharmacy purchases may no longer be eligible.]

    2. You can set up a credit or debit card with your HSA and use that card to pay medical bills.

    3. Your employer can make the contributions for you, in which case it's tax-free to you (no federal tax, no FICA, etc.) like any other medical benefit.  I think if you take it out for other than medical expenses, it is only tax-deferred, just as though you'd put it in yourself, so you have to pay the taxes then, and the penalty if less than 65 years old.

    4. You can use the money tax-free (not just tax-deferred) to pay:

      1. Medical expenses as described above.

      2. Health insurance premiums while you are on unemployment.

      3. COBRA health insurance premiums (the kind you pay for up to 18 months to stay on your former employer's group plan after leaving or being fired, before finding another job).

      4. Long-term care insurance premiums.

      5. If over age 65:
        1. Premiums for Medicare Part A, Part B and Medicare HMO (but not Medigap policies).
        2. Employee share of premiums for employer-sponsored health insurance for employees and/or retired employees.

    5. You can have both an HSA and an IRA, each to its own dollar limit.

    6. There are two options for rolling money into an HSA from another tax-deferred account that is not an HSA or MSA.  Each of them can be done only once in a lifetime:

      1. You can do a once-in-a-lifetime "qualified HSA funding distribution" from an IRA into a HSA.  

        No taxes due since you are moving money from one tax-deferred account (IRA) to another (HSA).  However, since the money is gaining the new status of being tax-free if you spend it on medical expenses, you can't roll over your entire IRA.  The sum of the transfer amount plus any new money you deposit directly into the HSA that year is still subject to the annual limit.  So, you lose a chance to defer some income, and instead roll over some savings that is already tax deferred.  This is only useful if you can't afford to make a regular contribution that year.

      2. You can also do once-in-a-lifetime "qualified HSA distribution" from an FSA or HRA, with no taxes due.  No dollar limit, I think.  This makes sense since they seem to be weaning people off of these less useful arrangements (FSA and HRA) onto HSAs.

      During the months that you are paying into the HSA account:

    1. You must not be covered by any additional health plan.

    2. You must not be eligible for Medicare (so you can't contribute past age 65).

    3. You must be covered by a "High Deductible Health Plan" (HDHP).  This means:

      1. Your insurance plan deductible must be at least:

        • 2005:  $1000 (individual) or $2000 (family)
        • 2006:  $1050 (individual) or $2100 (family)
        • 2007:  $1100 (individual) or $2200 (family)
        • 2008:  $1100 (individual) or $2200 (family)
        • 2009:  $1150 (individual) or $2300 (family)
        • 2010:  $1200 (individual) or $2400 (family)
        • 2011:  $1200 (individual) or $2400 (family)
        • 2012:  $1200 (individual) or $2400 (family)
        • 2013:  $1250 (individual) or $2500 (family)
        • 2014:  $1250 (individual) or $2500 (family)
        • 2015:  $1300 (individual) or $2600 (family)

        The point is to encourage people to have high deductibles, so they'll have an incentive to keep their own medical expenses down.

      2. Your max out-of-pocket expense (deductibles, co-pays, etc.) under the insurance plan must be no more than:

        • 2005:  $5100 (individual) or $10,200 (family)
        • 2006:  $5250 (individual) or $10,500 (family)
        • 2007:  $5500 (individual) or $11,000 (family)
        • 2008:  $5600 (individual) or $11,200 (family)
        • 2009:  $5800 (individual) or $11,600 (family)
        • 2010:  $5950 (individual) or $11,900 (family)
        • 2011:  $5950 (individual) or $11,900 (family)
        • 2012:  $6050 (individual) or $12,100 (family)
        • 2013:  $6250 (individual) or $12,500 (family)
        • 2014:  $6350 (individual) or $12,700 (family)
        • 2015:  $6450 (individual) or $12,900 (family)

        The point is to limit how much money you can avoid paying tax on, and to rule out plans where you are not really insured at all because the max out-of-pocket is sky-high.

      3. Also, before 2007, you couldn't put away more than the amount of your deductible each year.  In 2007 and beyond, you can put away as much as the full legal limits, regardless of the amount of your deductible, as long as the deductible is high enough to qualify as an HDHP.  For example, in 2006, if you had a deductible of $1500, you could put away no more than $1500 tax deferred, not the full $2700.  However, in 2007, with the same deductible, you can put away the full $2850 tax deferred.  

        So, as of 2007, why would you want a deductible that was significantly above the $1100 minimum, since it means you risk having to pay more out of pocket expenses before your insurance kicks in?  In 2006, you might have raised your deductible well past the $1050 minimum to $2700 because it allowed you to put away $2700 tax deferred, instead of just $1050.  However, as of 2007, you could leave the deductible at $1100 and still put away the full $2850 tax deferred.  So, why take the risk of having to pay more out of pocket?  The only remaining reason is that your insurance premiums will probably be lower if you have a higher deductible.

    For more info see:

   (Form 8889 instructions)
   (Form 8889)
   (Government Employee HSA plan)

    Thanks to Mark Zahour for pointing out the once-in-a-lifetime rollover options!


  2. Roth IRAs

    Original Version: 2/19/2009
    Last Updated: 4/17/2012

    [Note: Comments about the current state of the economy may no longer apply.   That was 2009.  Now that Obama has had time to undo some of the Bush damage, the economy is booming again.  I hope you took my advice in the New Opportunity section below.]

    A Roth IRA may be a great investment, especially in today's lousy economy.  

    Moving money from an IRA to a Roth IRA could save you a lot in the long run because you pay the taxes now, while the market is down, and perhaps while your income is lower.  Same for 401(k) vs. Roth 401(k).  But you must have enough other savings to be able to pay the taxes now.


    Note: Skip to the New Opportunity section below, if you already know all about Roth IRAs and Roth 401(k)s.

    Generally speaking, a Roth IRA is like a traditional IRA, except:

    1. With a Roth IRA, you pay the taxes today on contributions, but never pay taxes on earnings.
      With a traditional IRA, you pay the taxes later on both contributions and earnings.

      Do you expect to be in a higher tax bracket now or later?  If now, use a traditional IRA and defer the taxes till retirement.  If later, use a Roth IRA, and pay the tax now.

    2. With a Roth IRA, you can withdraw your contributions (but not earnings) tax-free and penalty-free at any time.

      Are you hesitant to put money into an IRA because you worry that you might need it sooner than expected?  If you put it in a traditional IRA, you risk getting stuck with a 10% penalty for early withdrawal.  If you put it in a Roth IRA, you can pull it back out suddenly, if necessary, tax-free and penalty-free.  You don't have to wait for retirement age.  This makes sense since you already paid the tax on the money you put in.  However, the 10% penalty still applies to early withdrawal of earnings.

    Rollover 401(k) to Traditional IRA:

    Your "regular contributions" to either type of IRA are limited to roughly $5000/year, so it doesn't add up too fast.  However, when you leave an employer (by resigning, being fired, being laid off, or whatever), you have the option of creating a "Rollover IRA", and moving your entire 401(k) balance (contributions and earnings) to it.  Since 401(k) contribution limits are typically around $15,000/year (three times as much as IRA), plus employer contributions, and since you may have contributed for many years, this can be a lot of money.  After such a rollover, your IRA balance may easily be in the hundreds of thousands of dollars.

    Rollover Traditional IRA to Roth IRA:

    If you didn't choose a Roth IRA years ago, it's not too late.  At any time, you can choose to roll over part or all of a traditional IRA (including the "Rollover IRAs" described above) into a Roth IRA.  You pay tax immediately on all the money you move to the Roth IRA (known as "rollover contributions", not "regular contributions"), but you never pay taxes on the future earnings.  

    It's the same tradeoff as before: pay now (Roth) if you think your future tax rate will be higher, pay later (traditional) if you think it will be lower.  But, you are making the decision for part or all of your entire IRA balance, not just for this year's small annual "regular contribution".

    "Back door" Roth IRA:

    What if you're not eligible?  Use the back door.  If you have too high an income or if your company has a retirement plan, you may not be eligible to open a new Roth IRA or make new contributions.  However, everyone is allowed to to open or make new contributions to a traditional IRA, and everyone is allowed to immediately roll those contributions over into a Roth IRA.  If you were able to fund the traditional IRA with pre-tax dollars, you'll have to pay the tax when you do the rollover.  If you had to fund the traditional IRA with post-tax dollars, there's no tax to pay during the rollover.  Either way, you pay the tax now and never again, exactly as if you'd funded a Roth IRA directly.

    Roth 401(k):

    All of the above may still apply, even if you are still employed at the same company, and can't move your 401(k) to a Rollover IRA.  There is also something known as a "Roth 401(k)".  You may be able to roll over part or all of your traditional 401(k) to a Roth 401(k).  Check with your employer.

    New Opportunity:

    The recent drop in the stock market provides a new angle, which is what prompted me to write this article.

    The decision is not really based on just the tax rate now vs. then.  It is also based on the total value of the IRA now vs. then.  

    Usually, you expect your IRA to gradually increase in value, so paying tax now on a lower balance vs. later on a balance that has grown over time is more or less a wash.  It's the old question about paying less now in today's dollars, or more later in future dollars after inflation, and earnings, etc.  No easy answer.  It depends on whether the money you use to pay the taxes now would have grown to be more than the money you would have paid later.

    However, we are currently experiencing an unprecedented (and hopefully temporary) massive drop in stock market values, so your IRA is probably worth about half what it was a year ago (and hopefully half what it will be worth again soon).  If you roll over to Roth today, you pay the tax based on today's value, which means half the tax bill.  And you are still done with taxes on that money forever.  Might be a good idea. 

    Other considerations:

    1. If your income is lower than usual this year (due to layoff, or whatever), your tax bracket may be lower than usual, so here's a chance to pay a lower rate on a lower balance -- a double win.  

      I rolled over part of my IRA to Roth a couple years ago, when I took a sabbatical from work and had a low-income year.  Even without the low market values we're seeing today, I saved quite a bit on future taxes.  However, I could only do it in a low-income year because I had enough in non-retirement savings to pay the taxes, and because I knew the next year my income would be back to normal.

    2. You can withdraw "regular contributions" (but not earnings) from a Roth IRA at any time without tax or penalty.  You don't have to wait for retirement age.  If you withdraw earnings early, you pay the 10% penalty, but still no taxes since it is growth on contributions that have already been taxed.  

      However, this is no big deal because, as I said earlier, those "regular contributions" were limited to $5,000 or so per year, so you probably don't have much there.

    3. The big deal is that after 5 years, the same applies to "rollover contributions".  

      That is, starting 5 years from when you do the rollover, the following is all true of "rollover contributions" just like for "regular contributions":

      You can withdraw "rollover contributions" (but not earnings) from a Roth IRA at any time, without tax or penalty.  You don't have to wait for retirement age.  If you withdraw earnings early, you pay the 10% penalty, but still no taxes since it is growth on contributions that have already been taxed.  

      Since the rollover contributions can be so much more than the regular contributions, this is a big deal.  Are you considering early retirement, or are you worried about losing your job 5 years from now, and having to dip into retirement money?  By rolling over the IRA to Roth, you only have to wait 5 years, not until retirement age, to avoid the 10% penalty on what could be a huge amount of money.

    4. Do NOT roll over to Roth if you don't have enough separate money to pay the tax bill now.  Pulling money from the IRA to pay the bill, and thus rolling over only part of the IRA, costs too much.  You have to pay the 10% penalty on the amount you didn't roll over.

    5. Do NOT roll over too much to Roth in any one year.  Keep in mind that any amount rolled over to Roth counts as regular income this year.  Don't push yourself into a higher tax bracket by rolling over too much.  That's why I did only part, not all, of my IRA a couple years back.  I purposely stopped short of the next tax bracket.  

    6. It gets better in 2010, when a special law goes into effect, allowing you to spread the tax hit for a Roth rollover into years 2011 and 2012.  However, that may not help keep you out of the higher tax bracket.  I'm not sure whether you get to spread out the additional income, or have to count all the income in one year (bumping you to a higher bracket that year) and only get to spread out the tax payments.

    7. Rolling over to Roth is less worthwhile if you're pretty sure your tax bracket will be lower at retirement.

    8. With a Roth IRA, you are not required to start taking the money out at any particular age.  With a traditional IRA, you have to start at age 70 1/2, and since it is taxable income, you may get pushed into a higher tax bracket and pay more tax on all sources of income, including Social Security.

    9. You can't go back.  No rollovers from Roth back to traditional.  That would require the government to give you back some of the tax money you already paid.  Good luck with that!

    10. With the current state of the economy and the federal budget (deficits, bailouts, stimulus packages, etc.), it seems likely that tax rates will be higher in the future.  All the more reason to pay now instead of later.

    11. However, if everyone does this, and pays all of their taxes early, the government will get lots of income now, and none in the future.  Realistically, that means they'd end up changing the rules in the future to avoid going broke.  They probably wouldn't suddenly make the Roth IRAs taxable again, but they might make their advantage irrelevant by moving from an income tax system to a property tax, or sales tax, or usage tax.  So, no guarantees for the future.

    12. Both traditional and Roth IRAs allow early withdrawal without penalty to pay some major expenses, like medical bills, first house, college tuition, health insurance while unemployed, etc.  Check with your tax advisor.  Also, watch for more such exceptions to be added while the government is trying to help the unemployed, stimulate spending, etc.

    13. The deadline is December 31, not April 15.  If you choose to do a rollover to Roth this year, because your income this year is lower than usual, you must do so by December 31 of this year.  You can't wait till April 15 of next year, as you can with "regular contributions".

    14. Such rollovers have nothing to do with how the money is invested.  You can do a rollover from traditional to Roth without moving the money into or out of any particular stocks, bonds, mutual funds, bank accounts, etc.  However, your financial institution may insist on treating it as a transaction, and may charge fees as though you had bought and sold stocks, bonds, mutual funds, etc.  I'm not sure what all the rules are, but when I did this once to an IRA that was in a CD, my credit union charged me for closing the CD before its maturity date, and put the money in a new CD at a different rate.  Since the new rate happened to be higher, I didn't fight about it.

    For more info, see:

    Should You Convert Your IRA?

    Tips for Managing Your Roth IRA

    How to Save on Taxes Using a Traditional IRA

    Official IRS Publication 590, "Individual Retirement Arrangements (IRAs)": (HTML) (PDF)

    The Ins and Outs of IRA Conversions

    What You Need to Know Before Funding a Backdoor Roth

    All of these links and more are in the Retirement Planning row of my links page:


    Thanks to Jim Blue for reminding me of some of the "other considerations" above!


  3. Real Estate Tax is deductible without itemizing

    Last Updated: 3/5/2009

    Want to save $250 on your taxes?

    In tax year 2008, for the first time, you can deduct part or all of your real estate tax from your taxable income on IRS Form 1040 even if you don't file Schedule A to itemize deductions.

    It's easy to miss this change, but worth about $250 if you notice it.

    The "What's New" section on page 6 of the 2008 1040 instructions:



    "Standard deduction increased by real estate taxes and net disaster losses. Your standard deduction is increased by certain state or local real estate taxes you paid, and a net disaster loss attributable to a federally declared disaster.  See the instructions for line 39c on page 34."

    I'm a pretty detail-oriented guy, but I skipped right past that, assuming it applied only to flood victims, etc.

    When you get to line 39c in the form, it says simply:

    "Check if standard deduction includes real estate taxes or disaster loss (see page 34)"

    Again, didn't sound very promising, and who has time to read the entire 161 pages of instructions for Form 1040?  I usually read most of it, but skip past the parts that don't apply to me.  Since I typically use Schedule A for itemized deductions instead of taking the standard deduction, I didn't bother flipping to page 34.

    On line 40 in the form, where you enter either the standard deduction or the amount of your itemized deductions, the sidebar looked different from past years and caught my eye.  Instead of just listing the amounts to use this year for "Single", "Married Filing Jointly", etc., it also said:

    "People who checked any box on line 39a, 39b, or 39c or who can be claimed as a dependent, see page 34."

    OK.  3rd time's the charm.  Now I'm curious.  What is this all about anyhow?  

    I finally went and read page 34, where it says

    "Real estate taxes. Your standard deduction is increased by the state and local real estate taxes you paid, up to $500 ($1,000 if married filing jointly). The real estate taxes must be taxes that would have been deductible on Schedule A if you had itemized your deductions. Taxes deductible in arriving at adjusted gross income (such as taxes on business real estate) and taxes on foreign real estate cannot be used to increase your standard deduction."

    Sounds promising, so I filled out the "Standard Deduction Worksheet" on page 35, where it all becomes clear that this is for real.  It tells you to add your real estate taxes, up to $1,000 for "Married Filing Jointly", to the standard deduction of $10,900, and use the total of $11,900 on line 40.

    That's $1000 less income.  So if you are in the 25% tax bracket, that's $250 less tax.

    Didn't do me any good since I'm itemizing deductions on Schedule A as usual, but I thought you might like to know...