Bristle Software Consultant Tips

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Table of Contents:
  1. HSAs (Health Savings Accounts)
    1. Withdraw from HSA now, years later
  2. Roth IRAs
    1. Open your 1st Roth IRA immediately
    2. Convert to Roth in a low income year
    3. Convert to Roth during stock market crash
    4. Convert to Roth to reduce RMDs
  3. Cheap or Free ObamaCare Health Insurance
  4. Coworking spaces
  5. Real Estate Tax is deductible without itemizing
  6. 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: 1/8/2025

    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 have gone on Medicare, 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 the 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.]

      Decide later, withdraw anytime:

      You don't have to decide right away whether to pay a medical expense from your HSA.  For example, you can pay an expense directly, not from your HSA.  Then, years later when money is tight, you can reimburse yourself from your HSA.  So, you could even accumulate tens of thousands of dollars of unreimbursed medical expenses over the years.  Then reimburse yourself tax free from your HSA years later.  And all that time, the money in the HSA may have been invested and growing in value.

        2020 Coronavirus hint

        This is a great way to get a tax-free bucket of cash if you get laid off or need money unexpectedly.  Like during the 2020 Coronavirus #TrumpSlump.  If you have records of HSA-eligible expenses that you paid directly (not from the HSA) in past years, you can reimburse yourself for all of them right now, tax-free, penalty-free.  Just take the money out of the HSA, and use it for food, rent/mortgage, bills, whatever.

        It's a shame to dip into retirement savings like that.  But good to have the option when you really need it.

        Intentionally deferring valid expenses

        In fact, you might go so far as to intentionally pay a bunch (or all!) of your medical expenses outside of your HSA over the years.  Just to build up a bucket of cash that your HSA "owes" you, and that you can take out tax-free and penalty-free at any time.  Pay the expenses out of your regular taxable income and keep the receipts to show that you did.  Then someday reimburse yourself when you need tax-free cash. 

        When you DO pull it out, it helps keep your income lower, which can help you to:
        1. Keep your taxes lower
        2. Stay in a lower tax bracket
        3. Avoid the ObamaCare "cliff" if Trump brings that back
        4. Avoid having to pay higher ObamaCare premiums, regardless of the cliff
        5. Avoid the higher Medicare "IRMAA" premiums that come with higher income
        6. Avoid causing your Social Security income to become taxable

        And when future RMDs (Required Minimum Distributions) from your regular IRA risk pushing you into a higher tax bracket, this is a way to have more cash without making things worse. 

        Just be sure to keep all those receipts over the years!

        I think this balance of money that your HSA "owes" you can include all HSA-eligible expenses that you had at any time when you had an HSA.  Regardless of whether the HSA actually had enough money in it at that time to pay those expenses.  So if you have an HSA that's had a tiny balance for a long time, it's worth keeping the HSA.  Just so you can eventually add to it and then (immediately, if you like) reimburse yourself for those expenses.

    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.

      6. NOT other health insurance premiums -- only the specific cases above.

    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.


    Restrictions:      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)
        • ...
        • 2024:  $1600 (individual) or $3200 (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)
        • ...
        • 2024:  $8050 (individual) or $16,100 (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 $1100, you could put away no more than $1100 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:

            https://www.bogleheads.org/wiki/Health_savings_account
            http://www.treas.gov/offices/public-affairs/hsa/
            http://www.irs.gov/pub/irs-pdf/p969.pdf (HSA, MSA, FSA, HRA)
            http://www.irs.gov/pub/irs-pdf/i8889.pdf (Form 8889 instructions)
            http://www.irs.gov/pub/irs-pdf/f8889.pdf (Form 8889)
            http://www.opm.gov/hsa/ (Government Employee HSA plan)

    Shoutouts:

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

    Thanks to Jacob Petersen for pointing out the ability to reimburse yourself years later for old medical expenses that you paid outside the HSA!

    Thanks to Aniela Rosenberger for inspiring me to flesh out the parts about intentionally deferring valid HSA expenses!

    Thanks to John Patriarca for inspiring me to write about the value of keeping an old HSA that has a tiny balance!

    --Fred

  2. Roth IRAs

    Original Version: 8/31/1998
    Last Updated: 2/19/2025

    [4/17/2012 Note: Comments about the current state of the economy may no longer apply.   That was 2009.  Now that Obama's 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.]

    [3/23/2020 Note: Now that Trump has trashed the economy again, you have another chance to cash in.  See New Opportunity below.]

    [12/5/2024 Note: Here we go again!  With Trump coming back into office, get ready for more wild stock market fluctuations.  Buy the dips!  Or better yet, convert the dips!  See New Opportunity 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), and for 403(b) vs. Roth 403(b).  But you must have enough other savings to be able to pay the taxes now.

    Background:

    Note: Skip to the New Opportunity section below, if you already know the basic rules of Roth IRAs, Roth 401(k)s and Roth 403(b)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 (after 5 years, see below).

      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 $7,000/year ($8,000 if over age 50), 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) or 403(b) balance (contributions and earnings) to it.  Since 401(k) and 403(b) contribution limits are typically around $23,000/year (way more than an 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.

    Convert 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 convert 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 "conversions", not "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 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 convert those contributions to 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 conversion.  If you had to fund the traditional IRA with post-tax dollars, there's no tax to pay during the conversion.  Either way, you pay the tax now and never again, exactly as if you'd funded a Roth IRA directly.

    Roth 401(k) and Roth 403(b):

    All of the above may still apply, even if you are still employed at the same company, and can't move your 401(k) or 403(b) to a Rollover IRA.  There is also something known as a "Roth 401(k)" and a "Roth 403(b)".  You may be able to convert part or all of your traditional 401(k) to a Roth 401(k), or your 403(b) to a Roth 403(b).  Check with your employer.

    New Opportunity: Convert during stock market crash

    The recent drop in the stock market provides a new angle.

    The decision to convert's not based only on the tax rate now vs. then.  Also on the total value of the IRA now vs. then.  

    Usually, you expect your IRA to gradually increase in value.  So pay tax now (Roth) on a lower balance vs. later (non-Roth) on a higher balance?.  Pay less now in today's dollars, or more later in future dollars after inflation, earnings, etc?  No easy answer.

    However, we are currently experiencing an unprecedented (and hopefully temporary) massive drop in stock market values.  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 convert to Roth today, you pay tax based on today's value.  Half the tax bill.  And you're still done with taxes forever.  Might be a good idea. 

    Other considerations:

    1. Convert to Roth in a low income year
      If your income is lower than usual this year (due to layoff, sabbatical, retirement 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 converted part of my IRA to Roth IRA 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 a lot on future taxes.  However, in a low-income year, I could only do it 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. Deadline is December 31, not April 15
      If you choose to do a conversion to Roth this year, you must do so by December 31 of this year.  You can't wait till April 15 of next year, as you can with an IRA or Roth IRA contribution.  But that's not really a problem, unless you're trying to take advantage of your low income and low tax bracket this year, and expect them to be higher next year.  Just do the conversion anyhow, and it'll apply to the next tax year.

    3. Can withdraw contributions early
      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.

      Lifetime 5-year clock -- Open your 1st Roth IRA immediately!
      Note: Technically, it's not "at any time".  There's a 5-year clock that starts the 1st time you ever make a contribution to any Roth IRA at any institution.  So, 5 years after that date, you can withdraw part or all of that contribution.  Or part or all of any other contributions you've made to any other Roth IRA at the same or different institution since then.

      To get that 5-year clock running, open a Roth IRA immediately!  Today.  Don't wait.  Go to any bank, credit union, investment company, etc.  Open a Roth IRA with $100 or some other trivial amount.  Just to get the lifetime clock started.

      I opened my 1st Roth IRA at the Raytheon credit union.  Never put much money in it.  Many years later, I opened a 2nd Roth IRA at Vanguard.  Put lots of money in it.  From day one, I was able to take money back out of the large Vanguard Roth IRA.  No muss, no fuss, no taxes, no penalties.

      Because I'd originally opened the tiny Raytheon Roth IRA over 5 years ago.  Same if I had moved the money from the Raytheon Roth IRA to a new Roth IRA at any other bank, credit union, investment company, etc.  It doesn't have to still be in the place where you first put it.  Just has to be 5 years since you put it there.  In fact, I'm not sure, but I think it still applies if you've since closed that original Roth IRA early and paid a 10% penalty to do so.  No reason to wait.  Do it today!

      Note: Technically, it's not really a full 5 years.  It's rounded off to the tax year.  So it can be less than 4 years.  If you open your 1st Roth IRA on Dec 31, 2000, it counts the same as Jan 1, 2000.  In fact, since you can open a Roth IRA for a given year any time before that year's tax filing deadline, it's even better.  If you open your 1st Roth IRA on Apr 15, 2001, it counts the same as Jan 1, 2000.  So, you can start withdrawing on Jan 1, 2005 -- only 3.75 years later.

      I started withdrawing from my Roth IRAs at age 55 when I retired early.  Because I was not yet 59 1/2 years old, I couldn't withdraw penalty-free from my non-Roth IRA yet, and I couldn't withdraw the earnings penalty-free from my Roth IRA.  Only the contributions themselves.  But it was something.

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

    4. Can withdraw conversions early
      The big deal is that you can do the same with "conversions".  

      Additional 5-year clocks:
      Similar to the single 5-year clock that governs all of your "contributions", there's a separate 5-year clock for each of your "conversions".  That is, for each conversion, starting 5 years from when you do that particular conversion, you can withdraw some or all of the amount you converted.  Other than having to wait for these additional 5-year clocks, all the same rules apply as for withdrawals of regular contributions:
      • Withdraw "conversions" at any time
      • Don't have to wait for retirement age of 59 1/2
      • No taxes or penalties
      • If you withdraw earnings early, you pay the 10% penalty, but still no taxes since it's growth on conversions that have already been taxed.

      Since the conversions can be so much more than the 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 converting 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.

      And again, it's not really even 5 years.  It can be as little as 4 years.  (4 years, not 3.75 years like for contributions.  The deadline for conversions is Dec 31, not Apr 15.)

    5. Pay tax separately
      Do NOT convert 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 converting only part of the IRA, costs too much.  And you have to pay the 10% penalty on the amount you didn't convert.

    6. Avoid higher tax bracket
      Do NOT convert too much to Roth in any one year.  Keep in mind that any amount converted to Roth counts as regular income this year.  Don't push yourself into a higher tax bracket by converting too much at once.  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.  

    7. Spread taxes over 2 years in 2010
      It gets better temporarily in 2010, when a special law goes into effect for that one year only, allowing you to spread the tax hit for a Roth conversion 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.

    8. Not if lower tax rate in retirement
      Only convert to Roth if you expect a higher tax rate in retirement.  Why pay more now to save less later?

    9. No RMD (required minimum distribution)
      With a Roth IRA, you're not required to start taking the money out at any particular age.  Unlike a traditional IRA, where you have to start taking RMDs (required minimum distributions) at age 70 1/2 (changed to 72 in 2019, then 73 in 2023, will be 75 in 2033).

      RMDs can be substantial.  They are basically your entire IRA balance divided by the number of years in your official life expectancy. 

        Note: Not your real life expectancy

      So, at age 75, your official life expectancy is about 25 years.  If you have a $1 million IRA, your RMD would be about $40,000.  At a 15% tax bracket, that's $6,000 in additional tax.  At a 24% tax bracket, it's $9,600.  At 37%, it's $14,800. 

      And that's just on the 1st million.  If you have a $5 million IRA, your RMD would be about $200,000.  That could push you into a much higher marginal tax bracket, so depending on how much other income you already had, it could raise your tax bill by $35,000 - $70,000.  Yikes!

      Furthermore, with higher income, you'll end up paying significantly higher "IRMAA" premiums for Medicare.  As much as $600/month more -- an extra $7,000 per year. 

      And as much as 85% of your Social Security income could become taxable at the same high tax rate.  If you and your spouse each get $4,000/month from Social Security, that's about $18,000 - $26,000 more in taxes.

      And the same higher tax bracket for any additional income you earn, any interest or short term capital gains on your non-IRA investments, etc.  ALL sources of income.  All told, those RMDs could easily cost you over $100,000 per year!

      Not a bad problem to have in the grand scheme of things, since it's assuming you're getting $200,000 in RMD income.  So, you're not exactly starving to death.  But you still might want to avoid some of those taxes.

      The solution is to reduce your RMDs.  Which requires you to reduce your IRA balance.  To do that, move money from your IRA to your Roth IRA.  A little each year, since the amount you move is taxable income in the year you move it.  So, it's a balancing act.  Just like any other Roth IRA decision, it's pay the tax now (at a presumably lower rate) or pay later. 

      It's probably best to move enough each year to raise your total taxable income close to the border of one of the tax brackets.  And then consider whether or not to raise it to the border of the next bracket.

      I wondered "Since I have to take it out of my IRA anyhow, can I convert the RMD from my IRA directly to a Roth IRA instead of taking it in cash?".  The answer seems to be "no".  You can take the RMD as cash, and can then do an annual Roth IRA contribution.  But it's just your regular annual Roth IRA contribution, not a "conversion".  So, the regular dollar limits apply ($7,000 - $8,000).  Also, as with any other Roth IRA contribution, you must have that much in earned income that year.  So the money can't really just be moved from the IRA RMD directly to a Roth IRA.  You CAN do a Roth IRA conversion to reduce the IRA balance, and reduce all of your future RMDs, at the cost of even more tax than this year's RMD was triggering.  But you can't funnel this year's RMD directly into the Roth IRA. 

      BTW, if you donate to charities, starting at age 70.5, you might want to consider donating via a QCD (Qualified Charitable Distribution).  You may have been donating money from your taxable income and trying to get some of it back by using "itemized deductions" on your Federal tax form.  Instead, you can donate money directly from your IRA and avoid owing any taxes on that money, even if you don't itemize.  QCDs count towards your RMD, so if you're going to have to take an RMD of $200,000, and you already plan to give $100,000 to charity, you could donate directly from your IRA instead and take a smaller taxable RMD.

      One last warning: When you're required to take your very 1st RMD (at age 73 or 75), you don't have to take it by Dec 31.  For that 1st RMD only, you can wait till April 1 (not April 15) of the next year.  However, if you do, you still have to take the next year's RMD by Dec 31 of that next year.  So, you might end up being forced to take 2 RMDs in the same year, which can push your income WAY up for that year.  Higher tax bracket, Medicare IRMAA. taxable Social Security, etc.  Yuck!  You've been warned...  See:
    10. No going back
      You can't go back.  No conversions 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!

    11. Tax rates going up
      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.

    12. What if everyone does it?
      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 reverse themselves and suddenly make the Roth IRAs taxable after all.  But they might make them irrelevant by moving from an income tax system to a property tax, or sales tax, or usage tax.  So, no guarantees for the future.

    13. Early withdrawals are allowed for special cases
      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.

    14. $100,000 withdrawal allowed in 2020
      For the year 2020 only, in case of financial hardship, you can borrow up to $100,000 early from your traditional and Roth IRAs without penalty.  And without taxes from a Roth IRA, since you already paid those taxes.  For a traditional IRA, you can take 3 years to pay back the early withdrawal, if you don't want to pay taxes on it.  Or spread out the tax payments over 3 years.  Check with your tax advisor.  This is a provision of the 2020 "CARES Act" (Coronavirus Aid, Relief, and Economic Security Act).  See:
    15. No change to investment (stocks, bonds, CDs)
      Such conversions have nothing to do with how the money is invested.  You can do a conversion 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?
    http://news.morningstar.com/articlenet/article.aspx?id=305587

    Tips for Managing Your Roth IRA
    http://news.morningstar.com/articlenet/article.aspx?id=229354

    How to Save on Taxes Using a Traditional IRA
    http://news.morningstar.com/articlenet/article.aspx?id=228635

    Official IRS Publication 590, "Individual Retirement Arrangements (IRAs)":
    http://www.irs.gov/publications/p590/ (HTML)
    http://www.irs.gov/pub/irs-pdf/p590.pdf (PDF)

    The Ins and Outs of IRA Conversions
    http://news.morningstar.com/articlenet/article.aspx?id=322609

    What You Need to Know Before Funding a Backdoor Roth
    http://www.morningstar.com/cover/videocenter.aspx?id=544071

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

            http://bristle.com/~fred/#retirement_planning

    Shoutouts:

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

    Thanks to Jim Carroll for making me realize that the section on withdrawing early from a Roth IRA was worth elaborating on.  I added more detail about the separate 5-year clocks for regular contributions and for each rollover contribution.  Also other details.

    Thanks to Bill Brosmer for prompting me to also look into Roth 403(b) accounts!

    Thanks to Geoff Rhine and Brian Saunders for inspiring me to flesh out the parts about converting IRA to Roth IRA to reduce RMDs.

    Thanks to Geoff Rhine also for teaching me that waiting till after Dec 31 to take a 1st year RMD can be a bad idea.

    --Fred

  3. Cheap or Free ObamaCare Health Insurance

    Original version: 4/11/2016
    Updated: 11/19/2019
    Updated with info about Biden eliminating the subsidy cliff for 2021 and 2022: 10/27/2021
    Updated with info about Biden eliminating the subsidy cliff for 2023, 2024, and 2025: 11/18/2022
    Updated with numbers from 2024: 12/27/2024
    Updated: 1/14/2025

    Buying your own health insurance?  Low income this year?  Recently laid off?  Easing into early retirement?  Check out the ObamaCare web site.  You may get insurance for really cheap, or even FREE.

    Personally, my wife and have saved over $140,000 in the past 8 years.

    Sign up NOW.  The deadline is Dec 15, just 10 days away!

    Tell your friends and family too.  Better to have them insured than someday homeless with their hand out to you.

    My Personal Story

    In 2016, I was working for a non-profit, donating most of my time, since it was a worthwhile organization.  Then I cut back my billable hours even further and a wonderful thing happened.  Because my income dropped below $64,000 in 2017, we saved $15,000 on our health insurance!  And again in 2018!  And again in 2019!  And again in 2020! 

    By 2024, medical costs had gone up, so both premiums and income limits were higher.  And insurance got more expensive as we got older.  And Biden had removed the income limit ("cliff") so the subsidy just gradually tapers off to zero as income goes up.  So, we were saving $20,000 each year!

    Advantages of ObamaCare

    I've always been a huge fan of ObamaCare for a couple of reasons:

    1. Everyone is insured
      No longer do I lose sleep worrying about family members who decided they couldn't afford health insurance and just decided to "risk it".  I'd always known that if they got sick, I'd just end up paying their bills for them, rather than see them sick, homeless and suffering.  Wasn't looking forward to it, though.

      Now they are ALL insured, and they are no longer putting MY retirement money at risk.

    2. No pre-existing conditions
      Before ObamaCare, you could lose your health insurance by getting laid off from your job.  So bills for an ongoing condition (for you, your spouse, your kids, or any other dependents) would stop being paid.  And when you found a new job, or bought your own medical insurance with a different insurance company, they might still go unpaid because the ongoing condition you had is now suddenly a "pre-existing" condition, and not covered by the new insurance policy.  So millions of people were trapped in their jobs, unable to quit and desperately afraid of being fired or laid off.

      No more.  With ObamaCare, there's no such thing as a "pre-existing condition".  Everyone is insured, and when you transfer from one insurance plan to another, you're still covered.

    3. No caps
      I've always wanted health insurance to cover the REALLY expensive things that might otherwise bankrupt me.  I'm not really concerned about a couple hundred bucks here and there, or even a couple thousand in a bad year.  What I want to avoid is getting a bill for hundreds of thousands or even millions of dollars.

      Before ObamaCare, I didn't really have what I'd call "insurance". There was always a cap on how much the insurance company could ever have to pay.  If I had a serious medical problem, like a spinal cord injury, or long-term illness, they'd pay the first million dollars or so, and then stop!  I'd have to pay ALL the rest myself!  For the REST OF MY LIFE!  What good is that!?!?!?  It's like having home-owner's insurance that pays for small things like a tree branch falling and breaking a window, but maxes out and refuses to pay if the entire house burns down?  Insane!  Who would buy such a policy?

      No more.  With ObamaCare, there are no annual or lifetime caps for the insurance company.  Instead, YOU are the one with a cap.  Once you've paid your "out-of-pocket max" for a year, the insurance company pays ALL the rest!  That's what I call insurance!

    4. It's cheap and easy
      Signing up for ObamaCare is really easy.  Go to the web site, answer a few simple questions, choose your plan.  No medical tests.  No doctors or nurses.  Easy peasy!

      And for most people, it's really cheap.  For 80% of us, it's less than $75/month.

      When I was making a large income, I didn't mind paying for our own health insurance.  And when ObamaCare was first introduced, and our costs went up some, I didn't mind because of the HUGE advantages listed above.  Also because I didn't mind paying a little extra to subsidize my lower income friends and family.

    Beware the Subsidy "Cliff" (fixed for 2021-2025 by Biden)

    The one thing I disliked about the original version of ObamaCare was that there was a real "cliff" in its subsidy formula. 

    With our income taxes, we have a sensible "graduated" system.  If you earn more, you pay a higher percent in taxes. But it's a relatively smooth gradual thing.  There's never a point where earning an extra dollar can cost you hundreds or thousands of dollars extra in taxes. You pay 0% on the first several thousand dollars you earn, then 10% on each dollar above that for the next several thousand, then 15% on each dollar above that for the next several thousand, etc.

    Not so with the original ObamaCare subsidy.  When buying insurance for my wife and myself, we got a subsidy of about $15,000 if our income was below a number computed as 4X the FPL (federal poverty level).  So, if we earned less than about $64,000/year, our health insurance was absolutely FREE.  We actually got a bill from Blue Cross each month that said "$0.00 -- No payment due".

    But if we accidentally earned 1 dollar too much, we no longer qualified for the subsidy, and we'd owe over $15,000 on our taxes in April.  Yikes!  So, if I wanted to take on a new paid project, I'd have to make sure it brought our annual income to either less, or MUCH more, than the $64K cutoff.  In 2016, earning $64K was fine, but earning anywhere between $65K and $80K would actually mean LESS net income than earning $64K.

    By 2024, with rising healthcare costs, and with higher premiums as we got older, the numbers went up.  If the cliff wasn't fixed, earning an extra dollar over the now $80K cutoff would cost us $20,000 on our taxes.  So earning anywhere between $80K and $100K would be less net income than earning $80K.

    I waited years for that to be fixed.  It would be easy to smooth it out, so that earning each extra $1.00 costs me $0.50, or $0.75, or even $1.00, as I gradually lose my eligibility for a subsidy.  Unfortunately, ObamaCare was a tough bill to pass.  It was fought viciously by insurance companies, Republicans, and others.  Ended up being a compromise, designed by committee to satisfy all parties.  The goal was to get something passed, and to improve it later.  But, Obama didn't have time to make such refinements, and had to leave them for the next administration.

    Unfortunately, Trump had no interest in fixing ObamaCare.  He wanted to kill it entirely.  (Remember the famous "thumbs-down" vote by John McCain that stopped Trump from repealing it?)  So, we were stuck with the cliff for another 4 years.  Meanwhile ObamaCare was still MUCH better than anything we ever had before!  I retired, kept my income low, and continued to get a bill for $0 each month.

    Finally, Biden got elected, and one of the 1st things he did was the "American Rescue Plan" (ARP), which (among hundreds of other useful changes) fixes the ObamaCare subsidy cliff.  Now the subsidy tapers off gradually as your income increases, as it always should have.  People below 4X the FPL still have to pay a gradually increasing max of 0% to only 8.5% of their income for health insurance premiums.

    But now, the total amount ANYONE has to pay for health insurance is capped at 8.5% of their income, regardless of how much they earn.  Now, it behaves exactly like our graduated income tax system, with no cliff at all.  Earning that extra $1 would now cost me only 8.5 cents instead of $20,000.00.  Ah...  Much better!

    Unfortunately, like ObamaCare, the ARP was also a compromise, so the cliff was only eliminated for 2 years at first.  It applied to 2021 and 2022 only.  We still needed the same change for future years.  But in 2022, Biden's "Inflation Reduction Act" (yes another compromise) extended the same changes for another 3 years -- 2023, 2024, and 2025.  Hopefully, he'll still be president in 2025, and can extend it again or make it permanent.  Fortunately for us, my wife and I will both be on Medicare by then, so it won't matter to us.

    2024 Update: Trump has won the election, so we're in for another 4 years of attempts to sabotage and cut ObamaCare.  The Biden changes that expire in 2025 are not likely to be extended, so the cliff will return in 2026.  My wife and I will both be on Medicare by then, so it won't affect us.  Unless Trump/Musk find a way to bring the cliff back sooner.  In which case, it may cost us $20,000 if we can't keep our income low enough, by taking money out of Roth IRA vs regular IRA, by deferring travel and home improvement projects, and by otherwise keeping our costs as low as possible..  We'll see...

    Sign up today, before Trump takes it away from you!

    Trump has been doing everything he can to destroy ObamaCare.  During his campaign, and ever since, he kept saying it was a "terrible" plan, but never said what he didn't like about it.  Just that it was "terrible", "really terrible", "the worst plan he'd ever heard of", etc.  Kept promising to "repeal and replace" it with a "great" plan, but never did.  His "TrumpCare" proposal was so much worse than ObamaCare that it was strongly rejected by both Democrats and Republicans.

    Since then, he keeps claiming ObamaCare will "implode" and has done everything he can to cause that.  The easiest way is to make it as expensive as possible for insurance companies, so they decide to get out of the health insurance business.  And the best way to do that is to get relatively healthy people to not sign up for insurance, and just "risk it", leaving only the really sick and expensive people insured.  Which kills the "Everyone is insured" advantage I cited above, and will stick the unlucky ones and their friends and family with massive bills.  Bad idea!

    So far, Trump has:

    1. Attempted, but failed, to repeal ObamaCare
    2. Told the IRS to NOT enforce the penalty for a person who chooses to be uninsured.  This allows young healthy people to choose to "risk it", as they could before ObamaCare.  But if they get sick, it may be VERY expensive for them, since they're basically uninsured.  And may be very expensive for their friends and family, who may feel obliged to chip in when they lose their house, can't hold down a job, etc., and have no insurance.  If enough young healthy people do this, only the older, less healthy people are insured.  So costs go up for insurance companies, and they pass on those costs to the rest of us as higher premiums.
    3. Changed the law to allow insurance companies to sell bogus policies that cover little or nothing, for very cheap premiums.  Just like telling the IRS to not enforce the penalty, this allows young healthy people to choose to "risk it", as they could before ObamaCare.  With all of the same repercussions decribed above.
    4. Cut the enrollment period in half, from 90 days to 45 days, so more people will miss the deadline.  Was Nov 1 to Jan 31.  Now just during the holiday rush, Nov 1 to Dec 15, when people are distracted with Thanksgiving, Christmas shopping, etc.
    5. Cut 90% of the budget for advertising ObamaCare so fewer people know about it, and about the shorter enrollment period
    6. Cut 40% of the budget for community health centers, nonprofits, etc. that help people to enroll in ObamaCare
    7. Reduced the budget for people manning the phones to answer questions about ObamaCare, so more people will get frustrated and give up

    All really sleazy moves if you ask me.  Anything he can do to reduce the number of Americans who get health insurance.  And all so that he can later claim that ObamaCare "imploded" naturally, as though it were defective.

    Trump hasn't made ObamaCare "implode" yet, but his moves HAVE made it less appealing to insurance companies.  Some of them have pulled out of the business entirely.  Others have pulled out of some US states, typically those states with people who are older, less healthy, and with higher medical bills.  So some states now have fewer insurance companies offering health insurance.  Sometimes only one company.  With less competition, the prices have gone up, so people pay more.  And the subsidies have gone up, so the tax-payers pay more.  So we all lose!  Thanks, Trump!

    Don't be a sucker.  Sign up for ObamaCare today, before Trump takes it away from you!

    Remind your friends and family to sign up too

    They can't afford it?  Really?  Can't afford $75/month?  How much are they currently paying for cable TV?  Cell phones?  Lunch in the company cafeteria?  Coffee at Starbucks?

    Worst case, pay it for them!  Better than paying their huge medical bills out of your own pocket later when you can't stand to see them sick, homeless and suffering.  If your loved ones aren't insured, you're not really insured either.

    More Info:

    Shoutouts:

    Thanks to Aniela Rosenberger for inspiring me add more details about the subsidy cliff.

    --Fred

  4. Coworking spaces

    Original version: 4/30/2010
    Last Updated: 12/7/2018

    Working from home and need an occasional office?  Find a "coworking space".  Or go high end with an "incubator".

    I've worked mostly from home for more than 10 years.  I love sitting in my recliner, or in a lawn chair under a tree, with my laptop on my lap, cranking out apps, frameworks, documents, test cases, etc., setting up remote servers in the AWS cloud, and so on.  But sometimes I need to get out of the house to:

    I usually go to Wegmans, Panera, Starbucks, McDonalds, Barnes & Noble, John's Pizza, or any of hundreds of other local businesses that offer free WiFi and a relatively quiet sitting area.  I make it worth their while by buying my lunch there, picking up some groceries on the way out or something.  But no one's really watching to make sure I do.

    What if you want something a little more structured and professional?  Perhaps:

    Here's a list of over 2 dozen such places in the Philly area, including a couple in NJ and one in Wayne PA:

    Each description includes details on pricing, location, amenities, contact info, anchor tenants, and a picture of a typical working space.  Prices are typically about:

    This one is relatively high end:

    The list also includes "maker spaces" with wood shop, metalworking, 3D printers, etc.  And design/fashion places with washer/dryer, dressing room, sewing machines, irons, steamers, etc.

    --Fred

  5. 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:

            http://www.irs.gov/pub/irs-pdf/i1040.pdf

    says:

    "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...

    --Fred

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