Excluding accountants, filing taxes is no one’s favorite activity. But you can ease the pain today and make filing a little bit more tolerable. How? By maximizing your pre-tax IRA and HSA contributions.
The rules for both IRAs and HSAs (Health Savings Accounts) allow individuals and families to contribute to their 2019 accounts up to Tax Day on April 15, 2020 or up to the extension deadline if applicable. C-Corporations can file up to March 15, 2020 plus extensions. The same extensions apply to fiscal year taxpayers.
There are some dollar limits based on your filing status (single or family), however, these contributions lower your taxable income, and that is a good thing. Reducing your taxable income can equate to a more significant tax break. And, if you have filed your 2019 taxes already, you can still take advantage of additional 2019 contributions to Traditional IRAs by filing an amended return.
Traditional and Roth IRAs
You can contribute to both Traditional and Roth IRAs up to the maximums allowed. For 2019, individuals under 50 years of age can contribute up to $6,000; $7,000 if you are over 50. The additional $1,000 per year allows 50+ individuals to increase their savings as they near retirement. If you contribute to both a Traditional and Roth IRA, the combined contributions cannot exceed these amounts. Some limits apply based on income, as well as your participation in an IRA through work. Also, Roth IRA contributions are not tax-deductible, but withdrawals can be made tax-free.
Individuals can contribute up to $3,500 in a 2019 HSA. For families, the maximum is $7,000. People aged 55+ in 2019 may be allowed to increase their contribution by $1,000; this is called a “catch-up” contribution. However, as with IRAs, if your employer contributes to your HSA, the total contributions cannot exceed the annual limit. If they do, the excess amount is not tax-deductible.
Along with lowering your taxable income (if you are under the income limits), maximizing these contributions has additional benefits.
Putting the maximum amount into your IRA helps create a stable financial future. Your money is invested and, as a result, is earning more money. This benefits individuals and families alike. And Roth IRAs, which are tax-exempt when you make a withdrawal, give you the flexibility of saving for college or a significant household expense.
For low to moderate-income households, lowering your taxable income may qualify you for other tax credit programs like the Child and Dependent Care credit and the Health Insurance Premium tax credit or the Saver’s Tax Credit.
Contributions to HSAs are tax-deductible and may reduce your overall tax burden. However, they offer additional advantages. The interest you receive in your account is tax-free, and the money you withdrawal is also tax-free. One caveat, you must use this money for qualified medical expenses if you are under age 65. Plastic Surgery is not considered an eligible expense; however, most other medical expenses, from doctor’s visits to dental work, do qualify.
Once you reach 65, you can use the money you have saved for non-medical expenses, making HSAs a smart investment.
HSAs are also transportable, so if you get a new job, your HSA can come with you if you participate in a high-deductible health insurance plan.
It is better to have your money working for you rather than handing it over to the IRS. By maximizing your IRA and HSA contributions, you keep your money working for you.
If you would like to talk to an HSA and IRA specialist, contact Kirwan Benefits and Investments. We have a successful track record of helping clients keep and invest their money in the future.