Compassion and Competence

Ansible Tax & Document Research Services

March 18th, 2013 at 9:30 PM

Shield current income from current taxation now and 50% taxation later: tax-favored statutory investments

By Deborah Lagutaris, JD, FRTP

March 18, 2013

For just a  little bit of work now, a Health Savings Account (HSA) or an Archer Medical Savings (AMSA) Account can allow savers to defer income taxes until such time as they choose.

Unlike traditional IRAs, which require the taxpayer to begin withdrawals at age 70 1/2 in order to protect the tax-advantaged status of the income, an HSA has no “expiration date.”

Therefore, the HSA contribution should be maximized for any year that you are capable of doing so.

Why, you say? Well, if you have a traditional IRA with $10,000 balance, and you do not start taking out money by the time you are 70 1/2, you will be taxed 50% of the amount that you should have taken out for each year after 70 1/2.

Of course, you prefer to decide yourself where that 50% share ends up in your estate. Therefore you seek out ways in which to preserve a reasonable amount of money using  tax-favored statutory investments.

Some tax-favored statutory investments you should consider now

The Health Savings Account and similar programs have the same advantages as a traditional IRA, PLUS this SUPERPOWER. The account holder will NOT suffer a 50% financial penalty for taking money from the account in some circumstances.

In contrast stands the Roth IRA. Roth IRA monies are likewise not taxable if withdrawn after age 70 1/2. However, Roth funds are taxed at the amount they were worth before you made your Roth contribution. Therefore, the Roth is taxed at least once for the entrepreneur and many more times for the employee, who must labor under complex corporate financial structures.

Here’s how you set up and invest in an HSA.

There are a few rules.

Your health insurance plan must be a High Deductible Plan as defined by the IRS.

You are eligible to use the HSA benefit if you are covered with a Health Insurance High Deductible Plan for any month in the previous year.

You may not take the HSA benefit for one month if you were not covered by a High Deductible Plan during that particular month.

You may take the HSA benefit for the entire year if you were covered by a High Deductible Plan.

*This information is not individual tax advice. Please consult your tax preparer or tax accountant for their opinion on the advisability of any investment. 



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