Harry Sit's Blog, page 11

How To Enter 2023 Mega Backdoor Roth in TurboTax (Updated)

[Updated on January 28, 2024 with screenshots from TurboTax for 2023 tax filing.]

A Mega Backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan and then moving it to the Roth account within the plan or taking the money out (with earnings) to a Roth IRA.

It’s a great way to put additional money into a Roth account without having to pay much additional tax. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it.

Suppose your plan allows it and you executed a Mega Backdoor Roth. You will receive a 1099-R from the plan in the following year. You will need to account for it on your tax return. Here’s how to do it in TurboTax.

Table of ContentsUse Downloaded SoftwareWithin the Plan Or To Roth IRA1099-R EntriesRollover DestinationAfter-Tax ContributionsVerify on Form 1040Use Downloaded Software

You should do it in TurboTax Deluxe downloaded software. The downloaded software is both less expensive and more powerful than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax from Amazon or Costco and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).

If you use other tax software, please see:

How To Enter Mega Backdoor Roth In H&R Block Tax Software or How To Enter Mega Backdoor Roth in FreeTaxUSAWithin the Plan Or To Roth IRA

You can do the Mega Backdoor Roth in two ways — convert within the plan or withdraw to a Roth IRA. Converting within the plan is much easier, and many plans automate this process. Transferring to a Roth IRA also works. See the previous post Mega Backdoor Roth: Convert Within Plan or Out to Roth IRA?

Here’s the scenario we’ll use as an example:

You contributed $10,000 as non-Roth after-tax contributions to your 401(k). By the time the money was converted to the Roth account within the plan or transferred to your Roth IRA, your contributions earned $200. You converted $10,200 to your Roth account.

I’m using 401(k) as a shorthand. It works the same in a 403(b). Now the entries into TurboTax.

1099-R Entries

Go to Federal Taxes -> Wages & Income -> IRA, 401(k), Pension Plan Withdrawals (1099-R).

When you come to the Retirement Income section, answer Yes because you received a 1099-R from your 401(k) plan.

Yes, you received a 1099-R form. Import the 1099-R if you’d like. I’m typing it myself here.

You have a normal 1099-R.

If you import the 1099-R, check the import carefully to make sure it matches your copy exactly. If you type the 1099-R, be sure to type it exactly.

The earnings portion should be in Box 2a. Box 2b “Taxable amount not determined” should NOT be checked. The non-Roth after-tax contributions (the “principal”) should be in Box 5. Box 7 should show a code G. Finally, the box “The IRA/SEP/SIMPLE box is checked on my copy of the 1099-R” should NOT be checked.

TurboTax wants to make sure the IRA/SEP/SIMPLE checkbox is not checked.

Rollover Destination

If you converted to Roth within the plan, answer Yes here. If you took the money out of the plan to a Roth IRA, answer No.

If you answered “No” to the previous question, confirm that the money went to a Roth IRA.

After-Tax Contributions

Answer Yes to confirm that you made non-Roth after-tax contributions to your plan.

TurboTax pulls up the amount of your non-Roth after-tax contributions from Box 5 of your 1099-R. If your 1099-R isn’t correct, you should work with your 401(k) administrator to have it corrected.

Not a public safety officer, unless you actually are one.

Not due to a disaster.

The summary shows your 1099-R entries. Repeat and add any additional 1099-Rs you may have.

Verify on Form 1040

Now let’s confirm you’re only paying tax on the $200 earnings, not on your $10,000 non-Roth after-tax contributions.

Click on Forms on the top right.

Find “Form 1040” in the left navigation pane. Scroll up or down in the right pane to lines 5a and 5b. Line 5a includes the $10,200 gross distribution amount. Line 5b only includes the $200 taxable amount.

With a Mega Backdoor Roth, you put an extra $10k into your Roth account. After paying tax on this $200, the future earnings on the $10,200 will be tax-free.

When you’re done examining the form, click on Step-by-Step on the top right to get back to the interview.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

The post How To Enter 2023 Mega Backdoor Roth in TurboTax (Updated) appeared first on The Finance Buff.

How To Report 2023 Backdoor Roth In TurboTax (Updated)

Updated on January 28, 2024 with updated screenshots from TurboTax Deluxe downloaded software. If you use other tax software, see:

How To Report Backdoor Roth In H&R Block SoftwareHow to Report Backdoor Roth In FreeTaxUSA

If you did a Backdoor Roth, which involves making a non-deductible contribution to a Traditional IRA and then converting from the Traditional IRA to a Roth IRA, you need to report both the contribution and the conversion in the tax software. For more information on Backdoor Roth, see Backdoor Roth: A Complete How-To.

Table of ContentsWhat To ReportUse TurboTax DownloadConvert Traditional IRA to RothNon-Deductible Contribution to Traditional IRATaxable Income from Backdoor RothTroubleshootingWhat To Report

You report on the tax return your contribution to a Traditional IRA *for* that year, and you also report your conversion to Roth *during* that year.

For example, when you are doing your tax return for year X, you report the contribution you made *for* year X, whether you actually did it during year X or the following year between January 1 and April 15. You also report your conversion to Roth *during* year X, whether the contribution was made for year X, the year before, or any previous years.

Therefore a contribution made during the following year for year X goes on the tax return for year X. A conversion done during year Y after you made a contribution for year X goes on the tax return for year Y.

You do yourself a big favor and avoid a lot of confusion by doing your contribution for the current year and finishing your conversion in the same year. I called this a “planned” Backdoor Roth — you’re doing it deliberately. Don’t wait until the following year to contribute for the previous year. Contribute for year X in year X and convert it during year X. Contribute for year Y in year Y and convert it during year Y. This way everything is clean and neat.

If you are already off by one year, catch up. Contribute for both the previous year and the current year, then convert the sum during the same year. See Make Backdoor Roth Easy On Your Tax Return.

Use TurboTax Download

The screenshots below are from TurboTax Deluxe downloaded software. The downloaded software is way better than online software. If you haven’t paid for your TurboTax Online filing yet, you can buy TurboTax download from Amazon, Costco, Walmart, and many other places and switch from TurboTax Online to TurboTax download (see instructions for how to make the switch from TurboTax).

Here’s the planned Backdoor Roth scenario we will use as an example:

You contributed $6,500 to a traditional IRA in 2023 for 2023. Your income is too high to claim a deduction for the contribution. By the time you converted it to Roth IRA, also in 2023, the value grew to $6,700. You have no other traditional, SEP, or SIMPLE IRA after you converted your traditional IRA to Roth. You did not roll over any pre-tax money from a retirement plan to a traditional IRA after you completed the conversion.

If your scenario is different, you will have to make some adjustments to the screens shown here.

Before we start, suppose this is what TurboTax shows:

We will compare the results after we enter the Backdoor Roth.

Convert Traditional IRA to Roth

The tax software works on income items first. Even though the conversion happened after the contribution, we enter the conversion first.

When you convert from a Traditional IRA to a Roth IRA, you will receive a 1099-R form. Complete this section only if you converted *during* the year for which you are doing the tax return. If you only converted during the following year, you won’t have a 1099-R until next January. Skip all the way to the next section: Non-deductible contribution to Traditional IRA.

In our example, we assume by the time you converted, the money in the Traditional IRA had grown from $6,500 to $6,700.

Enter 1099-R

Go to Federal Taxes -> Wages & Income -> IRA, 401(k), Pension Plan Withdrawals (1099-R).

As you work through the interview, you will eventually come to the point of entering the 1099-R. Select Yes, you have this type of income. Import the 1099-R if you’d like. I’m choosing to type it myself.

Just the regular 1099-R.

Box 1 shows the amount converted to the Roth IRA. It’s normal to have the same amount as the taxable amount in Box 2a when Box 2b is checked saying “taxable amount not determined.” Pay attention to the code in Box 7 and the IRA/SEP/SIMPLE box. Make sure your entry matches your 1099-R exactly.

You get this Good News, but …

Your refund in progress drops a lot. We went from $2,384 down to $858. Don’t panic. It’s normal and temporary.

Converted to Roth

Didn’t inherit it.

First click on “I moved …” then click on “I did a combination …” Enter the amount converted in the box. Don’t choose the “I rolled over …” option. A Roth conversion is not a rollover.

No, you didn’t put the money in an HSA.

Not due to a disaster.

You get a summary of your 1099-R’s. Repeat the previous steps to add another if you have more than one. If you’re married and both of you did a Backdoor Roth, enter the 1099-R for both of you, but pay attention to select whose 1099-R it is. Don’t accidentally assign two 1099-R’s to the same person.

Basis and End-of-Year Values

Didn’t take or repay any disaster distribution.

Here it’s asking about the prior year carryover. When you’re doing a clean “planned” Backdoor Roth as in our example — contribute for year X in year X and convert before the end of year X — you can answer No here. If you contributed for the previous year between January 1 and April 15 during year X, answer Yes here.

If you answered Yes to the previous question and you did your previous year’s return correctly also in TurboTax, your basis from the previous year will show up here. If you did your previous year’s tax return wrong, fix your previous return first.

Enter the values at the end of the year. We don’t have anything in traditional, SEP, or SIMPLE IRAs after we converted it all.

That’s it so far on the income side. Continue with other income items. The refund in progress is still temporarily depressed. Don’t worry. It will change.

Non-Deductible Contribution to Traditional IRA

Now we enter the non-deductible contribution to a Traditional IRA *for* the year we are doing the tax return.

Complete this part whether you contributed before December 31 or you did it or are planning to do it in the following year between January 1 and April 15. If your contribution during the year in question was for the year before, make sure you entered it on the previous tax return. If not, fix your previous return first.

Go to Federal Taxes -> Deductions & Credits -> Traditional and Roth IRA Contributions.

Because we did a clean “planned” Backdoor Roth, we check the box for Traditional IRA. If you did a detour when you first contributed to a Roth IRA before you realized your income is too high and you recharacterized the contribution as to a Traditional IRA, check the box for Roth IRA and answer the questions accordingly.

TurboTax offers an upgrade but we choose to continue in TurboTax Deluxe.

We already checked the box for Traditional but TurboTax just wants to make sure. Answer Yes here.

It was not a repayment of a retirement distribution.

Enter the contribution amount. Because we contributed for year X in year X, we put zero in the second box. If you contributed for the previous year between January 1 and April, enter the contribution in both boxes.

Right away our federal refund in progress goes back up! We started with $2,384. It went down to $858. Now it comes back to $2,335. The $49 difference is because we have to pay tax on the $200 in earnings when we contributed $6,500 and converted $6,700. If you had less earnings, your refund numbers would be closer still.

This is a critical question. Answer “No.” You converted the money, not switched or recharacterized.

You may not get this question if you already entered your W-2 and it has Box 13 for the retirement coverage checked. Answer yes if you’re covered by a retirement plan but the box on your W-2 wasn’t checked.

No excess contribution.

Same question we saw before. For a clean “planned” Backdoor Roth, we can answer No. If you made non-deductible contribution for previous years, answer Yes.

Total basis through the previous year. If you did your taxes correctly on TurboTax last year, TurboTax transfers the number here. If you made non-deductible contributions for previous years (regardless of when), enter the number on line 14 of your Form 8606 from last year.

Because we did a clean “planned” Backdoor Roth, we don’t have anything left after we converted everything before the end of the same year.

Income too high. We know. That’s why we did the Backdoor Roth.

The IRA deduction summary shows $0 deduction, which is expected.

Taxable Income from Backdoor Roth

After going through all these, would you like to see how you are taxed on the Backdoor Roth?

Click on Forms on the top right.

Find Form 1040 in the left navigation panel. Scroll up or down on the right to find lines 4a and 4b. They show a $6,200 distribution from the IRA and only $200 of the $6,200 is taxable. That’s the earning between the time you contributed to your Traditional IRA and the time you converted it to Roth.

When you’re done examining the form, click on Step-by-Step on the top right to go back to the interview.

Tah-Dah! You put money into a Roth IRA through the backdoor when you aren’t eligible to contribute to it directly. That’s why it’s called a Backdoor Roth. You pay tax on a small amount in earnings if you waited between contributions and conversion. That’s negligible relative to the benefit of having tax-free growth on your contributions for many years.

Troubleshooting

If you followed the steps and you are not getting the expected results, here are a few things to check.

Fresh Start

It’s best to follow the steps fresh in one pass. If you already went back and forth with different answers before you found this guide, some of your previous answers may be stuck somewhere you no longer see. You can delete them and start over.

Click on Forms on the top right.

Find “IRA Contrib Wks” and “IRA Info Wks” in the left navigation pane and click on “Delete Form” to delete them. Then you can start over by following the steps above.

W-2 Box 13

Make sure the Retirement Plan box in Box 13 of the W-2 you entered into the software matches your actual W-2. If you are married and both of you have a W-2, make sure your entries for both W-2’s match the actual forms you received.

When you are not covered by a retirement plan at work, such as a 401k or 403b plan, your Traditional IRA contribution may be deductible, which also makes your Roth conversion taxable.

Self vs Spouse

If you are married, make sure you don’t have the 1099-R and IRA contribution mixed up between yourself and your spouse. If you inadvertently entered two 1099-Rs issued to you instead of one for you and one for your spouse, the second 1099-R to you will not match up with a Traditional IRA contribution made by your spouse. If you entered a 1099-R for both yourself and your spouse but you only entered one Traditional IRA contribution, you will be taxed on one 1099-R.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Beyond the Numbers: a Closer Look at Renting By Choice

When the question of whether one should buy or rent a home comes up, the usual answer is “Run the numbers.” A good tool for running the numbers is the Buy-or-Rent Calculator from The New York Times.

This calculator thoroughly takes into account the price of the home, how long you’ll stay in the home, mortgage rate, down payment, home price growth rate, rent growth rate, investment return, inflation, property tax, the tax rate, closing costs, maintenance costs, insurance, utilities, and HOA fees. It calculates a rent-equivalent number. If you can rent a similar home for less than this number, then renting is better.

The Daily podcast from The New York Times put out this episode recently: Should You Rent or Buy? The New Math. The gist of it is that the double-whammy of higher home prices and higher mortgage rates has made renting more favorable than buying. Here’s a shorter interview with the same author on PBS NewsHour:

Why renting over buying might be the favored choice in today’s real estate landscape

Most people saying that renting is better than buying aren’t renters themselves. They only talk about renting in the abstract when they don’t have real-world experience in renting these days. I rented in the last four years before I became a homeowner again last month (I owned a home for 18 years before renting). My experience from four years of renting tells me that a buy-or-rent calculator should be the last step you take when you explore whether you should buy or rent, not the first step. Only running the numbers misses a big part of the picture in buying versus renting.

Here are 9 things I learned in real life that a buy-or-rent calculator doesn’t tell you.

Table of Contents1. You have fewer choices when you rent.2. Just because you see a listing doesn’t mean you get to rent it.3. Just because you have pristine financials and a great credit score doesn’t mean you’ll get the rental.4. Homes for rent are in general of lower quality than homes for sale.5. You have to ask for permission in how you live.6. Renting doesn’t mean maintenance-free.7. You don’t necessarily get to renew even if you’re a good tenant.8. Your rent can increase a lot on renewal.9. Renting is less flexible than you think.1. You have fewer choices when you rent.

This was the first surprise when I tried to rent. It may be different if you’re renting an apartment but I can only comment on renting versus buying single-family houses and townhouses because I was only in that world. You don’t need a calculator to tell you that renting a one-bedroom apartment costs less than buying a three-bedroom house.

These two maps from Zillow show homes listed for rent (excluding apartments) and homes listed for sale in my previous zip code in 2021:

The two maps below show homes listed for rent and homes listed for sale in my current zip code in 2024:

Different times, different places, same story. Before considering prices, sizes, or desirability, you start with fewer choices when you try to rent.

Look at the map from Zillow in both ways for your area. Is it any different?

2. Just because you see a listing doesn’t mean you get to rent it.

Renting a home isn’t like buying something from a store. Just because you see a listing and you’re OK with the asking rent doesn’t mean you get to rent it. You can only apply to rent it. The owner decides whether to rent it to you. Rightly or wrongly, the owner can insert personal preferences in picking the tenant.

Owners aren’t supposed to discriminate but as long as they don’t say it aloud, you can’t do anything when an owner discriminates against you because you’re young or old, male or female, single or married, because you have kids or dogs, or for a multitude of other reasons.

When I was looking for rentals in another city, someone refused to show me the home before a local person saw it first even though I was willing to drive over to see it. Maybe she was burned by an out-of-town renter before. I was guilty by association.

There’s less prejudice and discrimination when you try to buy a home because buying is a one-time transaction. The seller is gone after you buy it. Renting is an ongoing relationship between the owner and the tenant. The owner cares deeply about what you do after you rent it. If the owner suspects you’ll do something he or she doesn’t like because you’re young or old, male or female, single or married, you have kids or dogs, etc., etc., the owner will choose to rent it to someone else.

3. Just because you have pristine financials and a great credit score doesn’t mean you’ll get the rental.

Even if the owner doesn’t discriminate, he or she only needs a good tenant. The owner isn’t running a contest to see who has the strongest financials.

I once applied for a rental and the owner didn’t even look at my application. He said he received 30 applications in a few hours, found one acceptable after reading several, and discarded the rest. Continuing to review all 30 applications would’ve been a waste of his time.

After learning that lesson, I applied for the next rental minutes after Zillow sent me the alert of a new listing. I paid the $50 non-refundable application fee with complete documentation of my financials right away. That was how I got the rental.

When I gave my notice to vacate this rental two years later, the property manager listed it for rent on Zillow on a Saturday evening. By the following Monday, they already lined up 8 showings for Tuesday afternoon. I received another slew of texts on Tuesday morning saying that they canceled 7 out of the 8 showings because one of the 8 signed the lease already without seeing the rental.

The other 7 renters may have stronger financials than the one who signed but they still lost out because they weren’t aggressive enough.

The buy-or-rent calculator showing that it’s better to rent is irrelevant if you don’t actually get the opportunity to rent.

4. Homes for rent are in general of lower quality than homes for sale.

The best ROI in rentals comes from renting cheap homes for not-as-cheap rents. Renters as a whole have lower incomes than buyers. These factors make it rare to see good-quality homes for rent. Good-quality homes for rent are also taken away by the rise of Airbnb and VRBO. Most of the remaining homes offered as long-term rentals don’t look that great.

A home also deteriorates over time after it becomes a rental. You’ve heard of the saying that nobody washes a rental car. The owner doesn’t keep it up because renters don’t have an incentive to take good care of it. Some homes for sale specifically advertise that they have never been a rental.

The owner of my last rental home didn’t do much maintenance when I rented it. When the dishwasher broke, the owner replaced it with a $300 dishwasher, which was the cheapest you could find at The Home Depot. The dishwasher worked but I bet she wouldn’t have chosen that one if the home weren’t a rental. Doing much beyond the bare minimum isn’t worth the investment to the owner, which is understandable but this contributes to the lower quality of rentals.

5. You have to ask for permission in how you live.

You acted fast and you got the rental. You don’t mind its lower quality. You just pay the rent and live your life, right?

Remember that buying is a transaction and renting is a relationship. The relationship means you need permission from the owner in how you live when you rent.

Here are some terms of the lease for my last rental:

Occupancy by guests remaining over three consecutive days or more than five days in any calendar quarter will be considered to be a violation of this provision unless prior written consent is given by Owner. Owner may restrict any guest for any or no reason.

Resident is required to get approval for any companion or service animal PRIOR to the animal coming onto the Premises. Failure to obtain prior approval is a significant violation of this agreement which shall allow for immediate eviction.

Your sister is coming to visit you and she has a dog? She doesn’t have a dog but you want her to stay with you for 4 days? Ask for approval from the owner, please.

Reject these terms and negotiate? Forget about it. See 1 through 3.

6. Renting doesn’t mean maintenance-free.

If you think all maintenance is the owner’s responsibility when you rent, think again. From my last lease:

Resident shall be responsible to maintain the Premises including the exterior. It shall be the specific responsibility of Resident to maintain the sprinkling system and to care for and maintain the lawn and landscaping. This shall include but is not limited to; weeding, watering, mowing, edging, fertilizing, and anything else necessary to maintain the landscaping. In the event Resident fails to maintain the lawn and landscaping, Owner in its sole discretion may cause such to be maintained and shall be entitled to reimbursement from Resident for the costs incurred in such maintenance. Tenant shall be responsible for normal daily maintenance of the Premises and to keep the Premises clean and orderly. Other such maintenance may be assigned to Resident by Owner through the Rules and Regulations or by other written agreement. All costs of such maintenance shall be the responsibility of Residents.

Yes, you can hire lawn service but it’s still your responsibility to maintain the lawn and landscaping.

7. You don’t necessarily get to renew even if you’re a good tenant.

A typical lease term is one year. If the buy-or-rent calculator continues to say it’s better to rent and you’d like to continue, you still don’t necessarily get to renew the lease for another year.

Renting is a relationship. The other party in the relationship has to agree to continue the relationship. The owner may decide to sell, turn it into a short-term rental, rent it to a family member or a friend, or make it his or her primary or secondary home. It doesn’t matter how good a tenant you are.

The owner of our first rental notified us in the middle of the year that he wouldn’t renew the lease because he wanted to move into it. He was kind enough to give us notice six months before the lease expiration and he waived the early termination charge if we moved out sooner. Had he strictly gone by the terms of the lease, he only needed to give us notice 30 days before the end of the lease term and we would’ve had to scramble to find a new place in 30 days.

A buy-or-rent calculator implicitly assumes that you can always renew or you can always find another equivalent rental. The real world doesn’t work like that.

8. Your rent can increase a lot on renewal.

The New York Times buy-or-rent calculator has an input for the rent growth rate. It defaults to 2.5% per year. If the owner offers you to renew the lease, there’s no limit to how much the rent can increase absent local rent control laws.

The renewal I was offered in the second year of my last rental went up by 25%, not 2.5%. The owner threw me a bone and lowered it to 23% when I begged for mercy. If I didn’t accept the renewal, my only choice was to find another place in 30 days.

Hiring movers would’ve eaten up a large part of any savings assuming I was able to get a less expensive rental in 30 days. That also doesn’t count the hassle of packing, unpacking, and disruptions to life. I relented and renewed for a 23% increase.

If you move every time you have an unreasonable rent increase, you’ll be tired of it very soon. The unreasonable rent increase will look quite reasonable when your family asks you why you’re moving again. It’s rational for the owner to charge a premium for renewals because you get to avoid moving when you renew.

After we vacated the rental, it was listed for rent at a much lower rent than we were paying. New tenants don’t pay the renewal premium because they’re moving anyway.

9. Renting is less flexible than you think.

Flexibility is touted as a major benefit of renting. If something comes up in your life, you can just leave. It’s true when it happens close to the time of lease expiration but the owner isn’t obligated to let you out of the lease at other times. You don’t get to break the lease for only one extra month of rent.

From my last lease again:

If Resident vacates prior to the end of the initial term, all future rents under this Agreement shall accelerate and become immediately due.

If you must move two months into a one-year lease, paying rent for another 10 months isn’t much less than paying the transaction cost of selling a home. You don’t have the right to sub-lease when you rent.

Some leases automatically become month-to-month after one year. That’s not always the case. If the owner only wants 12-month renewals, moving is your only choice even though you know you’ll have to move again in two months.

***

Buying versus renting is much more about the price but a buy-or-rent calculator only tells you about the price. Consider these other factors before you jump into the buy-or-rent calculator.

Did I just have bad luck and run into unreasonable rentals? I doubt it. Basic economics says that lower-priced products see a higher demand. The higher demand creeps into non-price factors such as low availability, discrimination by some owners because they can, a large number of renters chasing after a small number of rentals, lower quality, and onerous lease terms.

A buy-or-rent calculator implicitly assumes a fantasy world in which rentals of equal quality to homes for sale are abundantly available, you get to rent a home of your choice as long as your financials qualify, you can renew for as long as you want for a reasonable increase in rent, and the lease terms are flexible and accommodating to you. If that’s the case in your area, great, run the numbers using the buy-or-rent calculator. Otherwise, not so fast.

Renting by choice looks good on paper but it gets messy in real life. Renting isn’t like buying regardless of the price. Buying is a transaction. Renting is a relationship. I’m happy to be a homeowner again and out of my renting relationship.

Buying may be more expensive (or it may not be) but price isn’t everything. According to a report by Pew Research Center, 90% of people in the top income quartile and 90% of people in the top half in net worth own their homes. Close to 40% of all homes in the U.S. don’t have a mortgage. People who own their homes free-and-clear don’t sell their homes to become renters when the buy-or-rent calculator says it’s better to rent because they know to look beyond the numbers.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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2023 2024 2025 Federal Poverty Levels (FPL) for ACA Health Insurance

People who don’t have health insurance from an employer plan can buy health insurance from a marketplace under the Affordable Care Act (ACA), also known as Obamacare. The monthly premiums are made affordable by a premium subsidy in the form of a tax credit calculated off of your household income relative to the Federal Poverty Level (FPL), also known as the federal poverty line, federal poverty guidelines, or HHS poverty guidelines.

The premium subsidy goes by a sliding scale. The higher your income relative to the FPL for your household size, the lower your premium subsidy is.

Modified Adjusted Gross Income (MAGI)

The income to compare against the FPL is the Modified Adjusted Gross Income (MAGI) for your household. It doesn’t matter how many family members in your household need coverage from the ACA health insurance.

There are many different definitions of MAGI in the tax code. MAGI for ACA health insurance is basically your Adjusted Gross Income (AGI) plus tax-exempt muni bond interest and untaxed Social Security benefits.

These incomes are included in your AGI, and therefore increase your MAGI for ACA health insurance:

Wages, salaries, tips, and other employment incomeBusiness incomeIncome from real estate rentalsUnemployment benefitsPension and withdrawals from pre-tax IRAs or annuitiesSocial Security benefitsInterest, dividends, and capital gains

These above-the-line deductions are removed from your AGI and therefore reduce your MAGI for ACA health insurance:

Pre-tax contributions to workplace retirement plans (pension, 401k, 403b, 457, etc.)Deductible contributions to Traditional IRAsHSA contributionsSelf-employment health insurance deductionOne-half of the self-employment taxPre-tax contributions to self-employment retirement plans (solo 401k, SEP-IRA, etc.)Student loan interest deductionEarly withdrawal penalties on CDsEducator expenses

In addition, these items aren’t in the AGI but are added back to your MAGI for ACA health insurance:

Untaxed Social Security benefits (see Calculator: How Much of My Social Security Benefits Is Taxable?)Tax-exempt interest from muni bondsThe Maximum Income

Before 2021, you qualified for the premium subsidy only if your MAGI was at 400% of the Federal Poverty Level (FPL) or below. You would lose all the subsidy if your MAGI went above 400% of FPL even by $1. You would have to pay back all the premium subsidy you already received when you file your tax return with the IRS. This was known as the ACA subsidy cliff.

The law changed in 2021, which turned the sharp cliff into a gradual slope. The Inflation Reduction Act extended the change through 2025. You still qualify for a premium subsidy now if your income goes over 400% of FPL. You just qualify for a lower amount as your income goes up. See ACA Health Insurance Premium Subsidy Slope.

This gradual slope only applies through 2025. The ACA subsidy cliff is scheduled to return in 2026.

In order to see how much you qualify for the premium subsidy, you have to know where the FPL is.

The Minimum Income

In addition to the maximum income to receive the premium subsidy, there’s also a minimum income to get accepted by the ACA marketplace. If your estimated income is too low, the ACA marketplace won’t accept you. They’ll send you to Medicaid instead.

The minimum income is 138% of FPL in states that expanded Medicaid, which is the case in most states and the District of Columbia. In states that didn’t expand Medicaid, the minimum income is 100% of FPL. According to a map from KFF, these states haven’t expanded Medicaid:

WyomingWisconsinKansasTexasTennesseeSouth CarolinaMississippiAlabamaGeorgiaFlordia

However, unlike the maximum income, the minimum income is only evaluated at the time of open enrollment (or special enrollment), not at the time when you file your tax return with the IRS.

If your estimated income at the time of enrollment is below the minimum, the ACA marketplace won’t accept you, and they will refer you to Medicaid. If your estimated income at the time of enrollment is above the minimum and they accepted you, but your income for the year ended up below the minimum due to unforeseen circumstances, as long as you made the original estimate in good faith, you are not required to pay back the premium subsidy you already received.

The FPL Numbers

Here are the FPL numbers for coverage in 2023, 2024, and 2025. They increase with inflation every year in January. These are applied with a one-year lag. Your eligibility for a premium subsidy for 2024 is based on the FPL numbers announced in 2023. The new numbers announced in 2024 will be used for coverage in 2025.

There are three sets of numbers. FPLs are higher in Alaska and Hawaii than in the lower 48 states and Washington DC.

48 Contiguous States and Washington DCHousehold Size2023 coverage2024 coverage2025 coverage1$13,590$14,580$15,0602$18,310$19,720$20,4403$23,030$24,860$25,8204$27,750$30,000$31,2005$32,470$35,140$36,5806$37,190$40,280$41,9607$41,910$45,420$47,3408$46,630$50,560$52,720moreadd $4,720 eachadd $5,140 eachadd $5,380 eachAlaskaHousehold Size2023 coverage2024 coverage2025 coverage1$16,990$18,210$18,8102$22,890$24,640$25,5403$28,790$31,070$32,2704$34,690$37,500$39,0005$40,590$43,930$45,7306$46,490$50,360$52,4607$52,390$56,790$59,1908$58,290$63,220$65,920moreadd $5,900 eachadd $6,430 eachadd $6,730 eachHawaiiHousehold Size2023 coverage2024 coverage2025 coverage1$15,630$16,770$17,3102$21,060$22,680$23,5003$26,490$28,590$29,6904$31,920$34,500$35,8805$37,350$40,410$42,0706$42,780$46,320$48,2607$48,210$52,230$54,4508$53,640$58,140$60,640moreadd $5,430 eachadd $5,910 eachadd $6,190 each

Source:

U.S. Department of Health and Human Services, notice 2022-01166U.S. Department of Health and Human Services, notice 2023-00885U.S. Department of Health and Human Services, coming soonThe Applicable Percentages

The FPL numbers determine one aspect of your eligibility for the premium subsidy. How much you are expected to pay when you qualify for the premium subsidy is also determined by a sliding scale called the Applicable Percentages.

The lower your MAGI is relative to the FPL for your household size, the lower you’re expected to pay as a percentage of your MAGI. This table shows the applicable percentages through 2025:

Income2022 – 2025< 133% FPL0%< 150% FPL0%< 200% FPL0% – 2%< 250% FPL2% – 4%< 300% FPL4% – 6%<= 400% FPL6% – 8.5%> 400% FPL8.5%

We cover it in more detail in ACA Health Insurance Premium Tax Credit Percentages.

Plan Choice

The ACA marketplace offers many different plan options. They’re categorized into Bronze plans, Silver plans, Gold plans, and Platinum plans. Multiplying your MAGI by the applicable percentage determines your premium contributions toward a benchmark plan — the Second Lowest Cost Silver Plan.

You’ll pay more if you choose a more expensive plan. The annual premium you’ll pay for the plan of your choice will be:

MAGI * applicable percentage + (annual premium for the plan chosen – annual premium for the Second Lowest Cost Silver Plan)

You’ll pay less if you choose a less expensive Bronze plan.

When your MAGI is lower than 250% of FPL, in addition to having a lower applicable percentage, you also qualify for cost-sharing reductions, which lower your co-pays and out-of-pocket maximum. We cover it in more detail in Cost-Sharing Subsidy Under ACA Health Insurance.

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File FinCEN BOI Report for Your LLC or S-Corp

Attention self-employed individuals and rental property owners, if you have an LLC, S-Corp, partnership, C-Corp, or other state-registered entity, your entity has a new federal reporting requirement starting on January 1, 2024.

It’s called the FinCEN Beneficial Ownership Information (BOI) report. This report is mandated by the Corporate Transparency Act passed by Congress in 2021. Basically your state-registered entity must tell the federal government who’s behind that entity.

Filing the report itself isn’t too difficult only if you know you must do it. Not filing the report by the deadline can incur civil penalties of up to $500 per day (!) or up to two years of prison time.

Who Must File the Report

Most small LLCs, S-Corps, partnerships, C-Corps, or other state-registered entities must file the report. Some entities are exempt but you should assume that your entity must report unless you see a clear exemption in the Small Entity Compliance Guide.

Sole proprietorships with only a DBA don’t need to file the report. From the FAQs:

C. 6. Is a sole proprietorship a reporting company?

No, unless a sole proprietorship was created (or, if a foreign sole proprietorship, registered to do business) in the United States by filing a document with a secretary of state or similar office. An entity is a reporting company only if it was created (or, if a foreign company, registered to do business) in the United States by filing such a document. Filing a document with a government agency to obtain (1) an IRS employer identification number, (2) a fictitious business name, or (3) a professional or occupational license does not create a new entity, and therefore does not make a sole proprietorship filing such a document a reporting company.

When to File the Report

Existing entities created before January 1, 2024 must file the report by January 1, 2025. Because it’s easy to forget and the penalties are heavy if you don’t do it, you should file the report ASAP.

A new entity formed in 2024 must file the report within 90 days of its formation. If you form a new entity after January 1, 2025, the new entity must file the report within 30 days of its formation.

After you file the initial report, you don’t have to do it every year. The entity must file an updated report within 30 days only when the previously reported information changes. This includes when the company or a reported beneficial owner moves or gets a new driver’s license or passport.

How to File the Report

You file the report electronically with the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the U.S. Department of the Treasury. You can submit a filled-out PDF file or use FinCEN’s online form.

There’s no fee for filing the report.

Go to FinCEN’s BOI E-Filing System. Either button will get you started.

What’s In the Report

The report itself is quite straightforward. It’s basically the company’s name, address, tax ID, and each beneficial owner’s name, address, date of birth, driver’s license or passport number, and an image of the driver’s license or passport.

A beneficial owner doesn’t necessarily have to have ownership in the company. Senior officers with substantial control must also be included even if they don’t have ownership.

The information filed in the report won’t be made available to the general public.

Each entity files a report separately. If you have multiple entities, you can obtain a FinCEN ID with your personal information and reference the FinCEN ID in each entity’s report without having to repeat your personal information in each report. This also makes it easier to update the information when you move or get a new driver’s license or passport.

For More Information

Please read FinCEN’s BOI Small Entity Compliance Guide.

***

The most important thing about this FinCEN BOI report is to know that your LLC or S-Corp is required to file the report. Filing the report only takes 15 minutes. As with any other law, not knowing the law’s existence doesn’t get you out of a penalty. I would much prefer not to have this chore but it is what it is. If you have an LLC, S-Corp, or other state-registered entity, presumably you have a good reason to have it. This new reporting requirement has just become a part of the deal.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Fidelity Private Client Group But No Free TurboTax, What to Do?

Fidelity chooses to give a selected group of customers free TurboTax Premier every year. If you’re selected and you use the link in the special offer to TurboTax’s website, the online version of TurboTax Premier is free and the download version costs only $5 (plus tax in some states).

Where to Find the Offer

Fidelity doesn’t email or otherwise alert you that you have this offer. If you’ve been selected to receive the offer, you’ll see it appear on the All Accounts -> Summary tab after you log in to Fidelity’s website.

The All Accounts -> Summary tab usually displays some informational and marketing “cards” such as this one:

You’ll see a card with the free/$5 TurboTax offer among these other cards on the All Accounts -> Summary tab if you’ve been selected to receive the offer. Be sure to scroll down and look for it.

Buy the Download

If you have the offer, buying the downloaded version of TurboTax Premier for $5 is a better deal than using the online version for free. I explained why that’s the case in Tax Software: Buy the Download, Not the Online Service. If you used TurboTax Online last year, the downloaded software can import last year’s data from TurboTax Online.

The downloaded version also has the useful What-If Worksheet for tax planning, which isn’t available in the online version. See Tax Planning with TurboTax What-If Worksheet: Roth Conversion.

The downloaded software charges a fee for state e-file (federal e-file is free) but you can e-file for free on the state revenue agency’s website in many states. See Free E-File State Tax Return Directly on the State’s Website.

Selection Criteria

If you don’t see the offer for free/$5 TurboTax on the All Accounts -> Summary tab after you log in to Fidelity’s website, that means Fidelity’s algorithm didn’t choose you. Which customers Fidelity chooses to offer the free/$5 TurboTax is always unclear.

Having large accounts probably helps but it doesn’t guarantee it. Some people with 5-figure accounts get the offer and some people with 7-figure accounts don’t get it.

Being in the “Private Client Group” and having an assigned advisor may help but it doesn’t guarantee it either. Some people receive the offer without an assigned advisor or the Private Client Group status and some people still don’t get the offer even though they have the Private Client Group status and an assigned advisor.

Having a taxable account isn’t required either. Some people get the offer with only retirement accounts and some people with a large taxable account still don’t get it.

There’s quite a degree of randomness and mystery in who gets the free TurboTax offer and who doesn’t.

Not Chosen, What to Do?

I have a large taxable account with Fidelity, I’m in the Private Client Group, and I have an assigned advisor, but I never received the free TurboTax offer. Not last year, not this year, never. If you’re like me and you think you have all the reasons to get the free TurboTax offer but you don’t see it on the All Accounts -> Summary tab, what now?

Check Spouse’s Login

If you’re married and your spouse has a separate login, ask him or her to check under his or her login. Sometimes one spouse has the offer and the other doesn’t.

Unfortunately my wife doesn’t get the offer either.

Wait

Not everyone sees the offer at the same time. Some people see it in mid-December and some people see it in January. If you don’t see the offer, it may still show up at a later time.

Ask Your Advisor

If you have an assigned advisor, he or she has no control over who gets the free TurboTax offer or when the offer shows up for you but your advisor may have some discretionary client relationship budget. Some advisors will tell you to buy the software yourself and they’ll reimburse you when you send them the receipt.

It’s up to you whether you want to pursue this with your advisor.

Ask a Friend or Family

If someone has the free TurboTax offer from Fidelity, they may not use TurboTax because they use an accountant or tax preparer or they prefer some other software.

If a friend or a family member has the offer but they won’t use TurboTax, you can use their link to buy it. After they log in to Fidelity and click on the offer, you use their computer to log in to your TurboTax account to buy it.

Buy It From Amazon

While it’s great to get TurboTax for $5, it isn’t that expensive when you buy it without the special offer. Amazon typically puts TurboTax on sale between Christmas and New Year’s Day. The Deluxe + State edition, which is sufficient for most people, usually sells for $35-40 at that time.

I buy the Deluxe (federal-only) edition for under $30 because my state tax is dead simple. I file the state tax directly on the state tax department’s website for free with only three numbers from the federal return.

I go this route every year. Fidelity doesn’t owe me a $5 TurboTax. I’ll take it if they choose to give it to me but I’ll just buy it on my own when they don’t.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Which Financial Decisions Require Extra Attention and Which Don’t

Karsten Jeske at the Early Retirement Now blog wrote When to Worry, When to Wing It: Withdrawal Rate Case Studies back in 2021. It looked into what really makes a difference in safe withdrawals in retirement. Does the withdrawal frequency matter? What if withdrawals fluctuate? What if you need long-term care? It’s a great post worth reading or re-reading.

I’ve been thinking along this line more broadly. We face all types of choices and decisions in personal finance. Which decisions should we be more careful of and which decisions can we “wing it”?

This distinction is important because if you give equal attention to every decision, either you’ll get bogged down by months of research on something that doesn’t make much difference or you’ll make a casual decision that sets you back a huge sum. You should prioritize your mental energy for things that really require it.

Is It One-Time or Recurring?

A big category in the blogging world is food. People share how to make all types of dishes and pastries. These are good candidates for winging it because you don’t make something just one time. You’ll have plenty of opportunities to fine-tune and improve.

You need a good recipe, not necessarily the best one, although everyone says their recipe is the best, which is subjective anyway. This good recipe works. That good recipe works too. If you start using one recipe, you’re not bound to use it forever. Even if a recipe totally doesn’t work for you, you ruin only one attempt. You have hundreds of attempts ahead of you. You just use a different recipe next time.

You don’t have to do it “right” the first time if it’s a recurring task. It’s not a big deal to wing it.

Can You Do Both?

Many choices aren’t all-or-nothing. You can split and do both.

I browsed some pages of the book The Food Lab by Kenji López-Alt at Costco one day. The author experimented with different ways to boil eggs. He tried starting in cold water in one pot and starting in boiling water in another pot. He boiled eggs for one minute, two minutes, three minutes, … He cut each egg open to see which way he liked better.

The author’s point wasn’t that you should just go with his recommendation on how you should boil eggs. You may prefer a different degree of softness, you live at a different elevation, the power from your stove is different, and you have different cookware. You can experiment with multiple ways simultaneously to find what works best for you.

If the choice isn’t either-or, you can split and do both. This is especially helpful when results are uncertain. You reduce your risk by having several irons in the fire.

What If You Decide to Switch?

If it’s one-time and you can’t do both, what does it take if you decide to switch when you realize you should’ve done it differently?

Many financial decisions can be reversed easily. If you decide to go with Bank A and you realize later you should’ve used Bank B, you can open a new account with Bank B and transfer everything from Bank A. Maybe you could’ve earned a little more interest if you went with Bank B in the beginning but you don’t lose any principal by switching.

You can wing it if you see that it won’t cost much to switch when you know better.

When to Be Careful

You should be careful when a choice is one-time, all-or-nothing, and it’s impossible or costly to switch.

I’ve been working on a home construction project this year. Most decisions I had to make for this project were of this type: one-time, all-or-nothing, and it’s costly to switch.

Should I add insulation between the interior walls for sound-dampening purposes? This is the only time I’m doing it because I don’t have another home to build in the foreseeable future. It’ll be difficult to add insulation later if I don’t do it now. Doing it half-and-half doesn’t really help. Does it really work to reduce noise? The contractor doing it says it works but is that asking a barber whether I need a haircut? I’ll lose 100% of what I spend on materials and labor if I can’t tell the difference with or without insulation in the interior walls.

Things that require a physical change are more difficult because they’re often one-time, all-or-nothing, and costly to switch.

So, when you face a choice or decision, ask whether it’s like cooking or construction. Is it one-time or recurring? Can you split and do both? What if you decide to switch? These answers tell you whether you can wing it or you must be careful in making that decision.

Personal Finance Decisions

Let’s look at some frequently asked questions in personal finance from this angle.

Should I use a high-yield savings account or a money market fund for my short-term savings?

Wing it. It isn’t either-or. If you’re using a high-yield savings account now, you can put a small amount in a money market fund and see how it works. If you move from one to another and you don’t like it, you can always move back.

Should I use Vanguard, Fidelity, or Schwab for my IRA?

Wing it. Pick one as a start. Have a second account elsewhere if you’re curious. Let your own experience guide you.

Which tax software should I use? Online or download? Is Deluxe enough or do I need Premier?

Wing it. You’ll use something every year. It isn’t difficult to switch. Use one this year and a different one next year. It’s not that expensive to buy two in the same year. You’ll see which one you like better.

Should I buy whole life, variable universal life, or term life insurance?

Be careful. You’ll lose a large sum if you buy into whole life or variable universal life insurance and you realize you don’t want it.

Should I contribute to a pre-tax Traditional account or a Roth account?

Wing it. I chuckled when I read in a book written by a financial advisor that one should seek the expert counsel of a financial advisor on this question. It’s complex if you must choose one and stick to that choice for the rest of your life but that’s not the case. Nothing stops you from splitting and doing both. If you start with Traditional and you realize you should go with Roth (or vice versa), you can change it next month. Money in a Traditional account can be converted to a Roth account. So choose one or both and adapt as you go.

Should I invest in a mutual fund like VTSAX or an ETF like VTI? What about Fidelity’s zero-expense-ratio funds?

Wing it. Try both if you’d like to see how they work. You can switch if you prefer one over another.

Which job offer should I take?

Be careful. You can’t take both jobs at the same time. If you go with one, by the time you realize it’s the wrong one, the other opportunity may not be waiting for you anymore. Being in the right place at the right time can make a huge difference in one’s career and financial success.

I’m retired. How much can I withdraw from my portfolio, 3%, 3.5%, or 4%?

Wing it but not too wildly. Spending is a fundamental driver of financial success in retirement. It’s difficult to determine what will work if you must follow the same path for the rest of your life, but you don’t have to. You’re allowed to adjust and adapt. Just don’t start at 8% unless you’re Dave Ramsey.

When should I claim Social Security?

Be careful. You only have one year to change your mind once you claim. If you claimed early, you must wait until your Full Retirement Age to suspend. If you claim late, you can only go back six months. Use the Open Social Security calculator. Use another calculator for a second opinion.

Should I buy a home or rent?

Be careful. You can’t buy half and rent half. You can’t buy 10% of a home this year and another 10% next year. It’s costly to switch between owning and renting. Not buying at the right time or buying at the wrong time can cost you hundreds of thousands of dollars.

Should I invest or pay extra toward my mortgage?

Wing it. You can do both. You can start or stop at any time.

Should I convert from my Traditional account to Roth? How much?

Be careful if you’re thinking of converting a substantial amount because you can’t undo a Roth conversion. Wing it if you’ll convert every year. You don’t need to map out your conversions for the next 30 years and follow a table rigidly. Start low and adjust as you see fit.

Can I retire?

Some people have an option for going part-time or regaining employment after a break. Be careful if you don’t have that option.

***

Not all financial decisions require equal attention from us. Spend more energy on decisions that are one-time, all-or-nothing, and difficult to switch. Ongoing decisions don’t need to be optimized upfront. Start with something, split, experiment, and adapt as you go.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Downsides of HSA: When It’s Not Worth It to Contribute

You may have heard that the Health Savings Account (HSA) is the ultimate retirement account because it’s triple tax-free. Contributions go in tax-free. The balance grows tax-free. Withdrawals are again tax-free to pay for accumulated out-of-pocket medical expenses.

I have an HSA but it’s my least favorite retirement account. My HSA has the lowest balance among all my accounts. It’s not always worth it to contribute to an HSA.

Low Contribution Limit

The first problem with the HSA is that it has a low contribution limit. Here are the contribution limits of different account types in 2024 (double these for a married couple):

Before Catch-upWith Catch-up401k/403b/457$23,000$30,500 (age 50+)IRA/Roth IRA$7,000$8,000 (age 50+)HSA$4,150$5,150 (age 55+)

The HSA contribution limit is only slightly more than half of the IRA contribution limit. It’s less than 20% of the 401k/403b/457 contribution limit. The catch-up contribution for HSA starts at age 55, not age 50 as in a 401k or an IRA.

Triple tax-free is good but you just can’t put as much into the HSA. The 401k/403b/457 plan and the Traditional or Roth IRA should still be your primary retirement accounts.

Requires High Deductible Health Insurance

You also can’t contribute to an HSA just because you want to. You must be covered under a High Deductible Health Plan (HDHP) without any other coverage. Because most people get health insurance through their employer, this depends on the employer offering an HSA-eligible health insurance plan. If you get health insurance from the ACA marketplace, this depends on insurance companies offering HSA-eligible plans in your area. If you’re on Medicare, you can’t contribute to an HSA.

You don’t have the option to contribute to an HSA if you don’t have the right health insurance.

This requirement to be covered under only a High Deductible Health Plan gets complicated when a married couple has different health insurance or when health insurance changes mid-year due to job change, marriage, divorce, childbirth, enrolling in Medicare (sometimes retroactively), etc., etc. See HSA Contribution Limit For Two Plans Or Mid-Year Changes. Don’t get me started on some employers having a “plan year” that doesn’t start on January 1. That brings extra wrinkles too.

High Deductible Health Insurance Pays Less

Having a high deductible means your health insurance pays less. It works if you’re healthy with low healthcare expenses. It can also work if you have high healthcare expenses but the premiums on the high-deductible plan are much lower. You use the money saved from the premiums to pay for the higher out-of-pocket expenses.

This tradeoff between lower premiums and higher out-of-pocket costs may not always work out in favor of a high-deductible plan. You have to do the math. I have a spreadsheet in Do The Math: HMO/PPO vs High Deductible Plan With HSA. If a low-deductible plan makes more sense for your expected healthcare expenses, you may be better off foregoing the HSA.

Even if your employer or the ACA marketplace offers an HSA-eligible plan and you have low healthcare expenses, the HSA-eligible plan may not have your doctors in the network. Then you face the dilemma of switching doctors for the whole family just to contribute to the HSA or continuing with the same providers out of network and not getting discounts from negotiated rates.

High Deductible ≠ HSA-Eligible

An HSA-eligible high-deductible plan has specific definitions. Just because the deductible is high doesn’t mean the plan is automatically HSA-eligible.

Insurance companies sometimes “enhance” their high-deductible plans to make them not HSA-eligible. The small “enhancements” ruin your opportunity to contribute to an HSA.

I’m facing this situation next year. Here are the high-deductible plans I see from the ACA marketplace for the two of us:

Current PlanNew PlanNew HSA PlanDeductible$15,000$18,300$16,100Out-of-Pocket Maximum$15,000$18,900$16,100Office VisitMust meet deductible first$45 primary care
$95 specialistMust meet deductible firstHSA-eligibleMonthly Premium$1,117$1,282 (+15%)$1,612 (+44%)

Our current plan is HSA-eligible. We pay everything except preventive care out of pocket because we have little chance of meeting the $15,000 deductible.

The new plan for next year raises the deductible and the out-of-pocket maximum by another 20%, which we don’t expect to come even close. It throws in some Day 1 coverage for office visits. We’ll pay a $45 co-pay to see a primary care doctor or a $95 co-pay to see a specialist before meeting the deductible. This is worth something but it makes the plan not HSA-eligible (the out-of-pocket maximum is also too high to qualify).

If we still want to contribute to the HSA, the premium for an HSA-eligible plan is $495/month higher than this year, and it’s $330/month higher than the premium for the non-HSA plan. Paying almost $4,000 more for the HSA-eligible plan takes away the tax benefits from contributing to an HSA.

***

Triple tax-free is great but a lot of things must line up to obtain HSA’s tax benefits. You must have an HSA-eligible health insurance plan as a choice from your employer or the ACA marketplace. The HSA-eligible plan has to cover the right doctors and facilities. The higher deductible has to make sense for your expected healthcare expenses. The premium has to be not so much higher than a non-HSA plan as to blow out all the tax benefits. These practical considerations are often glossed over when people are excited about HSA’s tax benefits.

When the stars line up, go ahead and contribute the maximum to the HSA. The HSA contribution limit is still low but it’s better than nothing.

The HSA is my least favorite retirement account because things don’t always line up. The tax benefits are easily negated by other factors. I’m not going to pay $4,000 more for health insurance only for the sake of putting $8,300 into the HSA.

Learn the Nuts and Bolts I put everything I use to manage my money in a book. My Financial Toolbox guides you to a clear course of action.Read Reviews

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Why the HSA Is My Least Favorite Retirement Account

You may have heard that the Health Savings Account (HSA) is the ultimate retirement account because it’s triple tax-free. Contributions go in tax-free. The balance grows tax-free. Withdrawals are again tax-free to pay for accumulated out-of-pocket medical expenses.

I have an HSA but it’s my least favorite retirement account. My HSA has the lowest balance among all my accounts.

Low Contribution Limit

The first problem with the HSA is that it has a low contribution limit. Here are the contribution limits of different account types in 2024 (double these for a married couple):

Before Catch-upWith Catch-up401k/403b/457$23,000$30,500 (age 50+)IRA/Roth IRA$7,000$8,000 (age 50+)HSA$4,150$5,150 (age 55+)

The HSA contribution limit is only slightly more than half of the IRA contribution limit and it’s less than 20% of the 401k/403b/457 contribution limit. The catch-up contribution for HSA starts at age 55, not age 50 as in a 401k or an IRA.

Triple tax-free is good but you just can’t put as much into the HSA. The 401k/403b/457 plan and the Traditional or Roth IRA should still be your primary retirement accounts.

Requires High Deductible Health Insurance

You also can’t contribute to an HSA just because you want one. You must be covered under a High Deductible Health Plan (HDHP) without any other coverage. Because most people get health insurance through their employer, this depends on the employer offering an HSA-eligible health insurance plan. If you get health insurance from the ACA marketplace, this depends on insurance companies offering HSA-eligible plans in your area. If you’re on Medicare, you can’t contribute to an HSA.

This requirement to be covered under only a High Deductible Health Plan gets complicated when a married couple has different health insurance or when health insurance changes mid-year due to job change, marriage, divorce, childbirth, becoming eligible for Medicare, etc., etc. See HSA Contribution Limit For Two Plans Or Mid-Year Changes. Don’t get me started on some employers having a “plan year” that doesn’t start on January 1. That brings extra wrinkles too.

Having a high deductible means your health insurance pays less. It works if you’re healthy with low healthcare expenses but if a low-deductible plan makes more sense for your expected healthcare expenses, you may be better off foregoing the HSA.

Even if your employer or the ACA marketplace offers an HSA-eligible plan and you have low healthcare expenses, the HSA-eligible plan may not have your doctors in the network. Then you face the dilemma of switching doctors for the whole family just to contribute to the HSA or continuing with the same providers out of network and not getting discounts from negotiated rates.

High Deductible ≠ HSA-Eligible

An HSA-eligible high-deductible plan has specific definitions. Just because the deductible is high doesn’t mean the plan is automatically HSA-eligible.

Insurance companies sometimes “enhance” their high-deductible plans to make them not HSA-eligible. The small “enhancements” ruin your opportunity to contribute to an HSA.

I’m facing this situation for next year. Here are the high-deductible plans I see from the ACA marketplace for the two of us:

Current PlanNew PlanNew HSA PlanDeductible$15,000$18,300$16,100Out-of-Pocket Maximum$15,000$18,900$16,100Office VisitMust meet deductible first$45 primary care
$95 specialistMust meet deductible firstHSA-eligibleMonthly Premium$1,117$1,282 (+15%)$1,612 (+44%)

Our current plan is HSA-eligible. We pay everything except preventive care out of pocket because we have little chance of meeting the $15,000 deductible.

The new plan for next year raises the deductible and the out-of-pocket maximum by another 20%, which we don’t expect to come even close. It throws in some Day 1 coverage for office visits. We’ll pay a $45 co-pay to see a primary care doctor or a $95 co-pay to see a specialist before meeting the deductible. This is worth something but it makes the plan not HSA-eligible (the out-of-pocket maximum is also too high to qualify).

If we still want to contribute to the HSA, the premium for an HSA-eligible plan is $495/month higher than last year, and it’s $330/month higher than the premium for the non-HSA plan. Paying almost $4,000 more for the HSA-eligible plan takes away the tax benefits from contributing to an HSA.

***

Triple tax-free is great but a lot of things must line up to obtain HSA’s tax benefits. You must have an HSA-eligible health insurance plan as a choice from your employer or the ACA marketplace. The HSA-eligible plan has to cover the right doctors and facilities. The higher deductible has to make sense for your expected healthcare expenses. The premium has to be not so much higher than a non-HSA plan as to blow out all the tax benefits. These practical considerations are often glossed over when people are excited about HSA’s tax benefits.

If everything lines up, go ahead and contribute the maximum to the HSA. The HSA contribution limit is still low but it’s better than nothing.

The HSA is my least favorite retirement account because things don’t always line up. The tax benefits are easily negated by other factors. I’m not going to pay $4,000 more for health insurance only for the sake of contributing $8,300 to the HSA.

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2024 Social Security Cost of Living Adjustment (COLA)

Retirees on Social Security receive an increase of their Social Security benefits each year known as the Cost of Living Adjustment or COLA. The COLA was 8.7% in 2023, which was the largest in 40 years. Retirees on Social Security will once again receive a COLA in 2024 but it won’t be as big as the one in 2023.

Table of ContentsAutomatic Link to InflationCPI-WQ3 Average2024 Social Security COLAMedicare PremiumsRoot for a Lower COLAAutomatic Link to Inflation

Some retirees think the COLA is given at the discretion of the President or Congress and they want their elected officials to take care of seniors by declaring a higher COLA. They blame the President or Congress when they think the increase is too small.

It was done that way before 1975 but the COLA has been automatically linked to inflation for nearly 50 years. How much the COLA will be is determined strictly by the inflation numbers. The COLA is high when inflation is high. It’s low when inflation is low. There’s no COLA when inflation is zero or negative, which happened in 2010, 2011, and 2016.

CPI-W

Specifically, the Social Security COLA is determined by the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W is a separate index from the Consumer Price Index for All Urban Consumers (CPI-U), which is more often referenced by the media when they talk about inflation.

CPI-W tracks inflation experienced by workers. CPI-U tracks inflation experienced by consumers. There are some minor differences in how much weight different goods and services have in each index but CPI-W and CPI-U look practically identical when you put them in a chart.

CPI-W and CPI-U 1993-2023

The red line is CPI-W and the blue line is CPI-U. They differed by only smidges in 30 years.

There’s also a research CPI index called the Consumer Price Index for Americans 62 years of age and older, or R-CPI-E. This index weighs more by the spending patterns of older Americans. Some researchers argue that the Social Security COLA should use R-CPI-E, which has increased more than CPI-W in the last 30 years.

CPI-W and R-CPI-E 1993-2023

The green line is R-CPI-E. The red line is CPI-W. R-CPI-E outpaced CPI-W in 30 years between 1993 and 2023 but not by much. Had the Social Security COLA used R-CPI-E instead of CPI-W, Social Security benefits would’ve been higher by 0.1% per year, or a little over 3% after 30 years. That’s still not much difference.

Regardless of which exact CPI index is used to calculate the Social Security COLA, it’s subject to the same overall price environment. Congress chose CPI-W 50 years ago. That’s the one we’re going with.

Q3 Average

More specifically, Social Security COLA for next year is calculated by the increase in the average of CPI-W from the third quarter of last year to the third quarter of this year. You get the CPI-W numbers in July, August, and September. Add them up and divide by three. You do the same for July, August, and September last year. Compare the two numbers and round the change to the nearest 0.1%. That’ll be the Social Security COLA for next year.

The government released the CPI-W for September on October 12. The Social Security Administration made the calculation and announced the Social Security COLA for 2024.

2024 Social Security COLA

Because the Q3 average CPI-W in 2023 increased by 3.2% over the Q3 average CPI-W in 2022, the 2024 Social Security COLA will be 3.2%. This is in line with my previous projection.

Medicare Premiums

If you’re on Medicare, the Social Security Administration automatically deducts the Medicare premium from your Social Security benefits. The Social Security COLA is given on the “gross” Social Security benefits before deducting the Medicare premium and any tax withholding.

Medicare announces the premium for next year around the same time Social Security announces the COLA but not necessarily on the same date. The increase in healthcare costs is part of the cost of living that the COLA is intended to cover. You’re still getting the full COLA even though a part of the COLA will be used toward the increase in Medicare premiums.

Retirees with a higher income pay more than the standard Medicare premiums. This is called Income-Related Monthly Adjustment Amount (IRMAA). I cover IRMAA in 2024 2025 Medicare IRMAA Premium MAGI Brackets.

Root for a Lower COLA

People intuitively want a higher COLA but a higher COLA can only be caused by higher inflation. Higher inflation is bad for retirees.

Whether inflation is high or low, your Social Security benefits will have the same purchasing power. It’s the purchasing power of your savings and investments outside Social Security that you should worry about. When inflation is high, even though your Social Security benefits get a bump, your other money loses more value to inflation. Your savings and investments outside Social Security will last longer when inflation is low.

You want a lower Social Security COLA, which means lower inflation and lower expenses.

Some people say that the government deliberately under-reports inflation. Even if that’s the case, you still want a lower COLA.

Suppose the true inflation for seniors is 3% higher than the reported inflation. If you get a 1% COLA when the true inflation is 4% and you get a 5% COLA when the true inflation is 8%, you are much better off with a lower 1% COLA together with 4% inflation than getting a 5% COLA together with 8% inflation. Your Social Security benefits lag inflation by the same amount either way, but you’d rather your other money outside Social Security loses to 4% inflation than to 8% inflation.

Root for lower inflation and lower Social Security COLA when you are retired.

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