Harry Sit's Blog, page 19

2022 2023 ACA Health Insurance Premium Tax Credit Percentages

If you buy health insurance from healthcare.gov or a state-run ACA exchange, up through the year 2020, there was a hard cutoff for whether you qualify for a premium tax credit. You didn’t qualify for a premium tax credit if your income was above 400% of the Federal Poverty Level (FPL). The American Rescue Plan removed the hard cutoff at 400% of FPL in 2021 and 2022. See ACA Premium Subsidy Cliff Turns Into a Slope.

Now, how much credit you qualify for is determined by a sliding scale. The government says that based on your income, you are supposed to pay this percentage of your income toward a second lowest-cost Silver plan in your area. After you pay that amount, the government will take care of the rest. If you pick a less expensive policy than the second lowest-cost Silver plan, you keep 100% of the savings, up to the point you get the policy for free. If you pick a more expensive policy than the second lowest-cost Silver plan, you pay 100% of the difference.

That sliding scale is called the Applicable Percentages Table. The American Rescue Plan also lowered the applicable percentages significantly in 2021 and 2022 from previous years. Unless these provisions are extended, the 400% FPL subsidy cliff and the higher applicable percentages will return in 2023.

Here are the applicable percentages for different income levels in 2022 and 2023:

Income20222023< 133% FPL0%1.92%< 150% FPL0%2.88% – 3.84%< 200% FPL0% – 2%3.84% – 6.05%< 250% FPL2% – 4%6.05% – 7.73%< 300% FPL4% – 6%7.73% – 9.12%<= 400% FPL6% – 8.5%9.12%> 400% FPL8.5%not eligibleACA Applicable Percentages

Source: IRS Rev. Proc. 2021-23, Rev. Proc. 2022-34

As you see from the table above, the changes between 2022 and 2023 are quite substantial. The percentage of income the government expects you to pay toward a second lowest-cost Silver plan depends on your income relative to the Federal Poverty Level. To calculate where your income falls relative to the Federal Poverty Line, please see Federal Poverty Levels (FPL) For Affordable Care Act (ACA).

For example, people with income between 250% and 300% of the Federal Poverty Level are expected to pay between 7.73% and 9.12% of their income toward a second lowest-cost Silver plan in their area in 2023. That’s much higher than the sliding scale between 4% and 6% of income in 2022.

Congress is considering a new bill — the Inflation Reduction Act of 2022 — that will extend the 2022 applicable percentages for another three years through 2025. If this bill passes, it will reduce the amount many people pay toward their ACA health insurance.

If your income is low, they expect you to pay a low percentage of your low income. As your income goes higher, they expect you to pay a higher percentage of your higher income. The higher percentage applies not just to the additional income but to your entire income. A higher income times a higher percentage is much more than a lower income times a lower percentage.

For example, a household of two in the lower 48 states is expected to pay 3.18% of their income when their 2022 income is $40,000. If they increase their income to $50,000, they are expected to pay 5.48% of their income. The increase of their expected contribution toward ACA health insurance, and the corresponding decrease in their premium tax credit will be:

$50,000 * 5.48% – $40,000 * 3.18% = $1,468

This represents about 15% of the $10,000 increase in their income. For a married couple, the effect of paying 15% of the additional income toward ACA health insurance is greater than the effect of paying 12% toward their federal income tax. It makes the effective marginal tax rate on the additional $10,000 income 27%, not 12%.

Normally it’s a good idea to consider Roth conversion or harvesting tax gains in the 12% tax bracket, but those moves become much less attractive when you receive a premium subsidy for the ACA health insurance. For a helpful tool that can calculate this effect, please see Tax Calculator With ACA Health Insurance Subsidy.

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An Unusually High Marginal Tax Rate Means Paying Lower Taxes

Most people are familiar with the concept of the progressive income tax system in the U.S. As your income goes higher, you pay a higher tax rate on your additional income.

Some people mistakenly think that getting a bonus that pushes them into a higher tax bracket will make them worse off than not getting the bonus. That’s not true because a higher tax rate isn’t imposed on the entire income. It only applies to the portion of the income that crosses the line and lands in the higher tax bracket. That’s why the phrase “tax bracket” in common parlance is really the marginal tax bracket. It applies to the income on the margin.

Table of ContentsMarginal Tax Rate > Tax BracketThe Root CauseGlass Half FullExamplesTax Credit PhaseoutDividends and Capital Gains Bump Zone“Tax Torpedo” on Social Security BenefitsConclusionMarginal Tax Rate > Tax Bracket

If you paid more attention to taxes, you would also know that your marginal tax rate isn’t necessarily those in the published tax brackets — 12%, 22%, 24%, 32%, etc. Other parts of the tax laws can give you a high marginal tax rate even when you don’t have a high income.

I showed this effect in Receive EITC, Contribute to Traditional 401k Not Roth 401k. People with a low enough income to qualify for the Earned Income Tax Credit (EITC) face a marginal tax rate as high as 41%. Mike Piper also explained this phenomenon well with more examples in his blog post Marginal Tax Rate: Not (Necessarily) The Same As Your Tax Bracket.

Some authors (not Mike Piper) use incendiary language and call it the tax torpedo, tax time bomb, etc., especially when it relates to taxes on retirement income.

The Root Cause

An unusually high marginal tax rate at a modest income almost always results from losing some tax benefits as your income goes up. The additional income gets taxed at the normal rate but losing some other tax benefits at the same time compounds the effect.

For instance, if an additional $1,000 of income normally gets taxed at 12% but you also lose $300 in other tax benefits due to this higher income, your taxes will go up by $120 + $300 = $420. That’s a 42% marginal tax rate, not 12%. People caught by this are naturally upset. They say they’re paying a higher tax rate than the rich.

The thing is, when you have an unusually high marginal tax rate, you’re actually paying lower taxes than other people with the same income. In other words, the unusually high marginal tax rate is a blessing, not a curse.

Glass Half Full

You pay lower taxes than other people with the same income because when you’re losing some tax benefits, you have something to lose to begin with. As you lose some of those tax benefits, you still get to keep a part of them. Income isn’t the only qualification criterion for tax benefits. Keeping some tax benefits makes you pay lower taxes than other people with the same income who aren’t eligible for those tax benefits for other reasons.

It’s a classic story of a glass half full or half empty. Losing some tax benefits gives you an unusually high marginal tax rate, bad! Keeping some tax benefits lowers your taxes, good! Should you lament at the loss or savor the part that you keep?

Examples

Let’s look at some real-world examples.

Tax Credit Phaseout

The American Opportunity Credit is a tax credit for people paying college expenses. The maximum credit is $2,500 per student. For a married couple in a specific range of income, they lose $125 per student for every additional $1,000 of income. People with income below the phaseout range get the maximum credit. People with income above the phaseout range get nothing.

Let’s say a married couple has two kids going to college in the same year. They would normally qualify for a $5,000 tax credit but they lose $3,000 of it because their income is in the phaseout range. Their marginal tax rate is the normal rate from their tax bracket plus 25%, but they still receive a $2,000 tax credit after losing $3,000. They pay $2,000 less in taxes than another couple with the same income whose kids don’t go to college. Higher marginal tax rate, yes, but lower total taxes in dollars. Getting a tax credit when your kids go to college (and presumably will have a better future) is great.

A similar effect exists in many other tax credits and deductions with an income phaseout, such as child tax credit, child and dependent care credit, earned income credit, saver’s credit, student loan interest deduction, and so on. In each case, a higher marginal tax rate from losing some tax credits and deductions means lower taxes compared to others with the same income but don’t qualify for those credits or deductions due to other reasons.

Dividends and Capital Gains Bump Zone

A “bump zone” exists when a part of your qualified dividends and long-term capital gains is taxed at 0% and the remaining part is taxed at 15%. Any additional ordinary income will be taxed at the normal tax rate in addition to bumping an equal amount of the qualified dividends and long-term capital gains from the 0% rate to the 15% rate. The net effect is that the additional ordinary income is taxed at 25% or 27% instead of 10% or 12%.

Suppose a married couple has $40,000 of income taxed at ordinary rates plus $60,000 in qualified dividends and long-term capital gains. If they receive an additional $1,000 in ordinary income, it’s taxed at 12% but it also bumps $1,000 of their qualified dividends and long-term capital gains out of the 0% rate to the 15% rate. Their marginal tax rate on this $1,000 of additional income is 12% + 15% = 27%.

Compare that to another couple with $90,000 of income taxed at ordinary rates and $10,000 in qualified dividends and long-term capital gains. If they receive an additional $1,000 in ordinary income, it’s taxed at 22% with no bumping effect because all of their qualified dividends and long-term capital gains are already taxed at 15%.

Both couples have the same total taxable income of $100,000. Although the first couple’s 27% marginal tax rate is higher than the second couple’s 22%, the first couple pays a much lower amount of total taxes in dollars because a big part of their income is still taxed at 0% after a small part is bumped out to 15%.

Again, a higher marginal tax rate means lower total taxes at the same income.

“Tax Torpedo” on Social Security Benefits

Retirees don’t pay federal income tax on their Social Security benefits when their income is low. As their income goes up and crosses a threshold, they start paying taxes on a part of their Social Security benefits. This works similarly to the bumping effect in the previous section on qualified dividends and long-term capital gains. Additional income is taxed at the normal rate plus it bumps another amount of the Social Security benefits out of the 0% rate.

It’s a little different than the dividends and capital gains bump zone in two ways:

1. The bump isn’t dollar-for-dollar. Each dollar of additional income only bumps 50 cents or 85 cents of Social Security benefits out of the 0% rate.

2. Social Security benefits can never be completely bumped out of the 0% rate. The bumping stops when 85% of the Social Security benefits are taxable. At least 15% of the benefits will stay tax-free even if your income is $1 million.

The effect of this bumping is that for some Social Security recipients in a range of income, their marginal tax rate on additional income is 1.5x or 1.85x of the normal rate. Some people call this the tax torpedo.

Suppose a married couple has $30,000 of income taxed at ordinary rates plus $50,000 in Social Security benefits. If they get another $1,000 from interest on their savings account, this $1,000 is taxed at 12% but it also makes another $850 of their Social Security benefits taxable. Their marginal tax rate on this $1,000 is 12% * 1.85 = 22.2% because they’re being “tax-torpedoed.”

Compare that to another couple with $80,000 of income taxed at ordinary rates who are not receiving Social Security benefits. If they get the same additional $1,000 from interest on their savings account, it’s taxed at 12% with no torpedoes.

Both couples have the same total income. Although the first couple’s 22.2% marginal tax rate is higher than the second couple’s 12%, the first couple pays a lower amount of total taxes in dollars. After taking on all the torpedoes, a good part of their income stays tax-free.

Conclusion

Knowing your marginal tax rate is important for tax planning on things to do on the margin — making Traditional vs. Roth contributions, realizing capital gains, Roth conversions, etc. — but having an unusually high marginal tax rate isn’t a problem. You’re not being penalized. You’re actually rewarded with paying lower taxes.

If you see people trying to rile you up by pointing to an unusually high marginal tax rate, they’re either misinformed or trying to mislead. What matters to your bottom line is the total amount of taxes you pay in dollars. You live on total after-tax dollars, not on marginal tax rates. An unusually high marginal tax rate coupled with low total taxes in dollars sure beats the other way around.

If you find yourself with an unusually high marginal tax rate, don’t dread it. Celebrate. It means you’re paying lower taxes than other people with the same income. It also gives you bigger incentives to lower your income and lower your taxes even further. You get much higher tax savings from your pre-tax contributions. Doing less work for a better work-life balance costs you less in after-tax income. It’s a great position to be in.

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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2022 2023 Tax Brackets, Standard Deduction, 0% Capital Gains, etc.

[Updated on July 13, 2022 after the release of the inflation numbers for June 2022.]

My other post listed the 2022 2023 retirement account contribution and income limits. I also calculated the inflation-adjusted tax brackets and some of the most commonly used numbers in tax planning for 2023 using the published inflation numbers and the same formula prescribed in the tax law. I’m calling these projections “preliminary” but they should be fairly close. I’ll keep them updated in the coming months.

Table of Contents2022 2023 Standard Deduction2022 2023 Tax Brackets2022 2023 0% Capital Gains Tax2022 2023 Gift Tax Exclusion2022 Savings Bonds Tax-Free Redemption for College Expenses2022 2023 Standard Deduction

You don’t pay federal income tax on every dollar of your income. You deduct an amount from your income before you calculate taxes. About 90% of all taxpayers take the standard deduction. The other ~10% itemize deductions when their total deductions exceed the standard deduction. In other words, you’re deducting a larger amount than your allowed deductions when you take the standard deduction. Don’t feel bad about taking the standard deduction!

The basic standard deduction in 2022 and 2023 are:

20222023 (Preliminary)Single or Married Filing Separately$12,950$13,850Head of Household$19,400$20,800Married Filing Jointly$25,900$27,700Basic Standard Deduction

Source: IRS Rev. Proc. 2021-45, author’s own calculations.

People who are age 65 and over have a higher standard deduction than the basic standard deduction.

20222023 (Preliminary)Single, age 65 and over$14,700$15,700Head of Household, age 65 and over$21,150$22,650Married Filing Jointly, one person age 65 and over$27,300$29,200Married Filing Jointly, both age 65 and over$28,700$30,700Standard Deduction for age 65 and over

Source: IRS Rev. Proc. 2021-45, author’s own calculations.

People who are blind have an additional standard deduction.

20222023 (Preliminary)Single or Head of Household, blind+$1,750+$1,850Married Filing Jointly, one person is blind+$1,400+$1,500Married Filing Jointly, both are blind+$2,800+$3,000Additional Standard Deduction for Blindness

Source: IRS Rev. Proc. 2021-45, author’s own calculations.

2022 2023 Tax Brackets

The tax brackets are based on taxable income, which is AGI minus various deductions. The tax brackets in 2022 are:

SingleHead of HouseholdMarried Filing Jointly10%$0 – $10,275$0 – $14,650$0 – $20,55012%$10,275- $41,775$14,650 – $55,900$20,550 – $83,55022%$41,775 – $89,075$55,900 – $89,050$83,550 – $178,15024%$89,075 – $170,050$89,050 – $170,050$178,150 – $340,10032%$170,050 – $215,950$170,050 – $215,950$340,100 – $431,90035%$215,950 – $539,900$215,950 – $539,900$431,900 – $647,85037%Over $539,900Over $539,900Over $647,850Tax Brackets

Source: IRS Rev. Proc. 2021-45.

The preliminary 2023 tax brackets are:

SingleHead of HouseholdMarried Filing Jointly10%$0 – $11,000$0 – $15,700$0 – $22,00012%$11,000 – $44,775$15,700 – $59,900$22,000 – $89,55022%$44,775 – $95,475$59,900 – $95,450$89,550 – $190,95024%$95,475 – $182,275$95,450 – $182,250$190,950 – $364,55032%$182,275 – $231,450$182,250 – $231,450$364,550 – $462,90035%$231,450 – $578,650$231,450 – $578,650$462,900 – $694,35037%Over $578,650Over $578,650Over $694,350Tax Brackets

Source: author’s own calculations.

A common misconception is that when you get into a higher tax bracket, all your income is taxed at the higher rate, and you’re better off not having the extra income. That’s not true. Tax brackets work incrementally. If you’re $1,000 into the next tax bracket, only $1,000 is taxed at the higher rate. It doesn’t affect the income in the previous brackets.

For example, someone single with a $60,000 AGI in 2022 will pay:

First 12,950 (the standard deduction)0%Next $10,27510%Next $31,500 ($41,775 – $10,275)12%Final $5,27522%Progressive Tax Rates

This person is in the 22% tax bracket but only $5,275 out of the $60,000 AGI is really taxed at 22%. The bulk of the income is taxed at 0%, 10%, and 12%. The blended tax rate is only 9.9%. If this person doesn’t earn the final $5,275, he or she is in the 12% bracket instead of the 22% bracket, but the blended tax rate only goes down slightly from 9.9% to 8.8%. Making the extra $5,275 income doesn’t cost this person more in taxes than the extra income.

Don’t be afraid of going into the next tax bracket.

2022 2023 0% Capital Gains Tax

When your other taxable income (after deductions) plus your qualified dividends and long-term capital gains are below a cutoff, you will pay no federal income tax on your qualified dividends and long-term capital gains under this cutoff.

This is illustrated by the chart below. Taxable income is the part above the black line, after subtracting deductions. A portion of the qualified dividends and long-term capital gains is taxed at 0% when the other taxable income plus these qualified dividends and long-term capital gains are under the red line.

The red line is close to the top of the 12% tax bracket but they don’t line up exactly.

20222023 (Preliminary)Single or Married Filing Separately$41,675$44,650Head of Household$55,800$59,800Married Filing Jointly$83,350$89,300Maximum Zero Rate Amount for Qualified Dividends and Long-term Capital Gains

Source: IRS Rev. Proc. 2021-45, author’s own calculations.

For example, suppose a married couple filing jointly has $70,000 in other taxable income (after deductions) and $20,000 in qualified dividends and long-term capital gains in 2022. The maximum zero rate amount cutoff is $83,350. $13,350 of the qualified dividends and long-term capital gains ($83,350 – $70,000) is taxed at 0%. The remaining $20,000 – $13,350 = $6,650 is taxed at 15%.

2022 2023 Gift Tax Exclusion

Each person can give another person up to a set amount in a calendar year without having to file a gift tax form. Not that filing a gift tax form is onerous, but many people avoid it if they can. In 2023, this gift tax exclusion amount will likely increase from $16,000 to $17,000.

20222023 (Preliminary)Gift Tax Exclusion$16,000$17,000

Source: IRS Rev. Proc. 2021-45, author’s own calculations.

The gift tax exclusion is counted by each giver to each recipient. As a giver, you can give up to $16,000 each to an unlimited number of people without having to file a gift tax form. If you give $16,000 to each of your 10 grandkids in 2022 for a total of $160,000, you still won’t be required to file a gift tax form. Any recipient can also receive a gift from an unlimited number of people. If a grandchild receives $16,000 from each of his or her four grandparents in 2022, no taxes or tax forms will be required.

2022 Savings Bonds Tax-Free Redemption for College Expenses

If you cash out U.S. Savings Bonds (Series I or Series EE) for college expenses or transfer to a 529 plan, your modified adjusted gross income must be under certain limits to get a tax exemption on the interest. Here are the income limits depending on your filing status in 2022:

Single, Head of HouseholdMarried Filing JointlyFull Exemption$85,800$128,650Partial Exemption$100,800$158,650Income Limit for Tax-Free Savings Bond Redemption for Higher Education

Source: IRS Rev. Proc. 2021-45.

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2022 2023 401k 403b 457 IRA FSA HSA Contribution Limits

[Updated on July 13, 2022 with preliminary projections for 2023.]

Retirement plan contribution limits are adjusted for inflation each year. Inflation has been at elevated levels in recent months. Most contribution limits and income limits will go up in 2023.

Before the IRS publishes the official numbers in late October or early November, I’m able to make my own calculations using the published inflation numbers and going by the same rules the IRS uses as stipulated by law. I’ve maintained a record of 100% accuracy ever since I started doing these calculations. However, higher inflation makes it more difficult to hit 100% accuracy. I’m calling my 2023 projections “preliminary” at this point, but they should be fairly close. I’ll keep these updated in the coming months.

Table of Contents2023 401k/403b/457/TSP Elective Deferral Limit2023 Annual Additions Limit2023 SEP-IRA Contribution Limit2023 Annual Compensation Limit2023 Highly Compensated Employee Threshold2023 SIMPLE 401k and SIMPLE IRA Contribution Limit2023 Traditional and Roth IRA Contribution Limit2023 Deductible IRA Income Limit2023 Roth IRA Income Limit2023 Healthcare FSA Contribution Limit2023 HSA Contribution Limit2023 Saver’s Credit Income LimitAll Together2023 401k/403b/457/TSP Elective Deferral Limit

401k/403b/457/TSP contribution limit will go up by $2,000 from $20,500 in 2022 to $22,500 in 2023. This limit usually goes up by $500 at a time but higher inflation is making it go four steps in one year.

If you are age 50 or over, the catch-up contribution limit will go up by $1,000 from $6,500 in 2022 to $7,500 in 2023.

Employer match or profit-sharing contributions aren’t included in these limits. If you work for multiple employers in the same year or if your employer offers multiple plans, you have one single employee contribution limit for 401k, 403b, and TSP across all plans.

The 457 plan limit is separate from the 401k/403b/TSP limit. You can contribute the maximum to both a 401k/403b/TSP plan and a 457 plan.

2023 Annual Additions Limit

The total employer plus employee contributions to all defined contribution plans by the same employer will increase by $6,000 from $61,000 in 2022 to $67,000 in 2023. This limit usually increases by $1,000 at a time but now it’s jumping six steps in one year.

The age-50-or-over catch-up contribution is separate from this limit. If you work for multiple employers in the same year, you have a separate annual additions limit for each unrelated employer.

2023 SEP-IRA Contribution Limit

The SEP-IRA contribution limit is always the same as the annual additions limit for a 401k plan. It will also increase by $6,000 from $61,000 in 2022 to $67,000 in 2023.

Because the SEP-IRA doesn’t allow employee contributions, unless your self-employment income is well above $200,000, you have a higher contribution limit if you use a solo 401k. See Solo 401k When You Have Self-Employment Income.

2023 Annual Compensation Limit

The maximum annual compensation that can be considered for making contributions to a retirement plan is always 5x the annual additions limit. Therefore the annual compensation limit will increase by $30,000 from $305,000 in 2022 to $335,000 in 2023.

2023 Highly Compensated Employee Threshold

If your employer limits your contribution because you are a Highly Compensated Employee (HCE), the minimum compensation will go up by $15,000 from $135,000 in 2022 to $150,000 in 2023.

2023 SIMPLE 401k and SIMPLE IRA Contribution Limit

SIMPLE 401k and SIMPLE IRA plans have a lower limit than standard 401k plans. The contribution limit for SIMPLE 401k and SIMPLE IRA plans will go up by $1,500 from $14,000 in 2022 to $15,500 in 2023.

If you are age 50 or over, the catch-up contribution limit in a SIMPLE 401k or SIMPLE IRA plan will increase by $500 from $3,000 in 2022 to $3,500 in 2023.

Employer contributions to a SIMPLE 401k or SIMPLE IRA plan aren’t included in these limits.

2023 Traditional and Roth IRA Contribution Limit

The Traditional or Roth IRA contribution limit will go up by $500 from $6,000 in 2022 to $6,500 in 2023. The age 50 catch-up limit is fixed by law at $1,000 in all years.

The IRA contribution limit and the 401k/403b/TSP or SIMPLE contribution limit are separate. You can contribute the respective maximum to both a 401k/403b/TSP/SIMPLE plan and a traditional or Roth IRA.

2023 Deductible IRA Income Limit

The income limit for taking a full deduction for your contribution to a traditional IRA while participating in a workplace retirement will increase by $5,000 for singles, from $68,000 in 2022 to $73,000 in 2023. It will increase by $8,000 for married filing jointly, from $109,000 in 2022 to $117,000 in 2023. The deduction completely phases out when your income goes above $78,000 in 2022 and $83,000 in 2023 for singles; and for married filing jointly, $129,000 in 2022 and $137,000 in 2023.

The income limit for taking a full deduction for your contribution to a traditional IRA when you are not covered in a workplace retirement but your spouse is will go up by $15,000 for married filing jointly from $204,000 in 2022 to $219,000 in 2023. The deduction completely phases out when your joint income goes above $214,000 in 2022 and $229,000 in 2023.

2023 Roth IRA Income Limit

The income limit for contributing the maximum to a Roth IRA will go up by $9,000 for singles from $129,000 in 2022 to $138,000 in 2023. It will go up by $15,000 for married filing jointly from $204,000 in 2022 to $219,000 in 2023.

You can’t contribute anything directly to a Roth IRA when your income goes above $144,000 in 2022 and $153,000 in 2023 for singles, and $214,000 in 2022 and $229,000 in 2023 for married filing jointly, up by $9,000 and $15,000 respectively in 2023. 2022 may be the last year you can do a backdoor Roth.

2023 Healthcare FSA Contribution Limit

The Healthcare FSA contribution limit will go up by $200 from $2,850 per person in 2022 to $3,050 per person in 2023.

Some employers allow carrying over some unused amount to the following year. The maximum amount that can be carried over to the following year is set to 20% of the annual contribution limit. As a result, the carryover limit will go up by $40 from $570 per person in 2022 to $610 per person in 2023.

2023 HSA Contribution Limit

The HSA contribution limit for single coverage will go up by $200 from $3,650 in 2022 to $3,850 in 2023. The HSA contribution limit for family coverage will go up from $7,300 in 2022 to $7,750 in 2023. These were announced previously in the spring. Please see HSA Contribution Limits.

Those who are 55 or older can contribute an additional $1,000. If you are married and both of you are 55 or older, each of you can contribute the additional $1,000, but they must go into separate HSAs in each person’s name.

2023 Saver’s Credit Income Limit

The income limits for receiving a Retirement Savings Contributions Credit (“Saver’s Credit”) will increase in 2023. For married filing jointly, it will be $41,000 in 2022 and $43,500 in 2023 (50% credit), $44,000 in 2022 and $47,500 in 2023 (20% credit), and $68,000 in 2022 and $73,000 in 2023 (10% credit).

The limits for singles will be at half of the limits for married filing jointly, at $20,050 in 2022 and $21,750 in 2023 (50% credit), $22,000 in 2022 and $23,750 in 2023 (20% credit), and $34,000 in 2022 and $36,500 in 2023 (10% credit).

All Together 20222023IncreaseLimit on employee contributions to 401k, 403b, or 457 plan$20,500$22,500$2,000Limit on age 50+ catchup contributions to 401k, 403b, or 457 plan$6,500$7,500$1,000SIMPLE 401k or SIMPLE IRA contributions limit$14,000$15,500$1,500SIMPLE 401k or SIMPLE IRA age 50+ catchup contributions limit$3,000$3,500$500Highly Compensated Employee definition$135,000$150,000$15,000Maximum annual additions to all defined contribution plans by the same employer$61,000$67,000$6,000SEP-IRA contribution limit$61,000$67,000$6,000Traditional and Roth IRA contribution limit$6,000$6,500$500Traditional and Roth IRA age 50+ catchup contribution limit$1,000$1,000NoneDeductible IRA income limit, single, active participant in workplace retirement plan$68,000 – $78,000$73,000 – $83,000$5,000Deductible IRA income limit, married, active participant in workplace retirement plan$109,000 – $129,000$117,000 – $137,000$8,000Deductible IRA income limit, married, spouse is active participant in workplace retirement plan$204,000 – $214,000$219,000 – $229,000$15,000Roth IRA income limit, single$129,000 – $144,000$138,000 – $153,000$9,000Roth IRA income limit, married filing jointly$204,000 – $214,000$219,000 – $229,000$15,000Healthcare FSA Contribution Limit$2,850$3,050$200HSA Contribution Limit, single coverage$3,650$3,850$200HSA Contribution Limit, family coverage$7,300$7,750$450HSA, age 55 catch-up$1,000$1,000NoneSaver’s Credit income limit, married filing jointly$41,000 (50%)
$44,000 (20%)
$68,000 (10%)$43,500 (50%)
$47,500 (20%)
$73,000 (10%)$2,500 (50%)
$3,500 (20%)
$5,000 (10%)Saver’s Credit income limit, single$20,500 (50%)
$22,000 (20%)
$34,000 (10%)$21,750
(50%)
$23,750 (20%)
$36,500 (10%)$1,250 (50%)
$1,750 (20%)
$2,500 (10%)

Source: IRS Notice 2021-61, author’s own calculations.

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How to Split an Existing I Bond for Multiple Beneficiaries

When savings bonds were only on paper, there was no account. The co-owner or the beneficiary had to be printed on the paper bond itself. The paper bond had room for only one co-owner or beneficiary.

After Treasury started issuing savings bonds in the online TreasuryDirect account, they continued with this setup. You have an online account but you can’t set your second owner or beneficiary at the account level as you normally do in your other investment accounts. You set it at the holdings level — bond by bond — and each bond can have only one person as the second owner or the beneficiary. See How to Add a Joint Owner or Change Beneficiary on I Bonds.

Table of ContentsSplit for Multiple BeneficiariesCustom Linked AccountOpen Custom Linked AccountPartial Transfer(Optional) Wait a Few DaysTransfer BackSplit for Multiple Beneficiaries

If you have two children, you can’t name both of them as 50/50 beneficiaries on the same bond. You’ll have to buy two bonds, one with each child as the beneficiary. See How to Buy I Bonds.

What if you didn’t realize this and you only placed one order for $10,000? How do you split your existing $10,000 bond into two $5,000 bonds and name a different child for each half?

There’s no direct way to do this in TreasuryDirect, but I figured out an indirect way.

Custom Linked Account

TreasuryDirect lets you open a Custom Linked Account linked to your main account. It’s like a sub-account or a goal savings account. In their words:

This is a flexible account you can establish to meet specific financial goals. You can even create a customized name, such as “Vacation Fund,” for the account. We offer the same convenient capabilities as in your Primary TreasuryDirect account.

The Custom Linked Account can only be accessed through your main account. Having a Custom Linked Account doesn’t increase your annual purchase limit. It only lets you separate your holdings for organization purposes. Most people don’t need a Custom Linked Account. We will use it to split your existing bond.

The idea is that you do a partial transfer of your existing bond to this Custom Linked Account. This will split your existing bond into two places — one part is in the Custom Linked Account and the other part stays in the main account. If you need to split an existing bond into more than two parts, repeat the partial transfer. After you’re done with splitting, you transfer the split parts back to your main account.

Transferring parts of an existing bond back and forth between your main account and your Custom Linked Account doesn’t trigger taxes. Nor does it eat into your annual purchase limit.

If you already have a Conversion Linked Account from depositing paper bonds to your TreasuryDirect account, you can also use that one to hold the splits. You don’t need to open a Custom Linked Account.

Open Custom Linked Account

I’m showing how to split using a Custom Linked Account even though I already have a Conversion Linked Account.

To open a Custom Linked Account, go to ManageDirect and then click on “Establish a Custom Linked Account.”

You’ll be prompted to answer a security question. Then it will ask you to give a personalized name for this new account and whether to use the same email address or a new email address. I just called this new account “Split” because I’ll use it to split an existing bond.

Your existing personal information and bank account information will copy over to the Custom Linked Account but we’re not going to buy new bonds in this account. After you submit the information, you will see an account number for the Custom Linked Account on the top right. Copy the account number. You’ll need it when you do the partial transfer.

Partial Transfer

Click on the link to your main account on the top right to go back to your main account. Go to ManageDirect and then click on “Transfer securities.”

Select one of your existing bonds. You can only split one bond at a time.

Choose “Transfer partial amount.” I divided the current value by two because I’m splitting this bond 50/50. If you’d like to split it three-way or in different percentages, adjust your partial amount off of the full amount including interest. Give your own Social Security Number as the “Recipient’s Taxpayer Identification #” because you’re transferring to a Custom Linked Account owned by yourself. You give the account number of the Custom Linked Account as the “Recipient’s TreasuryDirect Account #“.

The transfer happens immediately. If you’d like to split your bond into more than two parts, just repeat this process.

(Optional) Wait a Few Days

You may be able to transfer the split part from your Custom Linked Account back to your main account right away, but I waited a few days just in case it needed to age a little bit and get settled in the new home. I wasn’t in any hurry anyway. This may not be necessary but I figured it couldn’t hurt.

Transfer Back

The process to transfer the split-off bond from the Custom Linked Account back to the main account is just the reverse of the previous move.

Log in to your main account. Scroll to the bottom to find your list of linked accounts. Click on the link for the Custom Linked Account.

Go to ManageDirect, and then click on “Transfer securities.”

Answer the security question. If you split your bond into more than two parts, you can select all the bonds in the Custom Linked Account. If you only have one bond in the Custom Linked Account, select it and choose “Transfer full amount” this time.

Give your own Social Security Number as the “Recipient’s Taxpayer Identification #” and give the account number of your main account as the “Recipient’s TreasuryDirect Account #“.

Click on the link to your main account on the top right to go back to your main account. Click on Current Holdings. You’ll see all the parts of your original bond.

Now you can assign a different second owner or beneficiary for each part. See How to Add a Joint Owner or Change Beneficiary on I Bonds.

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A Large Margin of Safety Reduces Stress and Need for Precision

I eat oatmeal for breakfast. Because I’m lazy, I cook it in the microwave. When I first started doing it, the oatmeal overflowed and made a mess in the microwave.

I found a discussion online on this same problem. People had many different suggestions. Someone said to use water instead of milk. Someone said to cook it at 50% power for a longer time. Someone said to interrupt it in the middle, stir, and continue. Someone said to add a pinch of salt. Finally, someone said,

Just use a bigger bowl.

I bought this bowl from Target for $2. Problem solved.

You don’t have to be precise when the bowl is big enough. It doesn’t matter whether you use milk or water. You can cook at full power. You don’t need to stir and reheat. The big bowl gives you more leeway.

Benjamin Graham talked about the concept of “margin of safety” in the context of investing. When you buy at a wide margin of safety between a stock’s price and its intrinsic value, you’ll still get a good return even when your estimate of the intrinsic value is off a little.

Translating to personal finance, using a bigger bowl means saving and investing more such that you’ll always meet your goal even if you run into unfavorable market conditions. You don’t have to be precise in how much of your savings should go into traditional or Roth accounts. You’ll still be OK if you invested a good chunk in international stocks when international stocks did poorly relative to U.S. stocks.

At retirement, it means having a large portfolio such that you won’t worry about bear markets or high inflation. You spend your time on activities you enjoy, not watching what the Fed will do next. Your retirement success won’t depend on knowing when to harvest tax losses, how much you should convert to Roth, or whether you’ll pay IRMAA.

Big Bowls In Action

I read an interesting discussion on the Bogleheads forum. The poster retired in October 2021 but he had over 80% of his investment portfolio in one stock. As of early June when he posted an update, the value of his investment portfolio dropped 22% in five months. He had plans to reduce exposure to this single stock, but overall he hadn’t felt any undue stress. He was comfortable waiting for his investment thesis to play out.

Besides his confidence in this company as a leader in its field, he didn’t feel stressed because he had a big bowl. His portfolio value was $9 million after the drop and he planned to spend $250k a year in retirement. The planned expenses were less than 3% of the value of his portfolio and I imagine that a large portion is discretionary. It would be quite a different story if his portfolio value was $900k and the planned expenses were basic needs. The bigger bowl allowed him to take risks that are otherwise considered reckless.

I won’t put 80% of my portfolio in one single stock if I have $9 million but I’m not too worried about this person. The bowl is big enough. He can do whatever he wants.

I also read this interview of a retiree on ESI Money blog. He retired 14 months ago. His wife has been a stay-at-home mom for 15 years. Their investment portfolio is 89% in hedge funds plus some small percentages in real estate and other assets. That’s certainly unconventional but he’s not too concerned with not having enough safe assets such as bonds or annuities because they have $13 million in investments while spending $186k a year.

I won’t put 89% of my investments in hedge funds if I have $13 million but I’m not worried about them either. They have a big enough bowl.

If You’ve Won the Game, Stop Playing

Investment advisor and author Dr. William Bernstein famously said:

If you’ve won the game, stop playing.

This suggests reducing risk when you have enough assets to provide an adequate lifetime income stream.

You’ll have to decide whether you truly won the game. If your investments teeter on the edge between enough and not enough, you’ll naturally worry while going through rough patches. This creates great demand for retirement calculators and optimizing orders of withdrawals, Social Security benefits, and Roth conversions. Everyone wants to know whether they have enough to retire.

Ironically, when it’s abundantly clear they’ve won the game (“a big bowl”), as in the two examples above, it doesn’t really matter that much whether they stop playing or not. They can stop playing and convert everything into safe assets. Or they can keep playing and take unnecessary risks as they prefer. They’ll make it either way.

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Cash Out I Bonds Tax Free For College Expenses Or 529 Plan

There’s a tradition in this country for parents and grandparents to buy treasury savings bonds for their children or grandchildren as a savings vehicle for college expenses. Before I Bonds came along, it was done primarily using series EE Bonds and primarily in paper form. You can still use I Bonds you buy in the online TreasuryDirect account for college expenses for your children or grandchildren.

Taxpayers naturally assume the interest will be tax-free when they cash out I Bonds for college expenses. The redemptions can be tax-free but it’s not that easy to qualify. Many people intending to use I Bonds for college expenses end up not getting the tax exemption.

Not In Child’s Name

To qualify for the possible tax-free interest, the I Bonds must be in the name of a person age 24 or over at the time of purchase. This means if you put the I Bonds in a child’s name, they won’t qualify for the tax-free treatment (unless the child is already 24 when you buy the bonds for their graduate school or professional school expenses). The child can be a beneficiary on the bonds but not an owner.

Income Limit

Your modified adjusted gross income also must be under a set limit in the year you cash out the I Bonds for college expenses to qualify for the tax-free treatment. The income limit is adjusted for inflation each year. These are the limits in 2022 depending on your tax filing status:

Single, Head of HouseholdMarried Filing JointlyFull Exemption$85,800$128,650Partial Exemption$100,800$158,650Income Limits for Savings Bond Interest Exclusion

I track these limits for future years in Tax Brackets, Standard Deduction, 0% Capital Gains, etc.

It doesn’t matter what your income is when you purchase the bonds. To qualify for the tax exemption on the interest, your income has to be below the threshold in effect in the year you cash out. You won’t qualify for the tax exemption if your income will always be higher than the income limits.

Qualified Higher Education Expenses

The college expenses are limited to those for yourself, your spouse, or a dependent on your tax return. This means typically a grandparent or other relatives won’t qualify for the tax-free treatment when they cash out I Bonds to pay for college expenses for a grandchild or a niece or a nephew because the student isn’t a dependent on their tax return.

Only tuition and fees qualify. Room and board don’t qualify. The expenses also can’t be already covered by scholarships or another tax benefit such as 529 plan withdrawals, the American Opportunity tax credit, or the Lifetime Learning tax credit.

If you cash out more than the qualified education expenses, the interest is prorated by the qualified expenses relative to your total cashout. You can’t just assign 100% of the interest to the qualified expenses. For example, if you cash out $20,000 consisting of $15,000 in principal and $5,000 in interest but your qualified higher education expenses in the year are only $12,000, which is 60% of your cashed-out amount, then only 60% of the $5,000 interest is exempt from taxes.

Transfer to 529 Plan

If your income in the year when you expect to pay for college expenses won’t be under the income limit but you have a lower income in a year before that time, you can take advantage of the lower income by cashing out I Bonds and transferring the money to a 529 college savings plan or a Coverdell Education Savings Account.

The amount transferred to a 529 plan or Coverdell ESA for the benefit of yourself, your spouse, or a tax dependent also counts as qualified higher education expenses. When your lower income is below the income limit in effect for that year, you won’t pay tax on the interest.

Many 529 Plans have a separate line item on the contribution form (or a separate form) to indicate that the amount you’re contributing comes from savings bonds.

The amount transferred to a 529 plan for the benefit of a dependent still counts as a gift to the dependent for gift tax purposes in the same way as a cash contribution to the 529 plan.

Form 8815

You need to include IRS Form 8815 in your tax return when you claim the tax exemption on cashing out I Bonds for college expenses or transfers to a 529 plan. Tax software TurboTax and H&R Block cover this.

***

The tax exemption on using I Bonds for college is much harder to qualify than a 529 plan. Because the student must be a dependent on the tax return, it only works for the parents for the most part, whereas grandparents or other family members can also use a 529 plan. You also must meet an income limit, whereas there’s no income limit on a 529 plan. The interest will be tax-free only if you’re confident your income will be under the limit at some point.

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More Inflation Protection with TIPS After Maxing Out I Bonds

I Bonds are great, but there’s a limit on how much you can buy each year. After you buy all the I Bonds you can buy in your personal account, trust, business, as gifts, from your tax refund, and , then what? A natural answer is TIPS. They are another type of government bond with inflation protection.

I have a lot to say on this topic because I wrote a book about TIPS back in 2010. Amazingly little has changed in all these years. Specific interest rates changed, and some new mutual funds and ETFs came out, but the principles are still the same. I’ll give you the gist of TIPS in this post.

Table of ContentsWhat Are TIPS?No Purchase LimitYield Can Be NegativeInterest Rate RiskLesser of Two EvilsBreakeven Inflation RateWhen to Invest in TIPSHow to Invest in TIPSWhat Are TIPS?

TIPS are Treasury Inflation-Protected Securities. They’re a type of bond issued by the U.S. government. Both the principal and the interest are linked to inflation. If inflation goes higher, you get paid more interest and the principal repayment also goes higher.

No Purchase Limit

The biggest advantage of TIPS over I Bonds is that there’s no annual purchase limit in TIPS. You can buy as much as you want, in all types of accounts — including IRAs and HSAs, at an online broker you already use, both as individual bonds and in a mutual fund or ETF. Although you can also buy TIPS through TreasuryDirect, you don’t have to use TreasuryDirect.

Yield Can Be Negative

The biggest disadvantage of TIPS over I Bonds is that the yield on TIPS can be negative, which means they can be guaranteed to lose to inflation whereas I Bonds are guaranteed to at least match inflation.

5-Year TIPS yIELD: 2010 – April 2022

The chart above shows the yield on 5-year TIPS from 2010 through April 2022. It turned negative shortly after I published my book in 2010 (great timing, huh?). It stayed consistently positive only between November 2016 and December 2019.

The yield on 5-year TIPS was -0.46% as I wrote this on April 26, 2022. It means you’re guaranteed to lose 0.46% per year to inflation for five years if you bought a 5-year TIPS on that day and you hold it to maturity. No one likes to lose to inflation but there may not be a better choice after you buy all the I Bonds you can buy. Institutional investors invest billions of dollars in TIPS. They settle for a guaranteed loss to inflation to protect against losing an even larger amount to inflation.

You can see the latest yields on TIPS of different maturities at Daily Treasury Par Real Yield Curve Rates (click on the second link on the web page) and on this page from Wall Street Journal. As I wrote this, although the 5-year TIPS yield was still negative, it wasn’t as negative as before. It was -1.6% only 1-1/2 months ago. The 10-year TIPS yield was barely negative at -0.08% at this moment.

If TIPS yields become positive, this disadvantage can turn into an advantage. When TIPS yields were positive in the past, they were higher than the fixed rate on I Bonds.

Interest Rate Risk

The next disadvantage of TIPS over I Bonds is interest rate risk.

I Bonds are guaranteed never to lose money regardless of when you cash out. You forfeit the last three months of interest when you cash out within five years but you’re guaranteed to have your principal back plus the interest you get to keep.

It’s a different story with TIPS. You’re guaranteed to have your principal back only when you hold TIPS to maturity. If you must sell TIPS early, you get the market value, which can be higher or lower than your original investment.

Bond prices go down when market interest rates go up. You can lose money in TIPS over the short term even when inflation is high. For instance, Vanguard Inflation-Protected Securities Fund (VAIPX) invests 100% in TIPS. Its year-to-date return through April 25, 2022 was -4.41%, and that was with the high inflation so far in 2022. The short-term return was negative because market interest rates went up in recent months.

Lesser of Two Evils

Although the -4.41% short-term return on the TIPS fund sounds bad, it was actually a lot better than the returns on comparable non-TIPS bond funds. For instance, the year-to-date return on Vanguard Intermediate-Term Treasury Index Fund (VSIGX) was -6.81% in the same period.

TIPS can lose to inflation but other bonds can lose more to inflation. When TIPS yields are negative, after buying all the I Bonds you can buy, your choice isn’t losing to inflation or not losing to inflation. It’s losing a known amount to inflation with TIPS or losing an unknown amount to inflation with other bonds.

Breakeven Inflation Rate

The tradeoff comes down to how much inflation there will be in the future. No one knows. The market participants come out with an estimate. That’s the breakeven inflation rate, which is the difference between the yield on TIPS and the yield on nominal Treasury bonds of the same maturity. You’re better off with TIPS if inflation in the future comes out above this breakeven inflation rate. You’re better off with regular Treasuries if inflation in the future comes out below this breakeven inflation rate.

David Enna at TIPS Watch tracked the breakeven inflation rate at the time when TIPS bonds were first issued versus the actual inflation experienced during their lifetime. The data showed the market is always wrong on what future inflation will be. Sometimes the market estimated too high. Sometimes the market estimated too low.

You see the current breakeven inflation rates but you don’t know which way they’re wrong or by how much.

When to Invest in TIPS

Most of the questions on TIPS are really on whether it’s a good time to invest in TIPS right now.

Is it the best time to invest in TIPS right now?

Absolutely not. The best time to invest in TIPS was October 2008 when you could lock in a positive 3% yield above inflation for 20 years but we don’t have a time machine.

Should I wait until TIPS yields go higher in the coming months?

No one knows whether the yields on TIPS will go higher or lower. Money waiting in the wings also loses to inflation.

Is it better to switch from other bonds to TIPS now when inflation is high?

No one knows. High inflation isn’t a secret. When everyone expects high inflation, the breakeven inflation rate is also high. This compensates investors in other bonds for their lack of inflation protection.

Market participants collectively come to a conclusion that the current yields on TIPS and other bonds make them no better off or worse off one way or the other. You’re better off in TIPS when the market underestimates future inflation but no one knows whether the market is underestimating or overestimating right now.

Then how do you decide whether to invest in TIPS right now or not?

You decide by whether you want inflation protection or you want to take your chances relative to inflation.

When you invest in TIPS, you know how much you’ll earn or lose over inflation. Invest in TIPS if you’re satisfied by this number no matter what inflation turns out to be in the future. Other fixed-income investments may end up doing better or doing worse than TIPS but you don’t care. Your goal is to protect your investments from inflation.

On the other hand, if you don’t mind losing more to inflation for a chance to lose less, you don’t need to go out of your way to invest in TIPS. No one knows whether TIPS will do better or worse.

Finally, there’s always diversification. You don’t have to go either 100% TIPS or zero TIPS. You can invest in both TIPS and other bonds.

How to Invest in TIPS

If you decide to invest at least some money in TIPS, you can either buy individual TIPS or buy a mutual fund or ETF that holds TIPS. Buying a mutual fund or ETF is the easiest, in the same way as you invest in other bonds. When you’re new to TIPS, start with a mutual fund or ETF.

As in other bonds, short-term TIPS have a lower interest rate risk than longer-term TIPS but, in general, they also have a lower yield.

These mutual fund and ETFs invest in short-term TIPS (maturities up to 5 years):

MinimumExpense RatioiShares 0-5 Year TIPS Bond ETF (STIP)None0.03%Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)None0.04%Vanguard Short-Term Inflation-Protected Securities Index Fund (VTAPX)$3,0000.06%

These mutual funds and ETF invest in TIPS of all maturities:

MinimumExpense RatioFidelity Inflation-Protected Bond Index Fund (FIPDX)None0.05%Schwab Treasury Inflation Protected Securities Index Fund (SWRSX)None0.05%Schwab U.S. TIPS ETF (SCHP)None0.05%Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)$50,0000.10%

Buying individual TIPS gets more complicated. Please read my book Explore TIPS if you’re interested in buying individual TIPS.

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2022 2023 HSA Contribution Limits and HDHP Qualification

The contribution limits for various tax-advantaged accounts for the following year are usually announced in October, except for the HSA, which come out in April or May. The contribution limits are adjusted for inflation each year, subject to rounding rules.

Table of ContentsHSA Contribution LimitsAge 55 Catch Up ContributionTwo Plans Or Mid-Year ChangesHDHP QualificationContribute Outside PayrollBest HSA ProvidersHSA Contribution Limits202120222023Individual Coverage$3,600$3,650$3,850Family Coverage$7,200$7,300$7,750HSA Contribution Limits

Source: IRS Rev. Proc. 2020-32, Rev. Proc. 2021-25, Rev. Proc. 2022-24.

Employer contributions are included in these limits.

The family coverage numbers happened to be twice the individual coverage numbers in 2021 and 2022 but it isn’t always the case. Because the individual coverage limit and the family coverage limit are both rounded to the nearest $50, when one number rounds up and the other number rounds down, the family coverage limit can be slightly more or slightly less than twice the individual coverage limit.

Age 55 Catch Up Contribution

As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of the year (not age 50 as in 401k and IRA contributions), you can contribute an additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute additional $1,000 to your respective HSA.

However, because HSA is in one individual’s name, just like an IRA — there is no joint HSA even when you have family coverage — only the person age 55 or older can contribute the additional $1,000 in his or her own name. If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account in his name for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts in separate names if they want to contribute the maximum. There’s no way to hit the combined maximum with only one account.

The $1,000 additional contribution limit is fixed by law. It’s not adjusted for inflation.

Two Plans Or Mid-Year Changes

The limits are more complicated if you are married and the two of you are on different health plans. It’s also more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, the birth of a child, and so on.

For those situations, please read HSA Contribution Limit For Two Plans Or Mid-Year Changes.

HDHP Qualification

You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). You can use the money already in the HSA for qualified medical expenses regardless of what insurance you currently have.

The IRS also defines what qualifies as an HDHP. For 2022, an HDHP with individual coverage must have at least $1,400 in annual deductible and no more than $7,050 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum $2,800 in annual deductible and no more than $14,100 in annual out-of-pocket expenses.

For 2023, an HDHP with individual coverage must have at least $1,500 in annual deductible and no more than $7,500 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,000 in annual deductible and no more than $15,000 in annual out-of-pocket expenses.

Please note the deductible number is a minimum while the out-of-pocket number is a maximum. If the out-of-pocket limit of your insurance policy is too high, it doesn’t qualify as an HSA-eligible policy.

In addition, just having the minimum deductible and the maximum out-of-pocket isn’t sufficient to make a plan qualify as HSA-eligible. The plan must also meet other criteria. See Not All High Deductible Plans Are HSA Eligible.

202120222023Individual Coveragemin. deductible$1,400$1,400$1,500max. out-of-pocket$7,000$7,050$7,500Family Coveragemin. deductible$2,800$2,800$3,000max. out-of-pocket$14,000$14,100$15,000HDHP Qualification

Source: IRS Rev. Proc. 2020-32, Rev. Proc. 2021-25, Rev. Proc. 2022-24.

Contribute Outside Payroll

If you have a High Deductible Health Plan (HDHP) through your employer, your employer may already set up a linked HSA for you at a selected provider. Your employer may be contributing an amount on your behalf there. Your payroll contributions also go into that account. Your employer may be paying the fees for you on that HSA. You save Social Security and Medicare taxes when you contribute to the HSA through payroll.

When you contribute to an HSA outside an employer, you get the tax deduction on your tax return, similar to when you contribute to a Traditional IRA. If you use tax software, be sure the answer the questions on HSA contributions. The tax deduction shows up on Form 8889 line 13 and Schedule 1 line 13.

If your HDHP also covers your adult children who are not claimed as a dependent on your tax return, they can also contribute to an HSA in their own name if they don’t have other non-HDHP coverage. They get a separate family coverage limit. They will have to open an HSA on their own with an HSA provider.

Best HSA Providers

If you get the HSA-eligible high deductible plan through an employer, your employer usually has a designated HSA provider for contributing via payroll deduction. It’s best to use that one because your contributions via payroll deduction are usually exempt from Social Security and Medicare taxes. If you want better investment options, you can transfer or roll over the HSA money from your employer’s designated provider to a provider of your choice afterward. See How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee.

If you are not going through an employer, or if you’d like to contribute on your own, you can also open an HSA with a provider of your choice. For the best HSA providers with low fees and good investment options, see Best HSA Provider for Investing HSA Money.

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2021 2022 2023 HSA Contribution Limits and HDHP Qualification

[Update on April 12, 2022, after the government published March CPI data.]

The contribution limits for various tax-advantaged accounts for the following year are usually announced in October, except for the HSA, which come out in April or May.

The contribution limits are adjusted for inflation each year, subject to rounding rules. I calculated the limits for 2023 with the official inflation data.

Table of ContentsHSA Contribution LimitsAge 55 Catch Up ContributionTwo Plans Or Mid-Year ChangesHDHP QualificationContribute Outside PayrollBest HSA ProvidersHSA Contribution Limits202120222023Individual Coverage$3,600$3,650$3,850Family Coverage$7,200$7,300$7,750HSA Contribution Limits

Source: IRS Rev. Proc. 2020-32, Rev. Proc. 2021-25, author’s calculation.

Employer contributions are included in these limits.

The family coverage numbers happened to be twice the individual coverage numbers in 2021 and 2022 but it isn’t always the case. Because the individual coverage limit and the family coverage limit are both rounded to the nearest $50, when one number rounds up and the other number rounds down, the family coverage limit can be slightly more or slightly less than twice the individual coverage limit.

Age 55 Catch Up Contribution

As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of the year (not age 50 as in 401k and IRA contributions), you can contribute an additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute additional $1,000 to your respective HSA.

However, because HSA is in one individual’s name, just like an IRA — there is no joint HSA even when you have family coverage — only the person age 55 or older can contribute the additional $1,000 in his or her own name. If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account in his name for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts in separate names if they want to contribute the maximum. There’s no way to hit the combined maximum with only one account.

The $1,000 additional contribution limit is fixed by law. It’s not adjusted for inflation.

Two Plans Or Mid-Year Changes

The limits are more complicated if you are married and the two of you are on different health plans. It’s also more complicated when your health insurance changes mid-year. The insurance change could be due to a job change, marriage or divorce, enrolling in Medicare, the birth of a child, and so on.

For those situations, please read HSA Contribution Limit For Two Plans Or Mid-Year Changes.

HDHP Qualification

You can only contribute to an HSA if you have a High Deductible Health Plan (HDHP). You can use the money already in the HSA for qualified medical expenses regardless of what insurance you currently have.

The IRS also defines what qualifies as an HDHP. For 2022, an HDHP with individual coverage must have at least $1,400 in annual deductible and no more than $7,050 in annual out-of-pocket expenses. For family coverage, the numbers are minimum $2,800 in annual deductible and no more than $14,100 in annual out-of-pocket expenses.

For 2023, an HDHP with individual coverage must have at least $1,500 in annual deductible and no more than $7,500 in annual out-of-pocket expenses. For family coverage, the numbers are a minimum of $3,000 in annual deductible and no more than $15,000 in annual out-of-pocket expenses.

Please note the deductible number is a minimum while the out-of-pocket number is a maximum. If the out-of-pocket limit of your insurance policy is too high, it doesn’t qualify as an HSA-eligible policy.

In addition, just having the minimum deductible and the maximum out-of-pocket isn’t sufficient to make a plan qualify as HSA-eligible. The plan must also meet other criteria. See Not All High Deductible Plans Are HSA Eligible.

202120222023Individual Coveragemin. deductible$1,400$1,400$1,500max. out-of-pocket$7,000$7,050$7,500Family Coveragemin. deductible$2,800$2,800$3,000max. out-of-pocket$14,000$14,100$15,000HDHP Qualification

Source: IRS Rev. Proc. 2020-32, Rev. Proc. 2021-25, author’s calculation.

Contribute Outside Payroll

If you have a High Deductible Health Plan (HDHP) through your employer, your employer may already set up a linked HSA for you at a selected provider. Your employer may be contributing an amount on your behalf there. Your payroll contributions also go into that account. Your employer may be paying the fees for you on that HSA. You save Social Security and Medicare taxes when you contribute to the HSA through payroll.

When you contribute to an HSA outside an employer, you get the tax deduction on your tax return, similar to when you contribute to a Traditional IRA. If you use tax software, be sure the answer the questions on HSA contributions. The tax deduction shows up on Form 8889 line 13 and Schedule 1 line 13.

If your HDHP also covers your adult children who are not claimed as a dependent on your tax return, they can also contribute to an HSA in their own name if they don’t have other non-HDHP coverage. They get a separate family coverage limit. They will have to open an HSA on their own with an HSA provider.

Best HSA Providers

If you get the HSA-eligible high deductible plan through an employer, your employer usually has a designated HSA provider for contributing via payroll deduction. It’s best to use that one because your contributions via payroll deduction are usually exempt from Social Security and Medicare taxes. If you want better investment options, you can transfer or roll over the HSA money from your employer’s designated provider to a provider of your choice afterward. See How To Rollover an HSA On Your Own and Avoid Trustee Transfer Fee.

If you are not going through an employer, or if you’d like to contribute on your own, you can also open an HSA with a provider of your choice. For the best HSA providers with low fees and good investment options, see Best HSA Provider for Investing HSA Money.

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