It’s spring training season — always an ugly reminder that Tax Day (April 17) is right around the bases. Before you buy those peanuts and Cracker Jacks to watch the Nationals’ opener this year, warm up for your annual tax-return filing by considering two largely overlooked, last-minute tax strategies that can provide significant tax benefits for your investments.
First at bat is an HSA or Health Savings Account, which provides a triple-tax benefit: pretax contributions, tax-free earnings and tax-free withdrawals. An HSA allows you to set aside money on a pretax basis and even earn interest tax-free to pay for medical expenses.
Although not available to everyone, it should be considered as one looks for health insurance annually. To be eligible, you must have a qualified health insurance plan that has a $1,350 deductible for an individual or a $2,750 deductible for a family.
In 2018, you can contribute up to $3,450 as an individual or $6,900 as a family. HSA holders over 55 can contribute an additional $1,000 to their accounts. The added benefit is that, if you don’t need the money for medical reasons but desire more retirement income, you can transfer it to your retirement accounts in the future, tax-free. I am confident that everyone will have some medical costs in retirement, so why not pay for them with pretax, tax-free money?
Even if you can’t hit a triple with an HSA, everyone can get a double with a “backdoor” Roth IRA strategy. Roth IRAs have after-tax contributions and tax-free earnings, plus no required minimum distributions after age 70 ½. For many individuals, especially Georgetowners, if your income is over $135,000 — or $199,000 for a married couple — you are phased out and can’t contribute anymore. However, there is no contribution cap on an after-tax contribution to a Traditional IRA or on converting that money to a Roth IRA. So if you have money to contribute to a Roth IRA but the rules are getting in your way, you can contribute the maximum to a non-deductible IRA, then convert it to a Roth IRA. Two steps, but well worth the double tax benefits in the long run.
In 2018, you can contribute $5,500 to a Roth IRA per individual ($6,500 if you are over 50), provided you have earned income. Make sure you discuss this tax strategy with a qualified professional, especially the rules behind Roth conversions and IRA aggregation rules, so you aren’t surprised.
These two simple and underutilized financial planning strategies can add up over time. After all, when one considers how to invest his or her money in the game of life, pretax contributions are equivalent to a base hit — think 401(k)s and IRAs. After-tax with tax-free contributions are like a double — think Roth IRAs and 529 plans. Pretax with tax-free earnings and withdrawals are comparable to a triple.
If you can combine these strategies, you are certain to hit a home run.
Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an investment advisor representative of Capital Investment Advisors in Georgetown. This column originally appeared on Forbes.com.
