We hope you are feeling the freshness of Springtime that is upon us! There are some time-sensitive opportunities that we would like to share with you.
IRA and HSA April 15th Deadline
2021 IRA contributions and HSA contributions are due by April 15, 2022, even if your return will be on extension.
- The allowable 2021 IRA contribution is $6000 per person, with an extra $1000 if you were age 50 by December 31, 2021. The allowable 2022 IRA contribution remains at $6000 per person.
- The maximum 2021 HSA contribution is $3600 for self only coverage, and $7200 for family, with an extra $1000 allowed if you were age 55 by December 31, 2021. If your employer contributed only a portion of your HSA contribution during 2021, you are able to make up the difference if contributed by April 15, 2022. You will receive a tax deduction for this additional contribution on your individual federal tax return.
The Build Back Better Act never passed; therefore, we still have the ability to do back-door Roths in 2022. You may make a non-deductible IRA contribution, and if you have no other previously-deducted IRA or SEP-IRA balances, you can convert this to a Roth without taxation. While the IRA contribution for 2021 must be made by April 15, 2022, there is no need for the conversion to Roth to be executed by then. However, we do like this to occur before there is much investment growth in the IRA, as the conversion of that growth to Roth will be taxable.
Future Roth Conversions
Most employer retirement plans now allow for the roll-over of an employee’s previously-deducted IRA balances in to the company plan. This may be useful to get those previously-deducted balances out of your personal hands, so that your back-door Roth conversions of non-deductible principal remain tax-free.
- These funds may also enjoy better creditor protection under the company umbrella, rather than in your personal hands.
- Be prepared for any limitations in investment options that may be embedded in the company plan vs. your own IRA account.
Roth Conversion Opportunities
With a tough economy comes a few opportunities:
- If you expect your 2022 income to be particularly low, lower than in your retirement years, a Roth conversion at your lower tax rates may work to your advantage. Please consult us for a tax projection and analysis.
- If your IRA account takes a beating in the stock market, consider making your taxable conversion to Roth while the value is down. This makes the tax-effect lower, and the market recovery can take place in the completely-tax-free Roth.
- If you choose to convert, you may choose only a portion of your IRA if that best suits the tax planning. There is no need to convert the entire IRA balance.
For those of you participating in a company 401k, you can designate a portion or all of your elective 401k contribution to be non-deductible Roth. You will need to weigh the cost of the extra tax on your wages against the benefit of having tax free retirement income in the future.
Invest Your HSA
Don’t forget to get your HSA funds invested. The beauty of the HSA is that the contributions are tax deductible, the growth is tax-free, and you will be able to take those funds in to your household tax-free at any time in your retirement years if reimbursing yourself for out-of-pocket medical expenses. This is better than an IRA or retirement account whose distributions will be taxed in retirement.
- For this reason, we recommend not taking funds out of that HSA currently, allowing it to grow for years.
- We also ask you to save your receipts for all current out-of-pocket medical costs you are incurring, as those will qualify as substantiation for tax-free reimbursements of medical costs in your retirement years, without a time limitation.
Contact your LSL Advisor if you have any questions or need any analysis to assist you with these opportunities.