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Funding HSA from sale of stocks


Guest DMar

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I'm newly retired (age 62) and will be living on existing savings from now on. I will need to begin withdrawing from investments for living expenses and I need to know if it makes sense to sell some additional stock to continue funding an existing HSA. I would initially be selling out of a taxable S&P 500 index fund and paying capital gains, leaving the IRA money for later. I expect to have to pull about $50k out per year and with other income would have a gross income of about $70k. No mortgage or other source of significant deductions, if that matters. Any advice will be appreciated.

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It seems logical to me that (a) paying tax at long term capital gains rates, (b) in order to raise money to create a full tax deduction at regular tax rates, © and to fund an account that will eventually come back to you 100% tax free, is a pretty darn good deal. It would be even better if you didn't have to use step (a), but evidently you do or you wouldn't have asked the question.

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Thanks... I suppose the same question could apply to an ordinary IRA, except that any money in the account would be taxed at whatever my tax rate is at the time. That would seem to water down the benefit (paying capital gains to invest in an account that would itself be taxed at some point). On the other hand, putting the after tax money in a Roth might make more sense. Thanks again.

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Let me see if I understand.

You want to continue to fund an HSA for the next few years until you are eligible for Medicare. That is roughly 3 years.

You understand that you also need an HDHP. Have you found one that suits your medical coverage needs and which in combo with the HSA suits you better than whatever else is available ?

You understand that whatever is not used for qualfied medical expenses will be subject to taxation and penalties if used. Have you estimated how much more this would be when you become Medicare eligible ?

You are willing to give up your investment potential in order to do this. Bear in mind that we do not know whether the investment would appreciate or decline, in the future, if left alone. So we do not know what is really being given up.

You have actually simulated a tax return using this scenario and seen what the actual tax benefit will be, rather than guessing.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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<< Let me see if I understand. You want to continue to fund an HSA for the next few years until you are eligible for Medicare. That is roughly 3 years.

You understand that you also need an HDHP. Have you found one that suits your medical coverage needs and which in combo with the HSA suits you better than whatever else is available ? >>

Yes, I have an existing HSA account and HDHP that suits me.

<< You understand that whatever is not used for qualfied medical expenses will be subject to taxation and penalties if used. Have you estimated how much more this would be when you become Medicare eligible ? >>

My understanding is that whatever is taken from the account for other than medical expense is treated as taxable income just like a traditional IRA. Is that correct? Since I'm already over the 59 1/2 age, I don't think there will be any penalties. Is that also correct?

<< You are willing to give up your investment potential in order to do this. Bear in mind that we do not know whether the investment would appreciate or decline, in the future, if left alone. So we do not know what is really being given up. >>

My thought was that if I sell stock in a taxable account and pay the 15% capital gains, then put it into the HSA account I get a deduction at my current tax level of 28% so there's an advantage there. If I were to put it back into the same stock fund (SP500 for instance) as I took it from wouldn't there be an advantage? Not as good as if I didn't have to pay capital gains but some advantage? Since I've only got a couple years to Medicare it might not be significant though.

<< You have actually simulated a tax return using this scenario and seen what the actual tax benefit will be, rather than guessing.>>

I haven't done that. That's probably the best idea and should help clarify it for me. Thanks ... Don

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