A few questions about IRA and HSA for Employed / Self Employed

[kidooo]

I have a full time job without any benefits. However i do contribute to a regular IRA for me and my wife for a total of $11,000 combined a year.

Is there anyway for me to contribute more? I do consulting on the side, and have a EIN as but very little revenue (a few thousand a year). can i use this fact to somehow make my own 401K for example?

How about HSA? my wife goes to doctors a lot, so she has a $600/month insurance plan with $1K deductible and no out of pocket. Is there anyway for me to not pay taxes or lower taxes on that $8200 annual spend?

 

[Matt]

Depending on your AGI, you might be able to contribute to a plan via the consulting income. Self employment plans to explore include SEP IRA, Solo 401k and Simple. Note that the deductible 'regular' IRA limits change if you are covered or are not, so creating a plan that covers you may, or may not, impact your levels on the regular side.

For HSA, you don't want one when you have high healthcare costs. A HSA is only allowed if you have a HDHP (High Deductible) which means that you would pay a lot more out of pocket per year in most cases. You could certainly search for HDHPs to see if they cover 100% of the medical needs that your wife has, in which case, it might work out. EG I looked at a HDHP recently and thought it a bad move because my 1 yr old has pretty expensive regular 'ish' visits for immunizations etc, however the plan I saw covered such visits, so it wouldn't be that bad.

Generally speaking though, you might find yourself losing out as you spend more due to the less favorable health plan.

In terms of not paying taxes or lowering taxes on the balance. You could consider married filing singly. This tends to come with a lot of penalties (including related to the IRA) which makes it likely a bad choice. The medical expenses can be generally deducted when they exceed 10% of AGI (a floor).

Therefore, if you filed jointly and earned $81000 (you $49000, her $32000) you could claim $100 ($8200 minus 10% of $81000)
In a filing separately case of the above, she could claim the $8200 on her return so could claim $5000 ($8200 minus 10$ of $32000)

The impact of that would be a 'deduction' not a 'credit' meaning that her AGI for the year would be reduced from $32000 to $27000, this number would further be lowered by other allowable credits or deductions.

So... depending on her salary it 'may' be more favorable. However, you'd need to consider income disparity between the two of you, and also factor in that you would receive penalties in other aspects of your taxes to get this. Here's some more on what you lose out on. http://www.efile.com/married-filing-separately-tax-filing-status/

If I could eyeball this, based on not knowing your income I would say that the medical expenses may be not high enough to really make the Married Filing Separately a benefit. One other thing to look at may be an FSA - this is a way to create a deduction on certain out of pocket expenses, prescriptions etc.

 

[kidooo]

Thanks for detailed response!

Depending on your AGI, you might be able to contribute to a plan via the consulting income. Self employment plans to explore include SEP IRA, Solo 401k and Simple. Note that the deductible 'regular' IRA limits change if you are covered or are not, so creating a plan that covers you may, or may not, impact your levels on the regular side.

From reading about the Solo 401k it seems favorable, as it says: "the limit is capped at 20% of the self-employed income plus $18,000 for 2015" so i understand this to say even if my self employed income is only $1K or maybe even if i had a loss i can contribute a minimum of $18K. is this correct? and how can i know if this will affect my limit on a regular IRA?

For HSA, you don't want one when you have high healthcare costs. A HSA is only allowed if you have a HDHP (High Deductible) which means that you would pay a lot more out of pocket per year in most cases. You could certainly search for HDHPs to see if they cover 100% of the medical needs that your wife has, in which case, it might work out. EG I looked at a HDHP recently and thought it a bad move because my 1 yr old has pretty expensive regular 'ish' visits for immunizations etc, however the plan I saw covered such visits, so it wouldn't be that bad.

Generally speaking though, you might find yourself losing out as you spend more due to the less favorable health plan.

My insurance's high deductible plan would be $1k extra per year, with the same coverage (lower monthly payments higher deductible). so i guess the savings would have to be >$1K

In terms of not paying taxes or lowering taxes on the balance. You could consider married filing singly. This tends to come with a lot of penalties (including related to the IRA) which makes it likely a bad choice. The medical expenses can be generally deducted when they exceed 10% of AGI (a floor).

Therefore, if you filed jointly and earned $81000 (you $49000, her $32000) you could claim $100 ($8200 minus 10% of $81000)
In a filing separately case of the above, she could claim the $8200 on her return so could claim $5000 ($8200 minus 10$ of $32000)

The impact of that would be a 'deduction' not a 'credit' meaning that her AGI for the year would be reduced from $32000 to $27000, this number would further be lowered by other allowable credits or deductions.

So... depending on her salary it 'may' be more favorable. However, you'd need to consider income disparity between the two of you, and also factor in that you would receive penalties in other aspects of your taxes to get this. Here's some more on what you lose out on. http://www.efile.com/married-filing-separately-tax-filing-status/

If I could eyeball this, based on not knowing your income I would say that the medical expenses may be not high enough to really make the Married Filing Separately a benefit. One other thing to look at may be an FSA - this is a way to create a deduction on certain out of pocket expenses, prescriptions etc.

Between the 2 of us i earn to much for the health spending to be 10% but she earns under $5K. so this would effectively give her a negative AGI, is that even possible? and is it beneficial to have that?

As for FSA, isn't that only for employer insurance plans? i don't have one

 

[Matt]

From reading about the Solo 401k it seems favorable, as it says: "the limit is capped at 20% of the self-employed income plus $18,000 for 2015" so i understand this to say even if my self employed income is only $1K or maybe even if i had a loss i can contribute a minimum of $18K. is this correct? and how can i know if this will affect my limit on a regular IRA?

It's like a regular 401K (and can be traditional or roth) the employee can defer their salary into it, so if you earn $1K, its $1k.

My insurance's high deductible plan would be $1k extra per year, with the same coverage (lower monthly payments higher deductible). so i guess the savings would have to be >$1K

OK so the 'value' aspect for you to explore is whether the HSA contributions for both of you would offer some upside. I imagine that they would. Have you checked to see the little things, like co-pays? EG in a regular plan you might get a $25 doctor visit co-pay, in a cheap HDHP you might get 50/50 split of the fee... you should forecast a typical year using the actual events (not just the monthly payments) and see what you'd end up paying.

Between the 2 of us i earn to much for the health spending to be 10% but she earns under $5K. so this would effectively give her a negative AGI, is that even possible? and is it beneficial to have that?

You can't have a negative AGI, it goes to zero. There are ways to get credits when you do get to that level (called refundable credits) but there are only a few.

The problem is, if you earn the most, your bracket will stay where it is now, and it will lose out on deductions by filing separately. So in this case, you'll probably be better to forget it and file jointly. The reason for this is that her rate is at the lowest bracket, and she's already not earning enough to take advantage of all her deductions. On this note, you'll see me talk about years that I try to increase my tax basis (so I can use all my deductions to pull it down again) I do this via my traditional>roth rollovers.

You could try running the numbers joint vs separate, but I'm 99% sure that having the benefits of joint deductions pulling down your AGI will be better for you - you can wipe out her $5K tax basis in just a traditional IRA if you so chose.

As for FSA, isn't that only for employer insurance plans? i don't have one

Yeah its via an employer, I wasn't aware on your OP that your wife didn't have an employer plan either.

 

[kidooo]

11

It's like a regular 401K (and can be traditional or roth) the employee can defer their salary into it, so if you earn $1K, its $1k.



OK so the 'value' aspect for you to explore is whether the HSA contributions for both of you would offer some upside. I imagine that they would. Have you checked to see the little things, like co-pays? EG in a regular plan you might get a $25 doctor visit co-pay, in a cheap HDHP you might get 50/50 split of the fee... you should forecast a typical year using the actual events (not just the monthly payments) and see what you'd end up paying.



You can't have a negative AGI, it goes to zero. There are ways to get credits when you do get to that level (called refundable credits) but there are only a few.

The problem is, if you earn the most, your bracket will stay where it is now, and it will lose out on deductions by filing separately. So in this case, you'll probably be better to forget it and file jointly. The reason for this is that her rate is at the lowest bracket, and she's already not earning enough to take advantage of all her deductions. On this note, you'll see me talk about years that I try to increase my tax basis (so I can use all my deductions to pull it down again) I do this via my traditional>roth rollovers.

You could try running the numbers joint vs separate, but I'm 99% sure that having the benefits of joint deductions pulling down your AGI will be better for you - you can wipe out her $5K tax basis in just a traditional IRA if you so chose.

Yeah its via an employer, I wasn't aware on your OP that your wife didn't have an employer plan either.

Thanks Matt, this makes things a lot clearer to me.