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The Little Tax Free Secret for Physicians

| October 13, 2017
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Every so often, I hear something that makes my eyes get larger than saucers.

Not too long ago… this happened.

I got an email from a client recently and he wrote that you could convert an IRA into an HSA.

No way…. I didn’t think this was possible!

I never heard of this before. I looked it up, and sure enough… you could.

This is potentially powerful, powerful information, my friends.

First, let’s walk through what this is all about.

It is a Healthcare Savings Account.

These accounts are very typical when you have a high-deductible medical insurance plan. You get a tax deduction for putting the money into an HSA and then it comes out completely TAX-FREE for qualified medical expenses.

You don’t have to use the money today, tomorrow, or even a year into the future. You can let it build and build and build and then the funds could come out tax-free.

In comparison, an IRA or Individual Retirement Account- you get a tax deduction for putting in the money, but when you take it out- the money gets taxed on both a federal & state level (if applicable).

Definitely, for medical expenses, we want money to come out of HSA funds rather than IRA funds.

The Fine Print You Need to Know

However… there are a few caveats you`ve got to be aware of.

  1. The IRS allows you to do only one time convert part of the IRA to an HSA; the health care savings account. This is great! They do have limits on this bad boy. You can`t just put $300,000 into it. They are not going to let you do that.
  2. You have to be currently enrolled in a medical plan that has an HSA in it. As mentioned earlier, this is usually high deductible plan. Thus, if you aren’t currently working… This does not apply to you.
  3. We have to check out to see what those contribution limits are because they will only let you convert money from the IRA to the HSA up to the contribution limit. Let`s use an example… let`s say the contribution limit is $4,000. You can only put up to $4,000, but that’s not the whole story.

The whole story is that if you put money into your HSA through your usual employer deductions. Then, let`s say it was $2,000 dollars. You can only put and convert another $2,000 out of your IRA into the HSA.

Final Thoughts

This could also be a great situation for a physician who is working part-time (perhaps doing locums) and doesn’t need the tax deduction today of the HSA and has a substantial amount of assets in IRA accounts.

Just imagine moving thousands of dollars every year from a taxable situation to a tax-free situation WITHOUT paying the taxes. It’s like a Roth conversion- but no taxes!

Check out doing a conversion- it`s definitely worth looking into particularly for those of us that are closer to retirement.

Work with your financial team- your financial advisor, tax preparer, and others to see if this may be right for you.

Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.

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