Building Wealth Through Health Savings A/c Archives

Quest Trust CompanyBlogBuilding Wealth Through Health Savings A/c

How Your Self-Directed IRA Can Save On Your Tax Return

Posted on December 11, 2014April 13, 2021 by questadmin

Estimated reading time: 3 minutes

Most individuals are at least generally aware of the long-term tax savings that can be achieved by having an IRA. Investments in IRAs (including self-directed accounts that are set up with a custodian such as Quest Trust Company) grow on a tax-deferred basis, so that investment interest, dividends and gains that occur within the account are only taxed when they are withdrawn, i.e., when the account holder takes a distribution from their account.

Roth IRAs provide an additional measure of long-term tax savings in that withdrawals are not subject to tax upon distribution to the account holder, provided that the holder has reached full retirement age.

But you can also use your self-directed IRA to save on this year’s taxes as well.

Deductible Contributions
The most direct way of saving taxes this year is to make tax-deductible contributions to a self-directed IRA. Contributions to a Roth IRA are never tax deductible, so you’ll only be able to use this method of saving if you have a traditional self-directed IRA.

Depending on your modified adjusted gross income (MAGI), the contributions you make to a traditional IRA may be tax deductible.

Individuals who are not covered by a workplace retirement plan are eligible for full tax deductibility of their contributions, regardless of their MAGI.
For single individuals who are covered by a plan at work for 2021, IRA contributions are fully deductible for a MAGI of up to $66,000 (with a gradual deductibility phase out between $66,000 and $76,000).
For married couples filing jointly, where the contributing spouse is covered by a workplace plan, full deductibility is available for a MAGI of $105,000 (with a deductibility phase out between $105,000 and $125,000).

Note that these figures only relate to the deductibility of contributions, not eligibility for contributions. In general, any individual with earned income can contribute to a traditional IRA in an amount not exceeding that earned income.

A Second Self-Directed IRA
Some retirement savers prefer the Roth self-directed IRA structure over the traditional structure because of the long-term tax savings and estate planning advantages that the Roth account provides, as well as being able to eventually avoid the IRS rules on required minimum distributions.

Still, the immediate benefit of a deductible contribution is quite attractive for current year savings, so some people choose to open a second, traditional self-directed IRA so that they can make deductible contributions in the years that it’s most advantageous to do so.

This second self-directed IRA can be maintained so that it’s available to receive deductible contributions in any future years where that’s advantageous for the taxpayer, or it can eventually be rolled over into the taxpayer’s Roth account.

Permitted Early Withdrawals
Let’s say you’ve incurred a significant medical expense this year, or are now paying for the college expenses of one or more of your children. Many individuals don’t happen to have the cash on hand to pay for these things, so they may choose to sell some of their investments in order to raise the necessary funds. This can trigger a sizable capital gains hit.

The IRS regulations allow penalty-free withdrawals from an IRA if the funds are used for one of several specified purposes. If taken from a Roth self-directed IRA, you won’t face a current tax bill in raising the necessary funds. Contact Quest Trust Company for more information.

Health Savings Account: Building Wealth Through Health

Posted on January 31, 2012April 12, 2021 by questadmin

Estimated reading time: 3 minutes

By now you have probably heard of the Health Savings Account (HSA). What you may not know is just how amazing this type of account actually is, in terms of premium savings, tax savings, and, most importantly, what you can invest in with your HSA.

Qualification Requirements. In order to have a Health Savings Account, you must be an “eligible individual.” To be an eligible individual, you must 1) have a High Deductible Health Plan (HDHP); 2) have no other health coverage, with certain exceptions; 3) not be enrolled in Medicare; and 4) not be claimed as a dependent on another person’s tax return. More complete information of the requirements may be found in IRS Publication 969, which is freely available at www.irs.gov.

Tax Savings. One of the best features of an HSA is the tax savings for contributing to the account. Beginning in 2007, the contribution limit was no longer tied to the deductible. The contribution limit for 2021 is $3,600 for self-only coverage and $7,200 for family coverage. To the extent you make the contribution (as opposed to your employer), these amounts are fully tax deductible, no matter what your income level. If you are age 55 or older, you may contribute an additional $1,000 for 2021. There is even a one time ability to take a distribution from your IRA to fund your HSA with no taxes or penalty.

In my tax bracket, the ability to deduct my contributions is significant. For example, I contributed $6,150 for 2011 and will save approximately $2,030 on my taxes. If you add the premium savings over a traditional health plan to the tax savings from contributing to an HSA, the total benefit to me goes a long way towards covering the cost of my contribution.

Distributions from an HSA for “qualified medical expenses”, which are broadly defined and include expenses for yourself, your spouse and your dependents, are tax free forever! Because the expenses only have to occur after the HSA has been established, virtually everyone will end up with qualified medical expenses at some point in their life. You can take a qualified distribution at any point after the expense is incurred, even in later years, provided you keep track of the expenses.

Investment Opportunities. Even better than the tax savings is the ability to invest your HSA funds in non-traditional investments, just as you would in a self-directed IRA. Many banks and other companies offer the convenience of an HSA account with a debit card for you to pay medical bills with. However, if you are healthy and don’t have a lot of expenses or you can fund the expenses out of pocket, you can make your HSA account grow much faster with investments other than mutual funds or savings accounts which may pay very little.

With a self-directed HSA, you choose your HSA’s investments. Common investment choices made by self-directed HSA participants at Quest Trust Company Inc. in Houston,Texas include real estate, both domestic and foreign, options, secured and unsecured notes, including first and second liens against real estate, C corporation stock, limited liability companies, limited partnerships, trusts and much more. In my own HSA I have a portion of two hard money loans generating yields of 12%, a portion of a shared appreciation mortgage which generates 10% in addition to a share of profits when the property is eventually sold, and a membership interest in an LLC owning a debt-fee rental unit.

The Health Savings Account is truly the best of all worlds. It can significantly reduce your health care premiums, reduce your taxes, and produce tax free wealth through non-traditional investments in a self-directed HSA. With a self-directed HSA (or IRA), you don’t have to “think outside the box” when it comes to your HSA’s investments. You just have to realize that the investment box is much larger than you think!

Health Savings Account: The Best of Both Worlds by Nathan Long

Posted on January 31, 2012April 12, 2021 by questadmin

Estimated reading time: 5 minutes

By now most people have heard of using self-directed IRAs to make purchases other than stocks, bonds, and mutual funds. Companies like Quest Trust Company Inc., operating out of Houston and Dallas, Texas as well as Mason, Michigan, have been doing a good job, through a series of free education seminars, of teaching people about using self-directed IRAs to buy real estate, foreclosures, foreign property, invest in notes, deeds of trust, private stock, limited partnerships, LLCs, and other non-traditional assets. In examining some of the other government sponsored savings vehicles available for investing in non-traditional assets I discovered the highly under-utilized Health Savings Account (HSA). Before my recent employment with Quest Trust Company I did not know that you could purchase non-traditional assets with a Health Savings Account (HSA).

A Health Savings Account is a powerful investing tool that many people overlook. Because it is the only account where contributions are tax deductible and qualified distributions are tax free, it is the best of both worlds. Furthermore, the definition of “qualified medical expenses” is fairly broad. IRS Publication 502 has an available list of qualified medical expenses. These include a broad range of medical, dental and vision expenses, but generally do not include the cost of health insurance premiums. You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law (COBRA) as qualified medical expenses for HSAs. If you are age 65 or older, you can treat insurance premiums (other than premiums for a Medicare supplemental policy, such as Medigap) as quailed medical expenses for HSAs.

In order to be an eligible individual and qualify for a Heath Savings Account you must have a High Deductible Health Plan (HDHP), you cannot be enrolled in Medicare, and you cannot be claimed as a dependent on someone else’s tax return. Recent changes in HSA rules allow you to contribute the maximum amount to your HSA even if your deductible is less than that amount. If you are an individual the amount you can contribute for the year 2021 is $3,600 and for a family it is $7,200. In addition, if you are over the age of 55 you are allowed an $1,000 catch up contribution. Unlike other plans you may have heard about, the amount you put into a Health Savings Account is allowed to rollover from year to year and the profits on any investments with the money are tax deferred. When the money is used to pay or reimburse for qualified medical expenses the distributions are tax free.

The knowledge of how to invest with a self-directed Health Savings Account from Quest Trust Company Inc. allowed me to do some amazing investments this year. I have a High Deductible Health Plan (HDHP) for my family. This health plan works well for me. I personally like high deductible insurance policies. My family rarely turns in a claim on most of our insurance policies. Because my family is financially stable, in the event of an accident or major illness paying a few thousand dollars would not be a problem. Over the years I have saved a lot of money by using high deductible insurance policies. When I discovered that Quest Trust Company offered self-directed Health Savings Accounts I saw a great opportunity.

This year my wife needed extensive dental procedures. The cost went well over $5,650. The insurance company did not pay because it was a dental procedure and I don’t carry any dental insurance. I opened an HSA with Quest Trust Company Inc. with a maximum deposit of $5,650. I could have immediately taken a distribution for my wife’s dental expenses, effectively negotiating a discount on the dental bill equal to my marginal tax rate. Instead I chose to leave the money in the HSA and invest the money in partnership with my son’s Roth IRA and my wife’s Roth IRA to purchase a note secured by a first lien on real estate. The note was for 12% with a 2% origination fee and all costs were paid by the borrower, including Quest’s fees, with an 18 month balloon.

I can add more to the HSA in January of 2022. As the money grows I can take any amount of money out of the account as long as I have qualified medical expenses, including dental or vision expenses, to be reimbursed. Since I already have a large amount of dental bills I just keep these bills along with any others in a file. When I want to withdraw some money for any reason I just request a reimbursement for the expenses regardless of the year the expenses were incurred, as long as the expense was incurred after opening my HSA. That being said, don’t make the same mistake I made. I opened my HDHP at the first of the year but waited to fund my Quest HSA until I could fund it fully. My wife had some of the dental work done before I opened the HSA. The work done before the HSA was opened will not qualify for a tax free reimbursement. If I would have simply opened the account with a small amount then funded the rest later in the year I could have used those expenses as well.

If in the future we decide that a HDHP is not good for our family we can switch to another plan. We will not be able to continue to contribute to the HSA, but we can keep the HSA open and withdraw the money out as needed tax free for qualified medical expenses.

If I had just paid for the dental expenses out of my pocket like I originally planned to, I would have lost the opportunity for a $5,650 deduction on my taxes and the opportunity to make a great investment. Remember, I can take the money out as my investments mature and gains on the investments can be withdrawn tax free. Like we always say here at Quest Trust Company, Inc., “You don’t have to think outside the box, just realize the box is bigger than you think!”

Happy Investing!