Until recently would have said the Roth and other non-traditional IRA holdings (primarily cash or tax-efficient equity funds) ought to be positioned more aggressively - conventional wisdom being that Roths represent longer term $$. What we did recently to obtain $$ for a home repair has me questioning that wisdom. We pulled the entirety (about 10k) from the non-traditional side to avoid the tax hit. In essence, to obtain 10K useable funds would have meant taking about 3k additional from the traditional IRA just to cover taxes (state & federal). The issue being the bigger hit to future earnings potential. FYI mid 60s with pension and SS - so any withdrawals now are rare - usually for unexpected expenses. With markets up, would be a good time to reduce the aggressive positioning in the Roth. Wonder how others view the relative allocations between the tax sheltered side and the side on which taxes have already been paid?
Comments
Being a little more aggressive in a Roth seems to make sense to me. I would take profits when the aggressiveness is trending in you favor by exchanging a few shares into a less aggressive fund. By doing this your profits are now held in a less volatile fund so, if and when you need the money, you will have less of a likelihood of selling at the wrong time. Also if these accumulated profits become too sizable you could periodically dollar average back into aggressive funds that are out of favor (buy low), but always leave a cushion for unexpected redemptions.
The Math:
$100K in a Roth which experiences a 10% gain over an uptrend period...move $10K (profits) into less aggressive fund. Use the $10K as a place to get emergency money when needed...leave the $100K to grow aggressively.
I am neither smart enough nor wise enough to proffer you retirement drawdown advice.
So I’ll do what I often do in these circumstances. I’ll tell you what my top-tier strategy is. Some elements might apply in your case; others might not. Each instance is special onto itself, although, from your posting, you and I share some aspects in common like a corporate retirement package and Social Security benefits.
My overarching plan is conventional wisdom in most every facet.
Like a stoic military commander, I subscribe to an “order of battle” commitment policy during the distribution phase of my retirement. I never plan to withdraw resources at an annual rate greater than 4 % per year after inflation adjustments. During withdrawal I plan to access taxable accounts first. When those are exhausted, I plan to use traditional IRA accounts next, and will resist hitting the Roth accounts until absolutely necessary. I anticipate that the Roth stuff will never be deployed for my purposes.
Anyway, that’s the plan. Since my Roth positions are long-term investments, these holdings are the most aggressive in my and my wife’s portfolios. They are composed of high Beta (high octane relative to market movements) mutual funds and ETFs. They include zero bond funds. Typically, I change at least one fund each year in this portfolio. If you truly believe that stocks are superior over the long haul, this asset allocation supports that preference. Let the magic of compounding work its miracles.
I do hold balanced funds and bond funds in my traditional IRA and taxable portfolio accounts. As an emergency fund, I keep a minimum of one year's withdrawal needs in a short term, low cost corporate bond fund like that offered at Vanguard. I am very comfortable with this plan, and it has worked for me for over two decades now.
Given this game plan, my Roth portfolio is highly volatile. If my expenditures exceed my current levels for an extended timeframe, I might be forced to adjust my Roth positions to a more conservative stance. Given that unlikely circumstance, I would attempt to anticipate my needs by at least three years to permit an incremental adjustment to the more conservative holdings. Use time to soften possible blows.
This ends a sketchy summary of my conventional wisdom portfolio policy. It does the job for me. I wish it gives you some fuel for your own personal portfolio decision-making. It need not be a difficult or complex task.
Best Regards.
To see this, let's assume that one anticipates being in the 25% bracket at the time one withdraws money from a traditional IRA (this is pretty close to the percentage that hank was assuming). The particular number doesn't matter, but many people seem to get ideas more easily if the numbers used are concrete.
Then $13.3K in a traditional IRA would get taxed $3.3K, leaving an after-tax value of $10K. So I'll compare a $13.3K traditional IRA with a $10K Roth. Which should have the more aggressive investment? Let's say that one investment is expected to double in value by the time it's withdrawn, while the other investment is expected to go up 50%.
Let's make the traditional IRA the more aggressive one. At the time of withdrawal, it's worth $26.6K; after taking taxes out ($6.6K) one is left with $20K. As expected, its after tax value doubled. The Roth goes up 50%, and is worth $15K.
Now we reverse investments. The traditional IRA goes up 50% to $20K; after taking out the $5K in taxes, one is left with $15K. As expected, its after tax value went up 50%. The Roth doubles, and is worth $20K.
No difference. All that changed is which IRA grew more.
The tax rate doesn't matter. An investment that doubles in value doubles in after tax value whether it is in a traditional IRA or a Roth IRA.
For $13.3K, I might have to take more risk. However, for a lower Roth value that is taxable equivalent of Traditional, I can reach the goal with less risk and more certainty. Failure to reach the goal in Traditional comes with a consolation price of less taxes (than goal). Failure to reach Roth goal does not have consolation price and thus opportunity cost is higher.
What we forget about investing sometimes is that life (or death) sometimes gets in the way of our calculations/math. As I reread hanks first comment he was questioning the wisdom of a Roth IRA vs. a traditional IRA as it relates to life's emergencies...the furnace just died and it zero degrees Fahrenheit outside. I have always felt that my Roth IRA served a duel purpose for life's little surprises in that I could withdraw my invested principal at any age without penalty. I also could "roll" the redemption back into my Roth IRA so long as I did this within 60 days of the Roth distribution. There are some IRS tax forms to make sure are filed as well regarding the distribution and the rollover. This Roth rollover grace period provides 90 days to secure other funding sources for this emergency...say maybe a equity line of credit or you eat PB&Js for the next three month.
So, in a sense, a Roth IRA investor has created a "tax free" emergency fund inside their Roth. I consider it "tax free" because the other alternative would be to create an emergency fund in a taxable account with dollars that I have already paid taxes on and would continue to pay taxes on (the earnings). If you see the Roth IRA serving this additional purpose then try to keep a portion of your Roth in what I call an "emergency allocation" fund within your Roth Portfolio. By positioning a portion of your Roth portfolio in a less aggressive fund, the emergency money doesn't have to be pulled from funds that have just lost 25% or more due to periodic downturn in the markets (a double tax in a sense... you first paid taxes to the IRS to invest in a Roth...then to Wall Street to redeem it at the exact wrong time). Life's surprises have a way of promoting rotten timing so try and plan for these events.
By positioning part of your Roth portfolio in funds/ETF that you would consider your "sleep well at night" investment when an emergency happens (Sh*t happens)...you have prepared yourself for where the redemption will come from and removed a great majority of the market risk of that decision.
Investor mentioned opportunity costs. Your redemption creates a lost opportunity cost since the redeemed money is no longer invested so try and roll that money back into the Roth over the course of the 60 day grace period.
No harm...no foul...life goes on.
PS: FWIW, "flinched" yesterday & shifted bit of Roth to more conservative stance. Should point out that even after this, it still has somewhat higher risk profile (as measured by volatility) than my Traditional IRA. Thanks again.
Article on the topic:
http://www.mint.com/blog/saving/does-using-a-roth-ira-as-an-emergency-fund-a-good-idea-052012/
One topic that has not been has not been addressed is legal protection[s]. Many people just let the tax issue drive every decision. When ( like what took place with my Grandparents ) people become older and need long term care, medical treatments, etc - the cost can ( and do ) eat up all their retirement savings. Yes.. you can buy long term care insurance.. we ended up fighting two battles. Not only did my grandparents need daily medical care - the insurance companies became very lax in their payments. So, we ended up fighting for several years after their death against creditors.
Anyhow, just make sure that the money that is invested for your heirs is protected under law.
http://www.assetprotectionbook.com/forum/viewtopic.php?f=142&t=1566
Lets just deal with your investment doubling in both accounts. The traditional account starts with $12,500, doubles to $25,000, pays taxes of $6,250 and leaves you with $18,750. The Roth account starts with just $10,000 (since you had to pay $2,500 in taxes), doubles to $20,000 and leaves you with $20,000. You gained $1,250 by investing in the Roth.
The math is similar with the 50% investment gain. Traditional = 12,500 going to 18750, minus 4687 in taxes leaving you with 14,063. The Roth = 10,000 going to 15,000. You gained $937.50 in the Roth account.
And as we know, the Roth contributions were with after tax monies.
Just another angle of view.
Regards,
Catch
Let's try the arithmetic again.
You start with $12,500 pre-tax. You put it in a traditional IRA, and as you said, you have $12.5K to start, $25K after doubling, and $18,750 after withdrawal and taxes.
You start with $12,500 pre-tax. You pay 25% taxes (not 20%), taking away $3,125, leaving you $9,375 in the Roth, which doubles to $18,750.
I'm not sure what you mean by having to take more risk. What I think you may mean (please correct me if I'm wrong) is that if you contribute the same nominal dollars (say, $5K) to a traditional and to a Roth, then you'd have to take more risk to get the traditional IRA to be worth the same amount (post-tax) as the Roth.
For example, you'd need to take more risk with the traditional to get that $5K initial contribution to grow to $13.3K than the risk you'd need to take to get the initial $5K to grow to $10K inside the Roth.
But that's not an apples-to-apples comparison, because that "same" $5K in the Roth cost you 1/3 more (assuming the same 25% tax bracket). And that was my point - that if you start with the same pre-tax earnings and contribute to a traditional or a Roth, you'll have the same post-tax value in each vehicle. Assuming you invest each the same way, then down the road, they'll still be worth the same (post-tax).
One way of looking at it is that when you contribute to a Roth, you prepay your taxes, and get to keep whatever the post-tax amount grows to. When you contribute to a (deductible) traditional IRA, instead of sending those tax dollars to the IRS, you squirrel them away within the IRA. Then when you withdraw from the traditional, those tax dollars have grown along with the IRA, and fully pay for the taxes due on the withdrawal. No net difference (assuming your marginal tax rate was unchanged.)
I already put numbers on this, but to reiterate:
Pre-tax earnings of $13.3K.
- Pay the 25% taxes, put $10K into a Roth, let it double to $20K.
- Put the $3.3K of "dedicated tax money" along with the remaining $10K into a traditional IRA, let it double to $26.6K, pay 25% taxes, and have a post-tax value of $20K.
I would rather enjoy the certainty of tax rates today and have the tax free income land have an option to mix IRA and Roth to have a control on tax bracket during retirement. If all I have Traditional IRA, I will not enjoy that option. That is why, I value Roth account higher.
You are correct about my simplifying assumption. I also assumed that one is not maxing out, else (because nominal dollars are worth more in a Roth than in a traditional), the Roth becomes more valuable. That is, since the cap is in nominal dollars, one has the ability to get more value (post-tax) into a Roth than into a traditional.
The assumption that tax rates are the same is actually a combination of several different assumptions:
- what the tax brackets in the future will be (I agree with your expectation that they will rise)
- how much income (including traditional IRA withdrawals) will be taxed as ordinary income (this could go down as one retires, or up if all dividends are taxed as ordinary income, or ...)
- exclusion of some or all trad IRA withdrawals from state taxation (some states don't tax portions of pension/IRA/annuity payments)
Your goals are somewhat in conflict - gaining certainty (via prepaying taxes at today's rates) and maintaining flexibility/uncertainty by keeping some traditional IRA moneys. Nevertheless, I do appreciate the planning value of prepaying taxes, even if it doesn't produce a different final dollar result.
Lots of good points being made here...Let me add a couple.
Contributing to a Roth has two qualifying hurdles both relating to earned income. I must have earned income in the year that I contribute and I must not earn too much income ($125K / $183K for 2012). An important point I want to make is that this doesn't mean that the
'funding source" for the Roth needs to come from earned income.
If I were to inherit a tax free insurance policy or sell my personal residence (at a profit) or receive a monetary gift from a loved one, all could be "funding sources" that incurred no taxes in the tax year it was received and could be used as "funding sources" for a Roth, based on your other earned income qualifiers. When combined with a spouse the earned limit is higher and the contribution is doubled.
So let's say wifey and I have earned income of less than $183K...we sell our mansion...we make a profit that falls below the $500K capital gains threshold...we now have a tax free "funding source' for two Roth contributions. We fund our Roth accounts every year going forward using these same proceeds that we have temporarily invested in tax efficient or tax free accounts (index funds, munis, etc.). The earlier we can start this process in life the better.
Also, my traditional IRA will bridge the years between 59 1/2 and when I need to access the Roth account. This will vary with everyone. When an emergency hits... the Roth account is available to reduce the tax hit that would normally happen if you were to raid a traditional IRA account.
I haven't research this but, are there tax free uses for a traditional IRA...say, for the funding of Insurance premiums such as Health, Life, Long Term Care? This might be an efficient use of these dollars.
I believe (but also have not done thorough research) that any withdrawal from a traditional IRA is subject to income taxes. There are various exceptions that apply to the 10% penalty for withdrawals before age 59.5, but none seem to apply to the taxation itself.
If a beneficiary of an IRA is a charity, then when the charity withdraws the money, the withdrawal may technically still be taxable, but the charity pays no taxes. See, e.g. The Benefits of Naming a Charity as the Beneficiary of Your IRA.
Good to know...Also, A tax deferred IRA can be used to fund an HSA (Health Savings Account) by doing a one time rollover. This is a one time allowance equal to a maximum of $3250 for an individual and an additional $1,000 if over 55 years of age for a one time tax free roll over into a HSA for 2013 of $4250 (individual).
So long as the HSA is used for qualifying expenses there is no taxes on the contribution (IRA roll over) nor the distribution (qualified medical expenses).
Unfortunately that transfer to an HSA doesn't really accomplish anything special.
Suppose you simply withdraw, say $4250 from the IRA and contribute that money to an HSA. The withdrawal increases your income by $4250, but the HSA contribution is an above the line deduction that reduces your income back to what it was originally.
On the other hand, if you transfer $4250 from an IRA to an HSA, your income is unaffected. No difference - either way your income isn't affected, and you have $4250 moved from the IRA to the HSA.
As this Marketwatch article ("A Tax Break to Nowhere") makes clear, there are a few corner cases where the direct transfer can have an effect, but they are somewhat obscure.
Wow...nice. I guess if one were under 59.5 the roll over would avoid an early withdrawal penalty but, just doing as you suggest allows one to contribute each year instead of just once as is the case with the IRA roll over. Too much to keep track of. Thanks
Great discussion. Some of you have run the numbers on what comes first and that's crucial. However, the nut is having as much diversity in your retirement as possible . . . so that you have both additional options AND resiliency. Years back I referred to it as the 'retirement stool' with more legs respresenting a more stury stool. Here's what I wrote at the time. Here it is. Pardon anything that might be dated.
The Retirement Stool
Think of your retirement like a stool with legs. We all know that if your stool only has one leg, it won’t be very sturdy. Even if it has two legs, it will likely tip over. Once we get to three legs, it’ll stand on its own. With four legs, it becomes even sturdier. In addition, you want your legs to be strong.
With your retirement, the objective is to have as many legs under your own retirement stool as you can. More is better. You always want more legs. In this way, even if one leg falters or is cut off, you have other legs to support your stool. Five is better than four, six is better than five.
Examples of legs are numerous, but we can start with Social Security. Add in your Pension. How about a saving account? The equity in your house is a good one. You want to include deferred compensation and an IRA. Another leg could be an outside business – you could be an EBAY dealer, or a landlord, or have a corner store. What about having children that have gotten a good education (largely with you help, I should add). You might have a collection of widgets that have value. These ALL can become legs under your retirement stool. Which do you have and how strong are they?
SOCIAL SECURITY. Regardless of how secure you may, or may not, think the system is, in all likelihood it will be around to a greater or lesser degree. Sure, the age at which you can start drawing may increase and even benefits may be reduced. However, it remains such a key component of our society, that to some degree it will be one of your legs.
PENSION. Whether you’re going to receive a Defined Benefits (traditional) pension, or a Defined Contributions (401K) type pension, this is also another key leg under your stool. A traditional pension is nice because supposedly it’s a guaranteed income for the remainder or your life [note: this is no longer such a guarantee as in the past]. Sometimes you even have the choice of a “cash out” option where you can roll the monies into a Rollover IRA and thereafter have control over it. With a Defined Contribution (401K) pension, you also have some benefit in that it’s portable. If you decide to change jobs, you can ‘take it with you’. Normally, this is also through the process of moving it into a Rollover IRA.
SAVINGS. Hopefully, we all have some savings if nothing other than an Emergency Fund. An Emergency Fund is where you start and is normally six months worth of expenses (bills). Once this fund is established, additional savings can be invested or simply left in the bank. Either way, this money also represents another leg.
DEFERRED COMPENSATION. Many employers offer some sort of deferred compensation in addition to the 401(k), in which you have an option of also investing. Depending upon the particular plan, the limits may or may not be similar to those of a 401. You might have similar or different investment options and you also might have different withdrawal rules. However, it can become another Leg under your retirement stool.
IRA (TRADITIONAL OR ROTH). The Roth IRA is one of the nicest gifts ever made to us by the federal government. With limits, you can contribute up to a certain amount each with after-tax dollars and later withdraw everything TAX EXEMPT. There are some minor restrictions on withdrawal of the gains (not the principal), but these are minor and end at 59 ½ . After that you can take it out however you wish without worries about the taxes. This is very neat.
With the traditional IRA, if you have a lower income, you can contribute with after tax monies (the credit comes when you file your taxes). This money grows tax deferred but your withdrawals are subject to tax as income. There are even situations where it may be wise to contribute to a traditional IRA when you don’t qualify for the tax break. This is because you’ve contributed After tax money and therefore only the gain is taxable at a later date – not the principal. You would want to weigh the tax implications both now and in the future to go this route, but it should be considered in some situations.
A further note about these tax exempt or deferred IRS type of retirements savings plans (401, 403, 457, traditional IRA and Roth IRA) is that they often have drastically different withdrawal rules and tax implications. This means they provide a great deal of flexibility in how your use them for retirement . . . and flexibility is good.
HOME EQUITY. Buy a home. Period. It beats renting as you’re paying into your OWN equity, rather than the landlord’s. Over time this equity will increase and become available, should you need it, in retirement. There is even now such a thing as a reverse mortgage. This is where, in retirement, you sell your home to the bank, and continue to live in it until you die, but they pay YOU a monthly mortgage payment. However, this only works if you’ve either paid it off, or most of it, because in effect, you’re borrowing on your equity. Home equity is a great and crucial leg under your retirement stool.
OUTSIDE INCOME. Start another business on the side. Sell stuff on EBay. Become a landlord and rent out houses. With any of these, you’re establishing a second stream of income and another leg under you stool.
CHILDREN. You’ve heard the expression, “my son (daughter) - the doctor”. Well, don’t sneeze. Having kids and helping them through school so they can get good paying jobs is a form of security in your old age that can be very important. How many know of someone who had a parent or other relative move in with them? Whether you need or want to use it, it can be another leg.
In summary, you want to take an inventory of the number of legs you have under your retirement stool and how strong each of them is. Can you add another leg or two between now and when you retire? Can you strengthen any of the weaker legs you presently have?
The bottom line is that your retirement is only as secure and sturdy as you make it and having a variety of strong legs under your retirement stool, provide a diversity that can insure you against any one or more legs, getting chopped off or eliminated. Or think of it as diversifying your retirement. If diversification is good for your portfolio . . . why is it not good for your retirement?
finis,
and so it goes,
peace,
rono
Apples and oranges.
Here is your Roth calculation:
- Before taxes/contributions:
-- Pre-tax earnings: $10K
-- Post-tax money (e.g. bank account): $2.5K
- After taxes/contributions:
-- Roth IRA: $10K
-- Taxes paid: $2.5K (25% of $10K)
-- Post-tax money: $0
Here is the traditional IRA contribution:
- Before taxes/contributions:
-- Pre-tax earnings: $12.5K (has to be; can't contribute more than you earn)
-- Post-tax money (e.g. bank account): $0
- After taxes/contributions:
-- Traditional IRA: $12.5K
-- Post-tax money: $0
It's apples and oranges because with the Roth, you're assuming that you've got $2500 in posttax money with which to pay the taxes on the Roth, while with the traditional IRA, one has that $2.5K in pretax money, which is worth 25% less, i.e. you're starting with $625 dollars (post tax value) less. If you start with less, then of course you'll wind up with less.
Update 8/3/2012: The above information appears to be incorrect. Please see msf's reply on this.
The longevity, opinion diversity, and participation level on this topic is amazing. Yes, it does have a few complex and sometimes controversial elements. But these options have been with us for a lengthy time now, and the Internet supplies a rich library of documentation that addresses all these issues. Additionally, the vested interest community that is a slave to profit incentives are centers for useful information.
As mentioned, the debate over Traditional or Roth IRAs has raged since the Roth was introduced in 1997. The addition of the Roth option made decision-making a little more complex and confusing. However, I anticipated that the erudite and informed MFO membership could comfortably navigate these more turbulent waters with little likelihood of scuttling their retirement yacht. Perhaps I misgauged our research capabilities while underestimating our laziness tendency.
As a cohort, the responding MFO membership does seem reasonably well informed about IRA rules, its regulations, and its most influential parameters. I recognize this assessment is not universal, and does not apply to all contributors. The knowledge bank is not uniformly distributed. Some of what we believe is true is not so.
For those who are puzzled about the Roth rules and potential benefits, I direct your focus to one of many fine industry presentations; there are literally hundreds of respectable sites. Vanguard serves as an excellent example. Here is a Link that offers a comparative illustration for three IRA options for a 25 year time horizon:
https://advisors.vanguard.com:443/VGApp/iip/site/advisor/researchcommentary/research/article/IWE_RetResIRAOpp
Before making a decision, an investor must reserve time to assemble a file that permits an informed decision. He needs this help to avoid pitfalls. Recognize that, just like the more direct mutual fund selection process, the IRA decision incorporates both risk and uncertainty.
Allow me to describe the sometimes subtle distinction between risk and uncertainty.
Mathematical and economics wunderkind Ken Arrow contributed in this arena and was awarded the Nobel prize for his modeling. Risk implies incomplete information with a meaningful understanding of the governing probabilities. Uncertainty ratchets up the murkiness of incomplete and imperfect information with still less insight into the odds of the unknown event, either in a timing sense or a magnitude sense.
A Black Swan event easily falls into the uncertainty category and is really never in the meeker risky domain. Rolling dice is merely risky. However, if you suspect that the dice are loaded and unfair, that elevates the scenario to the uncertainty stratosphere.
When the Roth was introduced, I immediately sought to identify the critical driving parameters. These include time horizon, current tax rates, projected future tax schedules, expected wealth and drawdown rate when exercised, annual inflation rate estimates, and predicted returns for investments. There’s plenty of risk and uncertainty in this type of analysis that makes the projections fragile.
There is also a real asymmetry between the accumulation and distribution phases of IRA ownership. The various tax possibilities and payment time shifts distort the picture, and whether the tax bill is paid with IRA monies or exogenous sources is a major factor. Inadvertently, several MFO responders changed what was originally a distribution question into an accumulation analysis.
Given the complexity of the options, when I explored IRA opportunities in 1997, I wrote a deterministic computer code similar to that used in the referenced Vanguard analysis. The code permitted me to explore the issues parametrically; it allowed me to play what-if games. Not surprisingly, results were mixed in that they tightly depended on the timeframe, the end-point tax schedules and the rates of investment returns postulated. All of this required muddy guesstimates. That’s not a solid position for good decision-making.
So I broadened my analyses, and generated a Monte Carlo computer code to facilitate further studies. I did multiple 1000 case run simulations to test numerous parameter dimensions. As you might have guessed, the output results remained mixed. The optimum strategy depends on the cloudy future. But I did discover the most influential factors that tend to dominate final wealth estimates.
Not totally surprisingly, the most significant parameters were time horizon (the longer, the better), investment returns (the more, the better), and, in particular, using non-IRA monies to finance the original tax bill. Using IRA funds to pay the tax collector makes recovery far more problematic when selecting the Roth IRA route.
Let me close by donning my curmudgeon hat. I was disappointed with those MFO contributors who proffered an opinion without knowledge of the distinctions between Traditional and Roth rules and regulations. Partial understanding is a dangerous thing. That’s equivalent to going into a gambling casino without knowledge of either the house rules for the game or the relevant odds. That’s a recipe for disaster.
Most of the MFO observations and advice is spot on-target, but a small fraction is not. As always, I recommend consulting primary sources; the unverified Internet is simply not trustworthy enough. The major mutual fund firms (Fidelity, T. Rowe Price, Vanguard) are excellent departure points. Please take the time to more fully research the issues.
The problem with the current information exchange format is that some garbage must always be integrated with much good stuff. For the IRA novice, separating the wheat from the chaff is not an easy task. Also, the information exchange is presented in a jumbled, unorganized fashion. I challenge anyone to untangle this current thread. At best, it’s just plain messy and nearly impossible to follow in a cogent manner.
Not only do all the bases need to be identified and touched, the touching order itself is significant for a rewarding learning experience. That’s why, if IRA decision-making is on the radar screen, I suggest several visits to the referenced mutual fund websites to better secure a comprehensive review of IRA options.
Thanks for giving me the platform to battle, rattle and rumble on this controversial topic. Even as an 15 year Roth IRA participant, I benefited (just a little) from the mixed bag of responses, relies, counter-replies, counter-squared replies, and so on to infinity I suppose.
And the beat goes on.
You guys are both conscientious contributors and great fun.
Best Regards.
I believe you're getting confused (or I am) by a poorly worded Pub 969.
Look at the pdf file, specifically at the bookmarks (the breakdown of document sections that is shown on the left side of the window). Under HSAs, you'll see Contributions to an HSA. Underneath that, you'll see two separate subsections, Limits on Contributions and Rollovers. The content of each should be read as relatively separate.
In the first section, specifically on p. 6, it describes Qualified HSA funding distribution. This describes the one-time funding from an IRA. In it, the pub states: "The distribution must be made directly by the trustee of the IRA to the trustee of the HSA. The distribution is not included in your income, is not deductible, and reduces the amount that can be contributed to your HSA. The qualified HSA funding distribution is shown on Form 8889, Part I, line 10..."
(The instructions for 8889 line 10 reiterate that this is direct trustee to trustee, and reduces the amount that you can contribute to your HSA.)
Getting back to Pub 969, in the second section (Rollovers, p. 7) one sees as the first sentence, "a rollover contribution is not included in your income, is not deductible, and does not reduce your contribution limit." I believe this is what you are using as your authority.
But as one sees from reading the next few lines, this section is talking about rollovers from Archer MSAs to HSAs and HSA to HSA rollovers. Just as with the more familiar IRA to IRA rollover, moving money from one account to another of the same type (IRA to IRA, or here, HSA/MSA to HSA) doesn't count against a contribution limit. That's what you'd expect. And it's not the same thing as an IRA to HSA transfer (which is not a transfer between accounts of the same general type).
Since one should generally take IRS Pubs with a grain of salt (they're plainspeak docs, and not legal authority), I try to go back to statue (IRS Code), IRS regs and notices. Here's the relevant wording from Notice 2008-51: The amount contributed to the HSA through a qualified HSA funding distribution is not allowed as a deduction and counts against the individual's maximum annual HSA contribution for the taxable year of distribution." The Notice cites IRC Sections 408(d)(9) and 223(b)(4)(C) as the relevant code "allowing qualified funding distributions from IRAs to HSAs." But I think I'll stop here
I am sure this will help prevent some people from making errors. Thanks again for your attention to detail. I am very happy to have you here.