We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for December 18, 2023
Tax rate numbers for 2024 are out, and it’s important to understand them to make the necessary adjustments and know how your income will be affected.
Listen in to learn how the progressive tax system works and the importance of understanding your marginal and average tax rates. You will also learn about the 2026 tax rates sunset, long-term capital gains tax rates, standard deductions, and much more.
Tax rates are something everyone “loves.” Wrapping up at the end of 2023, new tax rates for 2024 have been released. If you’re funding your 401(k) or other retirement accounts, you may need to adjust for new contribution maximums.
We have a lot of important numbers that we’ll be going through in this article…
Tax rates are something everyone “loves.” Wrapping up at the end of 2023, new tax rates for 2024 have been released. If you’re funding your 401(k) or other retirement accounts, you may need to adjust for new contribution maximums.
We have a lot of important numbers that we’ll be going through in this article, but if you want a checklist, please send an email to info@pomwealth.net.
It’s common to assume that if you’re in the 32% tax bracket, all income will be taxed at the 32% rate. Thankfully, in the United States, we have a progressive tax code which means that different portions of income are taxed at different rates that build upon each other.
For example, a couple with $250,000 of taxable income in 2024 that are under the status married filing jointly will calculate their federal tax liability in the following manner:
10% on the first $23,200 of taxable income (which is $2,320 in tax)
12% on the next $71,100 of income between $23,200 – $94,300 (which is $8,532)
22% on the next $106,750 of income between $94,300 – $201,050 (which is $23,485)
24% on the remaining $48,950 of income exceeding $201,050 (which is $11,748)
In total, this couple would owe $46,085 in federal tax; this is much different in comparison to the entire $250,000 of income being taxed at 24% since that would result in a tax liability of $60,000. Because different portions of income are taxed at different rates, blending those rates together to calculate an average rate of tax can put into perspective what amount of income is actually paid towards federal tax. In this example, the couple’s average federal tax rate is 18.4%. What that means is for every $100 of taxable income this couple has in 2024, they are paying $18.40 in federal tax. NOT $24.
For your reference, the current ordinary income tax brackets are:
Tax Rate
Single Filer
Married, Filing Jointly
Head of Household
10%
$0 to $11,600
$0 to $23,200
$0 to $16,550
12%
$11,600 to $47,150
$23,200 to $94,300
$16,550 to $63,100
22%
$47,150 to $100,525
$94,300 to $201,050
$63,100 to $100,500
24%
$100,525 to $191,950
$201,050 to $383,900
$100,500 to $191,950
32%
$191,950 to $243,725
$383,900 to $487,450
$191,950 to $243,700
35%
$243,725 to $609,350
$487,450 to $731,200
$243,700 to $609,350
37%
$609,350+
$731,200+
$609,350+
In 2026, the tax laws are going to “sunset,” meaning that unless a major political change takes place, the 12% tax bracket will increase to 15%. The 22% bracket will move to 25%, 24% is going to 28%, etc. This will impact everyone who files a tax return.
What is the standard deduction?
The standard deduction is available to everyone and varies according to your tax filing status. This deduction decreases the amount of income you will pay tax on. In 2024, the standard deduction is:
Married, filing jointly (MFJ): $29,200
Single: $14,600
What this means is that if you’re filing under the status MFJ, you will not pay tax on the first $29,200 of income you have in 2024. For example, with gross income of $40,000, subtracting the standard deduction of $29,200 leaves $10,800 of income that will be subject to tax. If in any year, your income is below the standard deduction, you will not owe any federal tax and may not even be required to file a tax return that year. If you are over age 65 or blind, you will receive additional deductions on top of these figures. The standard deduction is adjusted for inflation.
Long-term Capital Gains
A long-term capital gain is income from the sale of an asset that has been held longer than one year. Capital gains assets include:
Real Estate
Investment securities such as stocks and bonds
Other tangible assets
Let’s say that you purchased stock at $10,000 five years ago, and today it’s worth $15,000. If that stock is then sold today, the $5,000 growth is taxed as a long-term capital gain.
Long-term capital gain tax rates are favorable because they are different from and typically lower than ordinary income rates:
With taxable income less than $94,050, you will pay a 0% tax on capital gains
With taxable income between $94,050 and $583,750, you will pay a 15% on capital gains
With taxable income exceeding $583,750, you will pay a 20% tax on capital gains
Note: These figures are for the tax filing status married, filing jointly. Rates for the other tax filing statuses vary.
Based on these examples, you may want to consider selling 50% of a stock now and the rest after the New Year to avoid a large capital gains tax all in one year. You may even consider tax loss harvesting to mitigate gains.
Social Security Taxation While Working
When you’re working and earning an income, you pay what is called FICA tax on your earnings. FICA is money that you contribute to Social Security and Medicare. After a certain amount of earnings, you no longer pay into the Social Security portion of FICA tax; in 2024, that limit is reached at $168,600 of earned income. So if you make $200,000, you don’t pay the social security portion of FICA on the amount over $168,600.
Social Security Benefits at Retirement
In 2024, social security benefits will receive a cost-of-living adjustment (COLA) of 3.2%, which is an adjusted rate based on inflation that puts more money into your pocket.
Anyone who takes Social Security before full retirement age will be limited on the amount of money they can earn, which is $22,320. If you earn more than this amount, you will have some sort of penalty on this overage.
It’s common to assume that social security benefits are tax-free, but if you have a certain amount of income, you may have to pay tax on your benefits. Your social security benefits can be:
0% taxable
50% taxable
Up to 85% taxable
The portion of social security that is taxable to you depends on the amount of other income you have. We do have a full episode on Social Security and taxes, which we recommend that you either listen to here or read here.
Medicare Premiums
If you receive Medicare Part B and Part D, you will pay a monthly premium. In 2024, the standard monthly premium is $174.70 for Part B. If your income exceeds certain thresholds, you may also pay a surcharge in addition to your standard Medicare premiums. This is called the income-related monthly adjustment amount, or IRMAA. IRMAA is another complex topic that we’ve covered in great detail on our podcast and in a blog.
If you’re married, filing jointly with income below $206,000, you won’t pay a surcharge. If you earn between $206,000 and $258,000, you’ll pay an additional surcharge of $69.90/month/person. Medicare Part B surcharges can be as high as $419.30/month/person for income $750,000 or higher. The surcharges are adjusted per year based on your income.
This is why taking IRMAA into consideration is important when planning for a Roth conversion or year with high income for other reasons.
Plan for Savings Going into 2024
Retirement planning is all about saving now so that you can retire in the future. If you automated your 401(k) contributions to max out last year and want to do the same in 2024, you will need to increase your contributions to meet the new maximum contribution. If your contributions are traditional/pre-tax, 401(k) contributions will reduce your tax liability for the year.
Maximum 401(k) contribution as an employee in 2024:
$23,000 which is up from $22,500 in 2023
Age 50 or older can contribute an additional $7,500 for total 401(k) contributions of $30,500
Age 50 or older can contribute an additional $1,000 for total IRA contributions of $8,000
Eligibility for Traditional and Roth IRA contributions is dependent on two things: having earned income and having income below certain limits. If you’re retired and want to contribute to an IRA, you must have earned income of some form; you cannot fund these accounts with your general savings.
If your income is greater than $161,000 as a single person or greater than $240,000 married, you cannot contribute to a Roth account. The deductibility of a traditional IRA varies. If your income is greater than $87,000 as a single person or $143,000 married, you cannot deduct your contributions.
Health Savings Account
An HSA is an account that you can put money into and later distribute to pay for medical expenses. HSAs are powerful retirement savings tools because they offer triple-tax benefits: you don’t pay tax on the dollars contributed, you don’t pay tax on growth if you choose to invest the funds within the HSA, and distributions are tax and penalty-free as long as they’re used for medical expenses. After the age of 65, you’re no longer penalized and can take distributions for whatever reason, medical or not, but you will pay tax.
HSA maximum contributions:
$4,150 for a single person
$8,300 on a family plan
Age 55 or older can contribute an additional $1,000 for total HAS contributions of $5,150 single or $9,300 family
We do love it when someone refers a family member or friend to us. Sometimes the question is, “How can we introduce them to you?” Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.
Here are this week’s items:
Portfolio Update: Murs and I have recorded our portfolio update for July 10, 2023
This Week’s Podcast – Using a Health Savings Account (HSA) for Medical and Retirement Planning.
A Health Savings Account is a valuable medical and long-term retirement planning tool with more than just tax benefits.
Listen in to learn how to let your HSA contributions grow and invest the money over time for future use as an asset. You will also learn the different ways you can control when and how you want to spend your money on different qualified medical expenses.
This Week’s Blog – Using a Health Savings Account (HSA) for Medical and Retirement Planning.
A Health Savings Account (HSA) is a very beneficial tool that you can use in your retirement planning. You can use these accounts for your medical needs, but there is a lot of information that people don’t realize that an HSA offers.
We’re going to go over 10 things about an HSA that can help you when you’re trying to secure your retirement.
A Health Savings Account (HSA) is a very beneficial tool that you can use in your retirement planning. You can use these accounts for your medical needs, but there is a lot of information that people don’t realize that an HSA offers.
We’re going to go over 10 things about an HSA that can help you when you’re trying to secure your retirement.
10 Things to Know About a Health Savings Account (HSA)
1. Tax Advantages
A crucial benefit of an HSA is that it has many tax advantages attached to it. The HSA works by contributing through an employer plan or an individual plan.
When you contribute to the plan, you receive a tax deduction. The deduction can help you stay in a lower tax bracket, but there are limits as to how much you can put into one of these accounts.
In 2023, a solo plan that is HSA-eligible (be aware of this when signing up for a plan) has a $3,850 contribution maximum. You can receive up to a $3,850 deduction on your taxes as a result.
If you have a family, the maximum contribution this year is $7,750.
Anyone 55 or older can contribute an additional $1,000 per year as a catch-up benefit.
You can also contribute at the tax deadline.
2. Triple Tax Savings
More tax savings? HSAs are a great option in retirement planning because they really offer what is known as “triple tax savings.” You receive a tax benefit by:
Putting money into the HSA to reduce income tax
Allowing funds to grow tax-free
Paying down medical expenses without paying taxes
If you need to buy something for a medical reason, you don’t have to pay taxes either. When using an HSA for medical reasons, it offers great tax advantages.
3. Lowers Healthcare Costs
An HSA can lower your healthcare costs. These plans are designed for high-deductible health insurance plans. Since you don’t have as much coverage from the insurer, they allow you to open an HSA and save money on your monthly health insurance premiums.
A high-deductible plan with an HSA may make sense if you are relatively healthy and don’t go to the doctor often, or you are younger (and healthy).
HSAs with a high deductible plan will make sense to lower insurance costs, but these plans are certainly not for everyone. You’ll need to review your own circumstances and really figure out if a high-deductible plan is better for you or not.
4. Portable and Long-term Savings
An HSA is a health savings account that may be offered by an employer, but it is a portable savings option that you can transfer. The account is owned by you and can be transferred regardless of your employer or insurer.
You can use the funds in the account if necessary or opt not to if you like.
5. Investment Opportunities
While not all HSAs offer investment options, others do. For example, Murs has an HSA through his credit union that acts like a savings account and offers a standard interest rate – something along the lines of 2%.
However, his wife has an HSA through her employer that allows her to:
Invest the funds in the account
Earn higher interest as a result
If you can grow the account over time, you can enjoy tax-free distributions in the future. This tax-free growth is crucial and one of the reasons we recommend considering an HSA as a retirement planning tool.
6. Flexibility and Control
An HSA is optional and not a requirement, but you must use it for medical expenses whenever possible to fully reap the benefits of tax-free withdrawals. There are many instances where you can use an HSA for medical expenses, for example, should you go to the hospital:
You can use the HSA for your deductible – or not
You can use the HSA for the co-pay – or not
It is worth restating that using an HSA for medical expenses can be a great choice to expand your tax benefits.
You can use your HSA for any medical-related expenses that fall within the rules. If you find yourself in a long-term care situation, you can use funds in the HSA for the co-pay.
Note: Many HSAs offer a debit card that you can use, much like your normal bank debit card.
7. Pretax Contributions Through Payroll Deductions
If you’re an employee, you know that you can have contributions taken from your paycheck sent straight into a 401(k). You can use the same payroll deduction for an HSA, which allows you to set and forget your HSA contributions.
8. No Use It or Lose It Rule
Unlike a Flexible Spending Account (FSA), there are no provisions that require you to use the money in the HSA. If you contribute $3,000 a year, you’ll have over $30,000 in the account in ten years if you don’t use the funds.
You never lose the funds that you put into the account.
9. Retirement Savings Vehicle
We view an HSA as a retirement planning vehicle, and it’s something that we use a lot with our clients. When we use an HSA as part of our client’s retirement focused plan, we make sure:
To contribute up to the maximum family amount of the HSA
The goal is to not touch the HSA for as long as possible
Of course, if you need the money in the HSA, you should use it. If you don’t need to use the money, you can keep contributing to it and invest it over time. We can pay medical expenses out of pocket, but at some point when we’re close to retirement, we’ll begin using this account for:
Tax-free expenses
Any purpose after age 65
If you don’t use the withdrawal for medical expenses, you will be taxed on the withdrawal. When you use the HSA for health-related expenses that fall within the requirements, it’s a nice tax-free deduction.
10. Control Over Your Healthcare Decisions
Insurance companies have a way of telling you what you can and cannot spend money on with your healthcare. HSAs can expand your options by:
Saving money on healthcare premiums
Allowing you consider having a non-generic prescription filled
Choosing how and when you use the money in your HSA
If you’re trying to secure your retirement or are in the middle of retirement planning and want to learn more about how you can use a Health Savings Account, feel free to reach out to us.
