retirement and HSA contributions tax savings

Using retirement contributions and a health savings account (HSA) to help reduce your immediate tax liability is a real way for tax savings. I highly suggest maxing out any retirement contributions possible. I also recommend contributing to your HSA, if you have one. Let’s dive deeper into retirement and HSA contributions and how they can help you save money on your taxes!

Retirement and HSA contributions

First up, retirement contributions.

IRA/401(k) contributions

Many people overlook setting aside money for retirement and this can add up to large tax savings.

Taxpayers can make tax-deductible contributions to traditional IRAs up to tax day. For 2018 that means you can make a contribution until April 15, 2019. However, the door closes on December 31st for any 401(k) plans.

The IRS caps tax-deductible contributions to a traditional 401(k) at $18,500 for 2018. Workers age 50 and older can make an additional $6,000 in catch-up contributions.

Self-employed individuals

Self-employed individuals can open a SEP IRA or set up a solo 401k plan.


The general rule for SEP IRA contributions is 20% of your business income up to $55,000 (2018 limit) or 25% of your W-2 salary as an S corp owner.

SEP IRA contributions come off of your personal income tax return (Form 1040) and help to reduce your personal income, not your business income on Schedule C. They have no effect on business income whatsoever. If you made the deduction on Schedule C, or made and deducted more than your allowed plan contribution for yourself, you must amend your Form 1040 tax return and Schedule C.

Solo 401(k)

The one participant 401k plan is a traditional 401k plan which covers a business owner that has no employees, or an owner and his or her spouse.  With this plan, you are able to exclude any part-time employee who works less than 1,000 hours per year. These plans have the same rules and requirements as any other 401k plan.

There are two types of Solo 401k contributions:

  • Elective: meaning you don’t have to contribute; you elect to contribute as an employee of the business
  • Non-elective: meaning you have to contribute according to the plan created by the business

Unlike traditional 401k plans, there is no vesting schedule for Solo 401k. That means when you (or your business) contribute to a 401k account you are 100% vested immediately. What does it mean to be vested?

Vesting refers to the ownership of your 401k. While all the money that you personally have contributed to your 401k is yours and will go with you should you choose to leave a job, the terms of employer matched contributions aren’t so simple. That’s where the benefit of a Solo 401k comes in to play; you always own 100% of the company matched contributions.

Contribution Limits

Similar to traditional 401k contribution limits for 2018, you can elect to defer up to $18,500 ($24,500 if you over age 50) of your pre-tax income in elective contributions.

On top of the employee election, as the employer, you can also make a non-elective profit sharing contribution up to 25% of your pay (based on your W-2 wages).

However, total contributions cannot exceed $55,000 for 2018. This means if you max out your elective deductions at $18,500 as an employee, then the business can contribute a maximum of $36,500 to your account.

Keep in mind a business owner who is also employed by someone else and participates in a 401k with that employer needs to understand elective contributions are by individual, not by plan. This means the limit is $18,500 ($24,500 if over age 50) for ALL 401k plans.

Now let’s move on a take a look at another option for tax savings, the HSA.

Health Savings Accounts contributions (HSA)

The annual 2018 HSA contribution limit is $3,450 for singles and $6,900 for those covered under qualifying family medical plans (up from $6,750 in 2017). However, if you’re 55 or older in 2018, you can contribute an additional $1,000, for a total of $4,450 to an HSA for singles and $7,900 for families per year.

Any balance in your account can be used tax-free for future medical expenses. Your HSA can be really helpful when you do have a large medical expense because you know you have the money in that savings account. It lessens the financial worry a little bit and allows you and your family to focus on health and getting better.

These contribution amounts count as deductions to your income which will lower your tax liability. Plus, having money set aside for qualified medical expenses is pretty helpful. While HSA funds can only be used for qualified medical purchases, these include eyeglasses, contacts, dentist visits, prescription medications, and more. For a complete list visit here.

While most retirement accounts are subject to required minimum distributions once you reach age 70 ½, HSAs do not have this requirement. Income levels do not affect your participation in an HSA as long as you have a qualifying high deductible health plan.

How to Tell If Your Plan Is HSA Eligible

If you’re new to high deductible health plans (HDHP) and HSAs, sorting through the various requirements can feel a bit overwhelming.

If you’re overwhelmed, keep in mind that insurance carriers label their plans as HSA eligible. When in doubt, ask the insurance carrier about your specific plan or to help find one that is HSA eligible.

Other HSA Requirements

In addition to having an HSA-qualified insurance policy, here are the other requirements for contributing to an HSA. You must

  • Be covered under an HDHP
  • Have no other health coverage, with the exception of several types of ancillary coverage
  • Not be enrolled in Medicare
  • Not be claimed as a dependent on someone else’s tax return

Health savings accounts can help you prepare for medical costs in retirement. These accounts work with a high deductible health plan, which the IRS defines as a deductible of at least $1,300 for an individual or $2,600 for a family in 2016. Here’s how an HSA can help you cover health care costs.

Withdrawals for qualified medical expenses are tax-free. Plus, once you reach age 65, you can also use your HSA for nonmedical purposes. Keep in mind the distributions get taxed at your current tax rate.

Death of an HSA Holder

When you set up an HSA, you should select a beneficiary. What happens to the money in the HSA when you die depends on whom you designate as the beneficiary.

If you select your spouse as the designated beneficiary, it gets treated as your spouse’s HSA after your death.

When your spouse isn’t the designated beneficiary, the account is no longer an HSA. The fair market value becomes taxable income to the beneficiary.

The amount taxable to a beneficiary gets reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.

Employers who offer HSA plans

Some employers with high deductible health plans provide a health savings account. This allows you to have your pre-tax contributions withheld from your paycheck. Sometimes, if you’re lucky, your employer will even contribute to it on your behalf.

If your employer doesn’t provide an HSA, you need to find a bank for the account. Look for a one which provides easy access to pay medical expenses with a debit card and offers little to no fees and expenses for maintaining your account. Inquire about access to good long-term investments so you can grow your account without excessive costs undermining the growth opportunities. Also, look for a mobile app so keeping track of your account is simple.

What are your questions related to retirement and HSA contributions?

RV Tax Queen

I’m a numbers person—but don’t let that scare you. I’ve been an enrolled agent (EA) since 2014 and a nomadic business owner since 2016. Because I’m a nomad myself, I know exactly how stressful life on the road can be.

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This website is for general information only and is not intended to substitute for obtaining legal, accounting or financial advice. It is not rendering legal, accounting or other professional advice. Presentation of the information on this website is not intended to create a client relationship. For specific tax assistance please consult a tax professional on an individual basis.

While I make every effort to furnish accurate and updated information, I do not guarantee that any information contained in this website is accurate, complete, reliable, current or error-free. I assume no liability or responsibility for any errors or omissions in its content.



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