1. Presentation at 11/16/18 Greater Indiana FPA meeting
by Greg Geisler, PhD, CPA (inactive)
Clinical Professor of Accounting at Indiana University-Bloomington
Research: Intersection of taxes and financial planning
Teaching: Teach “Income Tax” to future CPAs;
Will Teach “Tax Planning Strategies for Individuals” to future CFPs starting next semester.
11/16/2018

2. “Are HSAs better than an employer-matched 401(k)?”
Based on article of similar name in Journal of Financial Planning (Jan. 2016, pp )
Article within that article:
Tax-efficient Order to Invest & Pay Down Debts
11/16/2018

3. Health Savings Account (HSA) Overview
Almost 24 million HSA accounts
Number of accounts growing by about 10% per year last few years
Over 2/3rds of contributions withdrawn in the same year
Over $50 Billion in HSA accounts at 6/30/18
Only $19 Billion at end of 2013
Estimated to be $75 Billion by end of 2020
Only $10 Billion (i.e., 20%) is invested!
$40 Billion is in money market accounts!
Source: “2018 Midyear HSA Research Report” by Devenir
11/16/2018

4. Health Savings Account (HSA) TAX Overview
(HSAs) requires that an individual be enrolled in a high- deductible health plan (HDHP) to be set up.
HDHP for annual deductible >= $1,350 for self-only coverage or >= $2,700 for family coverage,
Annual out-of-pocket expenses <= $6,650 for self-only coverage or <= $13,300 for family coverage.
2018 contribution limit (for employer and employee combined) to HSA <= $3,450 for self-only coverage or <= $6,900 family coverage
11/16/2018

5. YES! For some employees. Which ones?
Answer to the Paper’s Title: Are HSAs better than an employer-matched 401(k)?
YES! For some employees. Which ones?
Is the employee’s combined tax rate > 20% and employer’s 401(k) match ≤ 25%?
Is the employee’s combined tax rate > 33⅓% and employer’s 401(k) match ≤ 50%?
Is the employee’s combined tax rate > 42.86% and employer’s 401(k) match ≤ 75%?
If the answer to any of the 3 questions is YES, then HSA contributions will make an employee wealthier than an employer-matched 401(k)!
11/16/2018

6. Visual Proof of which to do first
11/16/2018

7. Intuition Behind the Answer
What replaces the employer match?
Answer: The government provided tax savings at contribution combined with using HSA distributions for qualified medical expenses = tax-free distributions
VERSUS
Retirement accounts:
Roth: No tax savings at contribution
401(k): Tax paid at distribution
11/16/2018

8. Numerical Proof of Which to do First: (Assume: Takes Standard Deduction) ER 401(k) match is 50%. EE contributes $4,140 (after-tax), n = 20 years, R = 5%, 22% = federal tax rate, 6% = state tax rate, 7.65% = FICA taxes
Employee contributes to traditional 401(k): Employee’s contribution to 401(k) (pretax) $ 5,750 Employer’s contribution to 401(k) 2,875 Traditional 401(k) balance at end $ 22,885 Tax due on liquidation of traditional 401(k) (6,408) 401(k) after-tax future value $ 16,477 Employee contributes to HSA: Employee’s contribution to HSA (pretax) $ 6,434 HSA after-tax future value $ 17,071
11/16/2018

9. The Order to Invest and Pay Down Debts to Maximize Your Wealth (1 of 4)
Based on after-tax rates of return!
Does the individual have HDHP so they can contribute to an HSA?
If not, go to Second step first.
Is the individual’s combined tax rate > 33⅓% and employer’s 401(k) match ≤ 50% (or other 2 questions)
If “Yes,” contribute to HSA First!
For other combinations, see graph on earlier slide.
Second) Contribute to your 401(k) until you get maximum matching contributions from employer
11/16/2018

10. The Order to Invest and Pay Down Debts to Maximize Your Wealth (continued) (2 of 4)
If cash available, Third) Pay off high interest rate debts
If cash available, Fourth) If you have child(ren) (or grandchild(ren)) you want to help put through higher education, contribute up to maximum that provides state tax savings.
Indiana residents: $5,000 per year × 20% = $1,000 state tax savings!
But must Contribute to IN CollegeChoice 529 account
Can withdraw up to $10,000 per year for private school K-12 beginning 2018
Why is 529 account fourth? State tax savings is a guaranteed return so this is better than a contribution to a Roth retirement account!
11/16/2018

11. The Order to Invest and Pay Down Debts to Maximize Your Wealth (continued) (3 of 4)
If cash available, Fifth) Make unmatched contribution to retirement account. Which retirement account?
If to = tn, (i.e., if tax rate now is the same as your expected tax rate at retirement), 401(k) = Roth.
If to < tn, invest in the Roth 401(k) and/or Roth IRA.
If to > tn, invest in 401(k) or IRA if Deductible.
If to = tn, 4 nontax reasons favor Roth: (after-tax $ contributed is greater; tax diversification in retirement; no RMDs from Roth IRA; Roth can be emergency fund)
and 1 favors 401(k): (known $ of tax savings now)
11/16/2018

12. Sixth) Pay off moderate after-tax interest rate debt
The Order to Invest and Pay Down Debts to Maximize Your Wealth (continued) (p. 4 of 4)
If cash available,
Sixth) Pay off moderate after-tax interest rate debt
Seventh) Investing through personal accounts
(i.e., not through retirement accounts)
11/16/2018

13. Why Follow the Rank-Ordering?
Different people run out of money at different points in the rank-ordering. That’s why following the rank-ordering presented is so important… It is the most Tax-Efficient rank- ordering (i.e., it Maximizes Wealth!)
11/16/2018

14. SUMMARY: The Order to Invest and Pay Down Debts to Maximize Your Wealth:
1st and 2nd) Every one of your clients should contribute maximum to HSA if they have high deductible health insurance; AND get maximum employer match by contributions to retirement account 3rd) Pay off high interest rate debts 4th) If higher education an issue, contribute to 529 higher education account but only to the extent it saves state income tax 5th) Retirement account contributions (unmatched by employer ) 6th) Pay off moderate interest rate debts 7th) Invest through taxable (i.e., personal) accounts DON’T follow order? Only if good nontax reason(e.g., saving for home down payment)
11/16/2018

15. Synopses of Greg Geisler’s Recent Articles: 1 of 3 Potential Future Presentation Topics
Sept. 2017’s Journal of Financial Service Professionals:
Asset Location: When “Stocks in Retirement Accounts” and “Bonds in Taxable Accounts” is More Tax-Efficient
11/16/2018

16. Synopses of Greg Geisler’s Recent Articles: 2 of 3 Potential Future Presentation Topics
Sept. 2017’s Journal of Financial Service Professionals:
Fact: 10 Million tax returns show > 0% but < 85% of Social Security Benefits Taxed (i.e., included in Income).
IMPACT: Since more SSBs are taxed as Other Income increases (e.g., withdrawal from tax-deferred retirement account)…
Social Security Benefits Taxation: In 2018 and future, 49.5% is the top effective federal Marginal Tax Rate if income includes Qualified Dividends (Qual. Divs.) or Long-term Capital Gains (LTCGs)
If only ordinary income (i.e., no Qual. Divs. or LTCGs),
40.7% is the top effective federal Marginal Tax Rate
GOAL: Tax Planning around such high effective tax rates!
11/16/2018

17. Synopses of Greg Geisler’s Recent Articles: 3 of 3 Potential Future Presentation Topics
Feb. 2018’s Journal of Financial Planning (Retiree-60s)
Tax-efficient order of withdrawals in retirement (includes collecting Social Security and subject to Required Minimum Distributions).
Conventional Wisdom:
1st) Exhaust taxable (i.e., nonqualified) accounts;
2nd) Exhaust tax-deferred retirement accounts;
Last) Exhaust Roth retirement accounts.
There is a much more tax-efficient strategy that is not difficult to implement!
11/16/2018

18. Research Articles Currently in Process: Potential Future Presentation Topics
Tax-efficient charitable giving via Qualified Charitable Distributions from an IRA compared to and donating appreciated securities: Which saves more tax for a client over age 70 1/2?
Tax Planning Strategies to increase the 2018 (and future years) Qualified Business Income Deduction for Service-Providing Professional firms (applies to CFP firms, Investment Advisory firms, CPA firms, etc.,)
11/16/2018

19. Thank you for your interest and attention!
Questions about the Rank-Ordering
or About
HSA versus Employer-Matched 401(k)?
I have moved onto other research topics and do not spend my days in the “HSA world” so I will not be able to answer many of your detailed HSA questions even though I know it is important to you and your client that it applies to.
Greg Geisler, PhD
11/16/2018