Retirement Savings

Q&A: Tapping into a Health Savings Account while on Medicare

February 18, 2025 By Liz Weston

Dear Liz: I’m on Medicare but I also have a health savings account with a fair market value of over $9,000. Am I able to spend this on prescriptions, eye care, etc.? I hate to waste this money. My wife passed away and it’s been sitting there for a while.

Answer: You can’t contribute to an HSA once you’re on Medicare, but you can certainly spend the money you’ve accumulated.

As mentioned in previous columns, HSAs offer a triple tax break in that contributions are deductible, the account grows tax-deferred and withdrawals are tax-free for qualifying medical expenses. Those expenses can include dental and vision costs as well as Medicare premiums.

If anyone other than a spouse inherits the account, the HSA becomes taxable so you’ll definitely want to spend that money while you can.

Q&A: Roth conversions and holding periods

February 4, 2025 By Liz Weston

Dear Liz: Eight years ago I converted a number of stocks from an IRA to a Roth IRA and paid the taxes. Now I am in a position to convert the last shares but want to do it incrementally over the next four years. Does each conversion then require its own five-year waiting period or will anything in the existing Roth now qualify to be withdrawn at any time?

Answer: The IRS requires five-year holding periods before earnings can be withdrawn tax-free from Roth accounts. The five-year rule applies separately to each Roth conversion, so the partial conversions you’re contemplating will each have their own five-year holding period, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That’s different from regular Roth accounts, where the five-year rule starts the year the account was first opened and isn’t triggered again by subsequent contributions, Luscombe says.

Q&A: Navigating the Risks of 401(k)s, IRAs, and Payable-on-Death Accounts

January 27, 2025 By Liz Weston

Dear Liz: You recently wrote about the drawbacks of payable on death accounts, including that the funds go directly to the beneficiaries before the estate’s expenses are paid. Aren’t all 401(k)s payable on death? I’m often reminded to update my beneficiary info whenever I log into my account. Should 401(k)s be converted to IRAs once we leave our jobs when we retire? At least one of my 401(k) accounts from a previous job is still in that company’s plan, as it is a very good plan. Can we designate that certain expenses be paid from the accounts before our beneficiaries receive their inheritance?

Answer: Retirement accounts, including 401(k)s and IRAs, typically have named beneficiaries that will inherit the money directly. That means retirement accounts have the same potential drawback as payable-on-death bank accounts or transfer-on-death arrangements. If you have no other assets when you die, the person who settles your estate may have to appeal to these beneficiaries to return some of the money to pay your final bills. The beneficiaries usually would be under no obligation to cooperate, however.

You could name your estate as your beneficiary, but that could have some tax drawbacks so you should consult an attorney before doing so.

Q&A: Health savings accounts offer a rare triple tax break. Here’s what to know

January 7, 2025 By Liz Weston

Dear Liz: Can I contribute additional money to my health savings account, above the amount I’m contributing through payroll deduction? Also, I have an HSA account from a previous employer and one from my current employer. Can I combine the two?

Answer: If you have a qualifying high-deductible health insurance plan, you can contribute up to $4,300 this year to an HSA if the plan covers just you or $8,550 if the plan covers your family. If you’re 55 or older, you can contribute an additional $1,000. You can make additional contributions if your payroll deductions for the year, plus any employer contributions, fall short of the limit.

Maximizing your contributions can make sense because HSAs offer a rare triple federal tax break. Contributions are pre-tax, the money grows tax deferred and qualifying medical expenses can be paid with tax-free withdrawals. You can invest the money in your HSA for growth, and the balance can be rolled over year after year, making it a powerful potential supplement to other retirement plans. Although HSAs can be used any time to pay for medical costs, many HSA owners pay those expenses out of pocket so their accounts can continue to grow.

Consolidating an old HSA into your current one can be a smart move because combining accounts can reduce account fees and make it easier to manage your investments. You’ll also run less risk of losing track of an account.

The best way to consolidate would be to contact your current HSA provider and ask them to facilitate a direct trustee-to-trustee transfer from the old account. However, not all providers allow “in kind” transfers of investments. It should be no problem to transfer any cash in the account, but you may be required to sell the investments. You won’t owe federal tax on such a sale, but some states, including California, will tax any capital gains that result.

Q&A: Rolling over a 401(k) account after starting a new job — at age 73

November 11, 2024 By Liz Weston

Dear Liz: My wife, who turned 73 this year, worked for a company until Aug. 31. She started a new job with another company the following day. She plans to roll the 401(k) from the previous company into the 401(k) of the new company. Would she need to withdraw her required minimum distribution from the old 401(k), even though the money would be in the 401(k) of her current employer?

Answer: The answer to this question gets a little tricky, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

If she had changed jobs last year, the year before she turned 73, she could have rolled her old 401(k) account into her new employer’s plan and postponed the need to take a required minimum distribution as long as she continued to work for the new employer.

However, since she turned 73 this year and is no longer working for her old employer, she must take an RMD from the old 401(k) plan. RMDs can’t be rolled over from one 401(k) to another, so she’s required to take her RMD from the old account before moving the rest of the money to the new plan, Luscombe says.

RMDs typically must be taken by Dec. 31. A first RMD can be delayed until April 1 of the year following the year someone turns 73. People who delay, though, wind up having to take a second RMD the same year. If your wife wanted to delay her RMD, she would have to take both withdrawals before she could rollover to the new plan.

To avoid that, your wife would need to take her first RMD from the old plan before Dec. 31 and then roll over the rest. She would not be required to make additional withdrawals as long as she keeps working for the new company, Luscombe says.

If she didn’t take the RMD before rolling over her account, she would be considered to have made an “excess contribution” to the new 401(k), which could be subject to penalties, Luscombe says. She could avoid the penalties by withdrawing the RMD amount, along with any earnings or losses associated with the excess contribution, by Oct. 15 of the year after the rollover, Luscombe says. A tax pro can help with those calculations.

Q&A: Changing jobs? Think about transferring your retirement fund

October 22, 2024 By Liz Weston

Dear Liz: I’m a government employee with a 403(b) supplemental retirement plan. I’m taking a new job out of state and wonder what to do with the money in this account. Should I leave it in the plan, which has been doing great, or transfer it to my new employer’s plan? Also, I have a little money, about $8,000, in a 457(b) deferred compensation plan that I would like to remove for simplicity. Can I transfer this into a brokerage IRA without any tax hit?

Answer: You mention that your current plan has been “doing great,” but it would be surprising if that weren’t the case. As of mid-October, the one-year return for the Standard & Poor’s 500 market benchmark was about 34%.

If your new employer’s plan is a good one, then transferring your money there could be a great option since you’d have fewer accounts to manage and monitor. How can you tell if a plan is good? You’ll see a number of low-cost investment options with expense ratios well under 1%. If you’re a teacher, you can find ratings of school district 403(b) plans at the nonprofit 403bwise (https://403bwise.org/).

You’re allowed to roll your deferred compensation plan into an IRA or your new employer’s retirement plan. You may want to keep the money where it is, however. Once you leave an employer, you’re allowed to access a 457(b) plan at any age without paying a 10% early withdrawal penalty. That could be a perk worth keeping.