By Ian Berger, JD
IRA Analyst
Question:
Recently, I’ve received dozens of emails suggesting that traditional IRA owners can convert to a Roth IRA and somehow avoid all or some tax. Is this a scam?
Thank you in advance.
Bill
Answer:
Hi Bill,
There is no way for traditional IRA owners to avoid having funds converted to Roth IRAs count as taxable income in the year of conversion. The schemes that are being marketed do not mention that fact. Instead, a typical scheme entices individuals to put their money into investments that supposedly will produce enough deductions to offset the Roth conversion taxable income. That way, the Roth conversion will be “tax-free.” Our advice is to tread carefully. Do not take the bait without speaking to a knowledgeable financial advisor.
Question:
Hello,
I understand that I can take Health Savings Account (HSA) distributions in a year other than the year that I incurred a qualified medical expense. There is confusion and conflicting opinion, however, on what that distribution can be used for. Must it be for a qualified medical expense to be tax and penalty free? For example, if I paid $4,000 out of pocket for various qualified medical expenses in 2022, may I take a tax- and penalty-free distribution of $4,000 from my HSA in 2025 to go on vacation? I have the receipts as proof of paying out of pocket for the 2022 medical expenses. Wouldn’t the $4,000 distribution just be reimbursing myself and I can use the money as I choose?
Thank you.
Caroline
Answer:
Dear Caroline,
You are correct. Often, HSA funds are used to pay qualified medical expenses directly. However, that is not required. Instead, you could first pay for those expenses out of pocket and then have the HSA reimburse you — even in a later year. You could then use the reimbursed money for any reason. If you do that, make sure to retain good records of the medical expense and proof of your payment. This will establish that the HSA distribution should not be taxable or subject to penalty in case you are questioned by the IRS.
https://irahelp.com/slottreport/roth-conversions-and-hsa-distributions-todays-slott-report-mailbag/