But it has several errors/omissions. I understand it is meant to be a high-level overview, but that still means what is included should be accurate. I'll contact the author as he asks at the site, but want to mention the items here because I don't know how long site updates may take. Plus, I'm sure that here I'll get feedback on whether my input itself is flawed!
Terminology: in the tax preparation industry, "pre-tax" and "post-tax" usually only refer to contributions (not account types) that are or are not (respectively) excluded from current income. Earnings in the account over time are either tax-free or tax-deferred (depends on account type and what the distributions of said earnings are eventually used for), and distributions are either taxable (possibly with penalty), or tax-free.
HSA - these are indeed like a Traditional IRA "on steroids", but calling it "a pre-tax account that is only allowed to spend money on healthcare related items" is incorrect. Distributions from HSAs can be spent on anything, but they are taxed as ordinary income if not spent on medical expenses. Also, before age 65, distributions not spent on medical expenses receive a 20% penalty as well as regular tax. So, at age 65, it essentially turns into a regular Trad. IRA (distributions are taxable), except if you want, you can pay your Medicare premiums and other health expenses tax-free from the HSA.
An HSA can either be through an employer or opened directly by the individual. If there are other tax-advantaged employer health expense arrangements (or Medicare coverage), contributions to HSAs maybe limited. I have known of the benefits of HSAs for years but always felt the employer subsidy for non-HDHP insurance coverage was a better deal; however if you don't have employer insurance coverage, HSAs are probably the best way to go. See IRS Publication 969 for more details.
401k - "No access until minimum age 55". But what's worse, there is essentially no access at all while you are still employed with that employer, in other words you can't take any money out unless the plan allows it (and most don't), even if you are willing to pay tax & penalty. (There may be a loan option, but that is a bad idea for several reasons).
"For self-employed people, I would look into a SIMPLE 401K. " For self-employed people with no employees of their own, a solo 401k (401k with only the owner as a member) allow for much higher contribution levels than SEP-IRA, especially at lower profit levels.
IRA - "with an income of $140k, one cannot make ANY contribution, at least directly. " False. With even a little earned income, any taxpayer can make a contribution to a Trad. IRA no matter their total income (AGI). What the income limit pertains to is the deductibility of contributions to Trad. IRA (pre-tax or post-tax). And there is also an income limit that prevents any contributions to a Roth IRA at all. Until recently there was an age 70.5 cut-off on making contributions.
" IRAs do not allow access until minimum age 59.5" -- well they do, but with a 10% penalty (other than a few exceptions for special purposes). One feature not many understand is that at any age, you can convert money from Trad. IRA to Roth, pay the tax, and then after five years you can take that money out penalty-free from the Roth. So if you can afford to pay the tax now and wait five years, you can get some or all of your money out of your IRA at any age without penalty.
Section 529 plans aka QTP - "One can switch beneficiaries tax free up to $70k (double for couples) by "front-loading" or "superfunding", although there are federal gift tax consequences". This is really mixing up several different things. First, it is extremely unlikely that anyone would end up paying any gift tax on contributions to a 529 plan, although there may a tax reporting requirement (Form 706). Also, switching beneficiaries does not have anything to do with a $70K limit. What is being referred to is that one can contribute up to five year's worth of gifts all at once, each under the annual reporting threshhold for gifts, instead of having to spread the contributions out over five years to avoid reporting (and again, even with reporting, it is extremely unlikely any gift tax would be owed).
Yes, I am the writer of this. Thanks for the pointers!
About the "pre-tax" and "post-tax" terminology, you are right, I should change "post-tax" to refer to when distributions are tax-free. I had to keep the table to a certain width, so had to come up with short terminology.
I think calling an HSA "a pre-tax account that is only allowed to spend money on healthcare related items" is fair, because that's how the government refers to it.
https://www.treasury.gov/resource-center/faqs/Taxes/Pages/He...
"Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses". The rest of your point on HSAs stand though.
IRA - "with an income of $140k, one cannot make ANY contribution, at least directly." Yes, this was a typo, meant it specifically only for Roth.
"One feature not many understand is that at any age, you can convert money from Trad. IRA to Roth, pay the tax"
I briefly mention this in the post, but left out details for brevity sake.
"So if you can afford to pay the tax now and wait five years, you can get some or all of your money out of your IRA at any age without penalty."
I do not think this is correct in the normal case. You must be 59.5 years of age unless you qualify for an exception. Also, you wouldn't want to take this money out early anyway unless you direly needed to.
For your 529 point, I only hinted at this and could've worded it better, but switching beneficiaries and the $70k limit is relevant if you have a 529 for an unborn child that you are accumulating. I'll reword this.
Having all the info summarized in one page is useful.
> IRAs do not allow access until minimum age 59.5
For a Roth IRA, you can withdraw the contributions, but not the earnings, at any time. For example, if you contribute $5k that gains $100 in interest, you can withdraw the $5k without penalty. If you withdraw the $100, it'll be taxed and penalized.
One source:
> You can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. However, you may have to pay taxes and penalties on earnings in your Roth IRA.
1) after age 65, the HSA no longer has any restrictions (penalties) related to medical expenses, it works just like a Trad. IRA except that if you do reimburse for medical expenses, the distributions are tax-free.
2) Each conversion from Trad. IRA to Roth IRA starts a five-year timer on that conversion, after which the amount converted can be withdrawn tax and penalty free, just like Roth contributions. So for example a 40-year old who leaves a job and rolls over a 401k balance to an IRA, can then choose to pay tax now (via Roth conversion) and then take out some or all the money penalty free at age 45, which is significantly younger than age 59.5 (for IRA) or 55-and-separated-from-service (for 401k).
> Terminology: in the tax preparation industry, "pre-tax" and "post-tax" usually only refer to contributions (not account types) that are or are not (respectively) excluded from current income. Earnings in the account over time are either tax-free or tax-deferred (depends on account type and what the distributions of said earnings are eventually used for), and distributions are either taxable (possibly with penalty), or tax-free.
This is all true as far as it goes. However, if you've ever had to do any work for one of the trust custodians, you'd be keenly aware that DOL regulations require that all the different types of contributions be segregated into different accounts - or if you physically commingle the funds, you have to account for them separately on your own books.
So there are in fact different accounts for pre-tax & post-tax... except it's actually more like pre-tax employee contribution, pre-tax employer match, pre-tax employer profit-sharing, post-tax employee contribution, post-tax excess contribution, etc. etc.
These different account types are used to track the tax character of the eventual distributions. If you didn't have different pre- and post-tax accounts, it would be a frickin' nightmare to prepare forms 1099-R
You are correct, for 1099-R reporting where the issuer determines the taxable amount (such as pensions, annuities, etc). For IRAs, the taxpayer tracks the tax basis in the combined balance of all their Trad. IRAs, using tax Form 8606 from the IRS--the IRA trustee does not know or need to know that number. Then there is also that wonderful "taxable amount not determined" check box on the 1099-R. :)
Terminology: in the tax preparation industry, "pre-tax" and "post-tax" usually only refer to contributions (not account types) that are or are not (respectively) excluded from current income. Earnings in the account over time are either tax-free or tax-deferred (depends on account type and what the distributions of said earnings are eventually used for), and distributions are either taxable (possibly with penalty), or tax-free.
HSA - these are indeed like a Traditional IRA "on steroids", but calling it "a pre-tax account that is only allowed to spend money on healthcare related items" is incorrect. Distributions from HSAs can be spent on anything, but they are taxed as ordinary income if not spent on medical expenses. Also, before age 65, distributions not spent on medical expenses receive a 20% penalty as well as regular tax. So, at age 65, it essentially turns into a regular Trad. IRA (distributions are taxable), except if you want, you can pay your Medicare premiums and other health expenses tax-free from the HSA.
An HSA can either be through an employer or opened directly by the individual. If there are other tax-advantaged employer health expense arrangements (or Medicare coverage), contributions to HSAs maybe limited. I have known of the benefits of HSAs for years but always felt the employer subsidy for non-HDHP insurance coverage was a better deal; however if you don't have employer insurance coverage, HSAs are probably the best way to go. See IRS Publication 969 for more details.
401k - "No access until minimum age 55". But what's worse, there is essentially no access at all while you are still employed with that employer, in other words you can't take any money out unless the plan allows it (and most don't), even if you are willing to pay tax & penalty. (There may be a loan option, but that is a bad idea for several reasons).
"For self-employed people, I would look into a SIMPLE 401K. " For self-employed people with no employees of their own, a solo 401k (401k with only the owner as a member) allow for much higher contribution levels than SEP-IRA, especially at lower profit levels.
IRA - "with an income of $140k, one cannot make ANY contribution, at least directly. " False. With even a little earned income, any taxpayer can make a contribution to a Trad. IRA no matter their total income (AGI). What the income limit pertains to is the deductibility of contributions to Trad. IRA (pre-tax or post-tax). And there is also an income limit that prevents any contributions to a Roth IRA at all. Until recently there was an age 70.5 cut-off on making contributions.
" IRAs do not allow access until minimum age 59.5" -- well they do, but with a 10% penalty (other than a few exceptions for special purposes). One feature not many understand is that at any age, you can convert money from Trad. IRA to Roth, pay the tax, and then after five years you can take that money out penalty-free from the Roth. So if you can afford to pay the tax now and wait five years, you can get some or all of your money out of your IRA at any age without penalty.
Section 529 plans aka QTP - "One can switch beneficiaries tax free up to $70k (double for couples) by "front-loading" or "superfunding", although there are federal gift tax consequences". This is really mixing up several different things. First, it is extremely unlikely that anyone would end up paying any gift tax on contributions to a 529 plan, although there may a tax reporting requirement (Form 706). Also, switching beneficiaries does not have anything to do with a $70K limit. What is being referred to is that one can contribute up to five year's worth of gifts all at once, each under the annual reporting threshhold for gifts, instead of having to spread the contributions out over five years to avoid reporting (and again, even with reporting, it is extremely unlikely any gift tax would be owed).