Are HSAs Going Roth? The Future of HSAs Under Proposed Tax Legislation

Mar 26, 2025 | Taxes

Cornerstone is pleased to bring you this article by Ed Slott and Company, LLC, an organization providing IRA education and analysis to financial advisors, institutions, consumers, and media across the country. Our association with this organization helps us stay up to date on the latest developments in IRA and tax law updates. As always, give us a call if you’d like to discuss!

By Sarah Brenner, JD
Director of Retirement Education

Many of the provisions of the Tax Cuts and Jobs Act are scheduled to expire at the end of 2025. There are currently a number of proposals in the works in Congress to extend these tax cuts. A serious hurdle is how to pay for them. One interesting legislative proposal that has surfaced to cover the cost is the possibility of requiring Health Savings Accounts (HSAs) to be made on a Roth basis.

 

How HSAs Work

Under current law, an HSA is a tax-free account that is used to pay for qualified medical expenses that aren’t covered by insurance. It is similar to an IRA in that it’s a custodial or trust account set up with a financial institution that is owned and controlled by the individual, not by the employer.

 

Who Can Contribute to an HSA?

In order to contribute to an HSA, an individual must be:

  1. Covered by a high deductible health plan (HDHP),
  2. Not enrolled in Medicare, and
  3. Not eligible to be claimed as a dependent on someone else’s tax return

 

Tax Benefits of HSAs

Everyone gets a full federal income tax deduction for the HSA contributions they make. There is no income limit or phase-out. It is an above-the-line deduction rather than an itemized deduction, so it’s available even if the standard deduction is taken on the tax return.

HSA withdrawals are tax-free when used to pay for qualified medical expenses of the account owner, his spouse, or dependents. Also, the HSA can be used to reimburse the account owner for qualified medical expenses he already paid for.

 

What Qualifies as a Medical Expense?

Generally, qualified medical expenses are those that would be eligible for the medical expense tax deduction if someone was itemizing expenses on their tax return. They usually include all medical and dental expenses and prescription drugs (but not over-the counter medicines). IRS Publication 502, Medical and Dental Expenses, has comprehensive lists of what expenses are, and are not, qualified medical expenses.

 

What if HSA Funds Are Used for Non-Qualified Expenses?

If the HSA is not used for qualified medical expenses, then the distribution is not tax-free but instead is taxed as ordinary income and is also subject to a 20% penalty. If the individual is age 65 or older or has died or become disabled, then the 20% penalty won’t apply, but the distribution is still taxable if it wasn’t used for qualified expenses.

HSAs are an extremely tax-efficient way to pay for medical expenses. HSAs can be used to pay for current medical expenses on a tax-free basis – just like qualified Roth IRA distributions. Plus, regular HSA contributions made by a client are tax-deductible – just like most traditional IRA contributions.  It’s like getting the best of both worlds, at least when it comes to medical expenses.

 

The Impact of Roth HSAs on Taxpayers

Any Roth account is funded with after-tax revenue. Requiring a contribution to an HSA to be made as a Roth contribution would be a win for Congress because they would generate immediate revenue. However, for taxpayers that would be a loss.

While savers could still enjoy the benefit of tax-free distributions if HSAs become Roth accounts, they would lose the ability to deduct their contributions. That seems like a bad bargain for savers.

Membership in Ed Slott’s Elite IRA Advisor GroupTM is one of the tools our advisors use to help you avoid unnecessary taxes and fees on your retirement dollars. Members of Ed Slott’s Elite IRA Advisor GroupSM train with Ed Slott and his team of IRA Experts on a continuous basis to stay on the cutting-edge of retirement, tax law and IRA distribution planning. Through membership, Gordon is immediately notified of changes to tax law changes and updates on retirement planning, case studies, private letter rulings, Congressional action and Supreme Court rulings. In addition, he has 24/7 access to Ed Slott and Company LLC to confer with on complex cases.

Copyright ©2025, Ed Slott and Company, LLC. Reprinted from The Slott Report, https://irahelp.com/slottreport/are-hsas-going-roth/, with permission. Originally posted Monday, January 27, 2025. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article

Raymond James is not affiliated with and does not endorse the opinions or services of Sarah Brenner, JD, The Slott Report, ED Slott, Ed Slott and Company, LLC, IRA Help, LLC, irahelp.com, or Ed Slott’s Master Elite IRA Advisor Group.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that the foregoing material is accurate or complete. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James advisors do not provide tax or legal services, you should discuss these matters with the appropriate professional. CSP #714841

TAX-SAVVY INVESTING: UNDERSTANDING THE ESSENTIALS

Mar 24, 2025 | Taxes

When it comes to your wealth, minimizing your tax liability with tax savvy investing can make all the difference. Understanding key concepts and tax strategies like Roth IRA conversions, cost basis, reinvested dividends, and how capital gains and losses are applied can help you keep more of your investment earnings and avoid costly mistakes.

 

Understanding Roth IRA Conversions

A Roth IRA conversion – whether you convert part or all of your traditional IRA into a Roth IRA – is a taxable event with pros and cons. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, subjecting you to the Medicare surtax.

  • You do not have to convert all of your IRA to a Roth. It is best to prepare a tax projection and calculate the appropriate amount to convert.
  • Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.
  • Many 401(k) plan participants (if their plan allows) can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½.

 

Understanding Cost Basis

What Is Cost Basis and Why Does It Matter?

Cost basis represents the original value of a security, typically the purchase price, adjusted for stock splits, dividends, returns of capital, and other corporate actions. On your Raymond James Comprehensive Statement, cost basis is displayed for securities held in nonqualified accounts, giving you a basic snapshot of potential capital gains or losses.

 

How to Use the Cost Basis on Your Statements

Your statements provide unrealized and realized gain/loss calculations as a courtesy to help you monitor your investment performance, but they are not a substitute for official tax documentation.

Cost basis figures on monthly, quarterly, and year-end statements should never replace Form 1099-B when preparing taxes. Here’s why:

  • Adjustments Can Occur: Between year-end statements and the issuance of 1099s (typically mailed in mid-February), events such as wash sales, income reallocation, and corporate actions may impact cost basis calculations.
  • Avoid Errors: Relying on statement figures instead of 1099-B can result in incorrect tax reporting and potential IRS issues.
  • Beyond Taxes: Cost basis on statements should not be used for reconciling account fees, performance tracking, or deposits/withdrawals.

If you’re unsure how cost basis impacts your tax strategy, please reach out to our team. We’re here to help!

 

Understanding Reinvested Dividends

What is a Reinvested Dividend and Why Does it Matter?

This important calculation that can save you a bundle.

A reinvested dividend is when your mutual fund dividends are automatically used to buy additional shares instead of being paid out as cash. If you have mutual fund dividends that are automatically used to buy extra shares, each reinvestment increases your tax basis in that fund. An increase in your tax basis in the fund can reduce your taxable capital gain—or increase your tax-saving loss—when you sell shares.

 

How to Avoid Double Taxation on Reinvested Dividends

If this applies to you, tracking reinvested dividends can save you a bundle.

  • If you forget to include reinvested dividends in your tax basis, you could end up paying taxes twice—once in the year they were reinvested and again when you sell the shares.
  • Mutual funds often report the tax basis of redeemed shares, and financial institutions must report this to both investors and the IRS for shares purchased after regulatory changes.

If you’re unsure about your tax basis, check with your fund provider or reach out to us for help.

 

Understanding How Capital Gains and Losses Are Applied

What Are the Ordering Rules for Capital Gains and Losses and Why Does it Matter?

The IRS follows specific ordering rules to determine how gains and losses offset each other. Understanding how capital gains and losses are applied can help you minimize your tax liability.

How to Maximize Tax Savings with Capital Losses

If this applies to you, knowing the correct order for offsetting gains and losses can make a big difference. Here’s how it works:

  • Short-term losses must first offset short-term gains.
  • Long-term losses must first offset long-term gains.
  • If there are net short-term losses, they can be used to offset net long-term gains.
  • If there are net long-term losses, they can be used to offset net short-term gains.
  • If all gains and losses net to an overall loss, up to $3,000 can offset ($1,500 if married filing separately) ordinary income.
  • Remaining unused capital losses can be carried forward to later tax years and then considered in the same manner as described above.

Remember to look at your 2023 income tax return Schedule D (page2) to see if you have any capital loss carryover for 2024. This is often overlooked, especially if you are changing tax preparers.

Raymond James does not provide tax or legal services. This information is not intended to be a substitute for specific individualized tax, legal, estate, or investment planning advice as individual situations will vary. Please discuss these matters with the appropriate professional. Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. This information has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that these statements, opinions, or forecasts provided herein will prove to be correct.

 

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

 

Investing involves risk and you may incur a profit or loss regardless of strategy selected. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Forward looking data is subject to change at any time and there is no assurance that projections will be realized.

RAYMOND JAMES TAX FORM 1099 MAILING DATES

Feb 1, 2025 | Taxes

RETIREMENT ACCOUNTS ONLY
If you made a distribution/contribution/rollover in 2024 Tax document from Raymond James mailed Jan. 31.
If you did NOT make a contribution or distribution from your retirement account You will NOT receive any tax documents.
If you gave money to a charity directly from your IRA Tax document from Raymond James mailed Jan. 31. You should provide this information to your tax professional.

NON-RETIREMENT ACCOUNTS ONLY

You can expect a tax document from Raymond James regardless of whether or not you made contributions or took withdrawals. Mailings are in 3 groups starting Feb. 15. ** If a 1099 is delayed, it will be sent on either Feb. 28 or March 15 **

Note: IF YOU SELECTED ONLINE DOCUMENT DELIVERY when you enrolled in Client Access, printed tax documents will NOT be mailed to you. You will need to log in to Client Access and print your tax documents. You can change your delivery preference at any time.

Whether you prepare your own taxes or work with a tax professional, we want to help the process go as smoothly as possible. Please don’t hesitate to contact us at 605-352-9490 in Huron or 605-357-8553 in Sioux Falls with any questions.