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My financial situation is unique. I have a son with a degenerative illness that requires on going treatment. This year my employer contributed $1500 to an HRA and I contributed $2000 to an FSA. I exhausted the entire $3500 in the first half of the year. Next year my employer is bumping the HRA to $2000 and I plan on contributing the maximum of $2500 to the FSA.

To keep the premiums low the group policy was changed to an even higher deductible, out of pocket maximum and copay. Even after exhausting the FSA and HRA I will be on the hook for $500-$7100 in medical expenses. This is for in-network providers.

I've looked into HSAs but to my knowledge my employer doesn't offer "limited" HRAs and FSAs so the only way I'd be eligible to contribute to an HSA would be to refuse the HRA/FSA.

I've looked into contributing to a traditional or Roth IRA to make up the difference. Due to contribution limits ($5500) an IRA wouldn't quite make up the difference. I have a Roth that's already more than 5 years old. A Roth IRA has the benefit of allowing me to take distributions up to the amount contributed for any reason without penalty or taxes because they are already after tax. Anything above that requires additional paperwork at tax time.

Are there any other options I haven't thought of that would allow me to save for medical expenses and limit my tax liability at the same time?

  • What Roth IRA has to do with anything? How about purchasing a proper insurance coverage with yearly and lifetime limits? – littleadv Dec 4 '13 at 23:06
  • Distributions from an IRA can be used for medical expenses greater than 7.5% AGI tax and penalty free. This is the only plan my employer offers. I either take it or shop on the individual market. I doubt I'll find a better policy there. – Kenneth Cochran Dec 4 '13 at 23:11
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    10%, and not Roth IRA - regular IRA. But you can deduct the medical expenses over 10% on your taxes anyway, so its a wash, unless you're not itemizing at all (and then it would make sense). – littleadv Dec 4 '13 at 23:17
  • What is the problem you're trying to solve here? If you have to choose between an HRA funded by the employer with $2000, and your own HSA, choose the HRA (unless you're in the 39% tax bracket or something). You can tax deduct medical expenses over 10% of your income (not counting expenses reimbursed by the HRA or FSA). If your spouse has an FSA, that can also be funded up to $2500. Other than that, you pay the expenses out of pocket and don't get to deduct them. Hopefully the low premiums of your employer-provided insurance make up for the extremely high deductible/copay/coinsurance. – stannius Feb 25 '14 at 0:53
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The Roth IRA will provide no tax benefit to you if you are contributing after-tax money and then removing it immediately.

Also there is more information on tax benefits for parents of disabled children (and a real phone number, I tried calling) at http://www.irs.gov/uac/Tax-Benefits-for-Disabled-Taxpayers

  • Unless the rules have changed, to fund an HSA, you must have HDHP coverage and only HDHP coverage. That means that non-HDHP health insurance, FSA, and HRA (all of which are considered coverage) would make the OP ineligible to fund an HSA. – stannius Feb 25 '14 at 17:27
  • @stannius sorry about that, I have updated the scheme above – William Entriken Feb 25 '14 at 17:41
  • Also, of course this plan is "creative". All solutions to tax problems will be "creative" until we switch to an actual flat tax. – William Entriken Feb 25 '14 at 17:41
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    Sorry but it's still inaccurate. HSA contribution-ability is prorated depending on how long you are covered by an HDHP (with one exception that's not relevant here). Furthermore, any non-HDHP coverage makes you ineligible for an HSA, and that includes both HRAs and FSAs, even if they're exhausted! I gave you the benefit of the doubt because I thought that maybe the rules had changed and I wasn't aware, but the only change in 2014 was an inflation increase in the max contribution. – stannius Feb 25 '14 at 23:28
  • Thanks, I have edited to remove the HSA scheme which does not work – William Entriken Mar 3 '14 at 20:52

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