To those who avoid FICA with HSA payroll contributions

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camillus
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To those who avoid FICA with HSA payroll contributions

Post by camillus » Sun Feb 12, 2017 2:22 pm

Hi all, I'm wondering about the wisdom of "not" paying into social security. Is paying in to the social security system a better and less risky investment compared to taking the tax savings and investing that money myself?

My wife and I have the ability to avoid paying into social security due to the strange circumstance of being clergy. She pays no SECA on 403(b) contributions. I wrote a thread about that here: viewtopic.php?f=1&t=210804&newpost=3235309

Since that situation is so specialized, I thought of a larger group that may have thought about this - those who bypass FICA (and social security pay-in) by way of HSA payroll contributions. Has anyone thought about the comparative value of paying into social security?

Thanks!

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 2:36 pm

OP,

It does not make sense not paying social security especially when you have not crossed the first bend point. 90% of your taxed income is factored into the benefit. It is one of the highest returned investment.

KlangFool

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Re: To those who avoid FICA with HSA payroll contributions

Post by camillus » Sun Feb 12, 2017 2:54 pm

Hi KlangFool, thanks for your reply. I've noticed your comments on other posts on taxes related to retirement and found them helpful.

I should clarify, I didn't mean not paying into social security at all, but purposefully exempting a portion of income from social security tax. Much like sending $5500 to an HSA and bypassing FICA.

My wife's particular situation is this:

Let's say she makes 60k.
She can send 18k as an elective deferral to her 403(b).
As clergy, because of her strange dual employment status, this 18k is untaxed by SECA (15.3%).
Is it worth it for us to take this tax savings and invest it? Or are we better off using a different retirement vehicle and paying fully into SECA?
How do I figure this? What is the math?

I was a bit more articulate in my other thread mentioned in the OP. I'd be very grateful if you would comment here or there. Thanks very much!

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 3:10 pm

camillus wrote:Hi KlangFool, thanks for your reply. I've noticed your comments on other posts on taxes related to retirement and found them helpful.

I should clarify, I didn't mean not paying into social security at all, but purposefully exempting a portion of income from social security tax. Much like sending $5500 to an HSA and bypassing FICA.

My wife's particular situation is this:

Let's say she makes 60k.
She can send 18k as an elective deferral to her 403(b).
As clergy, because of her strange dual employment status, this 18k is untaxed by SECA (15.3%).
Is it worth it for us to take this tax savings and invest it? Or are we better off using a different retirement vehicle and paying fully into SECA?
How do I figure this? What is the math?

I was a bit more articulate in my other thread mentioned in the OP. I'd be very grateful if you would comment here or there. Thanks very much!
OP,

https://www.ssa.gov/oact/cola/piaformula.html
http://www.myretirementpaycheck.org/soc ... lated.aspx

Let me give you a simplify approximate number.

Let's say you pay SS tax on your 60K of income. So, SS taxed income is 60K.

The first bend point monthly number is $885. So, in order to cross the first bend point, your social security taxed income need to be 35 (years) X 12 (months) X 885 = $371,700.

Until you cross the first bend point, all your taxed income is credited 90%, this is a very good deal.

It is not as a good deal between first and second bend point, you are credited 32%. Still pretty good.

This is a simplify version with a lot of approximation. For very accurate calculation, you will need the ANYPIA tool. But, it should be good enough for your purposes.

KlangFool

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 3:13 pm

OP,

So, your question should be will your wife reach this 371K without this 18K? If the answer is yes, don't worry about this. Stick with 403b. Or else, you may want to do something else.

KlangFool

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Re: To those who avoid FICA with HSA payroll contributions

Post by tfb » Sun Feb 12, 2017 3:13 pm

camillus wrote:Has anyone thought about the comparative value of paying into social security?
I have. It's not worth it for me on the amount of the HSA contribution. Others may draw different conclusions. Where you are with regard to the bending points makes a difference.
Harry Sit, taking a break from the forums.

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 3:16 pm

tfb wrote:
camillus wrote:Has anyone thought about the comparative value of paying into social security?
I have. It's not worth it for me on the amount of the HSA contribution. Others may draw different conclusions. Where you are with regard to the bending points makes a difference.
+1.

That is the key. For example, I had crossed the second bend point. My social security benefit will not change significantly if I do not work another day.

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Re: To those who avoid FICA with HSA payroll contributions

Post by teen persuasion » Sun Feb 12, 2017 3:38 pm

I have considered it. DH is already past the first bend point, so it's a much smaller gain in SS than if he were below the first bend point. Other considerations help shrink the importance of any additional SS: lowered AGI increases our EITC (21% phaseout rate) and state EITC (30% of fed EITC, or equivalent to 6.3%), and decreases our EFC for the kids in college (increasing financial aid). Those refundable credits I use to fund Roth IRAs for both of us.

In your case, your wife would be avoiding 2x the FICA. Another way to look at it is that she gets half the SS benefit for her contributions, vs W2 employees.

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Re: To those who avoid FICA with HSA payroll contributions

Post by Fudgie » Sun Feb 12, 2017 3:41 pm

:oops:
Last edited by Fudgie on Fri Dec 08, 2017 7:15 am, edited 1 time in total.

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Re: To those who avoid FICA with HSA payroll contributions

Post by LSLover » Sun Feb 12, 2017 3:57 pm

If you are beyond the 2nd bend point, you are increasing your total return by 5.4%. i.e. every $10K in additional income will enable you you to collect about $540 over the course of retirement.

That assumes that you will collect SS for 15 years.

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Re: To those who avoid FICA with HSA payroll contributions

Post by Grogs » Sun Feb 12, 2017 4:16 pm

The bend points are definitely something to be aware of. I calculated my projected SS for the first time last year, and I'm somewhere between the 1st and 2nd bend points. That leads me to believe that paying FICA or not is probably a wash assuming full benefits are paid. Under the current law, SS benefits are set to drop by 25% when the trust fund is exhausted sometime around 2030. It's also possible I'll have a pension that will make a significant portion of my SS taxable. Combined, these factors make me think it's likely I'll come out better by avoiding as much FICA as I can through pre-tax health care premiums and an HSA. If I reach the second bend point before I retire, then I would definitely be better off avoiding the FICA.

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Re: To those who avoid FICA with HSA payroll contributions

Post by grabiner » Sun Feb 12, 2017 5:52 pm

I made an estimate on the wiki: Payroll Deduction: Health Savings Account. If you are over the second bend point, saving $214 in FICA taxes by payroll deduction reduces your Social Security benefit by $1 per month, adjusted for inflation. This is close to break-even. If your spouse will get 50% of your benefit, the break-even becomes 143 months rather than 214 (and even less if your spouse outlives you and gets a widow(er)'s benefit). If you are below the second bend point, saving $100 in FICA taxes reduces your benefit by $1 per month.
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Re: To those who avoid FICA with HSA payroll contributions

Post by randomguy » Sun Feb 12, 2017 6:29 pm

KlangFool wrote:OP,

It does not make sense not paying social security especially when you have not crossed the first bend point. 90% of your taxed income is factored into the benefit. It is one of the highest returned investment.

KlangFool
Run the math on what you get paid out of SS versus investing (remember to include the employers portion) and I doubt you will find that the SS payouts are a very good deal unless you are a very conservative investor (i.e. like SS which is basically invested 100% bonds). What they are is very safe. And of course money in SS can't be spent. Money in savings accounts requires you to be discplined.

The other thing to remember is that you have to look at SS as a couple. The value of SS payments could be effectively zero if the other spouse is a high earner.

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 6:34 pm

randomguy wrote:
KlangFool wrote:OP,

It does not make sense not paying social security especially when you have not crossed the first bend point. 90% of your taxed income is factored into the benefit. It is one of the highest returned investment.

KlangFool
Run the math on what you get paid out of SS versus investing (remember to include the employers portion) and I doubt you will find that the SS payouts are a very good deal unless you are a very conservative investor (i.e. like SS which is basically invested 100% bonds). What they are is very safe. And of course money in SS can't be spent. Money in savings accounts requires you to be discplined.

The other thing to remember is that you have to look at SS as a couple. The value of SS payments could be effectively zero if the other spouse is a high earner.
randomguy,

This only applies if they stay married for 10 years.

KlangFool

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Re: To those who avoid FICA with HSA payroll contributions

Post by niceguy7376 » Sun Feb 12, 2017 7:00 pm

KlangFool wrote: Let me give you a simplify approximate number.
Let's say you pay SS tax on your 60K of income. So, SS taxed income is 60K.

The first bend point monthly number is $885. So, in order to cross the first bend point, your social security taxed income need to be 35 (years) X 12 (months) X 885 = $371,700.

Until you cross the first bend point, all your taxed income is credited 90%, this is a very good deal.
KlangFool
I am still far away from SS withdrawl but still not clear on the whole SS.
So in above example, what is $371,700? It is the total of all SS taxed income for an individual for 35 years? Is it adjusted for inflation over a working career?

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Re: To those who avoid FICA with HSA payroll contributions

Post by theplayer11 » Sun Feb 12, 2017 7:04 pm

If the numbers show that it is probably more beneficial to pay the FICA taxes, why is the IRS so concerned with people who are claiming unreasonably low salaries compared to their distributions?

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Re: To those who avoid FICA with HSA payroll contributions

Post by grabiner » Sun Feb 12, 2017 7:31 pm

niceguy7376 wrote:
KlangFool wrote: Let me give you a simplify approximate number.
Let's say you pay SS tax on your 60K of income. So, SS taxed income is 60K.

The first bend point monthly number is $885. So, in order to cross the first bend point, your social security taxed income need to be 35 (years) X 12 (months) X 885 = $371,700.

Until you cross the first bend point, all your taxed income is credited 90%, this is a very good deal.
KlangFool
I am still far away from SS withdrawl but still not clear on the whole SS.
So in above example, what is $371,700? It is the total of all SS taxed income for an individual for 35 years? Is it adjusted for inflation over a working career?
Here is the formula from SSA for the Primary Insurance Amount.

You take your 35 highest-earning years, adjust for inflation, average the adjusted earnings, and divide by 12 to get your Average Indexed Monthly Earnings. Almost everyone winds up over the first bend point of $885 (annual $10,620, or a total of $371,300 over 35 years). Only higher-income retirees are over the second bend point of $5336 (annual $64,032, or a total of $2,241,120 over 35 years); these are the ones who don't benefit much from HSA payroll deduction
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Re: To those who avoid FICA with HSA payroll contributions

Post by grabiner » Sun Feb 12, 2017 7:36 pm

theplayer11 wrote:If the numbers show that it is probably more beneficial to pay the FICA taxes, why is the IRS so concerned with people who are claiming unreasonably low salaries compared to their distributions?
The employer also pays half'; an employer who underpays a worker by $10,000 (for example, not withholding for FICA on $10,000 of tips) is saving $765 of its own money and loses no benefit. And self-employed people pay both halves, so they can save twice as much as employees for the same benefit reduction.

There is also the accounting issue. If an employee underpays FICA, then both SS and Medicare get underpaid. Underpaid Medicare doesn't save the government anything in reduced future benefits, since everyone who qualifies for Medicare gets the same benefit.
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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 7:38 pm

niceguy7376 wrote:
KlangFool wrote: Let me give you a simplify approximate number.
Let's say you pay SS tax on your 60K of income. So, SS taxed income is 60K.

The first bend point monthly number is $885. So, in order to cross the first bend point, your social security taxed income need to be 35 (years) X 12 (months) X 885 = $371,700.

Until you cross the first bend point, all your taxed income is credited 90%, this is a very good deal.
KlangFool
I am still far away from SS withdrawl but still not clear on the whole SS.
So in above example, what is $371,700? It is the total of all SS taxed income for an individual for 35 years? Is it adjusted for inflation over a working career?
niceguy7376,

It is an approximation.

<<Is it adjusted for inflation over a working career?>>

The actual calculation does that. If you want an accurate number, get the ANYPIA tool from the social security site.

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Re: To those who avoid FICA with HSA payroll contributions

Post by randomguy » Sun Feb 12, 2017 9:52 pm

KlangFool wrote:
randomguy wrote:
KlangFool wrote:OP,

It does not make sense not paying social security especially when you have not crossed the first bend point. 90% of your taxed income is factored into the benefit. It is one of the highest returned investment.

KlangFool
Run the math on what you get paid out of SS versus investing (remember to include the employers portion) and I doubt you will find that the SS payouts are a very good deal unless you are a very conservative investor (i.e. like SS which is basically invested 100% bonds). What they are is very safe. And of course money in SS can't be spent. Money in savings accounts requires you to be discplined.

The other thing to remember is that you have to look at SS as a couple. The value of SS payments could be effectively zero if the other spouse is a high earner.
randomguy,

This only applies if they stay married for 10 years.

KlangFool
That is could part of the statement. Along with one of them making enough so that SS of the lower compesated one is never used.

That is the worst case for SS. The best case is probably something like getting disabled the second after you qualify:). In the normal cases (call it 35-45 years of employment) and the SS return is wretched. But it is very safe.

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Re: To those who avoid FICA with HSA payroll contributions

Post by camillus » Sun Feb 12, 2017 10:40 pm

I just made a spreadsheet and am convinced that even for those between the two bending points, avoiding SECA & FICA is worthwhile.

My spreadsheet assumed a 6% rate of return on 403b contributions of only the 7.65% FICA savings, a 4% safe withdrawal rate, and a 15% marginal tax rate in retirement. Only taking the 4% safe withdrawal, it's about even. That's not touching the rest of the portfolio, which you can dip into or bequeath. My spreadsheet also assumed that social security will remain unchanged for 35 years.

I'm not perfectly sure I made the calculations right, or the right calculations, but I feel better.

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Sun Feb 12, 2017 10:47 pm

camillus wrote:I just made a spreadsheet and am convinced that even for those between the two bending points, avoiding SECA & FICA is worthwhile.

My spreadsheet assumed a 6% rate of return on 403b contributions of only the 7.65% FICA savings, a 4% safe withdrawal rate, and a 15% marginal tax rate in retirement. Only taking the 4% safe withdrawal, it's about even. That's not touching the rest of the portfolio, which you can dip into or bequeath. My spreadsheet also assumed that social security will remain unchanged for 35 years.

I'm not perfectly sure I made the calculations right, or the right calculations, but I feel better.
camillus,

1) Has your wife crossed the first bend point yet? Aka, earning more than 317K and pay social security tax on that income?

2) You should show us the numbers. It is most likely wrong.

3) Have you taken in the consideration that social security payment is COLA adjusted?

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Re: To those who avoid FICA with HSA payroll contributions

Post by randomguy » Sun Feb 12, 2017 11:09 pm

KlangFool wrote:
camillus wrote:I just made a spreadsheet and am convinced that even for those between the two bending points, avoiding SECA & FICA is worthwhile.

My spreadsheet assumed a 6% rate of return on 403b contributions of only the 7.65% FICA savings, a 4% safe withdrawal rate, and a 15% marginal tax rate in retirement. Only taking the 4% safe withdrawal, it's about even. That's not touching the rest of the portfolio, which you can dip into or bequeath. My spreadsheet also assumed that social security will remain unchanged for 35 years.

I'm not perfectly sure I made the calculations right, or the right calculations, but I feel better.
camillus,

1) Has your wife crossed the first bend point yet? Aka, earning more than 317K and pay social security tax on that income?

2) You should show us the numbers. It is most likely wrong.

3) Have you taken in the consideration that social security payment is COLA adjusted?

KlangFool
1) She is making something like 20k after all these games. She will pass the first break point assuming something like a 16 year working career.

2) I am guessing it is right. A person making 20k/year with 35+ years of earnings is going to be well past the first end bend point. And a 6% return is a lot more than what SS offers. Throw in avoiding the employer part of the contribution (you do get a tax deduction for that but it still is painful) and the math gets even better.

c) The 4% SWR is inflation adjusted also.

Obviously investing is risker. Odds are you will end with a lot more money though. I am willing to be there would be very,very few people who would voluntary contribute more to SS to get a higher benefit. SS gets worse for people with 50 years of paid work (i.e. you start working at 16 and work for 50 years). You get nothing for 15 of those years of contributions. People might like a larger SS check when they retire. They wouldn't be happy about paying more to get it.

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Re: To those who avoid FICA with HSA payroll contributions

Post by grabiner » Sun Feb 12, 2017 11:48 pm

randomguy wrote:Obviously investing is risker. Odds are you will end with a lot more money though.
Investing doesn't need to be riskier. You can use the money you would have otherwise contributed to Social Security to buy long-term TIPS in your IRA, which are guaranteed to outperform inflation (although not necessarily the SS wage index) if held to maturity. And if appropriate, you can buy an annuity when you retire.

This gives a fair comparison. As in the common discussions of paying down loans versus investing, the fair comparison is with low-risk investments, as you can take more risk whether you pay more SS or not, just as you can take more risk whether you make extra mortgage payments or not.
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Re: To those who avoid FICA with HSA payroll contributions

Post by sandramjet » Mon Feb 13, 2017 12:21 am

IMO, viewing SS as an investment is wrong. I view it as "insurance". To be sure, it is a reasonable question to ask whether you need to "purchase" more (i.e. whether or not you should reduce the amount you get by reducing what is paid in), but assessing it like any other investment is the wrong approach.

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Re: To those who avoid FICA with HSA payroll contributions

Post by camillus » Mon Feb 13, 2017 9:14 am

Hi all, thanks for the replies and the ongoing discussion.
KlangFool wrote:1) Has your wife crossed the first bend point yet? Aka, earning more than 317K and pay social security tax on that income?
Hi KlangFool. No, my wife hasn't yet passed the bend point, but surely will if she works as planned.

Given my example in the other thread, if she makes 60k and has 18k deducted for 403(b), 42k is still taxed with SECA. (Housing allowance from the other thread is still taxed by SECA - maybe this is where that 20k figure came from). My wife actually works as clergy faculty at a divinity school, and so her increase in pay is standardized in the faculty handbook. If we did not contribute to a 403(b), she would have a chance of making it past the second bending point. This makes the assumption of a long career.

I suppose it is risky to avoid SECA without having first made it to the first bending point. I'm guessing the main risk is if she becomes disabled.
grabiner wrote:This gives a fair comparison.
Hi David, thanks for this. Thinking about a fair comparison is important since SS seems to have low risk. Even if my investing in a 403(b) were quite safe, not ultra safe but "quite" safe, I think I wouldn't do too bad against SS. In other words, I see little downside. There is, however, a huge upside in terms of flexibility and increased return if any equities I hold go for a wild ride.

I also have to think that if the market does poorly over the next 30 years, the SS formula will also then likely to be revised downward. This is just speculation.

Thanks again everyone for the comments.

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Re: To those who avoid FICA with HSA payroll contributions

Post by Epsilon Delta » Mon Feb 13, 2017 2:18 pm

camillus wrote:Hi all, thanks for the replies and the ongoing discussion.
KlangFool wrote:1) Has your wife crossed the first bend point yet? Aka, earning more than 317K and pay social security tax on that income?
Hi KlangFool. No, my wife hasn't yet passed the bend point, but surely will if she works as planned.
IMO this is the right way to think about it. It's making a prediction about the future (your wife's future earnings) but some parts of the future are easier to predict than others.
camillus wrote: I suppose it is risky to avoid SECA without having first made it to the first bending point. I'm guessing the main risk is if she becomes disabled.
If she becomes disabled (in the SS sense) before FRA the SS formula average less than 35 years of earnings. So she would not need $371k of life time earnings to reach the first bend point. I think it would be hard to come up with a scenario matching your facts where she did not reach that bend point. Never-the-less if you know your going to become disabled* it may be best to maximize SS taxes before hand, because you may receive benefits earlier and for a longer time than a typical retiree.

The real risk here is that she stops working but does not become SS disabled. Various things like becoming a stay-at-home parent or becoming disabled but not badly enough to qualify for SS disability benefit. Some of these are voluntary, but some of them aren't.

* Some parts of the future are harder to predict than others.

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Re: To those who avoid FICA with HSA payroll contributions

Post by motorcyclesarecool » Tue Feb 14, 2017 7:12 am

camillus wrote:Hi all, I'm wondering about the wisdom of "not" paying into social security. Is paying in to the social security system a better and less risky investment compared to taking the tax savings and investing that money myself?
[...]
Since that situation is so specialized, I thought of a larger group that may have thought about this - those who bypass FICA (and social security pay-in) by way of HSA payroll contributions. Has anyone thought about the comparative value of paying into social security?

Thanks!
Risk is a funny thing. As a member of the Full Retirement Age 67 generation, and having a time horizon of over 30 years, nearly every Social Security statement I've received has discussed scenarios for when the trust fund becomes insolvent. All of them involve either a (further!) increased FRA or a significantly reduced PIA. It would appear that I would be wise to prepare for disappointment. A guaranteed dollar today has its attraction to my generation vis-á-vis the shaky promise of an unknown future sum.

The main questions for me are:
1. Will "sovereign entitlement default" risk be so deep as to affect my savings from outside FICA?
2. If so, how should I go about diversifying against this risk?

Most of our assumptions are based on U.S. sovereign obligations being risk-free, and I am not persuaded by the gold fever-swamp that holding bullion is a suitable alternative. Is the risk that the Social Security Administration won't keep its promises so unthinkable that I simply shouldn't think about it?
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

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Re: To those who avoid FICA with HSA payroll contributions

Post by petulant » Tue Feb 14, 2017 8:20 am

sandramjet wrote:IMO, viewing SS as an investment is wrong. I view it as "insurance". To be sure, it is a reasonable question to ask whether you need to "purchase" more (i.e. whether or not you should reduce the amount you get by reducing what is paid in), but assessing it like any other investment is the wrong approach.
OP has a clear opportunity to structure whether certain income is taxed under FICA/SE, which affects future social security payments. How do you analyze this choice in any other way than to compare the difference in future social security payments to the taxes being invested in a conservative portfolio and annuitized or SWR'd? Sure, put enough caveats in the comparison like risk differences, but I don't see any other way to approach the decision.

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Re: To those who avoid FICA with HSA payroll contributions

Post by Epsilon Delta » Tue Feb 14, 2017 12:31 pm

Analyzing either insurance or investments requires paying attention to potential payments and costs. But with insurance you pay more attention to the worst case, while for investments you pay more attention to the average case.

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Re: To those who avoid FICA with HSA payroll contributions

Post by Phineas J. Whoopee » Tue Feb 14, 2017 2:25 pm

motorcyclesarecool wrote:...
Most of our assumptions are based on U.S. sovereign obligations being risk-free, and I am not persuaded by the gold fever-swamp that holding bullion is a suitable alternative. Is the risk that the Social Security Administration won't keep its promises so unthinkable that I simply shouldn't think about it?
Hi motorcyclesarecool,

I too am a member of the FRA 67 cohort. I became one in 1983, with the amendments of that year, which reduced my benefit (putting it two years later) and increased my taxes. The idea was the postwar baby boom resulted in so many people no following generation could support them, Social Security being pay-as-you-go, so besides supporting current retirees we'd build up assets to help pay our own benefits, via the SS trust fund. I don't remember any of my fellows liking the deal that was struck, but math is math, and the numbers simply weren't going to add up without reforms.

The next problem is likely to come up in the early to mid 2030s absent Congressional action. That means the '83 reforms will have worked for about half a century, which in my view is pretty good for financial legislation.

The Social Security Administration promises nothing. Congress does via the law. One aspect of the 1983 reforms that was important to secure passage was a design that couldn't raise the deficit: when the SSA doesn't have enough money it doesn't pay as much. That's the promise. Following the law as written and published is not default.

Now, of course, it would be good if there were a way found, some time in the next fifteen years, to rescue the system once again. The sooner the better, but there are hard choices to be made and in 1983 the legislation passed when we were just months away from problems.

For my own planning I assume my payouts, which I intend to claim in the early 2030s, will be reduced by a quarter. That's what will happen, approximately, without a change in the law. More realistically I anticipate there will be amendments that will cost me again, but not as much as 25%.

PJW

randomguy
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Re: To those who avoid FICA with HSA payroll contributions

Post by randomguy » Wed Feb 15, 2017 8:39 pm

grabiner wrote:
randomguy wrote:Obviously investing is risker. Odds are you will end with a lot more money though.
Investing doesn't need to be riskier. You can use the money you would have otherwise contributed to Social Security to buy long-term TIPS in your IRA, which are guaranteed to outperform inflation (although not necessarily the SS wage index) if held to maturity. And if appropriate, you can buy an annuity when you retire.

This gives a fair comparison. As in the common discussions of paying down loans versus investing, the fair comparison is with low-risk investments, as you can take more risk whether you pay more SS or not, just as you can take more risk whether you make extra mortgage payments or not.
Sort off. In the real world it can get hard to take on more risk. Think about what a 20 something who wants say a 80/20 portfolio has to do. Lets say they are making 100k, have 12k/year in SS (both parts), and save 15k. To get that AA, you are talking various types of leverage which isn't cheap. And the fact that SS isn't liquid also doesn't make it a perfect bond substitute.

Billionaire
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Re: To those who avoid FICA with HSA payroll contributions

Post by Billionaire » Wed Feb 15, 2017 8:56 pm

Due to an illness in my family, I've been maxing out my HSA. $5,750.00 in employee contributions and a $2,000.00 match from my employer. I don't even think about the impact on my FICA taxes. Number one, I am still maxing out on FICA and more importantly number two, I'm getting a discount on my medical bills in the form of lower Federal and State income taxes.

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camillus
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Re: To those who avoid FICA with HSA payroll contributions

Post by camillus » Thu Jan 11, 2018 8:25 am

Hi all,

I just wanted to update this thread with a link to Kitces.com, where he discusses the "ROI" of paying social security taxes:

https://www.kitces.com/blog/social-secu ... t-roi-irr/

Kitces goes through different scenarios explaining the relative benefit or "return" of paying FICA/SECA.

The comparison he used often is that FICA is like a forced-savings TIPS.

Enjoy!

deltaneutral83
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Re: To those who avoid FICA with HSA payroll contributions

Post by deltaneutral83 » Thu Jan 11, 2018 9:45 am

grabiner wrote:
Sun Feb 12, 2017 7:31 pm

You take your 35 highest-earning years, adjust for inflation, average the adjusted earnings, and divide by 12 to get your Average Indexed Monthly Earnings. Almost everyone winds up over the first bend point of $885 (annual $10,620, or a total of $371,300 over 35 years). Only higher-income retirees are over the second bend point of $5336 (annual $64,032, or a total of $2,241,120 over 35 years); these are the ones who don't benefit much from HSA payroll deduction
I believe you meant the inverse. People who are younger and anticipating clearing the second SS bend point in their averaged (inflation adjusted) 35 highest earning years (which can only be an assumption, nothing is guaranteed in life or employment) will "likely" be better off taking the FICA deduction in an HSA and investing according to your AA. A poster above mentioned the rate of return on SS above the second bend point is something like 5.4%. This is worth beating for me even before factoring in Medicare dedcution.

It is my assumption that when analyzing the FICA deduction and the choice to do so on an HSA, you would need to also incorporate the 1.45% medicare as you do not lose any future benefits by taking that portion of the FICA deduction? So when you are above the second bend point in SS and you are analyzing the SS aspect only, it is better to incorporate the Medicare portion you would hypothetically be investing on top of SS deduction for HSA?

In essence, it makes it even more attractive to take the FICA deduction above the second bend point of SS (as to my knowledge you can't break out the FICA deduction into SS and Medicare, it's both or none?) for HSA investing when you factor in not only the SS deduction, but the Medicare too?

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Thu Jan 11, 2018 10:27 am

deltaneutral83 wrote:
Thu Jan 11, 2018 9:45 am
grabiner wrote:
Sun Feb 12, 2017 7:31 pm

You take your 35 highest-earning years, adjust for inflation, average the adjusted earnings, and divide by 12 to get your Average Indexed Monthly Earnings. Almost everyone winds up over the first bend point of $885 (annual $10,620, or a total of $371,300 over 35 years). Only higher-income retirees are over the second bend point of $5336 (annual $64,032, or a total of $2,241,120 over 35 years); these are the ones who don't benefit much from HSA payroll deduction
I believe you meant the inverse. People who are younger and anticipating clearing the second SS bend point in their averaged (inflation adjusted) 35 highest earning years (which can only be an assumption, nothing is guaranteed in life or employment) will "likely" be better off taking the FICA deduction in an HSA and investing according to your AA. A poster above mentioned the rate of return on SS above the second bend point is something like 5.4%. This is worth beating for me even before factoring in Medicare dedcution.
deltaneutral83,

<<People who are younger and anticipating clearing the second SS bend point in their averaged (inflation adjusted) 35 highest earning years >>

Sorry to say that. As far as I can tell, the likelihood is getting slimmer for many of the younger generation. To clear the second bend point, the lifetime earning needs to be around 2 million now. This average out to 57K per year for 35 years.

KlangFool

deltaneutral83
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Re: To those who avoid FICA with HSA payroll contributions

Post by deltaneutral83 » Thu Jan 11, 2018 10:47 am

KlangFool wrote:
Thu Jan 11, 2018 10:27 am

deltaneutral83,

<<People who are younger and anticipating clearing the second SS bend point in their averaged (inflation adjusted) 35 highest earning years >>

Sorry to say that. As far as I can tell, the likelihood is getting slimmer for many of the younger generation. To clear the second bend point, the lifetime earning needs to be around 2 million now. This average out to 57K per year for 35 years.

KlangFool
Klang, thank you for weighing in, but does that second bend point pertain to SS only, I assume it does? The previous reason I asked was because I felt like it may be significant to incorporate the 1.45% Medicare deduction into the total equation because I do not think for the purposes of HSA deductions that you can elect to deduct just one, it has to be both (SS & Med) or none.

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Re: To those who avoid FICA with HSA payroll contributions

Post by KlangFool » Thu Jan 11, 2018 10:55 am

deltaneutral83 wrote:
Thu Jan 11, 2018 10:47 am
KlangFool wrote:
Thu Jan 11, 2018 10:27 am

deltaneutral83,

<<People who are younger and anticipating clearing the second SS bend point in their averaged (inflation adjusted) 35 highest earning years >>

Sorry to say that. As far as I can tell, the likelihood is getting slimmer for many of the younger generation. To clear the second bend point, the lifetime earning needs to be around 2 million now. This average out to 57K per year for 35 years.

KlangFool
Klang, thank you for weighing in, but does that second bend point pertain to SS only, I assume it does? The previous reason I asked was because I felt like it may be significant to incorporate the 1.45% Medicare deduction into the total equation because I do not think for the purposes of HSA deductions that you can elect to deduct just one, it has to be both (SS & Med) or none.
deltaneutral83,

Your comparison is only valid if and when a person clears the second bend point. Given that many of the young folks will not clear the second bend point, then, the comparison is irrelevant.

KlangFool

Nate79
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Re: To those who avoid FICA with HSA payroll contributions

Post by Nate79 » Thu Jan 11, 2018 11:05 am

There are a lot of flaws on both sides of the argument in the typical analysis of deciding whether SS is a good return and avoiding FICA.
1. SS is insurance and is a complicated insurance product at that with many benefits that are ignored in the cost benefit calculation (spousal income, income payable to children and spouse if you die, disability, etc).
2. SS is not safe. Rules can change that can significantly reduce the return. It has happened in the past and it will probably happen in the future (such as increase the age for FR).
3. SS has no liquidity. If I save money in an HSA for 35 years, during those 35 years I have access to that money as needed as well as at retirement that money can be used when needed. Same as whether to pay extra on the mortgage discussion.
4. SS is lost at death and not an asset that can be passed down to heirs except some value for spouse and children as mentioned in 1.
5. The stock market return historically has been much much much higher than the return for SS. Money put in asset allocation will beat the return of SS.

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grabiner
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Re: To those who avoid FICA with HSA payroll contributions

Post by grabiner » Thu Jan 11, 2018 8:25 pm

Nate79 wrote:
Thu Jan 11, 2018 11:05 am
There are a lot of flaws on both sides of the argument in the typical analysis of deciding whether SS is a good return and avoiding FICA.
1. SS is insurance and is a complicated insurance product at that with many benefits that are ignored in the cost benefit calculation (spousal income, income payable to children and spouse if you die, disability, etc).
3. SS has no liquidity. If I save money in an HSA for 35 years, during those 35 years I have access to that money as needed as well as at retirement that money can be used when needed. Same as whether to pay extra on the mortgage discussion.
4. SS is lost at death and not an asset that can be passed down to heirs except some value for spouse and children as mentioned in 1.
For these three reasons, the closest to a fair comparison is an annuity. If you pay less into SS, you can invest the money you didn't pay, and use it to buy an annuity when you retire. (Similarly, if you choose to take SS at 67 rather than 66, you are effectively using the SS you could have earned at 66 to buy an annuity which starts at 67.)

The disability and survivors benefits do affect the value of that annuity. If your spouse receives less SS than you do, then the difference between the widow/er's benefit and the spouse's benefit is equivalent to a survivor benefit on an annuity. And this makes SS an even better deal, since the survivor benefit does not cost anything extra; retail annuities impose an extra charge. Conversely, if you receive less SS than your spouse, increasing your own SS benefit is less valuable, since the extra SS goes away when either of you die. (Again, these issues apply to the decision of when to take SS as well; it's often best for the higher-earning spouse, or the older spouse if the earnings are close, to take SS at 70 and the lower-earning spouse at 66.)

The HSA argument in #3 is not the point here. The choice is not whether to invest in an HSA or not, but whether to make your HSA investment through payroll deduction. An HSA is one of the best investments you can make if you are eligible.
2. SS is not safe. Rules can change that can significantly reduce the return. It has happened in the past and it will probably happen in the future (such as increase the age for FR).
This is true; however, other investments are not safe either. The FRA age increase was announced well in advance. There have been changes of the taxation of SS, but that is a risk with other investments as well; the taxation of non-qualified withdrawals from HSAs has already been changed.
5. The stock market return historically has been much much much higher than the return for SS. Money put in asset allocation will beat the return of SS.
You need to consider risk and return. As in the decision to pay down a mortgage or invest, you have four choices.

A: Use payroll deduction and invest the savings in bonds.
B: Do not use payroll deduction and leave your investments unchanged.
C: Use payroll deduction and invest the savings in stocks.
D: Do not use payroll deduction and move an amount equal to the FICA tax from bonds to stocks.

A and B have similar risk, as do C and D. Therefore, if B is better than A (you get a better return on your FICA tax than on low-risk bonds), then D is better than C, so you should do either B or D.
Wiki David Grabiner

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camillus
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Re: To those who avoid FICA with HSA payroll contributions

Post by camillus » Sat Jan 13, 2018 10:00 pm

grabiner wrote:
Thu Jan 11, 2018 8:25 pm
Therefore, if B is better than A (you get a better return on your FICA tax than on low-risk bonds)
Hi David, as often as I have heard your argument, it may have finally sunk in. If an investor holds low risk bonds anywhere in their portfolio, presuming the good returns of FICA as you outline, it is worth paying FICA and making adjustments to your asset allocation.

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