Page 200 - TaxAdviser_2022

INDIVIDUALSFINANCIAL PLANNING
PERSONAL

12% are the after-tax returns. At 2%, percentage points across the respective which leaves an after-tax investment
6%, and 12%, the 10-year cumulative 2%, 6%, and 12% pretax returns. of $1,186.15 and an after-tax 10-year
after-tax returns are 21.9%, 79.1%, and Table 2 shows comparable figures cumulative return of 18.6%.
210.6%, respectively. If the only differ- to Table 1, except that the underlying If the $1,000 had remained invested
ence between investing outside the HSA investment produces taxable gain only inside the HSA at the same 2% com-
and inside the HSA is the 20% annual at the end of the 10-year period. The pounded annually, it would have pro-
tax on investment earnings, a $1,000 capital gains tax rate for the investment duced an after-tax investment valued at
investment within the HSA will produce outside the HSA is assumed to be 15% $1,218.99 and a 10-year after-tax return
cumulative 10-year returns that are 4.7, in Panel A and 30% in Panel B. For of 21.9%, 3.3 percentage points higher
19.3, and 60.5 percentage points greater example, in the first column of Panel than if invested outside the HSA. As-
than an investment outside the HSA, A, the $1,000 investment that earns suming pretax rates of return of 6% and
given pretax returns of 2%, 6%, and 12%, 2% compounded annually produces a 12%, respectively, an investment inside
respectively. In Panel B, the marginal tax pretax investment value of $1,218.99 the HSA produces cumulative 10-year
rate is 40%, and the additional after-tax (i.e., $1,000 × (1 + 0.02)10). The increase investment returns that are 11.9 and
benefit of investing within the HSA in investment value, $218.99, is sub- 31.6 percentage points higher than an
nearly doubles to 9.2, 36.7, and 110.2 ject to 15% capital gains tax ($32.85), investment outside the HSA. In Panel

Table 2: Comparison of after-tax cumulative returns from investing $1,000 for ten years
Table 2: Comparison of after-tax cumulative returns from investing $1,000 for 10 years
in an investment that produces end-of-period realization (i.e., capital gain)
in an investment that produces end-of-period realization (i.e., capital gain)

$1,000 reimbursed 1/1/22 from HSA, $1,000 paid personally on 1/1/22,
then invested outside the HSA leaving $1,000 invested within the HSA
Pretax annual earnings rate 2% 6% 12% 2% 6% 12%

Panel A: 15% marginal tax rate
Pretax accumulation at end $ 1,218.99 $ 1,790.85 $ 3,105.85 $ 1,218.99 $ 1,790.85 $ 3,105.85
Tax on end-of-period gain realized $ (32.85) $ (118.63) $ (315.88) $ - $ - $ -

After-tax investment at 12/31/31 $ 1,186.15 $ 1,672.22 $ 2,789.97 $ 1,218.99 $ 1,790.85 $ 3,105.85
Cumulative after-tax 10-year return 18.6% 67.2% 179.0% 21.9% 79.1% 210.6%

Additional after-tax return by delaying
HSA reimbursement 3.3% 11.9% 31.6%
Panel B: 30% marginal tax rate
Pretax accumulation at end $ 1,218.99 $ 1,790.85 $ 3,105.85 $ 1,218.99 $ 1,790.85 $ 3,105.85

Tax on end-of-period gain realized $ (65.70) $ (237.25) $ (631.75) $ - $ - $ -

After-tax investment at 12/31/31 $ 1,153.30 $ 1,553.59 $ 2,474.09 $ 1,218.99 $ 1,790.85 $ 3,105.85

Cumulative after-tax 10-year return 15.3% 55.4% 147.4% 21.9% 79.1% 210.6%

Additional after-tax return by delaying
HSA reimbursement 6.6% 23.7% 63.2%

30 April 2022 The Tax Adviser