The 25% cap is where this gets tricky in practice. If someone's already maxing their cash balance at say $300k/year, carving out $75k for the 401(h) sounds great until they realize the setup and admin costs need to justify themselves against the tax arbitrage. At 37% going in and 37% hypothetically coming out, the real value is eliminating taxation on medical expenses that would've been paid with after-tax dollars anyway. But here's the nuance - most high earners I've talked to underestimate their retiremnet medical spend. They budget for premiums and copays but forget LTC insurance can easily run $10k+ annually, and the Medicare gap gets expensive. The break-even on this stratgey probably happens faster than people think, especially if health issues emerge later. One thing I'd add is that the "medically neccessary spa treatment" carveout is audit bait without proper documentation.
I agree with all of your points. 1). the tax benefit (e.g., $75k deduction at 37%) has to justify the costs (e.g., $5k annually) so most suitable for high-income docs. 2) yes, many docs underestimate their retirement medical expenses, so having a tax-free bucket to fund the costs during their golden years is a good idea. 3) substantiation is a key. :) I pushed that med spa example a bit as a conversation starter, but your caution is absolutely well-taken. Conversation like this solidify my TAX NEURAL FOUNDRY and sharpen my thinking - thanks to you. :)
The 25% cap is where this gets tricky in practice. If someone's already maxing their cash balance at say $300k/year, carving out $75k for the 401(h) sounds great until they realize the setup and admin costs need to justify themselves against the tax arbitrage. At 37% going in and 37% hypothetically coming out, the real value is eliminating taxation on medical expenses that would've been paid with after-tax dollars anyway. But here's the nuance - most high earners I've talked to underestimate their retiremnet medical spend. They budget for premiums and copays but forget LTC insurance can easily run $10k+ annually, and the Medicare gap gets expensive. The break-even on this stratgey probably happens faster than people think, especially if health issues emerge later. One thing I'd add is that the "medically neccessary spa treatment" carveout is audit bait without proper documentation.
I agree with all of your points. 1). the tax benefit (e.g., $75k deduction at 37%) has to justify the costs (e.g., $5k annually) so most suitable for high-income docs. 2) yes, many docs underestimate their retirement medical expenses, so having a tax-free bucket to fund the costs during their golden years is a good idea. 3) substantiation is a key. :) I pushed that med spa example a bit as a conversation starter, but your caution is absolutely well-taken. Conversation like this solidify my TAX NEURAL FOUNDRY and sharpen my thinking - thanks to you. :)