Choose the High Deductible Health Plan

Posted on September 26th, 2007 in Health Care by wayne

Many companies are now offering the choice of a “traditional” health care plan or a high deductible health plan (HDHP). Often, the employees are only told that the HDHP costs less (usually by 20% - 30%) and has a higher deductible. The deductible for a family “traditional” plan is often at least $500 per individual and $1,000 for the family. For a HDHP the family deductible is often as much as $3,000.

If your traditional plan costs $200 per month and the HDHP costs $160 per month (20% less) you might be believe that the $40 per month ($480 per year) savings is not worth the risk of possibly paying $2,000 more in deductible expenses. This could be true, if you do not take advantage of the tax free Health Savings Account (HSA) that can be matched with the HDHP.

However, if you are in at least the 25% federal income tax bracket and deposit the family policy maximum of $5,650 into your HSA, the cost of an HDHP will always be less than a the cost of using a traditional plan. If you are in the 25% federal tax bracket, the $5,650 HSA deposit will provide a federal income tax savings of ($5,650 *25%) = $1,412.50.

Next, using your HSA for medical expenses lets you pay for them with tax-free dollars. The $3,000 deductible can be paid with these tax-free funds. This reduces the $3,000 cost by your 25% tax bracket to a cost of $2,250 on an after tax basis.

Let’s add up the after tax costs of each plan. The traditional plan costs $480 more and saves you ($2,250 - $1,000) = $1,250 on after tax deductible costs, for a net “savings” of ($1,250 - $480) = $800

However, the HSA deposit of $5,650 has an income tax saving of $1,412.50. When the income tax savings is included, the HDHP plan costs ($1,412.50 - $800) = $612.50 less than the “traditional plan, even when your health care costs “max” out the $3,000 deductible.

If you only use $1,000 in medical expenses for the year, the savings with the HDHP is $2,142.50. This represents the sum of the insurance savings ($480), the HSA tax savings ($1412.50) and the savings from paying the deductible with funds that are never taxed ($250).

If you are in a higher tax bracket and/or if you pay state income taxes, your savings with an HDHP are even greater. Plus, the funds remaining in the HSA continue to grow tax free and can be used for future medical expenses tax free.

The bottom line is that, if you are in at least the 25% federal income tax bracket and your company offers an HDHP, you will always come out ahead with the HDHP, as long as you contribute the maximum amount allowed to your HSA.

When should you begin taking Social Security?

Posted on September 22nd, 2007 in Retirement Planning by wayne

As the “baby boom” generation ages, we are suddenly faced with making the decision of when to begin taking Social Security benefits. In 2008, the leading edge of “baby boomers” turns 62 and become eligible for Social Security. However, since their Social Security “Full Retirement Age” (FRA) is age 66, the amount that they receive at age 62 will be only 75% of the amount that they will receive if they wait until they turn 66.

If you wait until age 70 to begin receiving your Social Security benefits, your “delayed retirement credits” will provide benefits that are 32% more than the age 66 (FRA) benefits and 76% more than you receive at age 62. Another factor to consider is that between the ages of 62 and 65, if you earn more than $12,960 annually, your Social Security benefits are further reduced by 50% of all earnings above that amount.

If your spouse has career earning that are considerably less than yours, your spouse may choose to receive ½ of your Social Security benefit amount. However, if you begin taking your Social Security benefits early, your spouse can only receive up to one half of your reduced benefit. When you die, your spouse may also receive 100% of your benefits, even if your benefits include the “delayed retirement credits.”

If your Social Security benefits will be more than twice your spouse’s benefit, it will often be in your best interests to delay collecting Social Security benefits until you are age 70. Unless both you and your spouse are in poor health, the odds that at least one of you will live to 85 and beyond are fairly high. If this occurs, you and/or your spouse will be very glad to be receiving the increased benefit amount.

Fund Your HSA with Your IRA

Posted on September 14th, 2007 in Health Care by wayne

As discussed in the Financial Abundance Guide, if your marginal federal income tax rate is 25 percent or higher, on an after tax basis, you will save money with a High Deductible Health Plan (HDHP), when you fully fund your Health Savings Account (HSA).  In 2007, if you are single and your Adjusted Gross Income (AGI) is over $31,850 or filing jointly with an AGI over $63,700, an HDHP/HSA combination will save you money, as long as you fully fund your HSA.

For many people, the ability to fully fund their HSA may be a challenge. “Fully funding” requires that a single person deposit $2,850 or that a family deposit $5,650 into an HSA.  To help solve this problem, the Tax Relief and Health Care Act of 2006 allows you to do a one-time funding of your HSA by rolling over IRA funds into your HSA.

This rollover is similar to doing an IRA to Roth IRA conversion. However, with an HSA rollover, you are not required to pay taxes on the funds transferred to your HSA (as long as you maintain your HDHP for at least 12 months).  Like a Roth IRA, all HSA funds grow on a tax free basis and can be withdrawn tax-free, as long as the funds are used to pay for health care related expenses.

Another one time funding source for your HSA is a rollover from an employer-sponsored flexible spending account (FSA) or health reimbursement account (HRA).  Your rollover is limited to the account balance on the date of transfer or on September 21, 2006, whichever is less.  The rollover must also be made before January 1, 2012.  If your yearly FSA contributions will not be consumed, this approach may keep you from losing the remaining FSA funds.

If you have a High Deducible Health Plan (HDHP), fully fund your Health Savings Account (HSA).  By doing this, your total after-tax health care costs are virtually guaranteed to be lower than they would be with a comparable “low deductible” health care plan.

Estate Planning Using Roth IRAs

Posted on September 10th, 2007 in Estate Planning by wayne

Did you know that Roth IRAs are a great Estate Planning tool?

Most people know that contributions to a Roth IRA can grow tax free and provide tax-free withdrawals. This tax free growth can often provide better after-tax returns than a traditional IRA, depending upon your present tax bracket and what your tax bracket will be when you turn 70 ½.

You may not be aware of all of the following additional differences between a Roth IRA and a traditional IRA:

  1. If you file income taxes jointly and you and/or your spouse are covered by a company retirement plan, you and your spouse can each contribute $4,000 ($5,000 if you are over 50) to a Roth IRA, as long as your Adjusted Gross Income (AGI) is under $156,000 ($99,000 if you are single).
  2. As long as you have earned income and your AGI is under the maximum amounts allowed, you may contribute to a Roth IRA, regardless of how old you are.
  3. You are never required to take distributions from a Roth IRA.
  4. When you die, your Roth IRA beneficiary may roll over your Roth IRA into an inherited Roth IRA. The beneficiary will be required to take annual distributions based on their life expectancy, with the remaining assets growing tax free for as long as they live.
  5. In 2010, Adjusted Gross Income restrictions on converting IRAs to Roth IRAs are eliminated. While you pay taxes on the converted amounts, if you pass your Roth IRA assets to a younger heir, the total tax savings could very significant.

If you are in a position to pass some of your assets to your children or grandchildren, passing Roth IRA assets can provide many years of tax free income and growth to your beneficiary. Be sure to discuss this approach with your Estate Planning attorney.

Section 529 Plans for Grandparents

Posted on September 8th, 2007 in Educational Expenses by wayne

As you may already be aware, a Section 529 College Savings Plan is an excellent method of saving for a child’s college education.

The funds invested in a Section 529 College Savings Plan will grow on a tax-free basis and, when used for secondary educational expenses, can be withdrawn with no taxes ever paid. By never paying taxes on the plan income, you are effectively buying educational services at a “discount”, equal to the combined federal and state taxes that you would have paid on the plan’s growth.

What you may not know, are the benefits that Grandparents have when setting up a Section 529 Plan. The person that sets up the plan is the plan owner, with another person named as the beneficiary.

Setting up the plan is considered a completed gift to the beneficiary and is covered by the federal gift tax annual exclusion of $12,000. However, with a 529 Plan, you may elect to make a gift of up to 5 times the annual exclusion rate, allowing up to $60,000 to be given to each beneficiary or $120,000 if your spouse agrees to “gift splitting”.

If you are concerned that your estate may someday be required to pay estate taxes, this is an excellent way of removing up to $120,000 for each grandchild from your estate.

The unique part of a 529 Plan for Grandparents is that, even though the funding is treated as a completed gift, you, as the owner, have virtually complete control over the 529 Plan funds. In the future, you can change the beneficiary to anyone in your direct family tree.

You can even ask for the money back, if your finances change. If you ask for the money back, you must pay ordinary income taxes plus a 10% penalty on the 529 Plan’s income. However, all of the money used to fund the plan comes back to you.

The Section 529 College Savings Plan is the only plan, I know of, that allows you to give your money away as a completed gift, and still have virtually complete control of the funds. You can even choose the successor owner of the plan if you were to die.

For more information on the benefits of a Section 529 Plan and how to choose the best plan for your needs, go to www.savingforcollege.com.

Donor Advised Funds

Posted on September 6th, 2007 in Charitable Giving by wayne

If you are planning on making charitable gifts at the end of the year, to support your favorite charities and be able to claim a 2007 tax deduction, now is the time to consider setting up a Donor Advised Fund.

You may already know that giving appreciated long-term capital gain stock to a charitable organization gives you a double tax savings. You may deduct the full market value of the stock as a charitable deduction plus you are not required to pay capital gains taxes on the stock’s appreciated value. However, to give stock directly to multiple organizations can be both cumbersome and time consuming.

To overcome the problems of directly gifting appreciated stock, you can create a Donor Advised Fund. These are qualified, private, nonoperating foundations that pool their donations and allow donors to select qualified charities for gifts.

Donor Advised Funds are simple to establish. Fidelity, Schwab, Vanguard and other brokerage firms offer these accounts. You may even deduct more in a given year than you actually grant to your chosen charitable organizations, with any excess available for future charitable gifts.

Donor Advised Funds are similar to having your own charitable foundation, without the overhead and legal expenses required to establish a foundation. If this approach seems appropriate for you, either visit on-line or call your brokerage firm today.

Employer matching 401(k)s

Posted on September 3rd, 2007 in Retirement Planning by wayne

If your employer offers an employer “match” to your 401(k) or 403(b) contributions, do everything possible to fund your account up to the full matching amount.

The logic behind this statement is covered in the Financial Abundance Guide, where I show how “Jeff” receives a 145% total return, in only 5 years, when his company matches his $6,000 annual 401(k) contribution. In five years, his $30,000 invested becomes $73,635, with only an 8% annual return.

In a recent Wall Street Journal article, Eleanor Laise found that the number of people participating in Fidelity Investment’s defined contribution plans had actually decreased from 56.9% in 2005 to 56.6% in 2006. This has occurred, in spite of the Pension Protection Act, which allows employers to automatically enroll employees, requiring them to “opt out” of the 401(k) plan.

Most employers have been slow to implement this approach, often providing “opt out” only to new hires. An explanation of why employers are being slow to implement this change is offered by Stephen Utkus, director of the Vanguard Center for Retirement Research: “If you (the employer) get more people to participate, you have to pay more in matching contributions, so employers have been slow to phase it in.”

To attain financial abundance, you must take control of your finances. If your employer offers a match to your 401(k) or 403(b) account, the total amount that is matched is “free money”. This “free money” can provide you with an immediate 100% return on your investment. If you are offered this “free money” use it, don’t lose it.

Welcome to Financial Abundance

Posted on September 3rd, 2007 in Financial Abundance by wayne

Are you interested in living from a position of financial abundance?

Meeting current financial obligations, saving for your family’s education and retirement expenses while increasing charitable giving are the outcomes of living in financial abundance.

With a better understanding of your financial health and new approaches to meeting your financial goals, your fears of financial scarcity will be reduced. By implementing the strategies covered in Financial Abundance Guide, living in financial abundance can become a reality.

I will be publishing blog entries to provide information that may help you increase your sense of financial abundance. These entries are meant to supplement the material contained in Financial Abundance Guide. If you have questions or comments on the information provided, please add to my blog.

Over time, my goal is to have a blog where people can increase their personal financial knowledge and learn to live from a sense of financial abundance.