With inflation exceeding 5%, are you searching for ways to cut expenses and save for retirement? While often overlooked, the Health Savings Account (HSA) can significantly lower your health care costs and provide a tax-free way to save for retirement.
For you health insurance needs, you should consider the combination of a High Deductible Health Plan (HDHP) with an HSA. These health insurance plans are often undersold by insurance agents due to the lower commissions they receive. However, when compared to a traditional health insurance plan, the HDHP/HSA combination will virtually always reduce your health care costs.
The HDHP/HSA combination is often characterized as only being advantageous for the healthy and the wealthy. This assertion is wrong! As long as you contribute the maximum annual amount to your HSA, the HDHP will virtually always save you money on your health care costs, regardless of your health care expenses.
An HDHP/HSA provides three financial advantages over a traditional health insurance policy:
1) If a traditional health care plan, with a $1,500 family deductible, costs $400 per month, an HDHP, with a $4,000 family deductible, will typically cost around 25% less or $300 per month. In this example, the HDHP provides a $1200 per year savings on insurance premiums.
2) When you contribute the family maximum to your HSA, a $5,800 tax deduction is applied to both federal and Colorado income taxes. If family taxable income exceeds $65,100, all incremental income is taxed at 25% for federal income taxes and 4.63% for Colorado state income taxes. The $5,800 maximum HSA deduction provides a combined federal and state income tax savings of $1,718.50.
3) Medical expenses paid from your HSA are made with tax-free dollars. With a traditional health plan, all expenses are paid in after tax dollars. Thus, paying the traditional plan’s $1,500 family deductible will require before tax earnings of $2,132.
Let’s assume that your health care costs exceed $4,000 in 2008. On an after tax basis, the traditional health insurance plan’s deductible will save you $1,868 over the $4,000 HSA deductible. However, HDHP premiums are $1,200 less and the HSA deposit saves you $1,718.50 in federal and state income taxes. Combining both the premium and income tax savings, the HDHP/HSA plan costs $1050.50 less than a traditional health insurance plan, at the maximum HDHP deductible amount of $4,000. HDHP plans also have no co-pays and often pay 100% of all medical expenses after the deductible is met.
If your family is healthy and you only require $1,000 in medical expenses for the year, the annual after tax savings with the HDHP is $3,340. This represents the sum of the HDHP insurance premium savings, the HSA income tax savings and $421 saved by paying the $1,000 in medical expenses with HSA funds that are never taxed.
An HSA is the only savings device that combines the income tax savings of an IRA with the tax free withdrawal of a Roth IRA. Like an IRA, funds deposited into an HSA are completely deductible from your income taxes, even if you don’t itemize. Like a Roth IRA, HSA funds can be withdrawn tax free at any time, to pay for medical expenses.
If your finances will allow, use current income to pay medical expenses and save your HSA funds until retirement. The Employee Benefit Research Institute estimates that a 65 year old will require $164,000 in medical expenses if they live 20 years after retirement. With HSA funds growing tax free, you could potentially have “free” medical care throughout your retirement years.
As long as you fully fund your HSA account and are in at least the 25% federal income tax bracket, you will virtually always come out ahead with the HDHP/HSA. When it comes time to renew your health insurance coverage, consider the HDHP/HSA approach. It will save you money and it can provide an excellent savings vehicle for your retirement years.
Henry “Bud” Hebeler is author of “Getting Started in a Financially Secure
Retirement” and founder of www.analyzenow.com. He is also wrote the Foreword of Financial Abundance Guide.
For the complete text of bankrate.com article click 20 years of spending saps savings
Concerned about how a business downturn will affect your personal finances? Here are some steps that may help you withstand an oncoming recession as well as any future recessions.
First, prepare an annual budget. For your estimated monthly expenses, track your expenditures for three months. Be sure to include federal, state and FICA taxes. To your estimated monthly expenses add quarterly, semiannual or yearly expenses, such as home and auto insurance, vacations and property taxes. The sum is an estimate of your annual expenses.
Determine your annual “non-retirement income.”
This is your total income less any contributions made to 401(k) plans, IRAs or other retirement accounts. Non-retirement income less annual expenses is the amount of savings that you have available to recession-proof your life.
Use savings to pay down one of the most expensive forms of debt available. If you have good credit and equity in your home, consider a home equity line of credit. Use this line to pay off your credit card debt and then pay off your home equity line as quickly as possible.
Get an “emergency fund.”
An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. With an emergency fund in place, you can survive a business downturn, job loss or short- term disability without invading your retirement accounts.
If you receive the $600 per person federal tax rebate, use it to pay off credit card debt, increase your emergency fund or to save for educational or retirement expenses. This income can be your first step in recession proofing your life.
Once your credit card debt is eliminated and your emergency fund is in place, use your savings to buy your first house, pay for your children’s education or to better insure an abundant retirement.
When saving for your first house, consider a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of income plus all of your Roth contributions for a down payment on your first house.
By following these simple, powerful steps you can achieve financial security. If you do not feel that you can take these steps by yourself, find a knowledgeable and trustworthy financial planner to help you with this journey. While lowering your current spending may cause some short term financial discomfort, the payoff of recession-proofing your life is a reduction of fear and stress.
Did you know that you could earn no income and still contribute up to $4,000 ($5,000 if you are over 50) to an IRA in 2007?
With a “Spousal IRA,” if either spouse has earned income during the year, both spouses may be able to use the income to fund their own IRA. Even if the income earner has a company sponsored retirement plan, the other spouse may fully contribute to an IRA.
The only limitation with a spousal IRA is that the Modified Adjusted Gross Income (MAGI) on the joint tax return must be less than $156,000 to be fully deductible. The IRA is partially deductible if the MAGI is between $156,000 and $166,000.
If you or your spouse have little or no income in 2007, consider contributing to an IRA. As long as your joint income exceeds the total amount contributed to both of your retirement accounts and your MAGI is below the maximums mentioned above, you may fully fund and IRA with no personal income.
In the November 17th Wall Street Journal, Glenn Ruffenach has an excellent article entitled “The Baby Boomer’s Guide to Social Security.” In the article, he describes a little known plan for two earner baby boom couples to maximize their Social Security benefits. In this entry, I will describe the seldom used tactic and add another twist that Glenn does not cover in his article.
In my scenario, George is age 66 (his full retirement age) and has not yet filed for his Social Security benefits. He is planning on waiting until he is age 70 to file for Social Security, so he will receive “delayed retirement credits” that provide him with 132% of his full Social Security retirement benefit ($2,000 per month) for a total of $2,640 per month.
George’s wife, Barbara, has recently turned 62 and would like to start collecting her Social Security, which would also be $2,000 per month at her full retirement age of 66. Since Barbara is only 62, she will receive 75% of her full retirement benefit or $1,500 per month.
What George found out by reading Glenn Ruffenach’s WSJ article is that he may file for a spousal benefit at age 66 and receive 1/2 of Barbara’s full projected Social Security benefit or $1,000 per month. This allows George and Barbara to jointly receive $2,500 per month, until George turns 70.
When George turns 70, he will apply for Social Security benefits based on his earnings and begin to receive his delayed retirement benefit of $2,640. Thus, when George turns 70, the couple’s Social security benefit will increase from $2,500 per month to $4,140 per month.
The final advantage to this approach occurs if George dies before Barbara, a likely scenario since he is four years older and a male. If this occurs, Barbara may apply for “survivor benefits” and receive George’s full benefit of $2,640 per month instead of her $1,500 per month, for the rest of her life.
Assuming both George and Barbara live until they are age 80, by using this approach, they will receive $59,520 more in Social security benefits than if George had merely filed for his full benefit at age 66.
All of these numbers assume no inflation. On an inflation adjusted basis, the increases in the amount of additional Social Security collected would be even greater.
The above example does not mean that this is the best approach for you. It is only meant to demonstrate that Social Security is a very complex system and the decisions that you make on when and how to receive your benefits can have a major impact on the income that you will receive. Be sure to get expert advice on the vagaries of the system before you make your decision on when and how to take your Social Security benefits.
Thanks to the present financial crisis that began with the proliferation of “sub-prime” mortgages, housing prices are dropping and mortgages are getting harder to obtain, even for people with a good credit history. If you are wondering if you will ever be able to buy your first home, you may want to consider the benefits of saving for it by using a Roth IRA.
If you are single, with an Adjusted Gross Income (AGI) of under $99,000, or married (filing jointly) with an AGI of under $156,000, you may contribute up to $4,000 of your income to a Roth IRA. In 2008, the maximum Roth IRA contribution will be $5,000. While your contribution does not lower your immediate taxes owed, it can literally open the door to owning your first home.
Let’s assume that you would like to buy a house in the next 5 years. In 2007, you contribute $4,000 to a Roth IRA. In 2008 -2011, you contribute $5,000 each year. At the end of 5 years, assuming an 8% return on your Roth IRA investments, the $24,000 that you have invested will have grown to over $30,000.
With a Roth IRA that has been established for at least five years, you are allowed to withdraw up to $10,000, in income and growth, plus all of your contributions, when the proceeds are used to buy a first home. In the example above, all $30,000 can be withdrawn to purchase a first home, without any income tax or penalties.
This approach will allow you to make a 10% down payment on a $300,000 house. If the remaining $270,000 is financed with a 30 year mortgage with a 6% annual interest rate, your monthly payments would be approximately $1,620 (plus taxes and insurance). While this approach takes patience, it may allow you to become a home owner, building up equity in your future, while your friends are still renting.
I am often asked whether it is better to contribute to a traditional, deductible IRA or to a Roth IRA. As with most personal finance questions, my answer is typically “it depends.” In this entry, I will provide some guidelines to help you decide which is best for you. When I use the term “IRA,” I am only addressing deductible IRAs. In a future entry I will discuss why I believe that it is seldom wise to fund a non-deductible IRA.
Let’s first look at the rules:
With a traditional IRA, you must be under 70½ years old plus you and/or your spouse must have earned income. In 2007, your maximum contribution is the lesser of $4,000 ($5,000 if you are over age 50) or the total amount that you and/or your spouse earned. If you are covered by a retirement plan, you can only deduct the full amount contributed to your IRA if your Modified Adjusted Gross Income (MAGI) is no more than $52,000 as a single tax payer or $83,000 as a joint filer.
With a Roth IRA, your Adjusted Gross Income (AGI) must be less than $99,000 as a single filer or $156,000 as a joint tax filer plus you and/or your spouse must have earned income. In 2007, your maximum contribution is the lesser of $4,000 ($5,000 if you are over age 50) or the total amount that you and/or your spouse earned. If you make any deductible IRA contributions, the amount that you can contribute to a Roth IRA is further reduced by the amount that you contributed to the deductible IRA.
Based on these rules, the decision on which IRA to use is sometimes obvious:
Now let’s look at the more subtle differences between the IRA plans:
When none of the above apply, the decision of funding a Roth IRA or a traditional, deductible IRA must be made by analyzing your current tax bracket, what you believe will be your future (retirement years) tax bracket and whether you expect to consume the retirement funds or pass them to future generations. This is never easy and often comes down to whether you want the tax reduction now or you can wait to get it later.
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.
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.