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High Deductible Health Plans and HSAs
Contributed by: Matthew E. Chope, CFP®
I am a big fan of High Deductible Health Care Plans. As individual and group premiums rise, employers are pushing their employees to take more responsibility for their health and healthcare costs, and offering High Deductible plans is one way they are doing this. You can have a High Deductible plan as an individual or in a group plan.
There are some basics about these health care plans that you need to understand. Basically, high deductible plans are not allowed to offer any co-pay benefits – like paying $10 for a generic prescription or $35 for a doctor visit. Thus, they usually work well for healthy people, although more and more, they work even if you know you’re going to hit your out of pocket maximum for the year because of their lower premiums.
If you have a High Deductible Health Care Plan, you can take advantage of a HSA (Health Savings Acccount) which is typically opened at a bank or credit union. If you have an HSA plan, you are allowed to make pre-tax contributions to that account. The maximum contribution will be $6900 in 2018 for a family and $3450 for an individual. If you are 55 or older, you can add another $1000 to those figures. If you get your insurance through your employer, you may find that your employer offers the HSA account for you and even makes a contribution to it during the year. In which case, you would count this money as part of your contribution limit.
You might be thinking, what’s so great about this if my insurance covers almost nothing unless I hit my deductible and/or out of pocket maximum? (They are often, but not always, the same amount.)
The High Deductible Health Care Plan is a wonderful planning tool for several reasons
First, they operate the way insurance is supposed to operate: a smaller cost for an unlikely (but potentially catastrophic) event... think fire insurance on your home. Going to the doctor or filling a prescription are not unlikely events at all, so really, when a plan offers copays for things like doctor appointments and prescription medication, that’s not really insurance, that is a discount plan. Consider it as though you are paying for the discount in the premium.
Second, HSAs offer a great tax break: the money is contributed with pre-tax dollars, the account grows tax-free… and best of all… none of it is taxed coming out. (as long as you use them for qualified medical expenses.) Yes, there are rules about what is a qualified medical expense but in a nutshell most legitimate expenses for healthcare are okay. You can’t use them for: the actual premium cost of the insurance, supplements, massage, or elective surgery (this is usually the case but there are exceptions). The HSA is the only vehicle where the money isn’t taxed going in or coming out, if you follow the fairly simple rules.*
Third, HSA dollars can be used on things that insurance doesn’t typically cover, such as alternative care with a chiropractor or acupuncturist for example. You can also use HSA money to pay for things like the dentist or eye doctor. (See IRS Pub. 502 for a list of qualified medical expenses.)
Some people also use the HSA as another savings vehicle. They max out their contribution each year, but instead of spending the money on medical costs, they pay for their costs with regular old post-tax dollars. They still get the tax deduction, because the deduction is based on the contribution, not on the spending. Then in retirement they’ve got an account they can use for health care costs.
Taking the Strategy One More Step
If you have a large expense pre-retirement and you pay for it with post-tax dollars (i.e you just write a check), you can reimburse yourself for the cost years later. That means you can make a tax free withdrawal in retirement for a pre-retirement healthcare expense. This could make sense for a large ticket item, like a hospital bill. Having a tax-free account such as an HSA could really help you be strategic with retirement income. (Consult with your CPA, and save those receipts for this strategy!)
The High Deductible Health Care plan/HSA Strategy isn’t for everyone, but to figure out if it makes sense for you, it’s best to speak with someone who can analyze your individual situation and advise you. Brokers’ services are free to you, as they are compensated by the insurance carrier you choose. You can also contact us for help with deciding if this strategy makes sense for you.
* May be subject to State or local taxes.
Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.
This information does not purport to be a complete description of High Deductible Insurance Policies or Health Savings Accounts, it has been obtained from sources deemed reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Matthew Chope and are not necessarily those of Raymond James. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Our New Financial Planner: Bob Ingram
Contributed by: Nick Defenthaler, CFP®
The Center recently welcomed a new team member: Bob Ingram. With nearly 15 years of experience in the profession, Bob is thrilled to join a team where he can collaborate with other professionals to further enhance his role as a financial planner.
Prior to joining The Center, Bob helped clients achieve their financial goals at a large, national investment and financial planning firm.
In addition to meeting with clients, Bob will be an active member within The Center’s Financial Planning Department. If Bob looks familiar, it might be because you’ve seen him speak on various personal finance and investment related topics as the “Money Man” for Detroit’s WXYZ Channel 7.
Bob is not only excited to join our team, but happy to be on yours as well. Next time you’re in the office, stop by and say hi to our growing team!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.
Required Minimum Distribution Update
Contributed by: Timothy Wyman, CFP®, JD
As tough as it is to admit, sometimes after practicing for 26 years I take things for granted. I should know better! One such instance was working with one of the firm’s long term clients facing their first Required Minimum Distribution (“RMD”) from her IRA. As our client shared, “Since neither of us have experienced this life experience before, we know nothing about it.” The good news is that The Center has been helping clients satisfy their RMD requirement and integrating it into their financial planning for years. What I forgot was that what may appear a routine exercise for us as professionals may not be for folks experiencing a RMD for the first time.
Center partner Laurie Renchik, CFP®, provides a quick outline of the rules in the following blog post: http://www.centerfinplan.com/money-centered/2013/2/7/the-magic-age-of-70-and-your-required-minimum-distributions.html?rq=rmd
While the rules may be considered somewhat straight forward – as usual there are many nuances. More importantly, sometimes the issue is simply how one actually takes the money.
Need the money for living expenses? We can transfer to your bank account or send a check. This can be done monthly, quarterly, or even as a lump sum during the year.
Don’t need the money? We can transfer the after tax amount to a taxable investment account and reinvest for future use. Remember, the tax man wants to get paid (via income tax withholding) before the transfer.
For example, Mary’s RMD amount is $20,000 and she is in the 25% marginal income tax bracket for federal income tax purposes. We would request a gross distribution of $20,000 and send the IRS $5,000 for income tax withholding and the $15,000 balance could be reinvested in Mary’s taxable investment account. I should note, the State of Michigan in Mary’s case wants their share and therefore we would withhold another 4.25% in most cases.
Additionally, while not necessarily a RMD rule, those over 70.5 and subject to a RMD may also consider how a Qualified Charitable Distribution (“QCD”) might be beneficial. My colleague Nick Defenthaler provides a great recap here:
The ease of giving and potential income tax benefits makes this an attractive option for many. While not a substitute for professional assistance, please find a summary of the major provisions for your consideration:
Donor Benefits of the QCD include:
Convenience: An easy and simple way to support your favorite cause
Lowers Taxable Income: The donor does not have to include the qualified charitable distribution as taxable income – whether the donor uses the standard deduction or itemizes deductions.
Ability to make larger deductible gifts: A donor is not restricted to 50% of adjusted gross income by using an IRA for charitable gifts. Therefore, a donor may make larger charitable gifts.
Income tax savings: The donor may save substantial income taxes not otherwise available due to deduction floors and phase-outs at higher income levels.
You have worked to save money for the future and tax deferral via IRA’s for most has been an important component. At age 70.5 IRS regulations dictate that a minimum amount must be withdrawn whether you actually need the money for living expenses. The Center is here to assist you in your RMD planning and to ensure that they are integrated into your overall retirement planning.
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc.® and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Webinar in Review: 2018 Medicare Open Enrollment
Contributed by: Kali Hassinger, CFP®
Medicare Open Enrollment began on October 15th and lasts until December 7th, which is why The Center was excited to be joined by two Medicare professionals, Michelle Zettergren and Jim Edge, from Health Plan One (HP One) during our recent Webinar. Michelle and Jim provide a crash course on Medicare and explain how HP One’s partnership with Raymond James can assist our clients during the Open Enrollment period. Whether you’re new to Medicare or thinking about changing your current coverage, HP One can work with you to determine which Medicare options will best fit your needs.
We have covered Medicare Open Enrollment and basics in the past, but the supplement options and landscapes are ever changing, which makes it important to review your coverage before you’re locked in for another year. HP One works with Raymond James & Center for Financial Planning clients to make the Medicare process as easy and straightforward as possible with no cost to the client.
You can contact HP One at their dedicated Raymond James line by calling 844-269-2646 between the hours of 8:30 AM and 8:00 PM (EST). If you prefer to do some research and review options online, you can visit their website at http://hporetirees.com/raymondjames
You can also review some Medicare basics on our website at: http://www.centerfinplan.com/medicare-faq
Here’s the recorded webinar in case you missed it!
https://youtu.be/taxlFqWXuLA
Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®
Three New Faces on the Client Service Team
Contributed by: Lauren Adams, CFA®, MBA
It’s been one year since I last introduced new members of the client service team, and exciting things continue to happen within this department at The Center. We’ve added another three members to the team in the last few months. It’s my privilege to introduce them to you here, and I hope you’ll join me in giving them a very warm welcome to The Center Family!
Abigail Fischer joined us after recently graduating with a degree in Economics from Whitworth University in Spokane, Washington. She caught the financial planning bug from a young age and was heavily involved with financial education projects on campus. Most notably, she co-founded a counseling and financial workshop program—that was available to 2,000 students—with the goal of helping her peers build a foundation for a lifetime of financial well-being. She recently moved to Michigan to be closer to family, and we were lucky enough to snag her for a client service position this July. In addition to client service work, Abigail also helps manage The Center’s social media presence, and she loves to hear from clients and friends of The Center regarding blog topic ideas (or even just a Facebook Like or Share!).
Andrew O’Laughlin also came onboard at the end of July and joined our team after several years of experience at another advisory firm—experience he’s already putting to excellent use in his first few months as a client service team member. In addition, he earned his undergraduate degree from the University of Vermont and has completed a Masters of Business Administration at Wayne State University. If that wasn’t impressive enough, he has also obtained licenses in insurance and securities, and plans to continue to pursue more in the future (all with two little ones at home, by the way). He’s a great example of The Center’s “Continuous Learning and Personal Growth” Core Value, among others.
Joining us at the end of September, Sarah McDonell is our most recent addition to The Center’s client service team. Sarah graduated from University of Michigan with a degree in English Literature. Sarah also joined us from another financial advisory team and was attracted by The Center’s commitment to excellent client service, continual education, and strong work ethic. Speaking of which, she hopes to begin studying for the Series 7 license in the near future. Sarah also enjoys marketing and social media, as well as striving to WOW clients on a daily basis—a mindset we, of course, love.
Please join me in welcoming Abigail, Andrew, and Sarah to The Center Family! We’re so thrilled to have them onboard, and they can’t wait to meet all of our clients and friends soon.
Lauren Adams, CFA®, MBA is Director of Client Services at Center for Financial Planning, Inc.®
Raymond James Women’s Symposium Recap
Contributed by: Jeanette LoPiccolo, CRPC®
It is no surprise that women represent more than 50% of American population. What may surprise you is the number of female financial advisors in the US: less than 16%. The goal of the 23rd Annual Raymond James Women’s Symposium was to connect female financial advisors with each other, to share successes, learn from each other, and inspire women who are considering a career as a financial planner. From our office: Melissa Joy, CFP®, Laurie Renchik, CFP®, Kali Hassinger, CFP® and Jeanette LoPiccolo, CRPC® attended the 3 day conference in Tampa, FL.
The Symposium presented a number of great speakers who shared their stories and discussed how the critical decisions in their lives paved the way to their later successes. The Center’s own Melissa Joy, CFP®, lead an inspiring conversation with Dr. Lissa Young, Associate Professor, West Point on the subject of “Being your Authentic Self”. Dr. Young reminded the audience to embrace and encourage each other to be their genuine selves.
Jeanette LoPiccolo, CRPC® is a Client Service Manager at Center for Financial Planning, Inc.®
Dr. Lissa Young is not affiliated with Raymond James.
Investing vs. Paying Off Debt
Contributed by: Matt Trujillo, CFP®
You can use a variety of strategies to pay off debt, many of which can cut not only the amount of time it will take to pay off the debt but also the total interest paid. But like many people, you may be torn between paying off debt and the need to save for retirement. Both are important; both can provide a more secure future. If you're not sure you can afford to tackle both at the same time, which should you choose?
There's no one answer that's right for everyone, but here are some of the factors you should consider when making your decision.
Rate of investment return versus interest rate on debt
Probably the most common way to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return by investing than the after-tax interest rate you pay on the debt. For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. By getting rid of those interest payments, you're effectively getting an 18% return on your money. That means your money would generally need to earn an after-tax return greater than 18% to make investing a smarter choice than paying off debt. That's a pretty tough challenge even for professional investors.
And bear in mind that investment returns are anything but guaranteed. In general, the higher the rate of return, the greater the risk. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but you won't have had the benefit of any gains. By contrast, the return that comes from eliminating high-interest-rate debt is a sure thing.
An employer's match may change the equation
If your employer matches a portion of your workplace retirement account contributions, that can make the debt versus savings decision more difficult. Let's say your company matches 50% of your contributions up to 6% of your salary. That means that you're earning a 50% return on that portion of your retirement account contributions.
If surpassing an 18% return from paying off debt is a challenge, getting a 50% return on your money simply through investing is even tougher. The old saying about a bird in the hand being worth two in the bush applies here. Assuming you conform to your plan's requirements and your company meets its plan obligations, you know in advance what your return from the match will be; very few investments can offer the same degree of certainty. That's why many financial experts argue that saving at least enough to get any employer match for your contributions may make more sense than focusing on debt.
And don't forget the tax benefits of contributions to a workplace savings plan. By contributing pretax dollars to your plan account, you're deferring anywhere from 10% to 39.6% in taxes, depending on your federal tax rate. You're able to put money that would ordinarily go toward taxes to work immediately.
Your choice doesn't have to be all or nothing
The decision about whether to save for retirement or pay off debt can sometimes be affected by the type of debt you have. For example, if you itemize deductions, the interest you pay on a mortgage is generally deductible on your federal tax return. Let's say you're paying 6% on your mortgage and 18% on your credit card debt, and your employer matches 50% of your retirement account contributions. You might consider directing some of your available resources to paying off the credit card debt and some toward
your retirement account in order to get the full company match, and continuing to pay the tax-deductible mortgage interest.
There's another good reason to explore ways to address both goals. Time is your best ally when saving for retirement. If you say to yourself, "I'll wait to start saving until my debts are completely paid off," you run the risk that you'll never get to that point, because your good intentions about paying off your debt may falter at some point. Putting off saving also reduces the number of years you have left to save for retirement.
It might also be easier to address both goals if you can cut your interest payments by refinancing that debt. For example, you might be able to consolidate multiple credit card payments by rolling them over to a new credit card or a debt consolidation loan that has a lower interest rate.
Bear in mind that even if you decide to focus on retirement savings, you should make sure that you're able to make at least the monthly minimum payments owed on your debt. Failure to make those minimum payments can result in penalties and increased interest rates; those will only make your debt situation worse.
Other considerations
When deciding whether to pay down debt or to save for retirement, make sure you take into account the following factors:
Having retirement plan contributions automatically deducted from your paycheck eliminates the temptation to spend that money on things that might make your debt dilemma even worse. If you decide to prioritize paying down debt, make sure you put in place a mechanism that automatically directs money toward the debt--for example, having money deducted automatically from your checking account--so you won't be tempted to skip or reduce payments.
Do you have an emergency fund or other resources that you can tap in case you lose your job or have a medical emergency? Remember that if your workplace savings plan allows loans, contributing to the plan not only means you're helping to provide for a more secure retirement but also building savings that could potentially be used as a last resort in an emergency. Some employer-sponsored retirement plans also allow hardship withdrawals in certain situations--for example, payments necessary to prevent an eviction from or foreclosure of your principal residence--if you have no other resources to tap. (However, remember that the amount of any hardship withdrawal becomes taxable income, and if you aren't at least age 59½, you also may owe a 10% premature distribution tax on that money.)
If you do need to borrow from your plan, make sure you compare the cost of using that money with other financing options, such as loans from banks, credit unions, friends, or family. Although interest rates on plan loans may be favorable, the amount you can borrow is limited, and you generally must repay the loan within five years. In addition, some plans require you to repay the loan immediately if you leave your job. Your retirement earnings will also suffer as a result of removing funds from a tax-deferred investment.
If you focus on retirement savings rather than paying down debt, make sure you're invested so that your return has a chance of exceeding the interest you owe on that debt. While your investments should be appropriate for your risk tolerance, if you invest too conservatively, the rate of return may not be high enough to offset the interest rate you'll continue to pay.
Regardless of your choice, perhaps the most important decision you can make is to take action and get started now. The sooner you decide on a plan for both your debt and your need for retirement savings, the sooner you'll start to make progress toward achieving both goals.
Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.
You should discuss any tax or legal matters with the appropriate professional.
This Just In: Cost of Living Adjustment
Contributed by: Nick Defenthaler, CFP®
In recent weeks, it was announced that monthly Social Security benefits for more than 66 million Americans will be increasing by 2% starting in January 2018. Who doesn’t love a pay raise, right? This cost of living adjustment (COLA for short) is the largest we’ve seen since 2012. To put the 2% increase in perspective, 2017 benefits crept up by a measly 0.3% and 2016 offered no benefit increase at all.
Unfortunately, as many can attest to who are still in the work force, your “raise” may be partially or fully wiped away due to the increase in cost for medical insurance through Medicare – enter the "hold harmless" provision. Medicare premiums for 2018 will be announced later this year.
If you’re like many, this will probably cause some frustration knowing your increase could very well be going right back out the door in the form of medical premiums. However, it’s important to remember that Social Security is one of the only forms of guaranteed fixed income that will rise over the course of retirement. For those lucky enough to still have access to a pension, it’s extremely rare to have a benefit that carries a COLA provision.
While Social Security checks will be higher in 2018, so will the earnings wage base you pay into if you’re still working. In 2017, the first $127,000 was subject to Social Security payroll tax (6.2% for employees and 6.2% for employers). Moving into 2018, the new wage base grows to $128,700 a 1.3% increase. This translates into an additional $105 in tax each year for those earning north of $128,700.
Social Security plays a vital role for almost everyone’s financial game plan. If you have questions about next year’s COLA or anything else related to your Social Security benefit, don’t hesitate to reach out to us.
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.
This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Nicholas Defenthaler and are not necessarily those of Raymond James.