HSAs Underappreciated Value
Quote of the Week “Love what you do. Get good at it. Competence is a rare commodity in this day and age.” – Jon Stewart, Comedian/TV Show Host Technical Corner U.S. stocks rose for the third straight week, closing near record highs. Earnings continued to drive market action with third-quarter results so far coming in better than feared. I do want to point out that tech earnings are coming in a negative 31% over twelve months prior. We shall see what happens after all the earnings are in. Reports that the U. S. and China are close to finalizing sections of the trade deal also boosted investor sentiment as the trade rhetoric has softened. I will say again, “show me the money.” I think the “boosted sentiment” is more hope than reality. We shall see. Interest rates trending up slightly last week, which caused bonds to drop somewhat in value. Larry’s Thoughts The Underappreciated Value of Health Savings Accounts. When we meet with new clients, one of the questions we always ask is: Do you have the opportunity to invest in a Health Savings Account? These accounts are an exceptional value to clients’ long-term retirement planning if utilized properly. Not all of the best tax breaks require a deep dive into the federal tax code by a sophisticated and pricey tax attorney. One of the simplest is often overlooked: the health savings account, known as an HSA. These accounts, around since 2003, offer three tax breaks wrapped up into one, but their value is widely underestimated by even wealthy families. The HSA is a powerful tool to save for health care needs; with careful accounting, even wealthy folks can leave HSA assets untouched for years, growing tax-deferred. Later, they can be used either for health care or other costs in retirement. Taxpayers are eligible to open an HSA if their health insurance policy has a high deductible; a deductible must be at least $1,350 for a single policy and $2,700 for a family policy. These accounts work much like 401(k)s or IRAs to accumulate assets. Employees can make contributions to an HSA with pretax dollars. For those who invest in an HSA independently of an employer, the contributions are tax-deductible even for those who claim the standard deduction and don’t itemize deductions. Assets grow tax-deferred in the underlying investments. Contribution limits usually rise each year to adjust for inflation. This year the maximum investments are $3,500 for singles and $7.000 for couples. Those over age 55 can contribute an extra annual $1,000. Contributions for the calendar year can be made until the tax filing deadline of the following year. So, a 2019 contribution can be made any time until April 15, 2020. Assets can be taken out tax-free as long as they are used to cover health care expenses. This is a wonderful tool for paying medical expenses on a tax-free basis during your lifetime. Assuming the $7,000 maximum contribution rise $100 annually for inflation and is invested for a 5% average annual return, a 40-year-old couple getting started with an HSA now would have $428,000 by age 65. That’s about $100,000 more than if they had put the money into a taxable account, assuming the couple is in the 35% tax bracket, plus the contribution is tax-deductible which saves even more. Just about all states mimic the federal tax code when it comes to HSA’s. Arizona does mimic the federal tax code. The exceptions are California and New Jersey. When the account holder dies, the HSA can be passed on to the surviving spouse and retain its tax-free status for withdrawals for health care expenses. If inherited by a non-spouse beneficiary, assets in the account are subject to income taxes, but the growth is still tax-deferred. Money taken out prior to age 65 and used for anything but health care expenses are subjected not only to income taxes but a 20% penalty. But after age 65, these accounts can be used more broadly. At this stage, there is no penalty for using assets for expenses besides health care, but they will be counted as income and subject to income taxes, just as with a 401(k) or an IRA. To maximize these accounts, it is best to let them grow untouched and pay for health care expenses with out-of-pocket funds. Years later, the tax-deferred account can be used to reimburse these expenses in retirement tax-free. The caveat: It is important to keep excellent records over the years. Compile receipts for healthcare expenses, and bank or credit card statements showing how non-HSA funds were used to cover expenses. You can use those expenses to reimburse yourself for expenses incurred in prior years. The expenses don’t have to be incurred in the same year as they are withdrawn, just sometime after the account was opened. Cumbersome as that may seem, those records will come in handy in the future for drawing on a potentially six-figure account, tax-free.
Employer Plans Can Offer the Foundation of a Comfortable Retirement
Quote of the Week “Never attribute to malice that which is adequately explained by stupidity.” – Robert J. Hanlon Technical Corner U.S. stocks ended modestly higher as better than expected earnings and optimism around Brexit were offset by ongoing global growth concerns. The third quarter U.S. earnings season kicked off last week with major banks reporting solid earnings except for Goldman Sachs, against depressed investor expectations. Also helping investor sentiment was the news that the EU and UK agreed on a Brexit deal after days of negotiations. However, the deal was not approved by Parliament over the weekend. This sounds just like the U.S., except we don’t yell and jeer during our congressional sessions. On the negative side of the ledger, U.S. retail sales disappointed, and the International Monetary Fund (IMF) once again lowered its projections for global growth this year from 3.5% to 3%. Healthy household spending has been the linchpin of economic growth over the 10-year expansion, contributing to 70% of GDP. Last week new data showed that a key indicator of consumer health, retail sales, slumped for the first time in seven months, dropping 0.3% in September. It prompted market concerns that the consumers’ resilience to tariffs and slowing growth was starting to falter. If a new round of tariffs announced by the White House goes into effect later this year, the consumer may be more negatively affected by trade concerns or the prospect of rising prices on consumer goods. We are still allocated to a safe investment profile just in case the economy falls into recession. I don’t see any catalyst to cause the economy to suddenly reverse its course to the upside. Remember, we allocate with the trend, not against the trend. Stephanie’s Thoughts Last week Larry provided information on 401 (k) plans. The following article offers more food for thought. Employer Plans Can Offer the Foundation of a Comfortable Retirement October 20 to 26, 2019, is National Retirement Security Week, a nationwide effort to raise awareness about the importance of saving for retirement. Established by Congress in 2006, National Retirement Security Week is designed to elevate public knowledge about retirement savings and to encourage employees to save and participate in their employer-sponsored retirement plans. What better time to review the benefits of your retirement plan and determine if you’re making the most of them? Tax advantages Whether you have a 401(k), 403(b), or governmental 457(b) plan, contributing helps benefit your tax situation. If you make traditional (i.e., non-Roth) contributions to your plan, they are deducted from your pay before federal (and most state) income taxes are calculated. This reduces the amount of income tax you pay now. Moreover, you don’t pay income taxes on those contributions — or any returns you earn on them — until you withdraw money from the plan, ideally when you are retired and possibly in a lower tax bracket. If your plan offers a Roth account and you take advantage of this opportunity, you don’t receive an immediate tax benefit for participation, but you could receive a significant tax advantage down the road. That’s because qualified withdrawals from a Roth account are tax-free at the federal and, in many cases, state level. A withdrawal from a Roth account is qualified if it’s made after a five-year holding period (which starts on January 1 of the year you make your first contribution) and one of the following conditions applies: So should you contribute to a traditional account, a Roth account, or both? The answer depends on your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, you may find a Roth account appealing for its tax-free retirement income advantages. On the other hand, if you think you’ll be in a lower tax bracket in retirement, then a traditional account may be more appropriate to help reduce your tax bill now. Of course, you could also divide your contributions between the two types of accounts to strive for both benefits, provided you don’t exceed the annual maximum contribution amount allowed ($19,000 in 2019; $25,000 if you’re age 50 or older).1 Keep in mind that employer plans were created specifically to help Americans save for retirement. For that reason, rules were also established to discourage participants from taking money out early. With certain exceptions, withdrawals from traditional (non-Roth) accounts and nonqualified withdrawals from Roth accounts prior to reaching age 59½ are subject to regular income taxes and a 10% penalty tax. Employer contributions Employers are not required to contribute to employee accounts, but many do through matching or discretionary contributions. With a matching contribution, your employer can match your traditional pre-tax contributions, your after-tax Roth contributions, or both (however, all matching contributions will go into your traditional, tax-deferred account). Most match programs are based on a certain formula — for example, 50% of the first 6% of your salary that you contribute. If your plan offers a matching program, be sure to contribute enough to take maximum advantage of it. Neglecting to contribute the required amount is essentially turning down free money. Your employer may also offer discretionary contributions, which often take the form of profit-sharing contributions. These amounts generally go into your traditional account once per year, and typically vary from year to year. Employer contributions are often subject to a vesting schedule. That means you earn the right to those contributions (and the earnings on them) over a period of time. Keep in mind that you are always fully vested in your own contributions and the earnings on them. Review your strategy now While most people understand that their employer-sponsored retirement plan is a key to preparing adequately for the day when the regular paychecks stop, they may not take the time to review their plan’s benefits and ensure they’re taking maximum advantage of them. National Retirement Security Week provides a perfect opportunity to review your plan materials, understand its features, and determine if any changes may be warranted. 1Special catch-up rules may apply to certain participants in
Attention All Travelers!
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Benefit of Dogs
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Data Breaches: The Baggage That Comes With Our Digital World
Quote of the Week “Expectations are a setup for disappointment.” -Sandy Vilas, our business coach. Technical Corner Stocks finished higher last week for a second week in a row. News that the U.S. and China agreed to hold trade talks in Washington in October was the main catalyst for the rally. Economic data was mixed as the manufacturing activity contracted, falling to a three year low, while non-manufacturing activity expanded and accelerated versus the pace of activity in July. August’s jobs report showed that hiring slowed, but to a level strong enough to hold the unemployment steady at a near 50-year low with solid wage growth. The big test for the market will come in October when the corporate earnings will start to be reported. I anticipate that corporate earnings will be disappointing to the extent that the market could potentially experience a “black hole”. With so many investors owning stock ETFs such as the S&P 500 etc., which they think are safe, but if they start falling, they can sell with the click of a mouse, plus the potential of the trading algorithms in a downward market kicking in, we could be in for a volatile ride. September to remember? Over the past 30 years, September has had the third worst average monthly return behind August and June. September is also, on average, the second most volatile month of the year. I think this September will live up to its reputation in terms of volatility given the delicate and fluid trade situation between the U.S. and China, along with the upcoming Fed rate meeting, where consensus expectations have set a high bar for lower rates. Tom’s Thoughts Data Breach de Jour What will be the next data breach that on the newspaper front pages? Who knows. Following is an article that will help you deal with it. Enjoy!! Data Breaches: Tips for Protecting Your Identity and Your Money Large-scale data breaches are in the news again, but that’s hardly surprising. Breaches have become more frequent — a byproduct of living in an increasingly digital world. During the first six months of 2019, the Identity Theft Resource Center (ITRC), a nonprofit organization whose mission includes broadening public awareness of data breaches and identity theft, had already tracked 713 data breaches, with more than 39 million records exposed.1 Once a breach has occurred, the “aftershocks” can last for years as cyberthieves exploit stolen information. Here are some ways to help protect yourself. Get the facts Most states have enacted legislation requiring notification of data breaches involving personal information. However, requirements vary. If you are notified that your personal information has been compromised as the result of a data breach, read through the notification carefully. Make sure you understand what information was exposed or stolen. Basic information like your name or address being exposed is troubling enough, but extremely sensitive data such as financial account numbers and Social Security numbers is significantly more concerning. Also, understand what the company is doing to deal with the issue and how you can take advantage of any assistance being offered (for example, free credit monitoring). Even if you don’t receive a notification that your data has been compromised, take precautions. Be vigilant Although you can’t stop wide-scale data breaches, you can take steps to protect yourself. If there’s even a chance that some of your personal information may have been exposed, make these precautions a priority. Fraud alerts and credit freezes If you suspect that you’re a victim of identity theft or fraud, consider a fraud alert or credit freeze. A fraud alert requires creditors to take extra steps to verify your identity before extending any existing credit or issuing new credit in your name. To request a fraud alert, you have to contact one of the three major credit reporting bureaus. Once you have placed a fraud alert on your credit report with one of the bureaus, your fraud alert request will be passed along to the two remaining bureaus. A credit freeze prevents new credit and accounts from being opened in your name. Once you obtain a credit freeze, creditors won’t be allowed to access your credit report and therefore cannot offer new credit. This helps prevent identity thieves from applying for credit or opening fraudulent accounts in your name. To place a credit freeze on your credit report, you must contact each credit reporting bureau separately. Keep in mind that a credit freeze is permanent and stays on your credit report until you unfreeze it. If you want to apply for credit with a new financial institution in the future, open a new bank account, apply for a job, or rent an apartment, you’ll need to “unlock” or “thaw” the credit freeze with all three credit reporting bureaus. Each credit bureau has its own authentication process for unlocking the freeze. Recovery plans The Federal Trade Commission has an online tool that enables you to report identity theft and to actually generate a personal recovery plan. Once your personal recovery plan is prepared, you’ll be able to implement the plan using forms and letters that are created just for you. You’ll also be able to track your progress. For more information, visit identitytheft.gov.
What Is A Currency War?
A currency war refers to a situation where a number of nations seek to deliberately depreciate the value…
