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
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.
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.
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.