Are you aware of the many planning aspects of HSAs? We’d like to share some of the more in-depth aspects with you here so you can get the most from your HSA. However, if you’re unfamiliar with HSAs or need a quick reminder about them and high-deductible health plans (HDHP), then we encourage you first to read our blog article: A New Perspective on Health Savings Accounts.
HSAs are more tax efficient than other retirement accounts.
HSA accounts are often referred to as “triple tax-exempt” because your contributions, earnings, and qualified withdrawals are not taxed. This triple tax-exempt nature of HSAs makes them more attractive than other retirement accounts that are only double tax-exempt, including 401(k)s, IRAs, and Roth IRAs.
Employee HSAs could be considered quadruple tax-exempt.
Additionally, if you’re an employee and make HSA contributions via payroll deduction, then you have an added benefit of avoiding FICA (Social Security and Medicare) and FUTA (unemployment) taxes on those contributions. Contributions to your 401(k) via payroll deductions don’t avoid these taxes.
Don’t use your HSA for current medical expenses and invest the funds.
In order to fully benefit from the triple or quadruple tax-exempt nature of an HSA, you’ll need to let the account grow. It’s important to leave your contributions in your HSA and to invest them for the most potential growth.
Note: This means you’ll need to pay for medical expenses out of pocket, which can get expensive when you have a high-deductible health plan (HDHP).
Save receipts for current medical expenses to reimburse yourself in the future.
There is no time limit for reimbursing yourself for qualified medical expenses, so you can reimburse yourself in the future—even 30 years from now—for expenses incurred today. You must keep records of these expenses, so it’s important to keep your receipts. You’ll have plenty of medical expenses in retirement, so saving receipts for small expenses may not be worth the effort. Consider saving receipts for larger current expenses.
Note: You can’t reimburse yourself for medical expenses incurred before the HSA account was established or for medical expenses deducted on Schedule A of your tax return as itemized deductions.
Maximize your catch-up contributions in a family HDHP.
You can make an annual $1,000 catch-up contribution to your HSA beginning at age 55. If you have a family HDHP or two separate HDHPs, then you can potentially make two catch-up contributions—one for each spouse who’s 55 or older if the catch-up contributions are made to each of their separate HSA accounts.
Note: Most family HDHPs are set up with one HSA account in the employee’s name. If the spouse doesn’t have their own HSA account, then they will need to open one in order to make their own catch-up contribution.
Contribute after you stop working and before you enroll in Medicare
Unlike an IRA or Roth IRA, you don’t need to have earned income to be able to contribute to your HSA. You can contribute to your HSA if you have an HDHP and haven’t yet enrolled in Medicare. If you retire before Medicare age, then you’ll need to either continue your coverage through your employer with COBRA or get individual coverage. If either of these coverages is an HDHP, then you can contribute to an HSA.
Note: You can’t contribute to an HSA once you enroll in Medicare because Medicare is not an HDHP. Enrollment in Medicare includes enrollment in any Medicare coverage—Parts A, B, C, D, or a Medigap plan.
Contribute tax-free funds from your IRA in a one-time rollover.
You can make a one-time rollover from your IRA to your HSA up to your contribution limit for the year. If you wait to perform this rollover until you’re age 55, you can rollover both the maximum annual contribution and your catch-up contribution. This rollover must be transferred directly from your IRA into your HSA in order to be tax-free.
Note: A good candidate for this rollover would be someone who has a large IRA and might already be looking for openings to convert some of their IRA to after-tax accounts, such as a Roth IRA.
Use your HSA to pay for certain insurance premiums.
You can use your HSA to pay for certain health insurance premiums that are considered qualified expenses, including long-term care insurance (subject to limits and restrictions), healthcare continuation such as COBRA, healthcare coverage while receiving unemployment benefits, and Medicare or other healthcare coverage at age 65. Premiums for a Medicare supplemental policy are not considered a qualified expense.
Note: The annual amount of qualified long-term care premiums is limited and based on your age, which ranges from $420 for those age 40 and younger to $5,270 for those age 71 and older. The long-term care policy must also meet certain requirements itself to be qualified.
Non-qualified withdrawals after age 65 aren’t penalized.
Withdrawals for qualified expenses for yourself, your spouse, and your dependents are not taxable and not subject to a penalty. Non-qualified withdrawals are subject to a 20% penalty and tax, but the 20% penalty no longer applies once you reach age 65. Non-qualified withdrawals after age 65 are taxable, making them comparable to IRA withdrawals. While you’ll lose the triple-tax exempt nature of an HSA, your contributions and growth were tax-free.
Note: If you must take taxable distributions and you aren’t yet 65, then consider distributing funds from an IRA before distributing funds from your HSA to avoid the 20% penalty. Keep in mind that there is a 10% penalty for IRA withdrawals prior to age 59 ½.
Qualified distributions for a deceased owner are non-taxable within one year of death.
If you pass away and your beneficiary is your spouse, then they can continue the HSA as their own. If the beneficiary is not your spouse, then the value of your HSA at the time of your death is distributed and deemed taxable income for them. However, your beneficiary can use the HSA to pay for your outstanding qualified expenses within one year of your death. Funds used for this purpose by a non-spouse beneficiary are excluded from the value of the account, thus lowering their taxable income.
Note: Discuss your outstanding qualified expenses with your beneficiary. They can only use the account to pay for your expenses after your death if they have the necessary information and records.
Getting the most out of your HSA can be difficult, especially while trying to do so over a long period of time. It’s important to integrate HSA planning into your overall financial goals and retirement plan. As financial advisors, we love to help our clients accomplish these things, so please reach out to us if you have any questions. We’re here to help!
I want to acknowledge that all women are wonderfully unique individuals and therefore these tips will not be applicable to all of us equally and may be very helpful to some men and nonbinary individuals. This is written in an effort to support women, not to exclude, generalize, or stereotype any group.
I was recently reminded of a troubling statistic: Two-thirds of women do not trust their advisors. Having worked in the financial services industry for nearly two decades, this is unfortunately not surprising to me. But it is troubling, largely because it’s so preventable.
Whether you have a long-standing relationship with an advisor, are just starting to consider working with a financial planner, or are considering making a change, there are some simple tips all women should be aware of to improve this relationship and strengthen their financial futures.
Tip #5 – Go to the Meetings
I haven’t seen any studies on whether or not women attend fewer meetings. However, if two-thirds of women don’t trust their advisors, I have to believe they aren’t eager to sit in a room with someone they don’t trust for an hour. I sometimes hear that one spouse “just isn’t interested in finances” so they don’t attend meetings. It’s perfectly fine to not be interested. My spouse isn’t! One thing I always find fascinating about working with couples is seeing all the different ways we decide to divide and conquer household tasks. Those lines are often logically drawn based on who has the most interest or the most time. However, even if you completely trust your spouse to handle the finances and you don’t have any interest, it’s important that you are part of the big picture conversations. You may not have any opinion on whether you invest in mutual fund XYZ, but you may have goals that aren’t even on your spouse’s radar or strong opinions about whether your entire portfolio is invested conservatively or aggressively. I find that when one spouse “just isn’t interested in finances,” it means that they attended meetings with other advisors in the past where the conversation wasn’t properly framed to address their goals, or they felt uncomfortable asking questions.
In addition to making sure your financial plan properly addresses your goals and takes your comfort level into account, it’s also important to build a relationship with your advisor so that if you do have questions, if you separate from your spouse, or if they pass away, you have someone you trust to turn to for help.
Be sure to read our previous blog posts for additional tips to help women get the most out of working with a financial advisor. You may notice that all five of these tips are easier to follow when you follow tip #1—work with an advisor you like. There are many different considerations when hiring an advisor: Are they a fiduciary? Do they practice comprehensive planning? How are they compensated? What is their investment philosophy? They may check off all your other boxes, but if you don’t like them, you are unlikely to get all you need out of the relationship. If you’re looking for an advisor you’re compatible with, consider perusing our advisor bios.
2020 brought many expected and unexpected challenges – on top of a political election year, we faced a pandemic, a challenged economy, and turbulent markets, to name a few.
We don’t yet know what 2021 will bring for the economy, for markets, or for our own lives, but there are still some things we can control.
As we welcome in a new year with hopeful expectations, let’s take a moment to recommit to those factors within our control:
Sharing Our Dreams and Values
As we reflect on the strange and challenging times this year, many find themselves wondering what their families did in the past to get through difficult times. We may remember snippets of stories told by our elders or passed on through our family, but often wish we knew more.
As wealth advisors we know firsthand the importance of legacy planning through legal documents. We also believe in the value of sharing the essence of who you are, your values, and experiences for future generations to come, through the creation of a Family Legacy Letter.
Building Better Financial Behaviors
Too many investors focus on markets when they should focus on themselves, their hopes, their goals, and their dreams. Identifying the choices in our control isn’t just a good financial lesson, it’s a great life lesson dating back to ancient Greece, when the Stoic philosopher Epictetus said:
“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control.”
Understanding Our Biases
Daniel Kahneman and Amos Tversky are famous for their work on human behavior, particularly around judgment and decision making. We can apply much of their discoveries to investor behavior. While we can’t completely eliminate biases, we can learn about them and how they impact our decision making, allowing us to take action to address them and avoid costly mistakes.
May you and your family enjoy the warmth this season has to offer and a new year filled with hope, love and success!
During my senior year in high school, I was invited to go backpacking in Yosemite with the Yosemite Institute. I had been backpacking many times before with my father all over California. We even climbed the tallest mountain in the continental United States (Mount Whitney) when I was 14. I loved the adventure and challenge of backpacking. In those early years, I didn’t realize the importance of being in nature. It wasn’t until the Yosemite trip that our guides taught us about the history of the national parks in the delicate balance between the visitors and the surroundings. They also taught us the importance of taking care of our planet. When my classmates and I stopped in a McDonald’s on the way home from Yosemite, I remember taking the Big Mac out of the Styrofoam container and asking them to reuse it. Back in the 80s, I don’t think climate change was on many people’s radars. Today, the science of climate change makes me want to do everything possible to care for the planet for the generations to come. I’ve always done my part but drew the line when it came to investing sustainably. My thought has always been to maximize returns in my investment portfolio and give charitably to causes that fight climate change.
I just didn’t believe that I’d be able to diversify enough (too risky). I believed that returns would be lower in part due to higher expenses. I also got confused about the differences between being socially responsible and sustainable investing. There are also a lot of acronyms and terminology to understand, such as SRI (Socially Responsible Investing) and ESG (environmental, social, and governance).
The history of Socially Responsible Investing (SRI) goes back as early as Moses in 1500 BC. In more modern times, the 1950s saw the first mutual fund, the Boston-based Pioneer Fund, to avoid “sin” stocks: companies that dealt in alcohol, tobacco, or gambling.
While I don’t love to support alcohol, tobacco, and gambling, my values aim to focus on investments that help the planet. My values seek to focus on the “E” in ESG: the environment. Doing well while doing good.
Sustainability investing is a choice and investors decide whether aligning their investment decisions with their environmental values is right for them. At Merriman, we believe that, all else being equal, a sustainability investing strategy should generally reward companies for acting in more environmentally responsible ways than their industry counterparts. This belief is in contrast to many other sustainability investing approaches that exclude entire industries regarded as the worst offenders. Sustainability strategies place greater emphasis on companies considered to be acting in more environmentally responsible ways while also emphasizing higher expected return securities. This approach enables investors to pursue their environmental goals within a highly diversified and efficient investment strategy.
It feels like we have both been on the same journey to the top of the mountain to build a portfolio that focuses on the environment without sacrificing risk-adjusted returns. Merriman recently announced major changes to our values-based portfolio, and I have moved all of my investments into our new portfolio. When I combine a sustainable portfolio with charitable giving, it is one small way to do my part in “leaving no trace behind.” If you would like to learn even more about our approach, you can read “Incorporating Environment and Social Values into Your Merriman Portfolio”.
If you fail to plan, you are planning to fail. This adage, generally attributed to Benjamin Franklin, is as true for financial planning as it for other endeavors. At Merriman, we want to help clients meet their financial goals. Any successful goal-setting strategy includes a detailed plan. But this plan is not only helpful for increasing chances of success. It is also one method we use to minimize potential failures.
When you first met your advisor, did you start your relationship and immediately hand over your hard-earned resources to their management, or did they put you through a rigorous due-diligence process to develop an agreed-upon plan before moving forward?
While the latter requires a lot more time and energy upfront from both parties, this hard work pays off and makes the relationship more valuable and more productive in the long-term. (Short-term pain, long-term gain). It can especially add value during times of uncertainty or major life transitions, such as retirement. When the unexpected happens, the plan serves as the basis for deciding how to react. Without a plan, it is easy to act impulsively or without fully considering future consequences. A good plan has already taken into account potential pitfalls or trouble spots and has a strategy to overcome them. With a plan in place, you are able to adjust course, if needed, and ultimately still get to your desired outcomes.
At Merriman, we build a plan together from the beginning of our relationship and stress test your resources to determine the likelihood of achieving your most important financial goals. We start with a discovery meeting where we map out all aspects of your life—financial and otherwise—so we can provide a truly customized plan to help you achieve your goals. To make this meeting as productive as possible, we ask that if you have a spouse or partner, have them join us, as the plan we are building together is for the both of you.
As part of our due diligence, we securely collect important items such as tax documents, insurance statements, estate planning documents, paystubs, budgeting and expenses, financial accounts and retirement income statements, and debts, among other information. This may seem like a lot to ask for at the start, but these documents provide clues to potential weak spots in your plan.
Think of it this way: when you meet with a physician for the first time, do they judge your health based solely on your physical appearance, or do they ask tough questions and run a gamut of tests before providing a diagnosis? The collected samples and information serve as the inputs and the test results are the outputs based on the criteria used in the examination. A financial plan can be thought of the same way.
While test results are useful, they are in themselves really just data. We then interpret this data, informed by our education and experience, to provide comprehensive advice on how best to achieve your financial goals.
Why do you need a financial plan? Because in good times and difficult times, a financial plan is your best opportunity to meet your financial goals. At Merriman, that’s our mission, and that’s why we take financial planning as seriously as we do. You should expect the same attention to detail from anyone with whom you choose to work.
Reach out to us to discuss your specific goals and the necessary next steps to achieve them.
We expect most people have a grasp on how to make money in a bull market, but it can be far more challenging to contemplate how to make money during a bear market, when emotions are running high. It’s not all about making money, though. Some of it involves figuring out how to put oneself into a better financial position for the future so that you can heal faster from the losses. There are a handful of key strategies to engage in during a bear market that will help your finances as much as your future, and one of the most important of these is ROTH conversions.
Believe it or not, bear markets represent the best environment into which to make an IRA-to-ROTH conversion. The more negative the equity losses are, the more attractive the conversion becomes. When making a conversion to ROTH, you can either move cash or you can move shares of the stocks or mutual funds that you own in the IRA. When we make a conversion, we choose to move shares for our client families. The tactical benefit here is that we actually get to pick the specific funds to move from the IRA to the ROTH. Whichever funds have the deepest losses for the given year are the ones with the highest priority to move over first.
Think of it this way: if we found ourselves in a sharp bear market, we would expect several equity asset classes to be down, but maybe inside our IRA the US small cap fund went down the most with a -35% loss. Although it may not feel like it, bear market losses are temporary, so it is important to take action and make the conversion to the ROTH while the markets and the news are negative and remain temporarily distressed. If we were to hypothetically move $50,000 of the US small cap fund in our example, we would actually be moving shares that were previously 35% higher in value at $77,000. If we convert the $50,000 of small cap shares right now, we incur the tax liability on those shares on the day they are moved over. Once the shares have arrived in the ROTH, it then becomes a matter of exercising patience. It might take six or nine months for the current bear market to pass; but when the economy improves, those distressed shares should bounce back in value. In a relatively short number of months, the $50,000 that was converted and that you paid tax on might be worth $65,000 or $70,000—but remember, you only paid tax on $50,000. Much like a spring being compressed and then subsequently released, the idea behind the conversion is to move the shares to the ROTH while the spring is compressed. Simply put, the bear market represents a tax-savings opportunity in disguise, so acting now is highly important BEFORE things improve in society. Effectively, ROTH conversions and bear markets coupled together give us a way to legally cheat the IRS out of tax dollars.
The benefits of ROTH conversions are not just effective during a severe bear market but can be utilized nearly every year. If you employ a highly diversified portfolio with multiple asset classes held in your IRA and ROTH, there are lots of opportunities to take advantage of the up and down stock market movements, as many asset classes move at different rhythms. There are a host of financial planning advantages to ROTH accounts and gradually converting IRA money into ROTH each year. Keep in mind, ROTH accounts contain post-tax money; they do not have required minimum distributions, which do apply to traditional IRAs; and all of the future growth on the assets in the ROTH are considered post-tax. All withdrawals from ROTHs are voluntary, and all of the dividends, interest, and earnings in the ROTH are shielded from taxes. Another advantage of a ROTH account is that it can be viewed with your IRA using an overall investment approach that we call Asset Location. Essentially, Asset Location seeks to view the IRA and ROTH accounts as if they were one account holding one investment portfolio but divvies the funds between the accounts to the greatest advantage. Reach out to your advisor if you are curious about conversions and ROTH accounts and learn more about how we advocate for our families.