With so much going on ( election, political turmoil, hurricanes), you may have missed the latest in diabetes news this week. Not to worry! We’ve got you covered with the Diabetes Health Weekly Roundup to share the latest news, podcasts …
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This crossword puzzle was inspired by this week’s news and podcast reports. Play along with us to test your knowledge and comprehension on topics we post Monday-Friday.
Please click the link below to download this week’s Diabetes …
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For those of us who actually live in rustic homes in cold climates, the household items that define the ‘hygge’ decorating trend are a matter of survival.
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A shocking 17 times more people die from cold than heat each year, according to Lancet study.
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From tiny houses to busy bees
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I write many food articles each year, but these are the ones that really stood out for me.
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According to a new study, altering the way that you cook could reduce your risk of developing type 2 diabetes.
Poaching, steaming, and boiling foods are …
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I write many food articles each year, but these are the ones that really stood out for me.
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The changing from one year to the next is always when we look to evaluate our past year and dream of what the new year will bring. While I’m not a huge fan of new year’s resolutions, I do believe in setting SMART goals to achieve the results you want. Whether it’s in your personal life, your career, your business, or your personal finances, you should have a goal to go after.
But what if you don’t know what goal you’d like to set? To help, I asked 10 financial experts to share their own financial success stories from 2016. With a great variety of personal successes here, I’m sure you’ll find something that resonates with your own situation and inspires you to set a goal to improve your finances in 2017.
My biggest financial success in 2016 was increasing my income by 24%. Sometimes when we think about personal finance strategies, we think about watching our spending, reducing debt or saving more. While all of these strategies are solid personal finance strategies, they become easier if we could make more money. For me, I always try to focus some of my time, attention and efforts on the income side of personal finance. I am self-employed which allows me to focus my energy on income producing options but I would argue that everyone has some opportunities to increase income.
– Jim Yih, Retire Happy
– Jason Heath, Objective Financial Partners
My biggest financial success this year was becoming mortgage free (January) and debt free (November). It’s been a long journey of cost cutting and frugal living and it was totally worth it. This is the first time in my adult life where I’m not making payments, and the feeling is quite surreal. If you are thinking about going for debt freedom I encourage you to do it. Make a plan and get started!
– Andrew Daniels, Family Money Plan
Hands down, my biggest financial and life success of 2016 has been becoming a homeowner. I am absolutely a renting advocate, and will continue to be, if you can’t yet afford to buy your own home. However, after years of saving and researching, this year my husband and I finally found a place within our price range and desired neighbourhood that we successfully bought. The best thing is because we were very strategic in our house hunt, our mortgage is the same cost as our rent. So not only are we building equity, our cost of living hasn’t changed that much so we can continue to save for future financial goals and aren’t house-poor by any means.
– Jessica Moorhouse
My biggest financial success this year is related to following my passion for yoga, and taking time to nurture myself. I decided to take a month off from work, and I spent it at an ashram in Nassau, where I completed my Yoga Teacher Training. It was a month of deep reflection, and connecting mind, body and spirit. The experience was priceless, and one I will never forget. I have found that I now have better focus at work, and as result I am more productive.
– Brenda Hiscock, Objective Financial Partners
My biggest financial success of 2016 was finally taking full control of my investments. I sold my remaining high-MER Investors Group mutual funds and invested in low-MER exchange-traded funds through Wealthsimple. Don’t let deferred sales charges keep you in a prison of high fees! Sometimes it’s worth it to pay the penalties to regain your freedom. Everyone should review their investments annually to make sure they are comfortable with the fees they are paying.
– Beau Humphreys, Invest Wisely
Our biggest financial success in 2016 was hitting all our financial goals. We maxed out our Tax Free Savings Accounts (TFSAs), we doubled-up our mortgage payment throughout the year, and we managed to save $5,000 for another international trip. It was great we were able to do a little bit of everything – save for the future, slay mortgage debt and have some fun for today.
– Mark Seed, My Own Advisor
If I have to pick one thing, it would have to be more than maxing out our retirement savings accounts (both RRSPs and TFSAs). It’s something we’ve been focusing on yearly and the feeling we get never gets old. I guess you could say we focus on ‘paying our future selves first’.
– Hélène Massicotte, Free To Pursue
I had a few financial successes in 2016. My wife and I maximized both our RRSP and TFSA. We also received more than $12,500 from various blue-chip dividend paying companies for doing absolutely nothing. We managed to save a higher percentage of income compared to 2015. The biggest success however is the birth of our daughter back in March. With one boy and one girl, we feel our family is now complete.
– Bob Lai, Tawcan
My biggest accomplishment in 2016 was all about people. More than ever, I have witnessed increased anxiety from my clients regarding their financial futures. This is true of those with more than enough as well as those facing retirement shortfalls. It’s been a real pleasure empowering clients to take control of their financial lives which has in turn reduced anxiety and provided a greater sense of direction and clarity. The positive feedback I’ve received in the way of testimonials and client surveys tells me that my efforts are appreciated, which brings me great satisfaction. Looking forward to 2017!
– Nancy Grouni, Objective Financial Partners
No matter where you’re at in your personal finance journey, one of these success stories should certainly be able to inspire you to set your own goal for 2017. Make sure it’s specific, measurable, achievable, realistic, and has a timeframe to be accomplished by. Even better, take your big goal for 2017 and break it down into smaller milestones to help keep you on track. My goal for 2017 is to increase my income by 50%, mainly through my online ventures.
What’s your goal for the new year?
10 financial success stories from 2016 to inspire your new year appeared first on Retire Happy.
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A group called Para Kore has been working since 2009 to spread the message of waste reduction and diversion.
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A group of experts in the UK wants a special Ministry of Childhood created to protect children’s wellbeing, if parents won’t.
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A group of experts in the UK wants a special Ministry of Childhood created to protect children’s wellbeing, if parents won’t.
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If you’ve inherited 1 million dollars it’s exciting – really exciting. But if you’ve inherited 1 million dollars in an IRA it’s exciting too – but also complicated. I received an Ask GFC question on exactly that topic recently:
Hi Jeff, thanks for all you do and keep up the great work!! QUESTION: if a 30 year old inherits a $1 million IRA from Grandpa and that 30 year old converts it to an IRA in his name he will pay 50% in taxes thus reducing the $1 million to $500k (correct?) What are his alternatives? if he keeps grandpas IRA titled in grandpa’s name FBO himself then he must start taking RMDs the year he inherits the money regardless of either grandpa’s age or his own age (is this correct?) What would be your recommendation for a 30 year old with no extraordinary wealth that inherits a large sum of money? Thank you!!!
If you’ve inherited 1 million dollars in the form of an IRA, it’s real wealth, but wealth with some major strings attached to it. The money is yours for sure, but there are a lot of limitations as to what you can do with it, it even how much access you will have to it.
With that in mind, let’s set out to try and help this reader sort out his or her options.
We have to start the discussion with an important distinction. There are two types of beneficiaries who can’t inherit an IRA, spouse and non-spouse. The situation with spouses is pretty simple. You can roll the inherited IRA into an IRA under your own name (where you can even convert it to a Roth IRA), or you can roll it over into an inherited IRA account, where you can take withdrawals before turning age 59 1/2 without having to pay the 10% early withdrawal penalty.
But since the reader is indicating that this IRA is being inherited from his grandfather, we’re going to focus on inherited non-spouse IRAs.
With an inherited non-spouse IRA the beneficiary could be just about anyone – a child, a grandchild, a sibling, or even a close friend. The naming of a person as a beneficiary has important legal consequences. That’s because an IRA beneficiary designation outweighs a will. That means that even if the beneficiary is not listed in the decedent’s will, he or she will still inherit all rights to an IRA as a specific beneficiary of that account.
The IRA must be moved into a specific inherited IRA account. The custodian must register the account in your name, but also include the name of the person that the IRA was inherited from. This designation will establish the fact that the account is an IRA beneficiary distribution account.
“Distribution” is the operative word here! According to IRS rules, as the owner of a non-spouse inherited IRA you must begin taking minimum required distributions – commonly known as MRDs. Those distributions must begin no later than December 31, after the year of the death of the original owner of the IRA.
The MRD’s are determined by the age of the original account owner at the time of death. There are two options:
The original IRA owner died after reaching age 70½.
You will have the option to elect to calculate MRDs either by using your own age, or by using the age of the original IRA owner at the age of his or her death. Using the original owner’s age will likely work out better if that person was younger than you at the time of death, because it will spread the payments out over more years, and therefore keep the tax liability lower.
The distributions must be taken based on the life expectancy of either you or of the original IRA owner. They are calculated based on the IRS Life Expectancy Tables.
The original IRA owner died before reaching age 70½.
In this situation, the original owner would not have been required to take required minimum distributions from the IRA during his or her lifetime. If this is the case, then you will have the option to withdraw the funds over a period of five years. That will enable you to completely distribute the IRA by December 31 of the fifth year after the original IRA owner’s death.
Another important point: Distributions taken from an inherited IRA are subject to ordinary income tax. However, they are not generally subject to the IRS 10% early withdrawal penalty. That exemption is true even if the distributions are taken before you or the original IRA owner reaches age 59 1/2.
Still another really important point: When you roll funds from the original IRA over into an inherited IRA, you must be certain that it is completed as a trustee-to-trustee transfer.
This is super important – if the trustee of the original IRA issues you a check, the entire amount of the distribution will be taxable as ordinary income in the year it is distributed.
There is no 60 day rollover provision in regard to a non-spouse inherited IRA. Once money is distributed from the original IRA, it is no longer eligible to be rolled over into an inherited IRA, or any other IRA account.
OK, are you still awake? Let’s move on.
The reader’s question references converting the entire balance of the inherited IRA account and paying something like 50% of the balance in taxes. I suspect – but I’m not sure – that what he or she is referring to is having to pay income tax on the entire inherited 1 million dollars that is sitting in the IRA account.
While that might be possible, it’s neither necessary nor desirable. If you’re going to transfer the money from the inherited IRA over into your own personal IRA, you will basically be moving money from one IRA to another. But that’s basically what you’re doing when you roll the money over from the original owner’s IRA into an inherited IRA account.
The inherited IRA account is in your name, but includes the name of the original owner.
This will actually be to your advantage. That’s because the bulk of the money from the original IRA will remain in the inherited IRA account, where it will continue to grow on a tax-deferred basis. But the advantage is that you can begin taking distributions from the account at virtually any age. You won’t need to wait until you’re age 59 1/2, 65, or even 70 1/2. That’s an excellent benefit, since it can provide you with an immediate additional income, as well as a retirement account that can last for the rest of your life.
Now there is always the option to use the accelerated distribution method, and withdrawing all of the money from the inherited IRA within five years. That will certainly give you access to the money much more quickly than if it’s distributed over either your life expectancy, or that of the original owner at the time of death. But it’s probably not the best strategy.
With the accelerated distribution, yes you will get access to the money quicker, but you will also completely deplete the account, well before your own retirement, as this reader is just 30 years old.
The taxes are an even bigger consideration.
By using the accelerated distribution method, you will also be increasing the amount of income tax that you will need to pay on those distributions. If you’ve inherited 1 million dollars, you will have to add $200,000 to your income each and every year for five years.
That can push you into the 33% tax bracket – or higher – causing you to lose at least one third of the distributions to taxes, and that doesn’t include state income taxes.
However, if the distribution is done over the reader’s lifetime, which means that it may be spread out over 50 years or more, you’re looking at an annual distribution of about $20,000. If you’re in a 15% tax bracket, you will pay only $3,000 per year in tax on that distribution. In addition, it’s unlikely that a distribution that small will push you into a higher tax bracket.
I would say that if you don’t have an immediate and pressing need for the money, you should go with MRD’s based on life expectancy. That will not only result in a much lower tax liability, but it will also preserve the IRA for many, many years to come. Think of all the tax-deferred investment income you can earn on a $1 million IRA from age 30! That alone should remove all doubt.
In closing, I’d like to acknowledge that inherited IRAs are pretty complicated beasts, especially one that’s worth something like $1 million. For that reason, I strongly recommend that you consult with a CPA or tax attorney. Not only can they provide more specific advice, but they may be able to run some calculations that will clearly show the tax implications of the two different distribution methods.
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When most people look at Crystal Mountain, which stands in the shadows of Washington’s Mt. Rainier, they are in awe of the snow-swept rocks that tower the sky.
Kim Kircher, 45, just sees her workplace.
Kim learned to ski around …
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Severe flooding in Spain has led to shortages so bad in the UK that some supermarkets are flying produce in from the United States.
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While most people are well aware they should exercise more, few take the steps to get started. Depressed about their bodies, they continue living in a state of poor health. And because they’re depressed, they sit home and watch Netflix instead of hitting the gym.
Sadly, this same scenario plays out in individual’s financial lives as well, and with dire consequences. So many families know a monthly budget would benefit them, but continue sitting on the sidelines instead. Unfortunately, it’s human nature to want to change without actually doing anything about it.
In my eyes, all of this boils down to fear. We’re scared our fitness plans won’t help us achieve results, so we never get started. We’re afraid a budget won’t help us, so we don’t even try.
Obviously, this is a huge mistake that holds people back. When it comes to your physical health or your finances, you have to take control if you want results.
If you’re scared of failing with your budget, it’s time to set up a system that will ensure success. To find out how anyone can foolproof their budgeting efforts, I reached out to several financial advisors and wealth planners for their best tips.
By implementing several of these strategies together, you can start budgeting and get your finances back on track.
If credit or debit spending has obfuscated some of your spending habits and made budgeting harder, try a cash budget instead.
“Foolproof your budget the same way your grandparents did – by using envelopes,” says North Dakota Financial Advisor Benjamin Brandt.
To get started, you should isolate a few areas of your budget where you have some discretion – entertainment, groceries, eating out – and decide how much you plan on spending in each category.
“Before the month begins, withdraw cash from the bank and start filling envelopes,” says Brandt. “Once your envelope is empty, you are done spending in that budget category for the rest of the month.”
While this might sound like a pain, sticking to cash can help you acclimate your spending to your budget constraints. And when you only use cash, it’s impossible to spend more than you have. That’s a good thing, right?
If you have struggled with overspending and budgeting in the past, chances are good your expenses are too high. One way to foolproof your budget is to cut some of your fixed and discretionary expenses so you have more money to work with each month.
Financial planner Ty Hodges of Client Centric San Antonio offers a strategy to help you get started:
“From your list of expenses, develop two separate budget lists – one for essentials and the other for extras. Within each general budget category, some items are essential (the mortgage or rent payment, electric bill, and groceries); others are extra (new furniture, gifts, and pizza delivery).”
Look through these lists to find flexible budget expenses where you can cut back, says Hodges.
“Put a star next to these flexible items so you can identify them. This will narrow your focus quickly and make a big impact.”
While cutting your discretionary expenses can help your finances, so can avoiding large, recurring expenses. By avoiding large monthly payments, you can leave more room for debt repayment and savings in your budget.
One big mistake repeated often is taking on huge car payments when you can’t truly afford them. Wealth advisor Joseph Carbone of Focus Planning Group says he cautions his clients against buying new cars and tacking on huge monthly car payments all the time.
“A new car is one of the worst investments you can make,” says Carbone. “I urge my clients to look into certified pre-owned or demo deals. You can save thousands off of the purchase price and cut down your monthly payment significantly.”
Part of the reason people fail, says financial planner Charles C. Scott, is the fact that people see their budgets as restrictive and invasive. In a lot of ways, the negative feelings they have about budgeting make it easier to fail.
To combat this issue, Stott, who is a financial advisor in Scottsdale, AZ, says we should call our budgets “spending plans” instead.
“You probably don’t like someone telling you what you should do, so let’s put you in control,” says Stott. “Just making this simple little change in wording has made the difference in people being willing to make this a habit for themselves.”
Financial advisor Joshua Brein of Brein Wealth Management offers yet another interesting tip that could keep you on track – baseline spending agreements.
“This agreement means that they should come up with a pre-set amount that is considered a large purchase and agree to not exceed that large purchase cost without first getting approval from their spouse or partner,” says Brein.
For example, a couple might agree that any purchase over $50 or $100 has to be approved by both parties before they pull the trigger.
“I love this strategy because you’re basically agreeing to a set of rules to keep you accountable and keep your spending on track,” he says.
Part of America’s problem with money is we don’t feel comfortable talking about our struggles. And since financial issues have become a taboo subject, people would rather hide their problems and avoid asking for help.
This is a mistake, says Billy Xiao, a financial Advisor from Mobius Wealth of Vancouver, Canada.
To foolproof your budget, you have to get comfortable talking things over with your spouse or partner. You need to take an introspective look at your budgeting failures while also celebrating your successes. Obviously, this all starts with talking about your budget every single month.
“Finances and budgeting may be the hardest topic to talk about in some relationships, but these conversations are essential for lasting unity,” says Xiao. “Go through that hard conversation, come to an agreement, give grace to one another, and revisit the discussion from time to time.”
Remember that budgeting is a lifelong commitment, and that it works best when conversations are open, honest, and ongoing. You may not get things right at first, but you’ll figure it out if you keep communication lines open.
The word “budgeting” might seem scary, but you should at least give it a shot. In reality, a budget is nothing more than a spending plan that can help you achieve your dreams and goals. And you never know; you might even like budgeting once you get the hang of it.
To set yourself up for success, however, you need to foolproof your budget from the start. With these tips, you’ll be headed toward budgeting success in no time.
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The Medicare Payment Advisory Commission (MedPac) has released its 2017 agenda, and among the priorities is to reduce hospital admissions among nursing home residents. The group is …
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Too little sleep? Allergies? Overindulgence? Whatever your complaint, these tricks can help.
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Worried about toxic chemicals in your home? Try these natural laundry tips for non-toxic cleaning.
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At a time when health insurance premiums are going through the roof, and it seems as if medical expenses are getting harder to cover, people are becoming increasingly keen to learn about alternative ways to handle health coverage.
One of the best ways available is through health savings accounts, commonly known as HSAs. These plans are often available through employers, though not everyone participates in them.
Part of the reason for this is that an HSA represents an additional expense. Not only are you paying for your health insurance, but you must also fund your HSA. In many households, that creates a budget squeeze.
We received an Ask GFC question on this very topic:
“Jeff, what recommendations do you make to your clients when they are seeking to create a balanced budget while factoring in HSAs in a high deductible health plan? Please advise.”
I’ll get into the budget aspect of an HSA, but first let’s take a look at the basics for the benefit of those who don’t know what they’re all about.
HSAs were first created in 2003. In effect, they are employer-sponsored savings accounts that are designed specifically to pay for health care costs. They are typically set up under employer-sponsored cafeteria plans, in which you can select from a menu of employee options that you consider to be valuable, and are willing to fund.
Though they are most often offered by employers, you can also set up an individual HSA through a bank or brokerage firm that offers the plan.
The contributions that you make to an HSA are tax-deductible, much like IRA and 401(k) contributions. The money can even be invested to earn more money, and those earnings accumulate on the tax-deferred basis. Withdrawals can be made to cover qualified medical and dental costs only. That means you won’t be able to allow the money to grow and then to withdraw it for unrelated purposes.
HSA’s are designed specifically to work in conjunction with high deductible health insurance plans. The funds that are contributed to the HSA can be withdrawn and used for such expenses as copayments, health insurance deductibles, and even certain health insurance premiums.
A limitation is that you are not eligible for an HSA if you are either on Medicare or you can be claimed as a dependent on someone else’s tax return.
HSA’s do have contribution limits. For 2016 they are $3,350 for individuals with self-coverage only, and $6,750 for individuals with family coverage.
Contributions can be made either by you as the plan participant, your employer, or by a combination of both. So if you are an individual with family coverage, and your employer pays $3,000 for the plan, your maximum contribution will be $3,750, for a maximum total of $6,750.
You can make contributions to an HSA right up until the tax filing deadline for the previous year. For example, you can make a 2016 contribution as late as April 15, 2017.
Earlier I mentioned that HSA’s are designed to be used in conjunction with health insurance plans that have high deductibles. There are two such deductible levels, one for individual coverage and the other for family coverage. Those deductibles are as follows:
The basic idea behind HSA’s is that your contributions to the plan go to cover the higher deductible, which enables the premium on health insurance policy to be lower.
HSA’s have several benefits, even apart from the fact that your contributions to the plan are fully tax-deductible, and can earn investment income on a tax-deferred basis.
Withdrawals from the plan are tax-free. But only if they are used for qualified medical purposes. This can be a major benefit to someone who can’t deduct medical expenses, either due to the fact that they are unable to itemize their deductions on their tax return, or they don’t qualify to deduct medical expenses.
That second point needs some explanation. Even if you do itemize on your tax return, medical costs can only be deducted to the extent that they exceed 10% of your adjusted gross income. What that means is that if you make $100,000 per year, your medical costs will be deductible only to the extent that they exceed $10,000. Unless you experience a medical catastrophe, it’s unlikely that they will reach this level.
But if you have an HSA, you will be able to pay those expenses with pretax contributions to the plan. That will enable you to get the full benefit of the tax deduction even if you don’t or can’t itemize.
One other important limitation: any funds withdrawn from in HSA that are used to pay for non-medical expenses are subject to both ordinary income tax, and a 20% penalty. So if you have any idea about using the money for some other purpose, forget about it – the tax costs too high.
HSA funds can accumulate in the plan. With the high cost of healthcare, it’s entirely possible that your out-of-pocket medical expenses will exceed the amount of contributions that you can make to the HSA in any given year.
However, unused contributions can be rolled forward from year to year. That means, for example, that you might accumulate $20,000 in the plan over a three-year period. That would give you a generous resource for a year in which your medical costs are particularly high.
HSAs are portable. If you’ve built up a balance in an HSA with an employer, the plan comes with you even if you leave that company.
Since you can build up an HSA balance much like you can build up a retirement account, an HSA has the potential to become something of a medical IRA. This is particularly true if your participation in the plan starts when you are very young and healthy, and unlikely to make many withdrawals from the plan. The account balance can continue to grow steadily from a combination of contributions and investment earnings.
As an example of the potential of how this could play out, the Employee Benefits Research Institute (EBRI) reported the following:
“A person contributing for 40 years to an HSA could save up to $360,000 if the rate of return was 2.5 percent, $600,000 if the rate of return was 5 percent, and nearly $1.1 million if the rate of return was 7.5 percent, and if there were no withdrawals.”
Now that’s an incredibly optimistic projection.
But it shows what could happen if you were to invest in an HSA for 40 years – at a healthy rate of return – but without ever making any withdrawals. Still, the analysis raises an interesting possibility.
But that’s where an HSA as a medical IRA becomes an interesting possibility. Even if you can never reach the high account balances cited by EBRI, but you do manage to accumulate say, $100,000 or more in your HSA, you’ll have plenty of money available to pay for uncovered medical expenses.
This can include expenses such as prescription medications (including insulin), the cost of certain health insurance premiums, payments for long-term care, as well as co-payments and deductibles under your health insurance plan.
In this way, an HSA that accumulates money over the long term can offset one of the major expenses of the retirement years. Even if it cannot be used to pay for general living expenses, the ability to pay for healthcare costs will be significant.
Finally, let’s get to the reader’s primary question – creat(ing) a balanced budget while factoring in HSAs in a high deductible health plan.
Whether you are eligible to contribute up to $3,350 or $6,750, it will represent an additional expense in your budget. Remember, the HSA contribution is over and above your basic health insurance premium. This can create a problem in a lot of budgets. After all, any money that you contribute to an HSA, is money that is not going to other purposes, including savings and investments.
But there are a few factors working in favor:
If you set it up right, you’ll hardly notice that you are even making contributions to an HSA. And the payoff is that you will be covering what is perhaps the biggest contingency expense that most of us will face, and that’s a major medical event.
The peace of mind that you will gain from that kind of benefit will certainly be worth the inconvenience of carving out an extra space in your budget.
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At a time when health insurance premiums are going through the roof, and it seems as if medical expenses are getting harder to cover, people are becoming increasingly keen to learn about alternative ways to handle health coverage.
One of the best ways available is through health savings accounts, commonly known as HSAs. These plans are often available through employers, though not everyone participates in them.
Part of the reason for this is that an HSA represents an additional expense. Not only are you paying for your health insurance, but you must also fund your HSA. In many households, that creates a budget squeeze.
We received an Ask GFC question on this very topic:
“Jeff, what recommendations do you make to your clients when they are seeking to create a balanced budget while factoring in HSAs in a high deductible health plan? Please advise.”
I’ll get into the budget aspect of an HSA, but first let’s take a look at the basics for the benefit of those who don’t know what they’re all about.
HSAs were first created in 2003. In effect, they are employer-sponsored savings accounts that are designed specifically to pay for health care costs. They are typically set up under employer-sponsored cafeteria plans, in which you can select from a menu of employee options that you consider to be valuable, and are willing to fund.
Though they are most often offered by employers, you can also set up an individual HSA through a bank or brokerage firm that offers the plan.
The contributions that you make to an HSA are tax-deductible, much like IRA and 401(k) contributions. The money can even be invested to earn more money, and those earnings accumulate on the tax-deferred basis. Withdrawals can be made to cover qualified medical and dental costs only. That means you won’t be able to allow the money to grow and then to withdraw it for unrelated purposes.
HSA’s are designed specifically to work in conjunction with high deductible health insurance plans. The funds that are contributed to the HSA can be withdrawn and used for such expenses as copayments, health insurance deductibles, and even certain health insurance premiums.
A limitation is that you are not eligible for an HSA if you are either on Medicare or you can be claimed as a dependent on someone else’s tax return.
HSA’s do have contribution limits. For 2016 they are $3,350 for individuals with self-coverage only, and $6,750 for individuals with family coverage.
Contributions can be made either by you as the plan participant, your employer, or by a combination of both. So if you are an individual with family coverage, and your employer pays $3,000 for the plan, your maximum contribution will be $3,750, for a maximum total of $6,750.
You can make contributions to an HSA right up until the tax filing deadline for the previous year. For example, you can make a 2016 contribution as late as April 15, 2017.
Earlier I mentioned that HSA’s are designed to be used in conjunction with health insurance plans that have high deductibles. There are two such deductible levels, one for individual coverage and the other for family coverage. Those deductibles are as follows:
The basic idea behind HSA’s is that your contributions to the plan go to cover the higher deductible, which enables the premium on health insurance policy to be lower.
HSA’s have several benefits, even apart from the fact that your contributions to the plan are fully tax-deductible, and can earn investment income on a tax-deferred basis.
Withdrawals from the plan are tax-free. But only if they are used for qualified medical purposes. This can be a major benefit to someone who can’t deduct medical expenses, either due to the fact that they are unable to itemize their deductions on their tax return, or they don’t qualify to deduct medical expenses.
That second point needs some explanation. Even if you do itemize on your tax return, medical costs can only be deducted to the extent that they exceed 10% of your adjusted gross income. What that means is that if you make $100,000 per year, your medical costs will be deductible only to the extent that they exceed $10,000. Unless you experience a medical catastrophe, it’s unlikely that they will reach this level.
But if you have an HSA, you will be able to pay those expenses with pretax contributions to the plan. That will enable you to get the full benefit of the tax deduction even if you don’t or can’t itemize.
One other important limitation: any funds withdrawn from in HSA that are used to pay for non-medical expenses are subject to both ordinary income tax, and a 20% penalty. So if you have any idea about using the money for some other purpose, forget about it – the tax costs too high.
HSA funds can accumulate in the plan. With the high cost of healthcare, it’s entirely possible that your out-of-pocket medical expenses will exceed the amount of contributions that you can make to the HSA in any given year.
However, unused contributions can be rolled forward from year to year. That means, for example, that you might accumulate $20,000 in the plan over a three-year period. That would give you a generous resource for a year in which your medical costs are particularly high.
HSAs are portable. If you’ve built up a balance in an HSA with an employer, the plan comes with you even if you leave that company.
Since you can build up an HSA balance much like you can build up a retirement account, an HSA has the potential to become something of a medical IRA. This is particularly true if your participation in the plan starts when you are very young and healthy, and unlikely to make many withdrawals from the plan. The account balance can continue to grow steadily from a combination of contributions and investment earnings.
As an example of the potential of how this could play out, the Employee Benefits Research Institute (EBRI) reported the following:
“A person contributing for 40 years to an HSA could save up to $360,000 if the rate of return was 2.5 percent, $600,000 if the rate of return was 5 percent, and nearly $1.1 million if the rate of return was 7.5 percent, and if there were no withdrawals.”
Now that’s an incredibly optimistic projection.
But it shows what could happen if you were to invest in an HSA for 40 years – at a healthy rate of return – but without ever making any withdrawals. Still, the analysis raises an interesting possibility.
But that’s where an HSA as a medical IRA becomes an interesting possibility. Even if you can never reach the high account balances cited by EBRI, but you do manage to accumulate say, $100,000 or more in your HSA, you’ll have plenty of money available to pay for uncovered medical expenses.
This can include expenses such as prescription medications (including insulin), the cost of certain health insurance premiums, payments for long-term care, as well as co-payments and deductibles under your health insurance plan.
In this way, an HSA that accumulates money over the long term can offset one of the major expenses of the retirement years. Even if it cannot be used to pay for general living expenses, the ability to pay for healthcare costs will be significant.
Finally, let’s get to the reader’s primary question – creat(ing) a balanced budget while factoring in HSAs in a high deductible health plan.
Whether you are eligible to contribute up to $3,350 or $6,750, it will represent an additional expense in your budget. Remember, the HSA contribution is over and above your basic health insurance premium. This can create a problem in a lot of budgets. After all, any money that you contribute to an HSA, is money that is not going to other purposes, including savings and investments.
But there are a few factors working in favor:
If you set it up right, you’ll hardly notice that you are even making contributions to an HSA. And the payoff is that you will be covering what is perhaps the biggest contingency expense that most of us will face, and that’s a major medical event.
The peace of mind that you will gain from that kind of benefit will certainly be worth the inconvenience of carving out an extra space in your budget.
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