Is Your HSA a Retirement Tool?

How much do you need to retire

The Good, the Bad and the Ugly
Health Savings Accounts (HSAs) are a great way to pay for medical expenses, and since unused funds roll over from year to year, the account can also provide a source of retirement savings in addition to other plans like 401(k)s or IRAs.
But be aware HSAs can also come with significant disadvantages and less flexibility when compared with other retirement investment tools.

 

The Good

HSAs work best when they are used for their designed purpose: to pay for qualified medical expenses. Neither your original contributions to an HSA nor your investment earnings are taxed when used this way.

This makes HSA funds valuable, given that medical costs are one of our largest expenses as we age. The Employee Benefit Research Institute estimates the average 65-year-old couple needs $264,000 to pay for medical care over the course of their retirement. Being able to cover that amount with pre-tax dollars greatly extends the value of retirement savings.

In addition, unlike other retirement plans, there is no required distribution of funds after you reach age 70½.

The Bad

First, you can only contribute to an HSA if you have a high-deductible health insurance plan. That means you will pay more out of pocket each year when you need to use health services, which could make it difficult to build a balance within your HSA.

Second, contributions are limited. Currently, annual contributions to HSAs are limited to $3,400 a year for individuals and $6,750 a year for families. These limits get bumped up by $1,000 for people aged 55 or older. You also may only contribute to an HSA until your retirement age.

Finally, HSAs typically have fewer investment options compared with other investment tools including 401(k)s and IRAs. The accounts often have high management and administrative fees. All this makes building HSA earnings tough to do.

The Ugly

The worst thing about HSAs: before you reach age 65, non-medical withdrawals from HSAs come with a whopping 20 percent penalty. Plus non-medical withdrawls are taxed as income. Even after age 65, both contributions and earnings are taxed when they are withdrawn for non-medical expenses.

In this way, HSAs compare unfavorably with 401(k)s and IRAs, which end their early withdrawal period earlier, at age 59½. They also have lower early withdrawal penalties of just 10 percent.

HSAs are a powerful tool to help manage the ever-rising costs of health care. Knowing the rules and the costs associated with using these funds outside of medical expenses can help you get the most out of an HSA and avoid costly missteps.

How Much Do You Need to Retire?

How much do you need to retire

Most Americans simply don’t save enough for retirement. Nearly half of working-age households don’t have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and above) nearly two-thirds have less than one year’s worth of their annual salary in retirement savings.

 

 

The goal: a comfortable retirement

So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment returns. Mutual fund broker Fidelity estimates you need enough savings to replace roughly 85 percent of your annual pre-retirement income. Many experts estimate you will have to save between eight and 12 times your pre-retirement annual income to reach this goal.

But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, their savings estimate lowers to eight times your annual income.

This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority of workers (51 percent) surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan to continue working during retirement.

Some ideas to consider now

There are actions you can take now to put you in a better position during your golden years:

Bullet Point Contribute as much as possible every year to your employer-provided retirement plans. With a 401(k) pre-tax retirement plan, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older.
Bullet Point Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older.
Bullet Point If available, contribute as much as possible to a Health Savings Account, which can be used to offset medical expenses with pre-tax dollars. Individuals can contribute up to $3,400 a year, or $4,400 for ages 55 or older.

Don’t Forget to Review Your Insurance

Home office deductionsWhen was the last time you reviewed your insurance coverage?

An annual insurance review makes good financial sense.

 

Here are points to consider as you review your various insurance policies.

Bullet Point Health care. If you have an individual policy, investigate whether your employer, union or professional association offers a less expensive group policy.
Bullet Point Long-term care. Long-term care insurance may be advisable if you’re between the ages of 55 and 72 and you don’t have enough assets to fund long-term care.
Bullet Point Life. The protection you need depends on the number of people who rely on you for support. Whole, variable, and universal life policies combine insurance coverage with an investment future. If you want insurance only, consider term life.
Bullet Point Disability. Studies show that less than one in six Americans own enough disability insurance to provide a comfortable lifestyle during a two-year disability. Disability coverage is generally limited to 60 percent to 70 percent of salaried income. If you have adequate emergency funds, electing a longer waiting period for coverage to kick in will reduce your premiums.
Bullet Point Homeowners. With fluctuations in the real estate market, it’s possible that your home is now under- or over-insured. Coverage equal to the current replacement cost (excluding land), not its original cost, is advisable.
Bullet Point Auto. Liability insurance is a must, but consider dropping collision coverage if you can afford to repair or replace the vehicle on your own. Collision insurance is probably required if your car is financed or leased.
Bullet Point Umbrella liability. Personal liability coverage is included with most homeowner and auto policies. However, if you own substantial assets, umbrella coverage will provide additional protection at minimal cost.
Bullet Point Unnecessary insurance. Carefully examine policies with narrowly defined coverage (such as credit, travel, or cancer insurance). They often duplicate other coverage in policies you may already own.

Marriage Tax Tips

Credit Score Ingredients

If you recently got married, plan to get married, or know someone taking the matrimonial plunge, here are some important tax tips every new bride and groom should know.

 

 

 

 

 

1 Notify Social Security. Notify the Social Security Administration (SSA) of any name changes by filling out Form SS-5. The IRS matches names with the SSA and may reject your joint tax return if the names don’t match what the SSA has on file.
1 Address change notification. If either of you are moving, update your address with your employer as well as the Postal Service. This will ensure your W-2s are correctly stated and delivered to you at the end of the year. You will also need to update the IRS with your new address using Form 8822.
1 Review your benefits. Getting married allows you to make mid-year changes to employer benefit plans. Take the time to review health, dental, auto, and home insurance plans and update your coverage. If both of you have employer health plans, you need to decide whether it makes sense for each of you to keep your plans or whether it’s better for one to join the other’s plan as a spouse. Pay special attention to the tax implication of changes in health savings accounts, dependent childcare benefits and other employer pre-tax benefits.
1 Update your withholdings. You will need to recalculate your payroll withholdings and file new W-4s reflecting your new status. If both of you work, your combined income could put you in a higher tax bracket. This can result in reduced and phased-out benefits. This phenomenon is known as the “marriage penalty.”
1 Update beneficiaries and other legal documents. Review your legal documents to make sure the names and addresses reflect your new marital status. This includes bank accounts, credit cards, property titles, insurance policies and living wills. Even more importantly, review and update beneficiaries on each of your retirement savings accounts and pensions.
1 Understand the tax impact of your residence. If you are selling one or two residences, review how capital gains tax laws apply to your situation. This is especially important if one of you has been in your home for only a short time or if either home has appreciated in value. This review should be done prior to getting married to maximize your tax benefits.
1 Sit down with an expert. It is natural for newlyweds to focus their attention on the big day. There are so many decisions to be made from selecting a venue to planning the honeymoon. Because of this, reviewing your tax situation often is an afterthought. Do not make this mistake. A simple tax and financial planning session prior to the big day can save on future headaches and avoid potentially expensive tax mistakes.

If you’d like a review of how marriage will affect your tax and financial situation, call at your earliest opportunity.

 

 

2017 Health Savings Account Limits Announced

Stethescope around hunderd dollar bills

The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2017. The new limits are outlined here with current year amounts noted for comparison purposes.

What is an HSA?

An HSA is a tax-advantaged savings account to pay for qualified health care costs for you, your spouse, and your dependents. When contributions are made through an employer, they are made on a pre-tax basis. There is no tax on the withdrawn funds, the interest earned, or investment gains as long as the funds are used to pay for qualified medical, dental, and vision expenses. Unused funds may be carried over from one year to the next. To qualify for this tax-advantaged account you must be enrolled in a “high deductible” health insurance program as defined by HSA rules.

The limits

Health Savings Account (HSA) Limits NEW! 2017 2016 Change
Maximum Annual Contribution Self $3,400 $3,350 +$50
Family $6,750 $6,750 nc
Add: 55+ catch up
contribution
$1,000 $1,000 nc
Health Insurance Requirements
Minimum Deductible Self coverage $1,300 $1,300 nc
Family coverage $2,600 $2,600 nc
Out-of-pocket Maximum Self coverage $6,550 $6,550 nc
Family coverage $13,100 $13,100 nc

Source: IRS Rev Proc 2016-28

Note: To qualify for an HSA you must have a qualified High Deductible Health Plan (HDHP). A plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.

Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential benefits.

 

 

ACA Strikes Again

Are you prepared?

The Affordable Care Act (ACA) continues to evolve as the IRS begins to address challenges faced during the past tax season. A recent IRS announcement warns taxpayers who use the Premium Tax Credit to file their 2014 tax return immediately. Failing to do so may cause the IRS to deny using the Premium Care credit during 2016. Here is what you need to know.

Who? Anyone who uses the Marketplace to purchase their health insurance and receives the Premium Tax Credit. The IRS announcement applies to;

Affordable Care Act Premium Tax Credit

Advanced Premium Tax Credit Users

This IRS warning impacts anyone who has their Premium Tax Credit paid directly to their health insurance provider to help lower their monthly health insurance premium payments. And…

No 2014 Tax Return on File

notice specifically impacts those who use the tax credit and have not filed a 2014 tax return.

What happens. If you are impacted by this announcement you will no longer be eligible to receive pre-payment of the Premium Tax Credit in 2016. You will need to come up with the money to pay for your entire health insurance premium each month.

Action to take. If you do not want this to impact you, file your 2014 tax return as soon as possible. File now even if you filed a tax extension giving you until October 15, 2015 to file your tax return.

To learn more please review IRS Health Care Announcement: IRS 2015-40

New Level of Shared Responsibility Penalty

Don’t let this one get out of hand

UninsuredA part of the Affordable Care Act is the enactment of a tax penalty if you or your family does not have qualified health insurance coverage for the entire year. The new tax penalty, called the “shared responsibility payment” impacts taxpayers beginning in 2014. While the payment may have been manageable in 2014, it is going up quite a bit in 2015. Here is what you need to know.

Shared Responsibility Payment Calculation

greater of
2014 NEW! 2015 Change
Flat Fee
(or)
$95.00 per adult
$47.50 per child
$285 maximum flat fee
$325.00 per adult
$162.50 per child
$975 maximum flat fee
+$230 per adult
+$115 per child
+$690 maximum flat fee
Cap Fee 1% of your yearly household income capped at the cost of the national average premium of the bronze level health plans available through the marketplace.* 2% of your yearly household income capped at the cost of the national average premium of the bronze level health plans available through the marketplace.* * Average premiums vary by state. No one knows what the new average will be, but it is expected to go up a minimum of 6%.

Note: If premiums are more than 8% of household income or the gap in coverage is less than three consecutive months or there is an approved hardship then the shared responsibility payment could be reduced.

Action to take

Arrow Get coverage. If you are currently uninsured, each month you delay in getting coverage increases the amount of the penalty you will be required to pay.
Arrow Plan for the penalty. If you know the penalty is coming, save money to make this payment when you file your tax return.
Arrow Shop around. Check with your employer and/or state agencies to see about available coverage. There are often programs and assistance available to make getting health care more affordable for most of us.

Alert. 800,000 Form 1095-A Errors

1095-A Form In late February, the Government announced that 800,000 of the Form 1095-A’s they sent to taxpayers who used Healthcare.gov to purchase their health insurance in 2014 have errors in them. If you are impacted, you will receive an announcement of the error. You can also check to see if your form is wrong by logging into your Healthcare.gov account.

If you already filed your tax return, the Treasury Department is not requiring you to file an amended return. The corrected forms are being sent out in March, so you may need to wait for receipt of this form to file your taxes. Here is a link to the original announcement. Announcement: Form 1095-A Error

When to Notify the Healthcare Marketplace

When to Notify the Healthcare MarketplaceAvoid a Premium Tax Credit bill at the end of 2014

For the millions who now use the Healthcare Marketplace to purchase their health insurance, it is important to keep your information with them up to date. Not only does this help ensure you have the proper health insurance coverage, but it also ensures your healthcare Premium Tax Credit is properly applied.

Per the IRS, here is a list of changes in circumstance that can impact the value of your Premium Tax Credit amount:
Bullet warning getting married,
Bullet warning the birth or adoption of a child,
Bullet warning divorce,
Bullet warning getting a new job,
Bullet warning losing a job,
Bullet warning moving,
Bullet warning changes in eligibility for employer or government sponsored health care coverage,
Bullet warning ANYTHING that impacts family size or composition,
Bullet warning ANYTHING that impacts your family income.

2015 Health Care Savings (HSA) Account Limits Announced

2015 Health Care Savings (HSA) Account Limits AnnouncedThe savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2015. The new limits are outlined here with current year amounts noted for comparison purposes.

What is an HSA?

An HSA is a tax advantaged savings account to pay for qualified health care costs. The account consists of wages contributed on a pre-tax basis. There is no tax on the funds contributed or investment earnings as long as the funds are used to pay for qualified medical, dental and vision expenses. To qualify for this tax-advantaged account you must be enrolled in a “high deductible” health insurance program as defined by HSA rules.

The limits

Health Savings Account (HSA) Limits 2014 NEW! 2015 Change
Maximum Annual Contribution Self $3,300 $3,350 +$50
Family $6,550 $6,650 +$100
Add: 55+ catch up
contribution
$1,000 $1,000 nc
Health Insurance Requirements
Minimum Deductible Self coverage $1,250 $1,300 +$50
Family coverage $2,500 $2,600 +$100
Out-of-pocket Maximum Self coverage $6,350 $6,450 +$100
Family coverage $12,700 $12,900 +$200

Note: HSAs require a qualified High Deductible Health Plan (HDHP). To qualify, a health insurance plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.

Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential tax benefits.