It is that time of year when you get to reassess what to select for your company benefits. Here are some things to consider as you make your elections:
HSA (Health Savings Account)
If you participate in a high deductible health plan, you have the ability to contribute to an HSA. Families can contribute a maximum of $6,900 in 2018, with an additional $1,000 if you are age 55 or older. Individuals can contribute $3,450, and can also take advantage of the $1,000 catch up contribution if you are over age 55. Here are some of the benefits:
- Contributions are 100% tax-deductible and withdrawals are tax-free when used for qualified medical expenses.
- These accounts carry-over year-after-year (unlike flexible savings accounts – FSA), are portable if you change jobs or retire, and savings can be invested. This allows you to take advantage of the tax savings in your high-income years and build up savings to be used when needed, such as early retirement.
- Typically you cannot use your HSA to pay insurance premiums. However, there are exceptions for Long-term Care insurance, Health care continuation coverage such as COBRA, Medicare and other health care coverage if you are 65 or older (other than premiums for a Medicare Supplemental policy.
Here is more info on IRS guidelines.
Many people I talk to only have life insurance with their employer. The following are reasons to consider getting an individual policy outside of your employer.
- Most people change jobs through their careers. A policy that is yours will be portable and ensure you are covered as you change employment, or if you have a period of unemployment.
- It is often cheaper to get an individual policy, particularly if you are younger or healthier than the average employee at your place of business. Not only that, you will be locked into a lower premium for the term of the policy. Even if the cost is similar, there is more value to having a policy of your own.
- In the unlikely event that you become uninsurable in the future and do not qualify for life insurance, you will have coverage.
- When evaluating policies, make sure you choose a policy that will allow you to convert to permanent insurance at a future date if you desire. It is always better to have options.
- If you have a stay at home spouse, do not think because that spouse has no earned income there isn’t a life insurance need. Consider what it would cost you to replace the things that he/she is doing if you had to hire someone.
- I recommend working with a Life Insurance broker who works with multiple insurance companies, so they can find the best solution for you.
How much should you contribute? If your company matches contributions, ALWAYS contribute up to the match. This is FREE money. Though rules of thumb do not apply to everyone, they can be a good starting point. To increase the chances that your savings will fund your retirement, save 15% of your pre-tax income.
Roth or Traditional 401(k)? If you are in a lower tax bracket today than you think you will be in your retirement years, you may want to consider investing in the Roth 401(k) at work instead of the traditional 401(k). With the Roth 401(k), your contributions go in after-tax, but they grow tax-free and withdrawals are tax-free after age 59 ½. If you are just getting started, this is a great way to grow tax-free wealth. Another reason you might choose to contribute to a Roth 401(k) is if you make more money than the cut-off to contribute to a Roth IRA (starts phasing out at $186,000 for couples and $112,000 for individuals) and you think you will be in a similar tax-bracket in retirement and have already amassed a hefty tax-deferred retirement savings. This will give the opportunity to create tax-free income in retirement for yourself. The other benefit of a Roth 401(k) is that you do not have to take required minimum distributions at age 70 ½, so you can continue to let it grow and leave tax-free income to your heirs.
If you qualify to contribute to a Roth IRA, you can contribute to both your company’s Traditional 401(k) to get the tax deduction, and max out your Roth IRA at $5,500 per year, or $6,500 for those over age 50. This combination is ideal because you get the benefit of both.
If you have any questions as you are evaluating your options, please don’t hesitate to reach out to me at firstname.lastname@example.org. I am happy to answer any questions you might have.