Installment 4 of 6
Actions 17-22 …
- Open a Flexible Spending Account (FSA) – wouldn’t you like to save thousands of dollars annually by paying for everyday expenses pretax rather than post-tax? (For a review of the value of money pretax vs. post-tax, re-read A Penny Saved is NOT a Penny Earned.) To refresh your memory: a dollar post-tax (the net proceeds of your paycheck) could be worth a $1.50 or more pretax (depending upon your tax bracket, state and local taxes). Here’s the skinny on FSAs:
- FSAs are only offered through employers. If your employer doesn’t have an FSA program, lobby the HR department to set one up. Signing up for an FSA may only be allowed during the benefits open enrollment period. Ask. If you missed getting in on an FSA for 2017, make sure you get signed up in time for 2018!
- Your FSA is funded through payroll deductions. This lowers your income used to calculate Federal, Social Security, Medicare, and (in some cases) state/local taxes. It’s a wonderful thing!
- There are actually 3 separate FSA programs: (1) Out-of-pocket healthcare expenses – for 2017, up to $2600 annually per household (2) Dependent Care/Child Care – $5000 annually per household (3) Parking and public transportation commuting costs – ($255/month) Note: not all employers offer all three.
- As you incur healthcare, dependent care or commuting expenses, submit documentation to be reimbursed from your FSA. Some programs even provide a debit card for convenience.
- What if you took advantage of all 3 programs to the max? That would be a total of $10,600 paid pretax. Let’s say that your take-home pay after taxes is only 70 cents on a dollar pretax (pretty common). You would have saved approximately $3200 in taxes!
- Use it or lose it! The one downside to FSAs. If you don’t spend all the money in your FSA by year end, you lose it! But even if you have to walk away with some money remaining in the FSA, you may still come out ahead on tax savings. In recent years, the Use It or Lose It rules have been relaxed somewhat. Some plans allow you to claim expenses into the first few months of the following year. Others plans allow carrying up to $500 over to the next year.
- Open a Health Savings Account (HSA) – FSAs and HSAs easily confused but are actually two completely different programs. But in some respects, an HSA is an FSA on steroids. Here’s the scoop on the differences and HSA advantages:
- A Health Saving Account can only be used in conjunction with a “high-deductible” health insurance plan. For 2017, a high-deductible policy means a minimum deductible (that you pay) of $1300 per person or $2,600 per family.
- It’s an either/or choice for an FSA or HSA. They are mutually exclusive. However, you could have an HAS for healthcare and FSAs for dependent care and commuting costs.
- HSAs do not have a Use It or Lose It provision. You can accumulate funds in an HAS and use them years or even decades later in retirement.
- HSA contributions may be invested or kept in an interest-bearing account, so the balance grows over time.
- HSAs can be offered by employers or opened by individuals (provided the high-deductible policy requirement is met).
- HSAs offer these tax advantages: (1) contributions up to the annual limits are tax deductible (2) earning and appreciation are tax free. (3) withdrawals for medical expenses are tax-free.
- HSAs have much higher annual contribution limits compared to FSAs. As of 2017: $3,400 per person or $6,750 per family. If you are over 55, add in an additional $1,000 as a ‘catch-up’ contribution. For couples with no dependents on their health coverage, I recommend maximizing contributions by setting up two individual accounts rather than a single, family account.
- Contributions can only be made until age 65 (when you become eligible for Medicare.)
- Increase 401K/403B contributions – at a minimum, you should be contributing enough to your 401K or 403B to get the full employer match (typically 6% of your salary for a 3% employer match) failure to do so means losing out on a huge sum of money over a lifetime. This year, try to ratchet up your contribution another 1 or 2 percent. Such a small reduction in take-home pay likely will not be missed but could significantly accelerate your retirement savings. (go back and read You can’t spend what you ain’t got: Why You Need to Automate Your Savings.)
- Open a Roth IRA – a Roth IRA is beautiful thing indeed! While contributions are made with after-tax dollars, Roth IRA appreciation and retirement withdrawals are tax-free. There is also some flexibility for withdrawing contributions penalty-free prior to retirement (although I wouldn’t recommend it.) Unlike conventional IRAs, there are no minimum withdrawal requirements in retirement. Contribution limits are $5,500 or $6,500 if you are over 50. Be aware: eligibility to contribute to a Roth is phased out or eliminated at higher income levels ($117,000 for singles or $184,000 for couples as of 2017). And how would you contribute to your Roth? With an automatic deduction, of course! (Note, some employer 401K and 403B plans also offer a Roth option.)
- Start saving for the children’s college education; open a 529 Plan(s) – money contributed to a 529 grows tax-free. Many states also permit 529 contribution to be deducted from state income tax (but no such luck on federal tax). Generally, as much as $14,000 per child can be contributed each year (limited by federal gift tax exemptions). 529 Plans are administered on a state-by-state basis. However, you are not confined to your state’s plan; you can chose to go ‘out-of-state’ Here’s one article about the Best 529 Plans (Forbes, March 2016)
- Set up automatic transfers to a savings account – there are many reasons for bulking up your savings: establishing an emergency fund in case of layoffs or unexpected expenses, saving for a house down payment, saving for a replacement auto or a major appliance, even a vacation. The list goes on. Set up an automatic transfer to the savings account. Better yet, divert part of your paycheck directly to a saving account. A great place to keep said savings account: the Capital One 360 Money Market account. It’s pays 0.60% interest for balances under $10,000 and 1% for balances over $10,000. And it’s FDIC insured.
Hang in there! Just 6 days to go in January!
© 2017 Paul J Reimold