All posts in Work Lean

Tax-Free Investing. The True Secret Behind Health Savings Accounts.

By Brad Beckstrom

Why would I waste a perfectly good Thursday morning writing about health insurance and health savings accounts? Well, politics has made paying for healthcare a national obsession.

There’s been a lot in the news recently about the spiraling costs of healthcare and Republican promises to cut the costs of health insurance for individuals and families. While no formal plan has been presented, one key component mentioned by both Republicans and Democrats is the Health Savings Account or HSA. The fact is, tax-advantaged HSAs have been around for years. In many ways they are also one of the best ways to save for retirement. I’ll explain why.

What is an HSA?

An HSA used in conjunction with a high deductible health insurance policy allows users to save and spend money tax-free to use for medical expenses. Contributions to an HSA can be made pre-tax directly from your paycheck or you can make contributions on your own that are 100% tax-deductible, up to $3300 for individuals and $6550 for families and, if you’re over 55, you can contribute $7550 per year. For example, a family in the 25% marginal tax bracket could save you over $1600 a year in taxes.

How does it work?

Once you have money in your account, you can then use it to pay for all types of medical expenses, including things like new glasses, prescription drugs, medical and dental visits, and any medical expenses not covered by your high deductible health plan. To be eligible, you need to have a health plan that qualifies as a high deductible plan. (Example a minimum deductible of $1300 for singles or $2600 for families). A high deductible plan means you will pay more out of pocket before meeting your deductible. The advantage is that the premiums on these plans are lower. Due to the high cost of health care, many employers are now offering only high deductible plans, or versions of it, as an option.  For entrepreneurs, these plans are also available through healthcare.gov and labeled as HSA or through most health insurance brokers at comparable rates.

Simplify the process

When I first started researching HSA’s,I felt they were a bit complex. I had to set up a pretax deduction from my paycheck, then set up a HSA account with a participating bank and assure that these pre-tax deductions were transferred into the account. Once the account was set up and funded however, I found it was easy to track medical expenses in Quicken or online using Mint.com or PersonalCapital.com.  Once a month I can pull up my non-reimbursable medical expenses then simply pay myself back from the HSA account. I don’t see a need to save paper copies of the bills as the transactions applied to my deductible are saved by our health insurance provider and they are documented in both the credit card bills and online tracking. The HSA bank account allows you to track reimbursements paper free. You’ll get a year-end statement showing the exact amount of all transactions.

Using an HSA like a turbocharged tax free retirement account.

What happens if I don’t use up my budget? Any leftover dollars stay in the HSA account and can be invested in index funds. This is the true secret behind an HSA account. Unlike an IRA or a 401K, the money in an HSA account is not taxed when you make withdrawals during retirement. After you turn 65, you can also withdraw the money tax-free for any purpose, making it an ideal bookend to a traditional retirement account. Here is a great graphic from The Mad Fientist showing the cash flow.

Setting it up.

Here are some steps you should take if you’re considering an HSA account.

  1. Don’t wait until open enrollment period start researching health savings accounts. Find out what your options are now. Healthcare costs in the US are skyrocketing, and many employers, entrepreneurs and government agencies are switching to high deductible plans. You don’t want to be stuck in one of these without an HSA account.
  2. Choose which financial institution you’ll use for your HSA account. I was able to quickly set mine up with Bank of America, making it easy to handle transfers between checking and my HSA account. Most HSA accounts offer bill pay and transfer features even if you don’t bank with them.
  3. Find out if pre-tax contributions can be made from your paycheck. This lowers your tax bill and gives you tax-free dollars to spend on health expenses you’re going to have anyway, even if it’s new pair of glasses or a root canal.
  4. Don’t get HSA plans mixed up with other types of savings accounts like HRAs or FSAs  the key difference is that you own the HSA account and the dollars don’t need to be used up by the end of the year. Make sure it’s specifically HSA approved.
  5. Max out your tax-free contribution whenever you can. This money grows tax-free in your HSA account until you use it. The HSA account is especially useful for individuals who have also maxed out their retirement contributions.
  6. Another key difference with HSAs is that they have investment options for your leftover funds. Check a balanced index fund and put your extra cash in there at the end of the year. Over time this will grow tax-free.
  7. Once you start using your HSA account, pay your providers directly then reimburse yourself from the HSA. Some HSA accounts include debit cards but I found it easier to use a credit card with points and then reimburse myself, which is allowed under the plan.
  8. HSAs are great for the self employed you save an additional 7.65% on (employer paid) social security and medicaid taxes.
  9. Check out this article with more info about turning your HSA into a souped up retirement account.
  10. Call your congressmen and let him know that 100% tax deductible, affordable health care, and HSA accounts, are a good thing that should be improved on, not eliminated.

 

I’d love to hear about your experience with HSAs. A quick disclaimer — Any concepts presented on this blog are simply opinions and should not be considered as professional investment advice.  As with most other things in life, you are solely responsible for your own choices, make them thoughtfully.

 

The Frug

 

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The Secret to Running The Business of You.

haveasmallnut

By Brad Beckstrom

“Have a small nut; that’s the key to life.”

Graham Parker.

What’s an aging rock ‘n roller to do, the once big recording contracts, the limos, seven-figure tour revenue all start to trickle away? Graham Parker, a British punk rock pioneer, knows exactly what to do: enjoy life, have a great time, and keep making music. Graham’s quote “Have a small nut; that’s the key to life” sums up one of the core principles of financial independence. The small nut he’s referring to is not assets, but monthly expenses. Rock stars, athletes, entrepreneurs, everyday folks all hit the same wall. We hear these stories all the time, from the extreme, like Mike Tyson blowing through $400 million and ending up homeless, to the highflying salesperson that overextended themselves, justifying their current expenses on future income fantasies, only to be chop blocked at the knees by a corporate reorg or downsizing.

Professional athletes know this story all too well. The average career in the NFL is about four years. In major league baseball, it’s a little over five years. Knowing this, it seems crazy when you see young athletes, blowing their entire signing bonus, borrowing against it before they even get a check. The secret is to do the opposite, save the entire bonus along with any windfalls, and keep your monthly expenses to a minimum. Read more…

A Short Guide to Lean Investing.

taking-the-simple-path-to-wealth

By Brad Beckstrom

Have things gotten too complex?

Today we have more savings and investment options than ever before. Online tools and investment options that give us access to over 10,000 mutual funds and exchange traded funds, with another 40,000+ publicly traded stocks worldwide. Most of these investments are accessible without setting foot in a brokerage firm or bank. Online banking, trading, and mutual fund supermarkets give us access to sophisticated investment tools available only to professionals just a decade ago.

Yet, despite so many options, the US personal savings rate is hovering between 5% and 6% and has been in steady decline since the 50s. The retirement savings picture is even worse, one in three American adults has zero saved for retirement and 62% have less than $1000 saved. Many Americans like to blame the government for this predicament but in fact many countries with significantly higher taxes have savings rates that are 2 to 3 times ours.  On top of our tax advantages, we have a wide selection of pre-tax and post-tax savings options many other countries don’t have, including 401(k)s, IRAs, SEPs, Roth IRAs, Health Savings Accounts, 529 college savings plans, and about 10 more with various combinations of numbers and acronyms in the name. All of them are underutilized by any standard of measurement.

Part of the problem is complexity. We’ve made it easier to go out and get a loan for a new SUV or a 5,000 square foot house than to start saving or put that money away for retirement.  We’ve been incentivizing people to take out student loan debt instead of starting college savings accounts.

To solve the complexity problem we need to make it easier to save and invest. We need to create a simpler path to wealth through regular and efficient investing. I like to call this Lean Investing. Read more…

8 things I’ve learned after 1 year on a 10,000 hour creative quest.

By Brad Beckstrom

Youcantuseup

Just over a year ago I embarked on a creative project I called my Big Audacious Quest. My plan for this ambitious creative project is to master something I’d walked away from years ago, photography. The idea was to have this quest be about more than just photography. I felt that I had gotten into a creative slump over the years and wanted to create a body of work that would not only help me breakout creatively, but also write about it, and share what I learn. I also wanted to see what kind of impact things like photo sharing sites, digital cameras, social media, and photo management tools would have on my efforts. These are all things that were not around when I was first passionate about photography in the early 80s. So, after a year at this, here are a few of the things I’ve learned.

  1. How to define mastery on my terms.

To start I needed to define what becoming a master photographer would look like and put some clear goals and milestones in place along the way. In many ways, my quest is an actual journey so I also wanted to add some geographic elements to my goals as well. First, I had to address this whole mastery thing. In his book Mastery, Robert Greene talks about the origins of master craftsman guilds as far back as the early Middle Ages. Green gives examples of journeyman apprentices and masters on their own 7 to 10 year journeys. Green, Malcolm Gladwell (Outliers) and others talk about the 10,000 hour rule as the time investment required to truly master something. There are plenty of people who poke holes in this theory, especially as it relates to creative fields, but I feel these authors at least defined mastery and gave readers an idea of the type of time investment required.  For me, it was a great place to start. There’s no guarantee that investing 10,000 hours in something will make you a master but it allowed me to put some goals in place and begin the journey. So, I took the core elements of my quest: photography, geography, creativity, and time and put the goals down on paper. At the end of some crazy back of a napkin calculations on what 10,000 hours would get me, this is what the quest looks like.

100,000 photographs

10,000 photographs published

1,000 places explored

100 cities

10 years in the making

1 amazing journey

  1. How to hit walls

Sometimes going gangbusters at the beginning of a project can be the kiss of death, especially when you hit a wall. I knew if I was going in to stay on track, I would need to publish about 1,000 photographs a year from 100 places in at least 10 cities per year. Publishing can include, blogs, websites, photo sharing sites, and photo books.  After my first year, I’m ahead of my goal on certain items and behind on others. Over 2600 photos published, from 90 places, in 27 cities. Starting out I purposely kept the number of photos to publish goal relatively low as I knew i’d likely get ahead of the goal and later hit some obstacles that would slow me down, like a big work related project or the 3 months of crappy weather that we’ve had recently. Dealing with some of these obstacles has helped me put a daily practice in place so I can keep a few balls in the air and pivot between projects as needed.

  1. Don’t compare your beginnings to someone else’s middle or end

Read more…

Working Lean – 8 things I do to make work fly and enjoy life.

FrugFocus

By Brad Beckstrom

It’s going to be 75° today. The sun is already blasting in my office window at 7:30 AM. When I’m working at home, it can be hard to focus, especially if there’s someplace I’d rather be, like out on my bike. We all have work to do, but it’s hard to get stuff done if you’re not enjoying what you’re doing. This is even harder if someone else is dictating your schedule, meetings, conference calls, commutes etc.

There are a few things that I do daily to make work more enjoyable. Since they’ve become habits, they take very little effort but are a crucial part of getting stuff done.

Work in zones.

I divide my day into three zones: prime time (for me, mornings), the dead zone 3PM to 6PM and home (evenings). I like to get the tough stuff out of the way in prime time. I like to schedule one big task during prime time. The best tool I’ve found for this is a free product called Momentumdash. Once installed it presents you with a beautiful image, and reminds you of your focus each time you open a new tab on your browser.  I also plan for the dead zone each day, scheduling the easy stuff, or a workout, during my least productive times.

Don’t work off big to do lists.

I treat to do list apps as a catch-all for any necessary task that takes over a few minutes. If you stay focused on the big stuff, sometimes you find a little items on this list fall away.  At the end of each day I’ll take some time to plan the following day, pulling some of the most important tasks off the big catch-all list and writing them down in my notebook. I put the heavy-duty stuff in prime time. The act of pulling tasks off an overflowing digital list and writing it down in a notebook, gives you a more realistic feel for what can get done in a day.

logo pomodoro

Throw a tomato at it. Read more…