All posts tagged financial independence

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

 

Follow me on Twitter Facebook Flickr Instagram

 

Make Banks Work for You.

bankrates

How I locked in a historically low mortgage rate without getting lost in research, voicemails, and paperwork.

By Brad Beckstrom

I’ve been putting it off. Mortgage rates are at historic lows and, on paper, it made a lot of sense to refinance my current mortgage to a 10 year mortgage available at a lower fixed rate. It’s just that even thinking about my past experiences with refinancing both my home and some rental properties gave me gas. I knew I needed to get it done, especially since I’m always telling people to cut their largest expenses first. Our mortgage is our largest expense.

I’d made some mistakes in the past, like listening to some TV ad and then going to a website like Lendingtree. They say they’re going to find you the lowest rate but in fact they are getting all of your information and giving it to banks, selling your name as a lead. Immediately your phone starts to ring off the hook from banks you’ve never heard of. Luckily I gave them a Google voice number that sends all these folks directly to a digital voicemail graveyard. The messages are transcribed for me in a Gmail account and I quickly delete them in bulk. But, the calls kept coming for months. So, the lesson here is don’t give your loan or refinance information to any consolidator site, claiming to “find the best rate” or “do the work for you.” In fact, take this one step further: don’t share any of your personal information, email, phone number, address, income etc. with any mortgage site, including companies like Quicken Loans. Or any other big banks that bombard you with national TV ads. There’s a reason they can afford to advertise on the Super Bowl.

When it comes to finding a great mortgage rate, you’ll actually save time by doing it yourself, and you won’t have to share any personal information. Here’s a few steps I recently used to lock in a fixed 2.37% rate on a 10 year mortgage. With rates this low there’s really no benefit in getting an adjustable rate loan. Read more…

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…

Creating a list of musts, because you’ll need it someday.

23467865585_7c1987c033_z

By Brad Beckstrom

Must. That’s a funny word, but it’s a word that came to me along with some serious thoughts. Not so much as a verb, you must do this, or you must do that, more like a noun. As in something that should not be overlooked or missed.  More like, going deep on the important things is a must. Don’t overlook the musts.

About a year ago, I was pondering what old age would be like. I was struggling with what it might be, what risks or new discoveries may be in store.  Would I be healthy or sick?  Would I  be rich or poor, and in what, friends, time, money, freedom?  Outside of work, what was I doing to impact this.  Did I even know what “this” was?

Instead of making another to do list or a list of goals, I decided to write down some things that I felt needed to be musts in my life moving forward. I decided that a must is something that needs to be considered before anything that’s not on the list. A must is something that will influence all decisions. The first few were pretty straightforward: family, friends, health. They are easy to write down, but when you consider the commitment to make these three words musts, that would be a pretty complete list in itself. It was too broad.

For example, when I put something like health on the list that means it’s a must, something that’s in my life every day, not just a “to do” that I may not get to. Family and friends seem pretty obvious, but how many of us let work commitments, travel or commuting get in front of these?  I’ve done this in the past. After our first son was born, SuperK would  turn up the volume whenever the Harry Chapin song Cat’s in the Cradle came on. A reminder that you could miss much of your child’s years at home if you blink. So if family and friends are at the top of your list of musts, understand the size of that commitment.

If your musts are too broad, big categories like family, friends and health may get replaced with other broad categories like work, sleep, decompress, and spend money. So, it’s best to break those musts down into actions that can can become good habits.

So, for example, under health my musts include: Read more…