Healthcare

What Does the New SECURE Act Mean for Me?

December 23, 2019 by Hans Blake, CFA, CPA

Reading Time: 3 minutes The full House passed by a 297-120 vote on December 17, 2019 the year-end spending bill, which includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act, HR 1994, is being billed as the most comprehensive retirement security legislation in more than a decade. The Senate voted 71 to 23 to approve the legislation. The president signed it into law on December 21st.

What does the SECURE Act accomplish?

The SECURE Act:

simplifies the 401(k) safe harbor rules;
expands portability of lifetime income options;
allows long-term part-time workers to participate in 401(k) plans;
allows plans adopting by the filing due date to be treated as in effect as of the close of the year;
provides a fiduciary safe harbor for selection of a lifetime income provider;
modifies the treatment of custodial accounts on termination of 403(b) plans;
extends the current required minimum distribution requirements to age 72;
requires disclosures regarding lifetime income; and
modifies the nondiscrimination rules to protect longer-service participants.

How the SECURE Act Affects…

Retirees

Current law requires that participants start withdrawing from their retirement savings accounts at 70.5. The new bill raises that minimum age to 72. The law also changes the maximum age for contributing to a traditional IRA, also currently set at 70.5. This is good for retirees because it delays the time when they have to take their required minimum distributions which are taxed at ordinary tax rates.

Beneficiaries

The SECURE Act would make significant changes to inherited retirement plans like 401(k)s, traditional IRAs, and Roth IRAs. In the past, beneficiaries of these accounts could typically spread the distributions or “stretch” them over their own life expectancy (which could be a long time if the beneficiary was a grandchild for example). However, under the SECURE Act, the “stretch” provision has been removed and the new bill requires most beneficiaries to distribute the account over a 10-year period. This change would accelerate the depletion of inherited accounts for many large IRAs and retirement plans.

Students

The SECURE Act would also expand the uses for 529 accounts, an investment vehicle that helps individuals save for college and certain education costs. Currently, taxpayers who use 529 plan money for anything other than qualified education expenses are subject to a 10% federal tax penalty. However, the new bill allows individuals to use 529 funds for qualified student loan repayments of up to $10,000. This is great for HENRYs and millennials who have large student loans.

Parents

The bill would allow new parents to withdraw up to $5,000 from their retirement accounts to cover qualified costs associated with a new birth or adoption. Since Compassion is one of our Core Values, we are excited about this provision as it may encourage more adoptions.

Employees

Current laws allow employers to exclude their part-time employees from eligibility for a 401(k) plan. However, under the SECURE Act, your employer must allow you to participate in its defined contribution plan if you work at least 500 hours a year and have been at the firm for at least three consecutive years.

The bill also requires defined contributions plans to deliver a lifetime income disclosure to participants. This disclosure would essentially show how much income the lump sum balance in the retirement account may generate–in hopes of encouraging saving.

Employers

The SECURE Act would essentially allow small employers to come together and offer 401(k) plans with less fiduciary liability concern and less cost. The goal is to try to expand small employers’ capability to offer some form of retirement savings to employees.

The Act also offers a new tax credit of $500 to help some smaller employers encourage automatic enrollment into their retirement plan. This small credit could help offset some of the costs of operating a plan at the beginning. According to behavioral finance which is one of our three pillars of financial thought, automatic enrollment has seen great success in increasing plan participation by employees.

Last Thoughts…

The SECURE Act has sweeping and broad implications for financial, tax, and retirement planning. If you aren’t working with a fee-only fiduciary advisor, we’d love to introduce ourselves. If you would like to consider outsourcing your financial stress, please consider giving us a call. We’d be happy to have a short conversation with you to see if we can serve you and your family. Click here to learn more about our firm, or click the link below to schedule an anxiety-free call or meeting. Schedule a short discovery call or meeting

How to Maximize Your HSA

December 5, 2019 by Hans Blake, CFA, CPA

Reading Time: 7 minutes Many Americans either have or are eligible for health savings accounts (HSAs), but many fail to understand their benefits. At Intelligent Investing, our passion is to minimize your financial stress to maximize your life. We hope this HSA guide can help you maximize your HSA. We’ve even thrown in some Intelligent Investing tips at the bottom of the article, so be sure to read those as well.

How an HSA Works

The HSA was created when high-deductible Health Plans (HDHP) came about. The idea was to provide a way to pay for healthcare and not be taxed on it. Money deposited into an HSA is tax-deductible. It then grows tax-free and can be withdrawn tax-free to pay for qualified medical expenses. For 2019, individuals who have single health plans with a minimum deductible of $1,350 and a maximum out-of-pocket cost of $6,750 are eligible for an HSA. For those with family health plans, the minimum deductible for eligible policies is $2,700 and the maximum out-of-pocket costs are $13,500. For 2020, the annual contribution limit to an HSA is $3,550 for individuals and $7,100 for a family. People age 55 or older are permitted to kick in an extra $1,000 each. All deductibles, co-pays and coinsurance for in-network covered benefits must count toward the policy’s out-of-pocket limits. Be aware that the out-of-pocket spending limits to be eligible for an HSA are lower than the limits required for health insurance policies by the Affordable Care Act. So all HSA-qualified plans meet the ACA requirements, but not all ACA-qualified plans meet the HSA requirements.

The Triple Play- The 3 tax benefits of HSAs

If you take advantage of your HSA, as well as the ability to invest your money within it, there’s a unique triple tax advantage to HSA investing that simply doesn’t exist in other tax-deferred investment vehicles. Consider these three points:

If you’re eligible to contribute to an HSA, your contributions are tax-deductible up to your annual maximum. For example, if you’re under 55 and have family coverage, contributing the maximum to your HSA for 2019 will lower your taxable income by $7,000.
While your money is invested in an HSA, it grows tax-deferred. This is the same tax deferral that occurs in an IRA, 401(k), or another retirement vehicle, meaning that you don’t have to pay annual taxes on capital gains, interest income, or dividends that occur within the account.
Withdrawals from your account that are used to pay for qualified health-care expenses are 100% tax-free.

Let’s say you’re 45 and have a qualifying family health plan. If you contribute $7,000 per year to an HSA for the next 15 years, you’ll have excluded a total of $105,000 from your taxable income. At the end of the 20-year period, your account could be worth about $175,000, assuming 7% annualized investment returns — and you’d be free to withdraw this money tax-free to cover any out-of-pocket health-care costs. That’s a $70,000 profit on your investment that won’t cost you a dime in taxes if you use it for qualified reasons. Or you can simply let it continue to grow to give you a huge nest egg for health care in retirement.

Steps to Create an HSA (if you qualify)

To use your health savings investment account as a valuable retirement planning tool, follow these four steps:

Open an HSA investment account.
Contribute the maximum allowed.
Save your receipts and let your balance grow.
Use your HSA similar to an IRA in retirement.

Open a health savings investment account.

Bank and credit union HSAs can be convenient for those who plan to spend their money right away on health care expenses. However, because these institutions may offer little to no interest, you may want to look for an alternative provider who will allow you to invest your money for a potentially greater return. Be aware that fees for some investment accounts can be high, so it’s best to read all the fine print and shop around. At Intelligent Investing, we can coordinate your HSA accounts with your overall financial plan and portfolio. If you have a health savings account through your employer, you may not have an option as payroll contributions may need to be made to the provider they select. However, you can later transfer balances to a different HSA.

Contribute the maximum allowed.

You can contribute up to $3,500 to an HSA if you have single coverage or up to $7,000 for family coverage in 2019. Those who are age 55 or older are entitled to make an additional $1,000 in catch-up contributions. So if you’re at least 55 years old and have self-only health coverage, you can contribute a total of $4,500 to your HSA in 2019. If you’re 55 or older and are the primary insured on a qualifying family health plan, you can contribute as much as $8,000 to your account. Keep in mind that any amount your employer puts into your HSA counts toward the contribution maximum. So if you have family coverage and your employer adds $500 to your account, you’ll be able to contribute the remaining $6,500 for the year. Your contributions can be made until the April tax deadline in any given year. This is generally April 15, but it can differ slightly because of weekends or holidays. Tax deductions made for contributions to a workplace retirement plan (such as a 401k or 403b), may be limited based on income. However, there are no such restrictions on HSA deductions. The entire contribution is deductible regardless of your income.

Save your receipts and let your balance grow

While HSAs are intended to provide a tax-free way to pay for health care costs, you don’t have to use it when you have medical expenses. Let me repeat, you don’t have to use it when you have medical expenses. Instead, you could pay bills out-of-pocket and let the balance in your HSA grow. You could reimburse yourself years later. However, you need to keep good records. We recommend saving your receipts and keeping a spreadsheet of paid qualified medical expenses that can be used for reimbursement in the future. This strategy could be particularly useful for those who want to retire early and need to supplement their income before Social Security payments begin. You can boost your bank account by reimbursing yourself for several years’ worth of previous medical expenses as long as you have documentation to back up the claim should you be audited. If you later change insurance and no longer have a qualified high-deductible plan, you can still pay for medical expenses out of your HSA. However, you can’t make any new contributions until you have a qualified plan again.

Use your HSA similar to an IRA in retirement

Workers who use money from an HSA for anything other than qualified health expenses will incur a 20 percent tax penalty. Yikes! That is in addition to regular income tax that must be paid on the withdrawn amount. Double Whammy! There is no penalty for non-health care withdraws in retirement once you hit age 65. At that point, money can be taken from an HSA for any purpose with only income tax due on that amount (if it wasn’t for a qualified medical expense). HSAs also have an advantage over traditional IRAs. While traditional IRA holders are required to begin taking required minimum distributions (RMDs) at age 70 1/2, there is no such requirement with an HSA.

Other HSA Considerations

Does my enrollment in my employer’s Health FSA affect my HSA eligibility?

Yes. Health FSAs follow many of the same Internal Revenue Service (IRS) regulations as medical plans. When you participate in a Health FSA, you have an additional medical plan. Unless all your coverage is HSA-qualified, you’re disqualified from opening or contributing to an HSA. You can’t open and contribute to an HSA during any month that you participate in a traditional Health FSA, even if you’re also enrolled in an HSA-qualified medical plan and meet all other eligibility requirements.

I lost my job. Can I keep my HSA?

HSA accounts are portable. You own the account no matter your job status or if you leave your employer. You can also use your HSA if you aren’t covered by a high deductible health insurance plan. The funds in an HSA are yours to spend on eligible health expenses, and later, after age 65, may be withdrawn for other reasons without penalty.

Can I pay for insurance premiums (including COBRA) with my HSA?

Generally speaking, most insurance premiums cannot be covered by an HSA; they are not included on the eligible expense list published by the IRS. However, there are a few exceptions. According to IRS publication 969, you can’t treat insurance premiums as qualified medical expenses unless the premiums are for:

Long-term care insurance.
Health care continuation coverage (such as coverage under COBRA).
Health care coverage while receiving unemployment compensation under federal or state law.
Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).

So, yes, COBRA premiums can be paid out of your HSA and you can continue coverage. In addition, if you are unemployed and are receiving unemployment compensation, you can purchase other healthcare insurance with your HSA.

Can I contribute to an HSA While on COBRA?

The answer depends on the type of insurance coverage you have while on COBRA. As long as you are enrolled in a qualified high deductible health plan, you can make contributions.

Can I contribute to an HSA before I qualify for Medicare?

If you have an HSA-qualified high deductible health plan, you can contribute to an HSA whether you are working or not. However, be sure your spouse doesn’t have an account, such as a flexible-spending account (FSA), that might disqualify you from contributing.

Does enrollment in Medicare affect my HSA eligibility?

Yes. Medicare doesn’t offer an HSA-qualified option.

Can I keep contributing to my HSA once I’ve enrolled in Medicare?

No. You can’t make contributions after you enroll in any Part of Medicare, even if you’re also covered on an HSA-qualified plan and meet all other HSA eligibility requirements. So maximizing contributions now will allow the miracle of compounding to work, growing that money in your HSA over time.

Do medical expenses have to be reimbursed in the year they are incurred?

No. As mentioned earlier, the biggest payoff with an HSA comes when the money isn’t used for current medical bills and instead compounds over time. Just be sure you keep your receipts and detailed records. Without proof, the IRA may impose income tax on distributions–and a 20% penalty if you are younger than 65.

Can you reimburse yourself from an HSA for medical expenditures that were deducted on a tax return?

No. That is considered double-dipping.

Intelligent Investing Tips

At Intelligent Investing, we love financial technology, so here are some tips to consider:

Digitize: You can store medical expense receipts via an electronic tracking system of your own choosing such as an Excel spreadsheet. Some HSA providers offer online storage so you can catalog receipts online. If you’re used to keeping paper receipts, try a scanning app on your phone. Some scanning apps allow you to take a photo of the receipt and “scan” it on your phone, which then sends the PDF upload directly to the cloud. Whatever storing method you choose—whether old-fashioned shoebox or new-fashioned cloud—stay consistent.
Back it up: Keep in mind if you change benefits providers, your stored receipts could be hard to transfer or reclaim. Take extra care to backup those digital copies somewhere else or hold on to hard copies and keep notes about how and when those expenses were handled.
Don’t keep it a secret: Make sure you tell any beneficiaries where you keep this information, too. Your spouse, if listed as a beneficiary, can inherit your HSA tax-free.

Last Thoughts…

If you would like to consider outsourcing your financial stress, please consider giving us a call. We’d be happy to have a short conversation with you to see if we can serve you and your family. Click here to learn more about our firm, or click the link below to schedule an anxiety-free call or meeting. Schedule a short discovery call or meeting

How to Have an End-of-Life Family Meeting

June 7, 2018 by Hans Blake, CFA, CPA

Reading Time: 4 minutes

Over the next several decades, the biggest and wealthiest generation in U.S. history will transfer roughly $30 trillion in assets to their Gen X and millennial children. At Intelligent Investing, one of our four unique factors is to improve financial communication between families. We do that by being a communication bridge between generations. Every generation thinks differently than other generations. Knowing how to communicate with multiple generations is vital. Many families do not want to discuss this topic because of blended families or past bad experiences. However, here are some helpful considerations for creating a family meeting that will allow you to talk to your heirs about your end-of-life decisions.

Discuss your Family Legacy

One of Intelligent Investing’s Core Values is Legacy. We believe it is more important to pass on family values than it is to pass on valuables. The head of the family should take some time in recounting stories of your family history. Perhaps you can share what values are important to you, and a time in your life when those values were challenged. By sharing your values with your children and grandchildren, you are setting them up to be better managers of the resources you may be entrusting to them. What better time to impart nuggets of wisdom you have attained over the years. Perhaps you want to instill a sense of hard work, persistence, patience, or other virtues into the younger generations. Perhaps you could write down, “Five lessons I’ve learned over the years related to money.”

We believe it is more important to pass on family values than it is to pass on valuables. Share on X

Create Proper Expectations.

The key to any communication is to set proper and transparent expectations. It is important to address preconceived expectations as well. Once you have found a neutral private location for the meeting, you may want to begin with two questions:

The family head answers, “Why are we doing this?”
He asks the family members, “What would you like to get out of this meeting?”

By setting the right expectations for the meeting and allowing time to listen to everyone’s responses, you will set the right tone.

Answer Heirs’ Questions

As the family head learns what the others would like to get out of the meeting, he can address them specifically. Many times family members will have been contemplating questions or issues but will not have addressed them in the past. Perhaps they have addressed them with other heirs or siblings, but not with the family head. This is a great time to get the questions on the table to hear the family head answer them directly.

Wealth Transfer Process and Plans

A primary goal of the family meeting should be to clearly communicate the family head’s intentions regarding his or her estate plan. Be sure to clarify important details, such as who is the executor (personal representative) of your estate, where your will and important information is stored, and, of course, who will get what. You don’t want families to split and siblings not speak to each other after mom and dad pass away due to missed expectations. Explain the process you have gone through in order to arrive at the decisions you are sharing. Explaining the “Why’s” behind the decisions can be valuable as sharing the “What’s” and “How’s.” How do you hope the estate resources will provide new opportunities for the family members?

If there are some financial complexities, such as trusts, insurance policies, beneficiary IRAs, or other accounts that have tax ramifications, we can bridge the gap and explain how these various accounts affect the next generation and ways to mitigate potential traps.

Healthcare

This meeting may be a time for the patriarch or matriarch to share his or her end-of-life desires. Perhaps he wants family members to know that he has a do not resuscitate (DNR) clause. A DNR also known as no code or allow natural death, is a legal order written either in the hospital or on a legal form to withhold cardiopulmonary resuscitation (CPR) or advanced cardiac life support (ACLS), in respect of the wishes of a patient in case his heart was to stop or he was to stop breathing. The DNR request is usually made by the patient or health care power of attorney and allows the medical teams taking care of them to respect his or her wishes. The head of the family may want to discuss his or her long-term care insurance policies, whom he has appointed as health care power of attorney, or his nursing home preferences and wishes.

Lifetime (Current) Giving

There is nothing wrong with making inter vivos (Latin, “between the living”- a legal term referring to a transfer or gift made during one’s lifetime) gifts. In fact, it can be very satisfying seeing your children and grandchildren using the resources you have given them to make financial decisions where you see the fruit of those decisions. Some families make giving a family affair, choosing the charities collectively. If your children are involved in the decision making, they will gain firsthand exposure to your generosity, and may be more apt to continue the generosity you have established. At Intelligent Investing, we can setup a Donor Advised Fund or Foundation and let all family members participate in choosing which charities and non-profit ministries are important.

Next Steps

Our clients can host a multi-generational family meeting in which Intelligent Investing bridges the potential awkwardness while addressing specific financial questions and emotional topics. We can assist the family head in creating an agenda for the meeting but may take a back seat when the discussions begin. We think this is a vital meeting to have before a family crisis forces the conversation at a more awkward time with higher emotions present.

We work predominantly with high net worth individuals and institutions who have between $500k to $5M of investable assets. If you’d like to learn more about becoming an Intelligent Investor, click here to call or set an appointment.