Everyone thinks of January 1st as the time to start fresh and change things we want to change, but I see spring as an even more opportune time for this.
Here are eight SPRING CLEANING items you can tackle now:
Tax planning: Did you owe more than you expected on your taxes? Was it a one-time thing or does this tend to happen every year? Review your current paycheck and adjust your withholdings as needed (using form W4), or talk with your tax preparer about paying estimated tax payments throughout the year.
Tax planning: Did you get a very large refund? You need to adjust how much is being withheld. Don’t give the IRS an interest free loan. That extra money could be put to much better use for your benefit
Tax planning: Could you have saved more on taxes in 2023 if you had increased your retirement contributions or added money to a deductible IRA? Make adjustments to your paycheck contributions now so you are not in the same position next year.
Employer Benefits: If every year feels like “crunch time” during open enrollment, now is great time to review the benefits offered to you and ask your HR team for deeper explanations or clarifications if you do not understand something.
Emergency Fund Checkup: Make sure your emergency fund is fully funded or consider boosting it if needed. Aim to have enough saved to cover 3-6 months’ worth of living expenses.
Investment Portfolio Review: Evaluate your investment portfolio to ensure it aligns with your risk tolerance and both short and long-term goals. Consider rebalancing if necessary. Do you have the right types of investments in the best type of account? It can make a big difference over the long term.
Educate Yourself: Use this time to learn more about personal finance topics that interest you. Whether it’s investing, retirement planning, or debt management, increasing your financial literacy can pay off in the long run. Working with a trusted advisor will speed up this learning tenfold.
Make a list: what is in your head that keeps you up at night regarding your finances? One of my clients refers to this as her “financial brain dump”, which she then sends to me for safekeeping. 😉 Just writing it all out can help take a load off your shoulders and give you more clarity, making tackling each one over the next several months seem less daunting.
Let’s face it, when the sun is shining, the days are longer and the temps are rising, we are typically more motivated in just about anything we do!
Despite the snow on the ground and freezing temperatures outside, we are at least beginning to see the daylight lasting a little longer, the first sign that we “are on the other side” of winter.
Another sure sign of spring approaching for us hearty New Englanders is when the Red Sox report to Florida for spring training, and that time has arrived!
With baseball in mind, this month I introduce an underutilized and often misunderstood savings vehicle being offered by more and more employers.
Read on to learn how using a health savings account (HSA) can offers a TRIPLE TAXSAVINGS, ultimately scoring you a HOMERUN.
The Basics of an HSA
An HSA is a savings account for health care expenses tied to what’s known as a High Deductible Health Plan, offered as a health care option through your employer.
This type of account is different from a Flexible Spending Account (FSA), where you can lose any unused portion of your dollars set aside for a given year.
The money set aside in an HSA stays with you forever.
Even if you leave your current employer, your HSA dollars go with you. And as an added bonus, you are also allowed to invest your contributions. You don’t have to use them in that year.
How the high deductible health plan works and whether it is right for your circumstances is a newsletter for another time, but many who currently have this type of plan with an HSA don’t understand the benefits of the HSA in and of itself.
Triple Tax Advantaged
Your contributions are pre-tax, so they lower your taxable income in the year they are made. Think of this tax savings in the same way you think of your pre-tax 401(k) contributions.
You can invest your contributions and they will grow tax free forever, meaning any growth of your contributions is also NOT taxed. This account is like a Roth IRA in this regard, so for high income earners who are phased out of making direct Roth contributions, this is an excellent tax savings vehicle that offers the same tax free growth one gets from a Roth.
Withdrawals, AS LONG AS USED FOR QUALIFED MEDICAL EXPENSES, are 100% tax free.
Boom!!! A Triple Tax Homerun!
With ever increasing health care costs in this country, this is a great tool for your future self to have a bucket of tax free money to help cover your future medical care costs, and a great tool in the current year to reduce your taxable income.
Earlier this week, I was engaging in the nightly ritual of moving the Elf on the Shelf to a new location. As the tale goes, he had flown back to the North Pole overnight and reported to Santa whether my children were naughty or nice that day. Given my boys are now 16, 14 and 12, (edited: now 16, 18 and 20 Yikes!), there’s a whole lot of not so nice around here and long gone is the fear that Ruckert the Elf is going to tell Santa about it.
At best, my youngest is humoring me by even looking for the Elf each morning.
It got me thinking about what we all know as the “fear tactic”, most often used with children, to get them to do or act in a way which we desire…
Behave nicely or Santa won’t bring you any toys.
Eat your vegetables or you won’t grow big and strong.
And let’s not forget about Pinocchio and his nose!
But let’s face it, kids aren’t the only targets of the fear tactic.
If it’s a subject area I know little or nothing about (like car maintenance for example), I could be “told and sold” just about anything. After all, they’re the experts, right?
And they ALWAYS have my best interest at heart, right?
Well, the financial services industry is no different. There are folks out there trying to instill fear to get you to take action.
And not always, but often, that action is favorable to them in some way.
Statements such as: What has happened to YOUR 401(k) balance with the recent market volatility? Are you afraid of outliving your money?
and my personal favorite….
Don’t let the nursing home take all of your hard earned cash. Come see us before it’s too late!
FEAR TACTIC at it’s best!
The point is, when it comes to financial decisions, making a rash decision to DO or BUY or CHANGE anything out of fear is often met with regret down the road.
You have time… to ask questions and understand, to plan according to your needs and to make a decision from a place of knowledge and clarity.
In a recent meeting with a client who had just made a significant purchase, I asked the question, “How are you feeling about it?”
An emphatic “Great Question!” was her response.
We had discussed it often, run the numbers more than once on various options, and the numbers showed she could both afford it and choose how she wanted to finance it.
Yet, she still seemed to be a bit wrought with the decision, which prompted my question.
Money and feelings are connected? You betcha!
You see, the financial industry as a whole is looked at as a “math based” profession, fraught with spreadsheets and formulas telling you which financial decision makes the most sense.
But humans are fraught with FEELINGS. And EMOTION. And BIASES. And EGO. And even GUILT, when it comes to making financial decisions.
And that’s not just for big financial decisions, it goes for smaller, less impactful financial decisions too.
Like buying ice cream.
I have become a food shopping ninja since prices began to skyrocket last year. I have no choice. I can’t put into words the amount of hard core food my three boys eat in a week.
And for some reason, I have put my foot down when it comes to buying ice cream – I refuse to pay more than $2.99 for what is not even a half gallon of ice cream!
I can’t tell you exactly why, I just refuse.
And although I can’t tell you exactly why the price of ice cream has become my chosen boycott, I CAN tell you what is working in the background of this albeit small, financial decision. It’s the same as what is at work with my client’s big financial decision.
The PSYCHOLOGY OF MONEY is at play.
And I know it’s this, because the night after I go food shopping and refuse to buy ice cream for more than $2.99, I’m willing to spend $16.00 at Three Pugs Creamery for HALF the amount of ice cream I would have gotten at the store.
That’s FIVE TIMES the amount of money for HALF the amount of ice cream.
It doesn’t take a math wiz to figure out that I am making the “wrong” financial decision when it comes to my ice cream purchases.
EXCEPT for the understanding that in nearly every financial decision we make, there is more at play than just the numbers.
There is the PSYCHOLOGY OF MONEY at work.
When I spend $16.00 at the quaint ice cream shop in town, I’m buying quality time spent with one or more of my kids, I’m buying a future memory they’ll have of the small town where they grew up, I’m supporting local small business.
These are all touchy feely things, but they have a price I’m willing to pay.
So even though ON PAPER it makes perfect financial sense for my client to make her large purchase and no financial sense for me to be buying ice cream at Three Pugs Creamer instead of Shaw’s, our humanness will often be telling us otherwise.
The point is, we all have our own unique “money story” that has been developing and shaping our views since the time we were first learning to count our pennies. It can be helpful to have this awareness as you make financial decisions, big AND small.
Favorite Quote
Everything has a price, but not all prices appear on labels.
In my newsletter last month, I talked about some of the changes and confusion around new distribution rules for Inherited IRAs and promised this month I would share a few other changes of the SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement).
With some 90+ changes that pertain to individuals, employers, trusts and estates, it is a lot to keep straight, but here I’ve summarized 5 that may affect you:
1. Employer Match can now be made to a Roth account (Section 604) Your employer “may” (but is not required) to allow an employee to elect a matching Roth contribution, versus past law which has required all matching contributions be made to a pre-tax account on behalf of the employee.
2. “Catch up” contributions for certain employees MUST be made to a Roth (Section 603) Catch up contributions by those age 50+ can currently go to either a pre-tax account (and thus lower an employee’s taxable income) or to a Roth, or to a combination of both if the employee chooses.
Beginning in 2024, employees whose income is over $145,000 will only be able to elect Roth contributions for the catch up portion.
3. Student loan payments treated as elective deferrals for employer match (Section 110) Beginning in 2024, employers are allowed to treat student loan payments as if they were an employee’s contributions to their retirement plan.
Consider for example an employee who is not making 401(k) (or other employer plan) contributions because they are saddled with monthly student loan payments, thus missing out on the “free money” they could be getting through an employer matching contribution.
With the new ruling, whatever loan payment they are making on a monthly basis can now be matched, according to their employer plan matching rules, even if they are not directly contributing to the plan.
4. Increased age for Required Minimum Distributions (Section 107) The first version of the SECURE Act raised the age to 72. It has now been raised again to age 73 and then to age 75 beginning January 2033.
Here is a breakdown by year of birth: 1950 or before: No change 1951 – 1959: Age 73 1960 and later: Age 75
5. Reduction in penalty for failure to take timely RMD (Section 302) Through 2022, the penalty was 50% of the required amount that you failed to take. Beginning in 2023, the penalty has been reduced to 25% and can be further reduced to 10% if corrected “in a timely manner”. The proper tax form must be completed.
For anyone interested in delving further into some of the changes, here is a link to a 19-page “summary” from the senate finance committee.
Happy reading – just don’t try to memorize.
Favorite Quote
The women of today are the thoughts of their mothers and grandmothers, embodied and made alive. They are active, capable, determined and bound to win. They have one-thousand generations back of them …. Millions of women dead and gone are speaking through us today.
A friend recently came to me with a business idea that she felt could be really useful to many.
She felt quite strongly about it because she knew it would be very useful to HER, and she correctly assumed that many (many) others are in the same position.
Let’s call it:
I PAY LITTLE TO NO ATTENTION TO WHERE MY MONEY IS ACTUALLY GOING, and I could really use some help trimming the fat.
Her request was not so much about budgeting, but simply about TUNING IN, knowing where the dollars are going and trying to cut out the fat.
And let’s face it, with inflation having snuck up on us with a vengeance this year, we all need to covet and stretch every dollar, because our dollar can no longer afford what it could just 8 months ago.
Sometimes money “lost” is simply due to our failure to tune into things, like is that medical bill accurate, did you actually get the sales price advertised or are you sitting on unreturned merchandise.
I recently received a medical bill for almost $3,500. It looked right. I mean, we did use that provider on that date, and we do have a high deductible plan. BUT, because I tune into the EOBs (explanation of benefits) that come from our insurance provider, I knew our portion was only supposed to be about $1,500.
I potentially could have tossed $1,500 out the window if I had just paid it without tuning in.
I’m also a grocery store Ninja, I’ll admit it, even pre inflationary times. I should be on THE PRICE IS RIGHT.
And never more than now do I play their game because with three teenage football players in my house, you would not believe my grocery bill.
So while investing is an important aspect of your financial health, and it is disconcerting when the markets are down, it’s the day to day spending that you have the most control over that can make tangible differences.
If you feel like your spending could use some trimming (mine definitely could) and especially if you are finding you need every dollar just to cover the basics, here are some “tuning in” tips to think about:
Shopping:
Get rid of Door Dash. I will not let my kids order anything on my dime through Door Dash. I never have. What a money suck that is! Old fashioned pizza delivery, sure, but not Door Dash. I saw a receipt once that showed my son paid $9+ to have an $11 burrito delivered!
Tune into shipping costs and try to avoid. They can really add up.
Shop the grocery store circulars. Use the apps if you need to for certain “big” deals. Stick to what you would normally buy, don’t buy it because it’s on sale. But if it’s on sale AND it’s on your list for the week-fantastic. Check the receipt before you walk out the door to be sure you received the sale price. Head straight to customer service if you did not.
Buy store brand/generic wherever it truly does not matter, which is most of the time. But hey, we all have our favorites. I won’t give up my Charmin.
Buy cards at The Dollar Store. Honestly, you should never again purchase a card anywhere else. They have great ones. And let’s face it, your money literally gets thrown in the trash after it’s opened!
Return items you bought but will not be using. I’m a nut about returns. We all buy things either in store or on line that don’t work out as we had hoped, but you MUST return it or you are just throwing your money away.
If you are a Target shopper, use the app to place your order ahead of time and have it delivered to your car. My personal experience is you end up spending much less when you are not walking the aisles. And unlike some of the on line grocery delivery services, there are no extra fees (yet).
I wish I could say “get rid of Amazon” but I’m trying to be realistic. 😊
Other:
Employer benefits I’ve seen not insignificant amounts of money left on the table when people have not used plan benefits to their best advantage.
Pay attention to bills you are receiving, even if you have them set to autopay. And medical bills for sure.
Don’t carry a balance on your credit card. For every dollar you save with smart shopping, you’ll be paying way more in interest rate charges.
Ask yourself the age old question, “do I need this or do I want this”?
Whatever your financial situation, remember the mantra to pay yourself first (savings) and spend less than you make. You’ll be on your way to sound financial footing!
Quote
Do not LET what you cannot do interfere WITH what you can do.
Another 365 days to attempt to fulfill our New Year’s Resolutions.
Or not.
I’ve never been a big fan of making New Year’s resolutions. They tend to be too big and too overwhelming for most of us to see them through. We end up beating ourselves up a little bit each month for either not having started them OR for already having let them fall by the wayside.
What AM I a big fan of? Goals, Planning and Timelines, ANYTIME of the year!
True change takes multiple baby steps all strung together over time, not one giant step all at once.
I did a quick Google search to see which resolutions continuously make the list. You can probably guess the top ones without even looking. We’ve all made those!
Although not #1 or even #2, declarations such as “Save More Money” and “Get Finances Organized” do make the Top 5.
Issues around money are one of the greatest stressors in our lives, so it’s not surprising that it consistently makes the list.
But here’s the thing – resolutions like the ones above are much too broad!
I can almost guarantee the year will come and go and you will not have taken any steps to “save more money” or “get finances organized”.
And not because you’re a failure, or unmotivated, or any other negative tag you may give yourself, but because you’re HUMAN.
Nothing happens overnight, and sometimes these lofty resolutions we set for ourselves in January only leave us feeling defeated when we don’t accomplish them.
Whatever your resolutions may be, BREAK THEM DOWN. Set one small baby step at a time and a date to have it completed. When you accomplish that one, set a new one. Think small, but more frequent.
I promise you, over time, you will see the results you are looking for. Happy New Year!
My Favorite Quotes
“It’s wise to accept that human faults are inevitable. Factor that in and KEEP GOING.”
This topic has come up for me twice in the last week, so as is often the case, I’ve made it the topic for my newsletter this month.
I often get asked about the best strategies for saving outside of one’s 401(k).
My first caveat is that one size does not fit all, so what is a great solution for your neighbor may not be the best strategy for your situation.
I’ve highlighted in past newsletters the benefits of saving into an HSA, if you have one.
There’s also the option to contribute to an IRA, but regardless of which type of IRA you are to contributing to (deductible, non-deductible, ROTH, backdoor Roth), you are limited to how much you can contribute each year ($6,000 for 2020, $7,000 if you are over 50).
But what if you are in the fortunate position to be able to save more than this?
Introducing the Mega Backdoor Roth
There’s a little known strategy that I’m seeing as an option with more employers as of late. It’s the option to make after-tax contributions to your 401(k).
This strategy can offer tax diversification in retirement, but there are certain criteria that make it most effective.
It’s known in my industry as a “Mega Backdoor Roth”, but you will not see it described that way in your benefits guide. It allows you to sock away more into retirement than the annual limits on a 401(k) or IRA.
Here’s how it works:
Your 401(k) plan (your employer) allows after-tax contributions. If they don’t, game over.
Your employer offers in-service distributions of these after-tax contributions to a Roth IRA while you are still employed or allows you to move the after-tax potion of your 401(k) to the Roth 401(k) part of the employer plan (if they offer one).
If not allowed, game might be over, but not necessarily. It depends.
I know, you hate when I say that.
You convert the after-tax contributions to one of the above as soon as allowed in order that the growth on your contributions is tax-free. You will now have a Roth IRA in retirement where there are no RMD requirements and distributions are tax free. Game changer.
When MIGHT this strategy be an effective strategy for you?
You already max out on your 401(k) contributions.
You max out on your HSA, if your employer offers one.
You make too much money for traditional IRA contributions to be deductible.
You max out a Roth IRA or backdoor Roth ($6,000 for 2020, $7,000 if you are over 50).
As with most financial planning and tax strategies, there are a lot of ins and outs and I try to stick to top level highlights to educate and make you aware of possible options available to you. Consulting with your financial advisor or CPA is always prudent to determine which strategies are your best fit.
Financial Fitness Tip
Speaking of 401(k)’s, we are quickly approaching the end of 2020 (thank goodness). It’s a good time to check where you are with your 401(k) contributions for the year. You may have dialed back the % you contribute when things got a little coo coo in the markets or you had a temporary need for increased cash flow.
If things are looking brighter in your financial world, increase your % for these last few paychecks of the year and into 2021. And if there was never a hardship yet you are not maxing out, consider increasing it a percent or two now.
Little steps carry us a long way over time.
Things I Love
I will be pulling out my mom’s tattered and stained copy of her mom’s recipe to try to match what my grandmother used to create – a true masterpiece! I can never quite match it (my mother always said the same thing when she made it), but I can try.
And besides, it’s simply the tradition of making it and remembering them both that is my true Favorite Thing!
You are likely in the middle of open enrollment, or will be soon, so I thought this month would be a great time to review some of the crazy acronyms you see as your eyes glaze over the 100+ page benefits guide from your employer.
I can’t say here which benefits are the “best fit” for you. Reviewing benefit options is part of what I do with my clients each year. Lives change. Families change. Benefit packages change. For many, the confusion stays the same.
The Biggest Offenders
FSA – Flexible Spending Account HSA – Health Savings Account HRA – Health Reimbursement Account
These are NOT the same thing.
I’ll get the HRA out of the way, as it is not as common as the other two. This is an EMPLOYER owned and funded account an employee can use for medical expenses. It generally stays with your employer if you leave, unless they offer a retirement continuation.
FSAs are offered with a standard HMO or PPO (I’m going to assume you know these two old friends).
I wrote a newsletter on HSAs a few months ago and the triple tax benefit they offer. They are only offered in conjunction with a HDHP.
HDHP – High Deductible Health Plan
Similarities
Both are employee funded, although some employers will make contributions as an added benefit.
Both are funded with pre-tax dollars. Always a PLUS.
Both are used to pay for qualified medical expenses.
Differences
Pre-tax contribution limits are higher for the HSA than the FSA. The HSA also offers a catch up contribution for those over age 55.
The up front, out of pocket medical payments are higher for Team HSA/HDHP.
FSA contributions are forfeited if not used in the same calendar year. There is some flexibility for carry over and grace periods, but forfeiture is the general rule.
HSA contributions are yours forever. AND they can be invested. AND they can grow tax deferred.
Your FSA is not portable. If you leave your company, the funds in the account do not go with you. An HSA is yours forever.
While the HSA offers more flexibility than the FLEXIBLE Spending Account (oh the irony), it does not mean it is the right choice for you, even if both are offered by your employer. Every situation is unique.
Almost done, but a distinction I explain in this next section is REALLY important.
STD – Short Term Disability LTD – Long Term Disability
Granted, you probably know these two acronyms, but are you aware of the distinction when it comes to whether this benefit it taxable or not?
It all comes down to how the premium is paid. I’ve worked with many clients who were not aware of the key difference because most benefit guides don’t do a great job of explaining it.
It makes a big difference in how much money you actually take home, should you become disabled.
If premiums are paid by you with after-tax dollars, then the disability benefit will not be taxable.
If premiums are paid by your employer, then the disability benefit will be taxable.
Most LTD benefits offer coverage for “60% of salary”. If that 60% is not taxed, you are in OK shape.
If that 60% is taxed, your monthly benefit will be significantly less than your regular pay.
One final scenario offering a TAX FREE disability benefit:
Your employer pays the premium BUT adds the amount paid on your behalf to your gross earnings. By you paying taxes on the premium, any disability benefit you receive will be tax free.
If your employer offers a tax free disability benefit option, this is the option you want. Otherwise, you may want to consider a private policy to supplement your employer plan.
Financial Fitness Tip
I often tie in both personal and professional experience to my newsletter and this time is no different. I was in a minor fender bender this morning (thankfully, everyone is OK), so I thought this was a good time to touch on auto insurance. Ironically, I also worked on a client plan this week where I recommended they increase their coverage.
Most states require a minimum level of insurance, and if you are using a lender, they require proof of this coverage as well. Many folks go with the minimum requirements for Uninsured/Underinsured coverage and Property Damage. I don’t recommend this. Increase your coverage limits where you can. Back in my 20’s, I worked for an auto insurer as a claims adjuster, and believe me, these coverages come into play more often than we would like.
Things I Love
I could probably do an entire newsletter devoted to binge worthy shows. My current fave is “Heartland” on Netflix. It’s a modern day Little House on the Prairie, which of course was the favorite of my 7 to 11 year old self. As I said in my January newsletter about The Marvelous Mrs. Maisel, it allows me to fall asleep with a happy heart.
From a Google review: “This sprawling family saga takes place where an unfortunate tragedy has glued a family together to pull them through life’s thick and thin moments. Follow young Amy Fleming as she slowly discovers she possesses her now-deceased mother’s ability to aid injured horses as well as maintaining good relationships with those who are trying to get by one day at a time.”
Netflix has all 13 seasons and Heartland has been renewed for its 14th. When I saw that, I knew it must be a hit!
An HSA is a savings account for health care expenses tied to what’s known as a High Deductible Health Plan, often offered as a health care option through your employer. This type of account is different from a Flexible Spending Account (FSA), where you can lose any unused portion of your dollars set aside for a given year.
The money set aside in an HSA stays with you forever, similar to how your 401(k) would work. So even if you leave your current employer, your HSA dollars go with you. And like your 401(k), you can invest them.
You own the assets in your HSA forever.
How the high deductible health plan works and whether it is right for your circumstances is a newsletter for another time, but many who currently have this type of plan with an HSA don’t understand the benefits of the HSA in and of itself.
Triple Tax Advantaged
Your contributions are pre-tax, so they lower your taxable income in the year they are made. Think of this tax savings in the same way you think of your pre-tax 401(k) contributions.
You can invest your contributions and they will grow tax free, meaning any growth on the account is also NOT taxable. This works like a Roth IRA in this regard, so for high income earners who are phased out of making Roth contributions, this is an excellent tax savings vehicle that offers the same tax free growth one gets from a Roth.
Withdrawals, AS LONG AS USED FOR QUALIFIED MEDICAL EXPENSES, are 100% tax free.
Boom!!! A Triple Tax Homerun!
Now the caveat is that although you can make contributions to this account on an annual basis to pay for current medical expenses, the goal is to instead pay out of pocket and invest that savings, like you would any other qualified savings account, allowing it to grow tax free for as many years as possible.
With our ever increasing health care costs, this is a great tool for our future selves to have a bucket of tax free money to help cover our future medical care costs.
