Do you have an HSA? And if you don't, should you have one? Let's take a look and see.
First of all, HSA stands for Health Savings Account. As the name suggests, it is a way to save and pay for health related expenses. What the name doesn't imply though, is that it is also a way to reduce your taxable income. Who wouldn't want those two things?
Before you can set-up an HSA, you need to qualify to do so. To qualify you need to be enrolled in a high-deductible health insurance plan (HDHP). The U.S. Government has established that for 2018, an HDHP for an individual is a health insurance plan that has a minimum annual deductible amount of $1,350 and a maximum annual out-of-pocket expense of $6,650. If you have a family insurance plan, then the minimum annual deductible must be $2,700 with a maximum annual out-of-pocket expense of $13,300. Just to clarify; out-of-pocket expenses are things such as deductibles, co-pays, and other fees. They do not include health insurance premiums.
So how does this all work and what about reducing your taxable income? Every year you can contribute to your HSA any amount up to the government mandated maximum. Just as IRAs and 401Ks have maximum contribution amounts, so do HSAs. For 2018, the maximum contribution to an HSA for an individual is $3,450. For a family, the maximum contribution is $6,900. Here's an added bonus. If you are 55 years of age or older, you can contribute an additional $1,000 to your individual or family account. On top of this, these contributions are 100% tax deductible!
Another attractive benefit of an HSA is the fact that unlike a Flexible Spending Account (FSA), your HSA balance rolls over from year to year. You do not have to spend it or lose it each year like you do with a FSA. Once you turn 65 and enroll in Medicare, you are no longer eligible to contribute to your HSA, but you can still use the funds in your HSA to pay for out-of-pocket medical expenses. If you decide to use HSA funds on non-eligible expenses, you will have to pay income tax on the amount that you withdraw (plus a 20% penalty if you are under the age of 65).
In total, HSAs have three tax advantages.
Your HSA contributions are tax deductible.
Your money within your HSA grows tax-free.
Withdrawals that are used to pay qualified medical expenses are also free from income tax.
Sounds pretty good. But there are still more benefits to mention. First, money within your HSA can also be invested in mutual funds for the potential for higher growth than if the funds were left in cash. Second, unlike IRAs and other retirement accounts, there are no Required Minimum Distributions (RMDs) once you reach the age of 70 1/2. And finally, if you make your HSA contributions through payroll deductions with your employer, these contributions will not be subject to Social Security and Medicare (FICA) taxes. So in addition to escaping Federal and state income taxes, you will also avoid the 7.65% FICA tax hit. While your 401K contributions escape Federal and state income taxes, they do not escape the FICA tax.
While not the optimal solution for everyone, an HSA is a very attractive way to reduce your health insurance costs while at the same time saving for future medical expenses in a triple tax-advantaged way.
October is right around the corner. It's a time for World Series baseball, pumpkins, brilliant foliage, and stock market crashes. Wait? Stock market crashes? That's right. Some of the most notable stock market meltdowns have occurred, or escalated, in the month of October. These include 1978 (-9%), 1987 (-22%), and most recently, 2008 (-17%). October has also produced several of the largest one-day market declines. Black Monday (1987) and Black Tuesday (1929) both occurred in October.
Now I am not pointing this fact out to alarm you. Quite the contrary. I just want to put the current market environment into context for you, because I am sure that we will be inundated with a myriad of media reports about the coming stock market correction. You know, the one that is coming just because this bull market has been going on for so long now. Do not pay attention to those kind of stories!
Here's today's fun fact: Did you know that since 1950 the S&P 500 has had more double-digit gains in October than it has had double-digit losses? It's a fact. The month of October is also known as the "bear killer" because it marks the end of the seasonally weak period in the market. Historically speaking, October has been a positive month more often than it has not. The S&P 500 has actually finished higher in 60% of the Octobers between 1950 and 2017.
So while October may have a notoriously bad reputation, the histogram below shows us that maybe it is not well deserved. Each of the previous sixty-eight Octobers' returns have been placed into a performance bracket, allowing us not only to see that there have been more up Octobers than down Octobers, but also the degree to which they have been up or down. When you look at the far left of the histogram, you will notice that only four Octobers since 1950 have experienced a decline in excess of -5%. The most common experience in October has been a gain in the range of 2.5% - 5%.
(source: Dorsey, Wright and Associates, LLC)
While this is an interesting exercise to demonstrate what has happened in the past, it really does not tell us much about October 2018. What I do know is that currently my U.S. stock market indicators remain positive. U.S. Equities remain the top ranked asset class out of the six that I follow on a daily basis. There certainly could be some short-term market volatility as corporate earnings season will begin again in the next month or so. Also, increasing trade tensions and rising interest rates could impact market volatility. I remain vigilant and if US Equities begin to deteriorate relative to the other asset classes, portfolio allocations will be adjusted accordingly.
In the meantime, don't be spooked by dire warnings about the month of October and what it might mean for your investments. If the past is any indicator, then things will be OK.
Last Thursday, Equifax announced that they had been the victim of a serious cybersecurity breach. Approximately 143 million U.S. consumers' personal information may have been accessed. This hack has affected nearly one half of the U.S. population! It's huge. The information that was accessed included: names, Social Security numbers, dates of birth, addresses, and driver's license numbers. Equifax has also stated that the credit card numbers for almost 209,000 Americans and certain dispute documents with personal information for approximately 182,000 Americans were accessed. This breach occurred from mid-May through July 2017.
Who is Equifax? They are one of the three largest consumer credit reporting agencies in the United States. If you have ever applied for credit or taken out a loan, chances are that the creditor or lender accessed your credit report from Equifax in order to determine your credit worthiness.
So what should you do now? Equifax has set up a website for you to determine if your information was exposed (mine was!). The easiest way to get there is to go to: www.equifax.com. Right there, front and center on their website, is a link to check to see if your information was impacted by this breach. Click on the orange block and you will taken to a page with more information on this data breach. Click on the “Potential Impact” tab near the top of the page and then enter your last name and the last six digits of your Social Security number. Make sure that you are on secure computer when you enter this information. The site will tell you if you’ve been affected by this breach. Regardless if your information was exposed or not, Equifax will provide you with a free year of credit monitoring and other services. You will have to return at a future date to enroll. So, write down the date that you are provided and come back to the website and click “Enroll” on that date. You will have until November 21, 2017 to enroll.
According to the Federal Trade Commission's website, here are some additional steps that you can take to protect yourself after a data breach:
Check your credit reports from Equifax, Experian, and TransUnion - for free - by visiting annualcreditreport.com. Accounts or activity that you don’t recognize could indicate identity theft. Visit IdentityTheft.gov to find out what to do.
Consider placing a credit freeze on your files. A credit freeze makes it harder for someone to open a new account in your name. Keep in mind that a credit freeze won’t prevent a thief from making charges to your existing accounts.
Monitor your existing credit card and bank accounts closely for charges you don’t recognize.
If you decide against a credit freeze, consider placing a fraud alert on your files. A fraud alert warns creditors that you may be an identity theft victim and that they should verify that anyone seeking credit in your name really is you.
File your taxes early - as soon as you have the tax information you need, before a scammer can. Tax identity theft happens when someone uses your Social Security number to get a tax refund or a job. Respond right away to letters from the IRS.
Did you know that on Tuesday, the Dow Jones Industrial Average (DJIA) celebrated it's 119th Birthday? That's right - the DJIA was formed on May 26, 1896. What once started as a minuscule batch of twelve industrial stocks has now grown to a mature thirty. Interestingly, two of the original twelve, Chicago Gas Light & Coke and North American Company, both ended up being part of the current Wisconsin Energy Company (not in the DJIA). The United States Leather Company was the only preferred stock among the original twelve, but it dissolved in 1911. Only one company from the original twelve is still a member of the DJIA to this day. Like a fine bottle of wine, General Electric has improved with age and remained in the DJIA for all 119 years.
On October 4, 1916, the original twelve names expanded to twenty. Twelve years later, on October 1, 1928, this market index grew to its current size of thirty companies. The number of companies has remained constant for the last 87 years, while the composition has seen a fair number of changes. One of the more recent additions to the current thirty (March 2015) is Apple. They were responsible for replacing American Telephone & Telegraph Company - or more simply, AT&T. AT&T had been a member of the DJIA since its expansion to twenty companies in 1916. The fact that companies like Westinghouse Electric, Studebaker, Western Union, and Woolworth have been replaced by the likes of Cisco Systems, Intel, Nike, and Wal-Mart is a reflection of our society and how it has evolved over the years. Just as the Dow has continued to change, we too live in an ever changing world. One thing is for sure - change is here to stay.
Well, I am finally doing it. I am jumping into the "Blogging World"! No, it's not because everyone is doing it. I think that blogging will allow me to more easily stay in touch with clients, associates, and anyone else who is looking for timely and useful information about financial topics, as well as other items that I feel would add value to your world.
So, stay tuned! I welcome your feedback (good and bad) as well as your ideas about topics that should be discussed in this forum. Main my goal is to keep this blog fresh and chock full of valuable stuff. I know that you are busy and have many sources of information that vie for your attention on a daily basis. To that end, I will endeavor to post here regularly, but not daily.
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