5 Estate Planning Steps Literally Everyone Needs To Take

January 04, 2024

You may be thinking that you do not have the need for an estate plan or at least there is no harm in delaying getting started with estate planning.  The truth is that anyone with savings, debt, a spouse, children, a home, or a retirement plan needs to at least have the basics in place.

Hopefully, it’s true that you won’t need it for decades to come, but should something happen and you don’t have a plan, it could make a HUGE difference, sometimes even while you’re still alive.

Here are the 5 critical steps – make a plan to check these off the list today.

Step 1: Create or review your will

If you have a current will, congratulations! You have already taken an important step in the estate planning process. Your will controls the distribution of everything you own that doesn’t have a beneficiary designation and can also name a guardian for any minor children. Things that you pass via will include:

  • Tangible personal property like your home, your car, and all your stuff
  • Individually held financial accounts such as savings, checking, stocks, bonds, and mutual funds held outside retirement accounts which do not have a beneficiary designation.

Don’t have a will? If you die without a will, your state has laws that determine who gets your money called laws of intestacy. These laws vary from state to state but generally give first priority to your spouse and children. If you have neither, then blood relatives including parents, siblings, and others are your default heirs, under a specified order of priority. If no blood relatives can be found, your money goes to the state Treasury.

Protect your children! Should your minor children lose both parents, your will determines who will raise them and manage your money on their behalf until they reach the age of majority. If you die without a will, the state will name a guardian to take the children – and it may not be who you think is the most appropriate person!

In your will, you can designate a guardian for your children, as well as one or more alternates in the event your first choice is not available. You can name the same person, or a different one, to manage any money left to your children as well.

Step 2: Review your assets and update beneficiary designations

Many people think that once they have made a will, all of their assets will pass according to that document. Actually, a large number of your most valuable assets are not subject to probate, meaning they may NOT pass by will. Use this checklist to keep track of specific exceptions to your will.

Do you…

  • Own any bank accounts, mutual funds, or brokerage accounts in joint name with someone else?

-If yes, the joint account owner will automatically own the assets upon your death (in most cases). Also, in most states, you can designate an individual account to be “Payable On Death” (POD) or “Transfer On Death”(TOD) to a named beneficiary for the same result and the account will “skip” your will (and probate).

  • Own real estate with another person?

-If yes, real estate owned as joint ownership with rights of survivorship also does not pass by your will but goes directly to the other joint owner automatically.

  • Have insurance policies, annuity contracts, employer retirement plans and/or IRA’s?

-If yes, keep your beneficiaries updated.  All of these account types require you to name who will receive the account or policy value upon your death.  If you fail to name a beneficiary or all beneficiaries have died before you, the account will be payable to your estate.

  • Have a trust?

-If yes, your trust will determine how the trust property is distributed to beneficiaries, but only if you take the necessary steps to re-title accounts and other assets to the trust.  Failure to change the title to the name of your trust will cause them to pass by other means, regardless of what the trust says.

All of these exceptions pass directly to the person named, and not by your will. It is extremely important to keep your beneficiary designations up to date – it is not uncommon for older life insurance policies and previous employer retirement plans to be paid out to ex-spouses or other unintentional parties. Updating your will does not fix these accounts, since they are not subject to your will.

Step 3: Evaluate your insurance coverage

Whether your income stops due to death or disability, the effect on your family is the same. Where will the money come from to replace your paycheck? Insurance may be your best option. Without it, your family may need to sell assets, move to a less expensive home and/or disrupt college and retirement plans.

  • Life insurance. Use this calculator to get an idea of how much insurance you need to have in place. Once you decide on the right amount for you, be sure to find out what benefits you have through work first. Sometimes, you can get all of the life insurance you need there at the most affordable rates, but if you can’t, look into supplementing with a personal policy.
  • Disability insurance. This is your paycheck insurance – should something happen that keeps you from being able to work, this insurance kicks in to replace some of that until you’re able to work again. Statistically speaking, this is the insurance you’re more likely to use during your working years. First, confirm any coverage you have through work and find out if you can add to it, if necessary — most group plans are broken into Short-Term and Long-Term and often have lower premiums than individual policies. It’s important to know that most policies only provide 60 – 70% replacement income, so should you become disabled, you’ll still have a drop in income. Use this calculator to see if you need to purchase coverage beyond what you have through work.

Step 4: Check your powers of attorney

Remember that your will doesn’t take effect until you actually pass away, but what happens if you have an accident or are otherwise unable to make financial or healthcare decisions for yourself? You can designate someone else to make these decisions for you using the following important documents:

Advanced Directives – There are two types of documents, called advance directives, that can be prepared as part of your estate planning for future medical decisions.

  • Living Wills – If you have strong feelings about what type of medical care you want (or don’t want!) and you are unable to communicate, a living will can do it for you. This is a document that you can use to state under what circumstances you wish to be kept alive by artificial means. If you do not express your views in writing, all available means of treatment to maintain your life are usually provided, even if family members object. Therefore, if there are conditions where you would not want treatment, it is important that you state your wishes while you are able to do so.
  • Medical Power of Attorney – While the title and wording of this document may vary from state to state, most states permit a document that enables you to select someone to make medical decisions on your behalf. This power can only be exercised when you are unable to communicate but is not limited to situations where you are terminally ill.

Durable Power of Attorney – There can be a number of situations where you may need someone else to make financial transactions on your behalf. Whether you’re traveling overseas, in a coma, or sequestered in a jury, a document called a durable power of attorney permits the person named as your agent to sign documents, trade securities, and sell property. You do not have to be unable to act for yourself in order for your agent to act on your behalf.

The agent does have to act in good faith, and may not abuse the power of attorney for his/her own advantage. If you sign a power of attorney that is not specifically durable, the power is revoked upon your disability or inability to communicate. With a durable power of attorney, your agent can make the necessary transactions in order to pay your medical bills or make sure your family has the money they need.

Living Trust – Another method is to place your assets in a living trust. Don’t confuse this with the living will described above. Although they sound similar, they are very different. A trust is simply an arrangement that provides for a third party to manage your assets for a beneficiary, upon your death. A living trust allows you to start a similar arrangement while you are still alive. You can be your own trustee, and simply name a successor trustee to take over upon your death or disability. A living trust is a more expensive estate planning tool than a durable power of attorney, but it can also be customized to your specific needs. It is particularly useful for more complicated situations such as second families or people who own property in multiple states.

Step 5: Monitor your estate plan

Things change. That’s why you should review your estate plan whenever a life event occurs for you and your family. Even if it seems like nothing’s changed, you should review your estate plan every few years at a minimum. A good rule of thumb is that you should update your will any time someone enters or leaves your life (aka birth, marriage, divorce, death)

Documents to review

  • Your will and any trusts
  • Powers of attorney
  • Beneficiary designations on employer-sponsored retirement plans (401(k), 403(b), 457, etc), IRAs, life insurance policies, annuities, HSAs

An estate plan, like a financial plan, is always evolving as your life changes. It can be easy to delay making an estate plan because there are several important decisions you must make, but don’t fall victim to analysis paralysis. You can always change your documents as long as you’re still of sound mind, so choose what works for your life today, and then make updates as things change. Also, be sure to check with legal benefits offered by your employer to help with the estate planning process. 

How Taxes Work On Assets You Inherit

May 02, 2019

The death of a loved one is often a very emotional and stressful experience. Doubts about finances can compound that stress. One common concern is understanding what is owed in taxes on the financial assets that are left behind. Consulting with an estate planning professional is best, but here are some fundamental concepts about taxes on inherited assets that can help allay your concerns.

Income taxes take a back seat

Most of us are familiar with the concept of income taxes. It is the tax on the income we earn on our jobs, and therefore, the tax we worry about the most. In helping one client deal with the death of her mother, she expressed fear that the value of her mother’s assets would be added to her income for that year, and therefore, would increase the amount she would have to pay in income taxes.

She was relieved when I told her that estate tax rules are different from income tax rules, and therefore, she was most likely not subject to income tax in this situation. Generally speaking, this is true of most things that you inherit.

Step-up in basis

In her mother’s case, most of the money she left behind in investments was subject to the step-up in basis rule. For instance, if her mom owned a stock that she bought at $5 and it grew to be worth $100 at her death, her daughter will inherit that stock at $100, and her cost basis would now be $100. That means if her daughter sold the stock at $100, instead of paying capital gains taxes on the $95 in growth that her mom would have paid, she would pay nothing in tax. Also, any growth from that point forward would not be taxed at income tax rates but at long-term capital gains rates.  Despite recent legislative chatter about removing the step-up in basis rules, currently, no laws have changed.

Where income taxes show up

One major exception to this is assets in retirement plans like traditional 401(k)s and traditional IRAs. They are taxable at the income tax rate of the person who inherits the asset. This means if someone inherits a traditional IRA, withdrawals are taxable as income to the beneficiary who makes the withdrawal. In this case, you have multiple options on how to distribute the assets in order to control your taxation.

What about the ‘death tax?’

Federal estate taxes, sometimes called death taxes, are generally not a concern until the person who passed away has a net worth that exceeds a certain threshold. For 2022 that threshold is $12,060,000 per person. (Most spouses receive an unlimited exemption, which means no estate taxes if the money is going to your surviving husband or wife).

This federal estate and gift tax exemption excludes most Americans from having to pay Uncle Sam for money they are passing along to heirs upon their death.

Moving target

It is good to remain aware of the estate tax exclusion number because once an estate exceeds it, the tax rate is usually significantly higher than regular income tax rates. The exclusion is pretty high now, but it’s something that Congress likes to mess around with occasionally. As recently as 2001, the threshold was $675,000, and it affected a much larger percentage of Americans. When tax bills are passed, that number tends to move up or down depending on the political climate.

Not just federal

While the clear majority will avoid federal estate taxes, there could still be estate or inheritance taxes at the state level. Many states still have estate taxes, and the exemption levels may or may not be tied to the federal exemption.

That means that while the federal exemption is a little over $12 million, your state exemption may be much less. In addition, some states impose an inheritance tax, which heirs would have to pay. Like the federal estate tax, state transfer taxes are a moving target with several states rescinding their estate taxes in recent years to become more tax-friendly to retirees.

Talk to an expert

If you are dealing with the death of a loved one and you’re not sure about all of this, consulting with an accountant or estate planning attorney can be very valuable. If you are unsure where to find a professional, contact your employer’s financial wellness benefit or EAP, and they can often help you find the right person to advise you.

What Happens To Your Work Life Insurance When You Leave?

April 30, 2019

People often find that the most cost-effective way to buy life insurance is to buy the supplemental life insurance that many employers offer – it’s typically offered as part of a group policy, meaning that the risks are spread among more people, which usually makes it a lot cheaper than similar coverage would be for just you on the open market.

Guaranteed issue

This is an especially helpful benefit for people with health conditions that make buying insurance on the open market difficult – if you sign up at the same time you’re initially enrolling in benefits, most policies are “guaranteed issue,” meaning that there are no health evaluations necessary. Forgoing that early opportunity often means forgoing that guarantee of coverage, so it’s something you’ll want to think carefully about.

Tied to your job

One of the downsides we often discuss is the fact that it is, obviously, tied to your job. That can cause some people to forgo the coverage altogether, but before you do that, it’s a good idea to understand what the options would be if you do end up leaving. Here’s what you’ll want to look into if that’s a concern that you have:

Consider whether you’ll still need the same amount of insurance

The first step in deciding what to do with an insurance policy (or whether to buy any at all) is to decide how much insurance you need. A great resource to do this are the calculators on lifehappens.org.

Remember that what you need today may not be what you’ll need in the future, so for example, many people are comfortable leaving supplemental policies at work when they retire, as the need for insurance is no longer there due to children having grown along with adequate retirement savings to support any surviving dependents.

If you’ve determined that it is a good idea to purchase the insurance, here’s what you’ll want to know about whether you can take it with you should you leave:

  • Is it portable? Portable means exactly what it sounds like: can you take it with you? Typically that means you would have to pay the cost of insurance, which may be higher than the group rate you’ll pay while working there. There may be some requirements (tenure, age, health, etc.) that you must meet. If it is portable and you exercise that option, you basically end up with a new insurance policy that is considered an individual yearly renewable term policy.
  • Is it convertible? This means you can change from a term policy to a whole life insurance policy or universal life insurance policy without showing evidence of insurability (that means you don’t have to go through underwriting and can be really important if you’ve experienced any health issues such as cancer, diabetes, arthritis, etc.) Many people choose this option when available in order to cover their final expenses (such as insurance for medical bills, funeral costs, etc.), which allows them to pass along any remaining retirement savings to their heirs.

If you have a health condition that would make you uninsurable, using the portability and convertibility option may be your only way to maintain life insurance. If you are insurable but only at higher premium rates, the portability and convertibility option may allow you to keep life insurance at a lower rate.

If, at the time you’re leaving a job, you are healthy, you may be able to buy a new insurance policy for a lower premium than you’d pay by continuing your group policy. If you’re moving to another employer that also offers supplemental insurance, then you could purchase coverage through your new employer if they offer it or you could buy your own policy. 

Like much of financial planning, figuring out the best thing to do here involves a bit of predicting the future. But knowing what the options are can help you at least run worst-case scenarios as you decide.

What Should You Do With An Old Life Insurance Policy?

April 17, 2019

If you have an old life insurance policy and you no longer need the life insurance, don’t just stop paying the premiums and let it lapse – it may be worth something. Many people are surprised to learn that there are several options available, depending on the type of insurance. Before you get rid of any policy, you do want to make sure you’ve determined how much life insurance you need. To figure this out, we really like the calculators on LifeHappens.org.

Once you’ve decided you really don’t need a life insurance policy anymore, then you’ll need to determine the type of policy to figure out your options. Most life insurance can be classified as either term or permanent.

Term insurance

Term insurance is designed to cover you for a period of time (like 20 years) and typically has a fixed premium for that period. At the end of that period, it will typically convert into yearly renewable term and become dramatically more expensive. 

Your options when your term is up

  • If you don’t need the insurance, drop it – there is no value there to recoup.
  • If you need the insurance, see if your policy allows you to convert all or part of the death benefit to a whole life policy – this can help you keep some in place without having to pay the higher premiums.

Permanent insurance

Permanent insurance can mean a Whole Life policy or a Universal Life policy – both are designed to cover you permanently (aka for your lifetime) as long as you keep the policy in force. In the earlier years of these policies, keeping it in force typically means paying the premiums, although there are ways a policy can be fully paid-up or begin paying for itself.

That’s because these policies also build up a cash value over time and that can provide you some options if you no longer need the insurance in place. If you own a Whole Life or Universal Life policy and find that you can no longer afford the premiums or you simply don’t have a need for life insurance anymore, before you let the policy lapse, make sure you explore your options.

Your options for a permanent policy

  • You can surrender the policy – Also sometimes called “cashing out,” this is when you ask the insurance company to pay you whatever the cash value is, then the policy is canceled. The difference between what you paid in premiums and the cash value (aka if you made money over the years) is subject to income tax.
  • You borrow against the policy – This is a key feature that many insurance salespeople use to sell policies – this is a way to get at the cash value of your policy without taxes and while keeping the policy in force. The main downside of this is it may result in a taxable event if the policy lapses and what you paid in premiums is less that the amount you borrowed.
  • You can do a 1035 exchange to an annuity – The phrase “1035 exchange” references the tax code that allows for this. You basically use the cash value of your policy to buy an annuity that will pay out to you during your lifetime, rather than waiting until you pass for the policy to pay out. There are no tax implications to do the exchange and your cost basis (premiums paid) carries over. Your distributions from the annuity, whether an immediate income annuity or a deferred annuity, are taxable as they come out.
  • You can do a viatical settlement – That is where the owner of the policy (usually you), sells the policy to someone else (either a person or a business) for an amount less than the insurance face value. For example, if the new owner changes the beneficiary to themselves, then they get the death benefit when you die. You would pay income tax on the difference between what you paid in premiums and what they paid you for the policy. (You may qualify for tax-free income if the insured person has less than 24 months to live.)

The bottom line is don’t treat 30 year-old insurance policies like 30 year-old ties. Old life insurance policies may have some value left and can be a way to access money you didn’t even realize you had.

Why You Should Consider An Ethical Will

April 10, 2019

Most the time when we talk about the importance of estate planning, those conversations focus on the need for people to formalize the legal documents we associate with an estate plan: a Last Will and Testament, beneficiary designations, asset titling, trusts, etc. To be sure, those are very important things to have in place for a lot of reasons. 

Beyond that though, there is one estate planning document that is optional but could be just as important to those most important to you – an ethical will, which is sometimes just a letter to your family.

What is an ethical will?

For this post, I am going to use the terms ‘ethical will’ and ‘family letter’ interchangeably. Simply put, it is a way to pass along the non-material things you have acquired over a lifetime to your loved ones. A way to express to them what you value most in your life.

Passing along those things you can’t value

This idea goes back in time and across multiple religions and cultures. Some examples for what it may include are:

  • Your values
  • Life lessons
  • Stories from life about key moments or key people in your life
  • Your hopes and dreams for your family and friends in the future
  • Expression of forgiveness to those you wish to reconcile with

It is not a legal document – it will not distribute any material assets to anyone. 

Why do an ethical will?

The truth is that none of us are defined by the assets we have acquired when it is all said and done. We are remembered by the people we impact and the way we live. An ethical will is a way to tell those you love what they mean to you and what you hope they learned from you along the way. What a beautiful gift. 

Shaping and sharing your legacy

Sadly, I lost my father 10 years ago. While I miss him dearly – from his sage advice in times of trouble to his amazing sense of humor – I think about him daily and the lessons he taught me are never lost. That impact means more to me than any material wealth he could have left for me or my mom and sister. A family letter is a great way to document those feelings and lessons for all time. What a blessing!

How to create your own ethical will

There is no one-size fits all way to do an ethical will – since it’s not a legal document, it can really be anything you want it to be. Celebrations of Life is a great resource to help you get started, but it is a deeply personal thing that should reflect who you are. 

A chance to get creative

It can be written or done on video – how cool that your family would be able to watch any time they need to! My colleague Brian had a friend who made a video of how to grill a good steak for his young son when he found out he wouldn’t live to teach him himself. And this is not something that needs to be saved until your death. Share it while you are still living if you would like. Again, there is no one way to do this.

Including an ethical will or family letter in your estate plan helps to pass down the essence of who you are to your loved one. This added step goes beyond making sure your family is taken care of financially by reminding them of what matters most in life. What a beautiful gift!

What Happens When Someone Dies Before They Retire

April 02, 2019

Dealing with the loss of a loved one is obviously one of the most difficult periods in anyone’s life. Dealing with grief can be compounded by dealing with the financial matters that need to be wrapped up – things like probate, insurance claims, and dividing assets can be time consuming and stressful. Today I want to focus on the benefits that survivors may be entitled to if a loved one is still working when they pass away.

Pension

If your loved one had a pension with their employer, it is likely that plan has some type of pre-retirement death benefit. Each plan will have different options available to a surviving spouse or beneficiary, so it is important to reach out to the plan administrator to see what your options are to claim this benefit. You can get that information from HR at the company where the pension started. 

401(k), 403(b) or other employer-sponsored plans

While not all employees still have access to a pension, most will have access to an employer-sponsored retirement plan like a 401(k) or 403(b), and hopefully they were saving into it. Assuming the account had named beneficiaries at the time of death (good reminder here to make sure you have updated beneficiaries on your accounts), those beneficiaries are entitled to that money before probate is completed. There are certain deadlines on making decisions, so you may need to address this before other things in the estate.

  • Spouse as beneficiary – If the beneficiary of a 401(k) (or similar plan) is the deceased’s spouse, they can either treat that money as if it was theirs all along or roll it into an inherited IRA account.  One big difference between these two options is that as an inherited account, the surviving spouse can take penalty free distributions if they need to, whereas, if they treat it as their own, they must generally wait until age 59 ½ to receive distributions from the account penalty free.  They should familiarize themselves with the required minimum distributions imposed based on the specific choice and situation.
  • Non-spouse as beneficiary – If the beneficiary on the account is someone other than a spouse (usually a child or children), the options are a little bit different. The plan may or may not allow you to leave the funds in the plan itself, so you may have to open an inherited IRA account. You generally have two options with the money:
  1. Take all the money out within 5 years of the owner’s death (technically by December 31st of the fifth year following their death) and pay ordinary income taxes on each withdrawal.
  2. Take the money out in annual increments over your life expectancy (based on IRS life expectancy table) and pay ordinary income taxes on each withdrawal. This is referred to as a “stretch IRA” since you can stretch those withdrawals over your lifetime.

You will want to reach out to the 401(k) plan administrator to initiate the process of transferring the account – you can usually find this information on any recent statements or from HR at the company where they worked. You should also check with a tax professional to discuss the tax implications of your strategy with the funds.

Life insurance

Many employers offer basic life insurance benefits to their employees at no cost to the employee. In addition, your loved one may have purchased additional coverage at work. In the best case, the employer will reach out to you with that information, but it is worth a call to their HR or benefits group to see what life insurance coverage your loved one had. Remember, life insurance proceeds are tax-free to the beneficiary, and they are not included in probate, although they may be taxable to the estate in certain instances.

Other thoughts

If your loved one provided the health insurance for you through work, you may continue that through COBRA coverage for up to 18 months. You should also explore other coverage options to see what the most cost-effective option for you is – if you have insurance available through your job, this would be a qualifying event, allowing you to enroll mid-year if needed, but there is a time limit to making that change from the date of death.

I also encourage everyone to review all your beneficiary designations, your will, and other estate planning documents to make sure things are up to date. Also, maintaining a simple file with who to contact for all your accounts and policies – including those at work – will make it much easier for your loved ones to know who to contact should something happen to you.

4 Different Ways To Plan For Long Term Care

March 21, 2019

According to some statistics, over 70% of long-term care insurance policies are applied for after age 54. Maybe it happens after the kids leave the nest or perhaps when other goals like retirement are realized but I believe most people don’t start thinking about long-term care until they’ve experienced it through someone else. I’ve had my share of experience dealing with long-term care but my most recent encounter with Patty Smith (name changed to protect the innocent) has made me realize why it is so important to plan for long-term care before it is too late.

The story of the Smiths

Patty and Stan Smith never worried much about money during Stan’s years as a professional athlete and even after his professional career was over, the Smith’s enjoyed a comfortable lifestyle living in the suburbs of a large metropolitan city. Between pension and Social Security benefits, the Smith’s had over $3,000 a month in retirement income and it seemed like more than enough, especially after paying off their mortgage. Patty always trusted Stan’s decisions when it came to their finances but even she was a bit leery when Stan decided to refinance the home years later to make some home improvements.

Eventually, Stan’s health began to deteriorate and soon it was not safe for Stan to remain at home. Patty found a facility suitable for Stan’s care but the limited retirement income was not enough for Patty to pay for Stan’s care and still maintain their home. In order to continue paying for Stan’s care, Patty stopped making payments on the home loan and after months of missed payments, she received a notice of foreclosure.

Rising costs with fixed income

Since then, the cost of Stan’s care has risen to over $5,000 a month. Given their limited income, Patty has had to spend down their savings in order to qualify Stan for Medicaid assistance. Unfortunately, new laws that went into effect this year have delayed the application process and if the application is not approved soon, Stan will have to be transferred to another less desirable facility. For now, all Patty can do is wait.

No one hopes or expects to be in this situation but sadly, this story is playing out for tens of thousands of families every year. Costs continue to go up and as the cost of care continues to rise, the likelihood of not having enough money to pay for care increases. Here are four ways you can prepare for long-term care expenses:

4 ways to prepare for long-term care expenses

1. Buy long-term care insurance

LongTermCare.gov defines long-term care insurance as insurance “designed to cover long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.”

I think the easiest way to think about it is to relate it to your car insurance. You pay insurance premiums every year for car insurance, yet you hope you never have to use it (because that means you’ve had an accident or some other unfortunate event). In the same way, if you purchase long-term care insurance, you pay annual premiums hoping you never have to use the benefits (because that would mean you needed custodial care).

Now, that might be oversimplifying it a bit but the bottom line is that you can insure against the risk of needing long-term care later in life. There is a lot more that goes into determining whether or not long-term care insurance is right for you. To learn more, visit this website.

2. Purchase a longevity annuity

Critics of long-term care insurance claim that it’s a bad deal because it only covers long-term care, insurers can increase premiums, and claiming benefits can be a hassle. Instead, some favor using longevity annuities that pay a guaranteed income for the life of the annuitant. Income benefits are typically paid once the annuitant reaches a certain age, usually 80 to 85, which is when most long-term care insurance claims are filed.

The policy does have its drawbacks—you have to pay a large premium upfront and there may be no residual value after the annuitant dies—but as healthcare improves and people live longer and more productive lives, these types of policies seem to be making a comeback.

3. Use life insurance

One of the biggest concerns about purchasing long-term care insurance is the fear that policyholders may die before they receive benefits so insurance companies have created life insurance products that contain living benefits designed to pay a benefit either during the policyholder’s lifetime or after.

The upside to using life insurance to help pay for long-term care is the certainty that a benefit will be payable to someone at some point in the future. The downside is that the policy may not pay as much in long-term care benefits as a pure long-term care insurance policy. Check out this site for things to consider before using life insurance for long-term care.

4. Self insure

Purchasing insurance or an annuity may be right for some people but for younger investors that are planning ahead, some experts suggest that you should skip the insurance and self insure. A person who self insures is basically earmarking a portion of their wealth for potential future long-term care expenses.

The benefit to this approach is that it may be less expensive, the assets can be used for any purpose, and if you don’t have long-term care expenses, you still have assets that can be transferred through your estate.

On the flip side, if you require long-term care earlier than expected or if your investments don’t perform as well as you had hoped, then you may not have as much as you had planned to cover these expenses. As with all of these options, there are other things to consider before taking this approach.

Regardless of which option you choose, the worst thing you can do is nothing at all. Don’t wait for a close encounter before you plan for long-term care. The sooner you start planning, the less likely you’ll end up in a situation like Patty’s.

Should You Do A Rollover From Your IRA To Your HSA?

March 20, 2019

Did you know that if you have money in an IRA that you want to use for healthcare expenses tax-free, you may be able to roll it over to your HSA? As more people realize the power of the health savings account, we are getting more questions about this strategy. Here are the ins and outs of what to consider.

Who qualifies

You are able to do a one-time tax-free rollover from a pre-tax/traditional IRA to an HSA if you meet the following conditions:

  • You are enrolled in a high deductible healthcare plan (HDHP) when you make the transfer and continue to be enrolled in a HDHP until the last day of the 12th month after you make the transfer.
  • You can only contribute up to the maximum HSA contribution for that year. In 2019, that is $3,500 single, $7,000 family and if you are 55 or older a $1,000 catch up.
  • The distribution must be a direct transfer from your IRA custodian to your HSA custodian – it can’t be indirect.

When it makes sense

Some reasons why you would want to do rollover from an IRA to an HSA:

  • Save on taxes in retirement: Withdrawals from a traditional IRA are taxable, even after age 59 ½, and a common thing that retirees spend their IRA money on is for healthcare. If you spend money in an HSA for qualified medical expenses, it is tax free, so doing this transfer can save on taxes in the future for medical expenses.
  • It’s risk-free: After age 65, you are able to spend HSA funds on non-medical expenses if you want. If you do, you would have to pay income tax just like an IRA. In other words, if you roll money from your IRA to HSA then end up NOT needing it for medical expenses, you’ll still have access after age 65. In essence, your HSA becomes like an IRA with a healthcare tax benefit.
  • Good at any age: Many people don’t realize that you only have to be enrolled in a HDHP when you contribute to your HSA, but you can spend that money at any point after, even years later. You are able to spend money that is in an HSA on qualified medical expenses at any age.
  • Lower your RMDs: With a traditional IRA, you’ll be required to start taking a minimum amount out each year once you turn age 70 1/2. For some people that’s not an issue – they need the money anyway. But for people who may be trying to preserve their IRA for later years, rolling some of the money from your IRA to your HSA during your working years can lower the amount you’ll eventually have to withdraw in your 70’s. (keep in mind that once you’re on Medicare, you can no longer contribute to your HSA, so this strategy must be done prior to your enrollment in Medicare, so you have to plan ahead)

When it doesn’t make sense

Some reasons why you wouldn’t want to do this:

  • Your money is in a Roth IRA: If your money is in a Roth IRA and has been for at least 5 years, once you reach age 59 ½, the money that is in your Roth IRA can be used for any expenses without paying income taxes. You have more flexibility with Roth IRA distributions.
  • You’d be missing out on a tax deduction: You get a tax deduction if you contribute to your HSA from non-IRA money. You do not get a tax deduction for a rollover from your IRA to your HSA. If you have the money to max out your HSA with non-IRA dollars, it usually makes more sense to go that route first.

An example of someone who rolled money from their IRA to their HSA

This is a real-world example of when it might make sense to do a rollover from an IRA to an HSA:

  • Someone is 55, recently laid off and working part-time as an Uber/Lyft driver while looking for a new job.
  • A substantial portion of their savings is in IRAs and 401(k)s. Very little is in taxable accounts (individual or joint), meaning there isn’t much money available to spend penalty-free before age 59 1/2.
  • They are making enough income this year to cover their essential expenses but cannot contribute to an HSA.
  • They have an HDHP and anticipate having a HDHP in the future.
  • They think it may take them a year to find another position (the 1 month for every $10,000 of monthly income rule).
  • They think they will eventually use the money ($7,000 + $1,000 catchup) for qualified health expenses.

Like most financial decisions, your individual situation determines whether it makes sense to do a rollover from your IRA to your HSA, but in the right situation it can be a really great idea.

 

Where To Go To Create A Will

March 06, 2019

I’m sure you’ve heard before that having an estate plan is a crucial part of your financial plan. One crucial element of your estate plan is your Will – especially if you have minor children (as my colleague Doug Spencer outlines in this post).

Unfortunately, this is an area that is often put off for a variety of reasons. One reason we procrastinate on our estate planning is concern over the complexity and cost we think will be involved, but that’s actually not a super valid reason, based one what I know.

With this post, I want to dig into the various options for creating a Will (and other crucial estate planning documents) to help with eliminating at least one hurdle that may be stopping you.

4 different ways to create your Will

Estate planning attorney

A lawyer that specializes in estate planning can be a tremendous help in determining what documents are appropriate for you and making sure those are drafted accurately to reflect your intentions. This would certainly include your Last Will and Testament.

This option would typically be the most expensive one – but as my fellow-planner Erik Carter points out, you may be able to access an estate planning attorney at a discounted through your EAP or a pre-paid legal plan at work. Erik’s post is also a great resource for other ways to find a good attorney to help you with your Will.

Check at work

As mentioned above, your employer may offer some options to draft your will through either your EAP or a pre-paid legal benefit. Often, these plans offer free online Will services or discounted rates to consult with an attorney.

Software/online options

There are a host of programs available online to help guide you through the process of creating your own Will. You can check out this review to evaluate which features you value most, including:

  • Overall functionality
  • Need for frequent changes
  • Simplicity
  • Ease of use
  • Cost

This is the option my wife and I went with to create our will way back when, and it was relatively painless to get through.

Back of a napkin

You’ve probably heard the old saying, “Just because you can do something, doesn’t make it a good idea.” I would say that applies to this option. Not every state allows a holographic, or hand-written Will and it may open the Will up to contestation. However, in some cases it can be valid. You can learn more about this option here if interested.

Bottom line

You need a Will. Period. Regardless of age, wealth, or assets.

It is certainly not the only part of your estate plan you need to address, (while linked in the intro, this post from Scott Spann outlines other important steps – and how to accomplish them!) but it is an important step to take. Hopefully the resources here will help make it easier for you!

Making Sure You’re Covered During A Short Gap In Employment

February 25, 2019

As much as we all love our jobs (at least I do), sometimes for one reason or another we find ourselves considering a new career opportunity. One of the fun things about switching jobs is that, if we arrange it just so, we get a little time off between finishing up one job and starting the next. Recently, this was the case for a friend’s husband. They were so excited about him having some time off without having to take vacation days that they forgot all of the repercussions this can have.

The ripple effect of even a short employment gap

In their case, not only was he going to have a one week gap in employment, but he wouldn’t be covered by health, dental, disability and life insurance right away at his new job. They asked me to help them look at the risks this posed and decide what to do.

The most important thing: health insurance

The first consideration was health insurance. While the risk was very small that he would actually need health insurance during that week, an unexpected accident or health event is far from impossible and could be catastrophic to their finances without the proper insurance. Luckily, he checked with the benefits department at his current employer and found that his current insurance would cover him until the end of his last month at work, but that was going to leave 4 days of the next month uncovered until he started his new job.

He decided to check with the new employer to see if there was any way to start his new insurance on the first of the month, but that wasn’t going to be a possibility, so that led us to consider other options:

1. COBRA – Many employees have access to COBRA coverage when they leave a job which would typically provide for up to 18 months of insurance at the full premium, but it is usually very expensive. The nice thing, however, is that there is a 60 day window for applying and coverage is retroactive to the first day of eligibility, so you can take the wait and see if needed approach before signing up.

Caveat: This would have worked well except that because he had been working for a small employer (less than 20 employees), he was not covered by COBRA.

2. Healthcare.gov – Losing coverage is a qualifying event for enrolling in health insurance through the marketplace mid-year. For someone who needs coverage for a longer period of time, this may be an option to at least consider.

3. Spouse’s policy – If you are married and your spouse can get coverage through work, that is an option as well. Again, even though open enrollment is over, because he lost coverage mid-year, that is a qualifying event allowing my friend to add him to her coverage through her employer. We did look at this option, as she could have added him for one month and then removed him once he had coverage through his new employer. The cost was not too bad, but there was yet another option to consider.

4. Short term insurance –We decided to check out the option of a short term policy with a very high deductible. He would only be needing the coverage in the case of a true emergency, so they were effectively reducing their risk from hundreds of thousands of dollars down to $12,000 (the average deductible), which is much more palatable. The cost was reasonable as well, so this option seemed to make the most sense for them.

5. Bubble wrap – The only other option I could think of would be for him to confine himself to the house and be a couch potato for 4 days to take away his risk of an accident, however, I suppose he could still have a heart attack, so that isn’t even a perfect solution!

Other insurance coverage gaps

To address the issue of not having dental, life or disability insurance for a while, they decided to add him to my friend’s work policy for dental and get life and disability insurance in the private market. Since they don’t really need the extra coverage, once he’s enrolled in those coverages through his new job, they will likely discontinue those policies.

Let’s not forget the income gap

Lastly, having a week off between jobs may also mean that you miss out on a week’s worth of income (unless you have vacation pay coming to you). To handle that, make sure that you have enough in savings to comfortably cover the gap in income for that time period while still maintaining the recommended 3 to 6 months worth of living expenses in your savings account.

Taking even just a couple days between jobs can feel like a real break, so take the opportunity if you can. And don’t forget to enjoy some down time!

What Happens When You Inherit An IRA?

January 31, 2019

You’ve inherited an individual retirement account (IRA) – now what? Should you spend that money or save it for later? What are the consequences of either choice? Although there are several rules to follow regarding the method and timing of distributions from inherited IRAs, it is important to understand that distributions from inherited IRAs are not subject to the usual 10% penalty for distributions received before you reach age 59 ½. The IRS rules for distribution of inherited IRA funds are different depending upon several conditions:

  • Whether the IRA owner died before his or her beginning date for required minimum distributions (RMDs).
  • Your relationship with the deceased IRA owner (spousal or non-spousal)
  • Whether the inherited account is a traditional IRA or a Roth IRA

Spousal beneficiary of traditional IRA

If you inherited a traditional IRA from your spouse and were named the sole beneficiary, you may choose any of these options:

  • Own it. Treat the IRA as your own, even rolling it into an existing traditional IRA in your own name. Electing this option means the same rules and penalties apply to amounts withdrawn prior to you reaching age 59½. Assets will continue to grow tax-deferred.
  • Lifetime distributions. Open an inherited IRA (make sure it’s labeled “inherited”), transfer the inherited assets into it, and take annual distributions over your lifetime. Distributions need not begin immediately, but they must start no later than December 31 of the year in which your spouse would have turned 70 ½ or December 31 of the year following the year of death, whichever is later. If your spouse was age 70 ½ or older upon death, then distributions must begin no later than December 31 of the year following the year of death. These lifetime distributions are taxable, but they are not subject to a 10% penalty for early distribution if you are under age 59 ½.
  • Five year spend down. Open an inherited IRA, transfer the inherited assets into it, and take distributions of the full amount over a five year period. By the end of the fifth year, all inherited IRA assets must be distributed to you. These distributions are taxable, but they are not subject to a 10% penalty for early distribution if you are under age 59 ½.
  • Lump sum. Take a taxable lump sum distribution. As with the lifetime or five-year distribution options, a lump sum distribution to you is subject to income tax, but a 10% penalty for early distribution prior to age 59 ½ does not apply.

Non-spousal beneficiary of traditional IRA

If you are named as the beneficiary of an IRA from a parent, grandparent, sibling, aunt/uncle, friend, etc. (aka anyone you weren’t married to when they died) then the rules are different – you may not treat the inherited funds as your own. However, the other options available to a spouse are also available to a non-spouse. A non-spouse traditional IRA beneficiary may:

  • Open an inherited IRA in the deceased’s name, transfer the inherited assets into it, and take annual distributions over your lifetime. These distributions must begin no later than December 31 of the year following the account holder’s death. These lifetime distributions are taxable, but they are not subject to a 10% penalty for early distribution if you are under age 59 ½.
  • Instead, you may elect taxable distributions of the full amount over a five-year period without incurring a 10% penalty for distributions received prior to turning age 59 ½.
  • Finally, you could also take a taxable lump sum distribution immediately and without paying a 10% early withdrawal penalty if you’re under age 59 ½.

Spousal beneficiary of a Roth IRA

  • Treat the inherited Roth IRA as your own, including rolling it into a new or existing Roth IRA.
  • Elect lifetime tax-free distributions.
  • Elect tax-free distributions of the full amount over a five-year period. However, if the account is less than five years old when distributions occur, earnings will be taxable.
  • Take a lump sum distribution. However, if the Roth IRA was less than five years old at the time of the owner’s death, earnings are taxable when distributed.

Non-spousal beneficiary of a Roth IRA

With the exception of treating the inherited Roth IRA as your own (not an option in this instance), a non-spouse beneficiary of a Roth IRA has the same remaining options as does a spousal beneficiary:

  • Elect lifetime tax-free distributions.
  • Elect tax-free distributions of the full amount over a five-year period. However, if the account is less than five years old, earnings will be taxable.
  • Take a lump sum distribution. However, if the Roth IRA was less than five years old, earnings are taxable when distributed

Inheriting an IRA is, of course, a bittersweet occasion where we have to simultaneously deal with the physical and emotional loss of someone we care about and also face some critical financial decisions. For more information and details regarding this important topic, refer to IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). You might also want to consult with a qualified financial or tax advisor for advice on your particular situation.

5 Reasons Why I Think Everyone Needs Their Own Financial Plan

January 28, 2019

Does everyone need a financial plan? Apparently Wealthfront’s co-founder and CEO doesn’t think so. He claims that young people don’t really need a plan if they’re either single and currently saving money, or married, currently saving money, and not planning to have kids, or are single and can’t save. He argues that the first two should generally be okay even without a plan and the last would benefit more from a budgeting app.

However, here are some reasons that even young people in these situations probably need a financial plan:

1) They need insurance and estate planning.

Financial planning isn’t just about saving. In fact, one of the most important things for many young people is having adequate health, property and casualty, and disability insurance. This is especially true if they haven’t had enough time to build up enough savings to help cope with these risks.

Estate planning may seem like something just for older and wealthier people, but let’s not forget that Terri Schiavo was only 26 years old when she fell into a vegetative state without proper planning. That’s why it’s never too early to get the basic documents in place like an advance health care directive, durable power of attorney, beneficiary designations, and a will. Many employers even offer legal benefits to draft these documents for free or at a reduced cost.

2) They may need help prioritizing debt vs saving.

Many young people are tempted to pay down low interest student loans when they may be better off building emergency savings, capturing the match in their retirement plan, paying down higher interest debt, and/or saving for a down payment on a home. Of course, there are situations when paying down those students loans is the better course of action. That’s where financial planning comes in.

3) They may not be saving enough for retirement.

Many young people just stick to the default contribution rate in their retirement plans or contribute just enough to get the match. This could put them on track to be woefully unprepared for retirement, while even a small increase in their contribution rate could mean early retirement after decades of compounding.

4) They may not be fully utilizing tax-advantaged accounts.

I’ve seen many young people investing in a taxable robo-advisor account (like Wealthfront’s) when they could be benefiting from tax-free growth in a Roth IRA and/or HSA or just contributing more to their 401(k). Many are simply unaware of the benefits or how flexible these accounts can be.

5) Their investments may be improperly diversified or too expensive.

Many young people are either investing too conservatively for their time horizon or aren’t adequately diversified in their attempt to invest more aggressively. They also often don’t realize the impact of fees on their long term investment performance or even what fees they’re paying.

This is not to say that everyone needs to pay thousands of dollars for a 100-page “financial plan” that they probably won’t even read. However, practically everyone can benefit from having a chat with an unbiased financial planner who can help them uncover what they’re missing and what they should focus on at this stage in their financial life. (If they’re really fortunate, they may even be able to get this for free from their employer as part of a workplace financial wellness program.)

The Lessons I Learned From Having A Brother With Special Needs

January 18, 2019

One of the greatest joys of my life is my brother, Michael. Despite the fact that he has special needs, he always has a smile on his face every time I see him and the excitement in his voice when we talk warms my heart. Recently, my mother and I were reflecting on what we have learned in the almost 40 years she has been taking care of my brother. Below are some of the lessons we learned:

Infancy

1. Trust your instincts. My brother was way behind on the average baby milestones and my mother took him in for several visits before his doctor diagnosed him as having special needs. Her advice is that no medical degree or certification can come close to a parent who has daily contact with her child.

If you feel something is wrong, trust your gut and keep asking. Change doctors if needed. The earlier your doctor can diagnose your child, the earlier your child can be treated.

2. Apply for benefits. Do not assume you won’t qualify for benefits. Contact your state to find out about Medicaid benefits for special needs children. You may be entitled to Medicaid benefits, regardless of income, often in the form of a Medicaid waiver for special needs children.

3. Choose the right medical plan. Evaluate your employer healthcare benefit options to choose the plan that will provide the most benefits. Consider using medical savings plans like an FSA or an HSA to save money pre-tax that you can use tax-free for qualifying medical expenses.

School Age

1. Understand your rights to school services for special needs children. There are three federal laws that apply to children with special needs: the Individuals with Disabilities Education Act of 1975 (IDEA) that ensures your child can get a free education, section 504 of the Rehabilitation Act of 1973 to protect students from discrimination based on disabilities, and the Americans with Disabilities Act of 1990 to give reasonable accommodations to children with disabilities.

2. Get your child evaluated. In most cases, an evaluation is the first step to enrolling your child in a special education program. Consider contacting your local school to find out about the process of entering your child into a special needs program.

3. Explore school options. Review the special needs programs your school offers to see if your child will get the care they need through a public school or if a private school may be a better option. Special needs services also extend to pre-schoolers. Contact your local school system to find out the programs offered and local support organizations for your child’s diagnosis for guidance on finding the best program for your child.

Adulthood

1. Decide where your child will live. Will your child live in your home, a group home or an independent living community? Some group homes and independent living facilities may have a long wait list, so find out the details. Will your child need a day program or will they be able to work? If your child can work, start thinking about government and other nonprofit job search programs for adults with special needs.

2. Get guardianship or a power of attorney. My brother’s day program had an art program and soon an art association presented his artwork and his art started selling. Because my mother did not apply for guardianship and she did not have a power of attorney, she found that she had no say in how the art association presented or sold his artwork.

Luckily, I had a legal plan through my employer that extended to family and my mother was able to get guardianship of my brother. If you feel your child may need assistance making decisions as an adult, consider getting guardianship or a power of attorney. Contact your employer about group legal plans or legal services to help you create the legal documents.

3. Consider protecting your child’s benefits with a trust. In most cases, if your child has more than $2,000 in countable assets, they may not qualify for government benefits. A special needs trust can be a standalone document or part of a last will and testament. The trust generally can hold assets for the benefit of your special needs child without disrupting your child’s benefits. Depending on the type of special needs trust you set up, the trust funds might be used to pay back Medicaid, so consult with an attorney to see if and what kind of special needs trust is right for you.

We did not learn about many of these things until after the fact. Don’t make our mistakes. Consider using the resources above to help you make the most informed decisions in the care of your special needs child.

What Every Parent Needs To Know About Creating A Will

January 14, 2019

If you have kids, you have probably already heard various people say, “you have to make a will!” Some people may have even told you why you need a will, but have you ever heard what you need to make sure that your will actually says?

Why it is so important to have a will if you have children

OK, so in case no one explained why having a will is so important, it’s really very simple. Your will is your directions to the probate court, telling them who gets to care for your kids, who gets to handle the money for them, how that money can be used and when your kids can get it. If you don’t do that then the state you live in will make all of those decisions for you when you pass.

Here’s how to go about making those decisions, keeping in mind that you can change your will at any time as long as you’re of sound mind, so don’t let indecisiveness stand in your way any longer.

Who would you want to raise your kids if you weren’t around?

This is honestly the biggest reason that I’ve heard that people don’t have a will: they can’t agree on who would raise the kids if both parents pass away. It isn’t a fun or easy choice, but it needs to be made.

For us, when our oldest daughter was born we lived in Kansas, but my brother was in Dallas. He was single, working full-time and going to grad school for his MBA. My wife’s sister was finishing grad school in Mississippi. So neither one was really in a spot to become a parent overnight.

We also had our parents. We knew that they would all be great parents, but they had been there, done that. We wanted them to get to be grandparents. That left one of my cousins, Rob and his wife. They were recently married, settled down and planning on starting a family of their own. We felt that they were actually the most prepared and logical to raise our child(ren) if the worst happened.

Communicating your choice

Once we made this decision, we not only asked Rob and Gail, but we told our parents and siblings about it and why we made the decision. This made sure that there would not be any hurt feelings or legal challenges if something happened to us. So take the time to think about who is in a good place in life to raise your kids, keep the kids close to other family members and have similar core values to your own. Most importantly, who is going to love your kids as their own? (and remember, you can always change this as life changes)

What happens to the money?

You don’t have to have the same person who cares for your kids be in charge of the money you leave behind. My Uncle Bob passed away when his sons were just about 17 and 14. Their mom was still living so she was able to care for them, but the state appointed a conservator for each of them to handle the money they inherited from their dad. That meant that court costs, delays and just a general hassle.

More importantly, according to state law, when they became legal adults (18 in most states, 19 or 21 in some) then the money was all theirs, no strings attached. You can kind of guess what happened. Even though they were good, bright kids, they were still kids. The money was pretty much gone by the time they turned 21.

What can you do to prevent that from happening to your kids?

There is a simple tool you can use in your will called a testamentary trust that gives you all the control you want. In essence, you are using your will to create a trust that only goes into effect when you die. It determines who manages the money, what it can be used for and when your kids actually get the money.

For us, having seen what happened to two of my cousins, we knew that a testamentary trust would be part of our will. You can choose a person or a corporation – e.g. a bank or trust company – to be in charge of the trust (aka the trustee). Family members are less expensive and they are more tuned in to the kids’ needs, but a corporate trustee has the expertise and tools to make things much easier (and the ability to say no without causing family rifts).

We chose to name my parents and a local bank as co-trustees. Then we said that the kids could get any income the trust generated plus they could dip into the principal of the trust only for their health, education or to maintain their current standard of living.

Then we thought about when they should get the money. We decided to split it up – 1/3 at 25 when they are getting started in life and a little more mature, 1/3 at 30 when they may be buying a house or starting a family and the last 1/3 at 35 when they are likely to be established and having multiple demands on their finances. This doesn’t fit everyone’s needs or desires, but it made sense for us and our family.

Getting it done

This may sound like a lot, but this is really common, everyday planning that any estate planning lawyer or even a good will-making software program can help you with. Check with your employer to see if you can get online or live legal assistance through your Employee Assistance Program (EAP) or pre-paid legal program. Either one would make this a low cost and easy way to make sure that even if you aren’t here to physically care for your kids, you are still loving your kids and making sure that they have the emotional and financial care you want them to receive.

How Much Should You Contribute To Your HSA This Year?

January 09, 2019

How much should you contribute to your Health Savings Account in 2019? If you’re enrolled in a high deductible health plan for this year, take a look right now so that you can make any adjustments you decide to make ASAP (yes, unlike the FSA, most plans allow you to change your payroll contributions throughout the year).

What’s so great about HSAs and High Deductible Health Care plans?

What if I told you that you could reduce your current income taxes, invest your money so it could grow tax free and take future withdrawals pay for medical expenses – also completely tax free? Would you do it? Probably. That’s why Health Savings Accounts are such a great deal. However, there are some common misunderstandings about how they work in conjunction with an insurance plan.

The biggest risk with HSAs

Generally, with a high deductible health plan, in return for a less expensive premium, you will pay for more of your medical expenses yourself before your insurance begins to pay. (See this video on how a deductible works.) If you’re used to a more traditional insurance plan with a lower deductible which starts paying sooner, you may not realize that if you don’t contribute enough to your HSA, you could find yourself financially unprepared for thousands of dollars in medical bills.

Let’s take a simple example: You break your arm in a sports injury and have $3,000 worth of medical bills from urgent care, the X-Ray, your cast and follow up visits. Because you chose your company’s high deductible plan for its low premium, your insurance deductible is $3,500. That means that the FULL cost of your injury is yours to pay. You didn’t contribute much to your HSA, so you find yourself scrambling to pay for the bills with your credit cards and are considering taking a 401(k) loan for the remainder.

The minimum – cover your insurance deductible

If you had contributed enough to your HSA to cover your deductible you wouldn’t be in this situation. Many employers who offer high deductible plans also make HSA contributions on behalf of their employees, but it’s often not enough to cover the full in-network deductible. At a minimum, you should contribute enough to your HSA annually to cover the portion of your in-network deductible your company contribution doesn’t.

The maximum – contribute up to the IRS limits

Someone with individual coverage can contribute up to $3,500 to an HSA in 2019. Those with family coverage can contribute up to $7,000. Those who are 55 or older by the end of the year can contribute up to an additional $1,000 in catch up contributions. If you’re making catch up contributions, you’ll both need your own HSA. Note that if you and your spouse are both covered individually by your employers and file taxes jointly, your combined HSA contributions cannot exceed the family maximum. Need more details? See IRS Publication 969.

Use these charts to figure out how much you’d need to contribute each pay period.

Paid Every Two Weeks (26 times per year)

Paid Twice Per Month (24 times per year)

What if I don’t think I’ll need to spend all my contributions? Should I still make them?

Yes! In fact, that’s the whole idea behind HSAs. Many financial planners recommend maxing out your HSA before your 401(k). If you don’t spend all your contributions in the year you make them, you can roll them forward indefinitely without penalty. You can invest surplus funds to grow. Most HSA accounts have mutual fund investment options with long term growth potential, such as stock or balanced funds.

The growth of your investments in your HSA is tax-free, if you take future withdrawals for medical expenses. To give you a simple example, if your $1,000 surplus in your HSA grows to $10,000 in the future, you’d be able to reimburse yourself for future medical expenses for the entire $10,000 without taxes. This is such a powerful income-planning tool that folks are actually paying for their insurance deductibles using other funds now, so they can leave as much as possible in their HSAs to grow for the future. See The Health Savings Strategy That Not Enough People Are Talking About.

How much of my HSA should I invest, then?

A best practice is to keep the amount of your insurance deductible in cash. When you’ve got surplus more than the deductible amount, consider investing that in a longer-term option. If you leave your job, don’t worry – just like your retirement account you can leave the HSA with the provider or you can roll it to a new employer or the financial services firm of your choice (see this post.)

What if I can only change my payroll deductions annually but I want to save more?

If your company only allows you to choose how much you have deducted from your paycheck once per year during open enrollment, you can still write a check or set up a deposit from your personal checking account into your HSA. Contact your HSA provider for instructions.

The bottom line

Contribute enough to cover your insurance deductible, and more if you can swing it.

Why I Love My High Deductible Health Insurance Plan

December 18, 2018

I once talked to a fellow employee at Financial Finesse who wasn’t very happy about our health insurance plan. I was surprised because I love it. It turns out that she just didn’t understand how it worked. We both had a high deductible plan with a health savings account (HSA), a relatively new type of plan that’s becoming more common as traditional insurance premiums continue increasing.

Passing the savings along to employees

In my case with single coverage, Financial Finesse pays lower premiums because I currently have to spend $1,500 each year before most of the insurance coverage will kick in. My coworker didn’t think that sounded like a great deal for us employees.

However, the other side is that Financial Finesse uses the premium savings to put $1,500 each year tax-free into my health savings account that I can then use tax-free to pay that $1,500 deductible. (You can also use your HSA tax-free for non-qualified medical expenses for you as well as for your spouse and dependents even if those expenses aren’t covered by your health insurance.) As a result, I don’t really pay anything out-of-pocket until I’ve spent all of that $1,500 and then I only owe a small co-insurance percentage after that.

Letting the money pile up

The best part is that I pay no taxes on this money and unlike with a flexible spending account, I get to keep whatever I don’t spend in the HSA at the end of the year. That doesn’t mean I can take the money and splurge it on a trip (at least not without paying taxes plus a 20% penalty on it), but it does mean I can invest that money in my HSA tax-deferred until age 65. At that time, I can spend it on anything (including a trip) without penalty, use it tax-free for medical expenses (including some Medicare and long term care insurance premiums), or just let it continue to grow tax-deferred.

Why it’s even better than saving in my 401(k)

Another thing I love about HSAs is that I can also add about $2k pre-tax to it this year since the total contribution limit is $3,500 per year for a single person in 2019. If I have the deposits deducted from my paycheck, I also don’t have to pay the payroll tax on it. Not even 401(k) contributions let you avoid that. When you consider that HSAs offer you both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your employer’s retirement plan (after you’ve maxed the match) and an IRA.

When you add the premium savings, employer contributions to your HSA, and tax savings from your own contributions, high deductible health plans can be a great deal (especially the less you spend on health care and the more you pay in taxes). So what’s not to love for a relatively healthy professional? Apparently not much. Once I explained all this to my then colleague, she loved it too.

 

What Happens To Your HSA If You Leave Your Job?

December 11, 2018

One advantage of an HSA (health savings account) is that the money you contribute is yours to keep. Unlike an FSA, it’s not use it or lose it. Even if you’re no longer enrolled in an HSA-eligible high deductible health insurance plan, you can continue to use your HSA tax-free to pay out-of-pocket qualified medical expenses. At 65, you can even use it for any purpose without a penalty (and it’s still tax-free for eligible expenses including some Medicare and long-term care insurance premiums).

What to do with HSA money when you leave a job

What happens to your HSA once you leave your job? Generally, you can leave the account where it is, but you also have the option to transfer it to a new custodian without any tax consequences. In fact, you may even be able to transfer your HSA while you’re still employed at your job.

This can especially be a good idea if you want to invest your HSA since the investment choices vary based on where you have your account. You can see a breakdown of fees and investment options of some of the top HSA providers here.

What I’m doing with my HSA — without leaving my job

For example, I chose to transfer my HSA to Health Savings Administrators since I could invest all of the money in the account (many providers require you to keep a balance in cash), the fees are relatively low, and it provides access to specialized index funds from Dimensional Fund Advisors (DFA) that you normally can only access through a DFA-approved advisor (which means you usually have to pay their advisory fee).

This doesn’t mean they’re right for everyone. If I didn’t plan to invest the money or if I preferred other investment options, I may have made a different choice.

The one place you can’t take your HSA

There is one place you can’t take an HSA with you. When you pass away, your HSA money will be paid out to your beneficiaries and will be fully taxable. They don’t have the option to defer withdrawals like an inherited retirement account. For that reason, you may want to choose beneficiaries with a low tax bracket or even a charity as your beneficiary. Or just make sure there’s nothing left in the account when you die…

The whole idea of an HSA is to give you more control over your healthcare spending. Remember, it’s your money. Make sure it’s working hard for you, wherever that may be.

How We Are Deciding Which Spouse’s Insurance Plan To Use

November 28, 2018

My husband recently changed careers and is starting with his new employer at the end of this month. We’re all very excited about the transition as a family, but we have a very important decision to make: are we going to stay covered under our current health insurance plan that I have through work or are we going to move over to his plan? Or should the kids join my husband on his plan while I stay on my own? Decisions. Decisions.

How do you decide whose health insurance to use?

When both partners have benefits through work, it’s a good idea to re-examine your family coverage each year. Here are some of the things that we are considering as we decide which benefits to choose. These questions might trigger some points that are important to you and your family as well as you make your decision whether to stay put or move on to your spouse’s plan:

Questions to ask

  1. Are our current doctors considered in-network under my husband’s plan (especially the kids’ doctors)?
  2. Do my husband and I like the primary doctor options who fall in-network under his plan?
  3. If my husband has employee-only coverage at work, does his employer cover his monthly premium? (mine does)
  4. How do the monthly premiums and deductibles compare to what’s available under our current plan?
  5. Once we hit the deductible, how much is our coinsurance (the percentage we are responsible for paying)?
  6. Is a high deductible health plan (HDHP) an option with his employer and how much, if anything, does his employer contribute to a health savings account on his behalf?
  7. Are there any upcoming specialists we’ll need to see? Surgeries any of us will need? If so, are they covered? And how much would we be responsible for paying?
  8. Are there any specific medications we know we’ll need that are not covered under my husband’s plan?

These are some of the things we’ve started to consider. Thinking through your situation and coming up with your list of questions like these, or points that you want to be sure you address, will help you choose the coverage that best meets your needs. Be sure to break down the costs and compare apples to apples when choosing the right health insurance plan and steer clear of common mistakes that are often made during enrollment.

When you need to switch mid-year

It’s important to note that our decision happens to fall during my open enrollment period at work, but if it were outside of my company’s open enrollment period, my husband’s change in employment status (and thus his new eligibility to be covered under a health plan) would be considered a qualifying life event and we’d have a short time frame (typically 30 days) to make changes to our health plan.

 

How To Make Sure Your ‘Non-Money’ Spouse Is OK With Your Finances

November 20, 2018

One theme I have noticed when talking with some married people (most often women but not always), is one person being uncomfortable with their finances but not knowing what to do about it. These are couples who are saving, but most of the money including retirement funds and assets in general (like the house) are in the other spouse’s name.

In some cases the wife is concerned because she either hasn’t worked at all, worked off and on, or worked but made significantly less income than her spouse. Other times, they are not comfortable with how their husband is managing their funds. They also feel like the financial advisor they are using is only focused on relating to the husband and meeting his goals, which makes the wife feel left out and vulnerable – this becomes especially concerning when the husband passes away and leaves her to manage the finances (with a stranger as an advisor) for the first time.

This really can be the situation, no matter the gender. It’s not so much that the money managing spouse is intentionally leaving the other spouse out (that’s a whole separate issue), it’s usually more that he/she doesn’t know how to share the duties in a way that makes sense. Sometimes the other spouse simply isn’t interested or when you’re busy running your life, it’s often easier for one person to take on the money while the other tackles other equally important areas of life.

How to make sure your ‘non-money’ spouse is ok

Has your spouse expressed these feelings with you? OR if your spouse hasn’t said anything and you do run the show, it may be time to take a temperature check and initiate a conversation to see where he/she stands. If you’re the spouse with most of the assets in your name, or you are the sole/majority income earner for the family or you manage your family’s finances all on your own, here are some questions to ask that can help your spouse feel more involved and at ease.

Do you need more retirement savings in your spouse’s name?

This easily happens when one spouse far out-earns the other, but there are ways to get at least some retirement savings into the lower (or non) earning spouse’s name:

1) Your spouse can increase his/her retirement plan contributions at work – you may have to balance out cash flow another way.

2) Increase contributions to your spouse’s IRA (or spousal IRA if your spouse isn’t working).

Does your spouse feel uncomfortable having to ask for spending money?

There are ways to get around this no matter who earns what, you just have to remember that you’re both on the same team to try and avoid money fights.

1) Transfer a certain amount of funds each paycheck to an account for your spouse to spend without having to ask for permission.

2) Set up money dates so that your spouse has the opportunity to help make major financial decisions.

Do you have a plan that you’re both comfortable with should you unable to work?

This is a common fear that’s expressed by non-earning or lower-earning spouses that’s completely legitimate. You need a plan in case the worst happens.

1) Talk about what this would look like and understand how your ability to cover your expenses, keep up the same lifestyle, etc., might change. Would your spouse need to go back to work? Are you both making sure your spouse takes time to keep his/her skill set current so that transitioning back into the workforce wouldn’t be as difficult?

2) Disability insurance is extremely important to protect your family and to keep you on track in the event you find yourself unable to work due to a disability. Everyone needs this, but it’s especially important when a family is heavily reliant on one income. 

Does your spouse agree with the way you invest in your accounts?

Typically, one spouse is more aggressive than the other, but because the more aggressive spouse also manages the finances for the household, they ultimately end up making the decision. There’s a balance.

1) Find out both of your investment preferences and take that into account when making decisions. If you are vastly different and you feel that your spouse’s conservative nature could seriously compromise your long-term goals, perhaps he/she can invest more conservatively in his/her own accounts while you maintain a more aggressive mix in your own and joint accounts.

Does your financial advisor make sure that he/she understands your spouse’s needs and goals?

Make sure you’re getting value for what you’re paying your advisor – the best ones know how to balance couples who have differing interest and knowledge levels and ensure that both partners feel comfortable and heard.

1) Include your spouse in on all or at least annual meetings with your advisor.

2) If your advisor and your spouse just don’t click, it might be time to look for a new one.

Is your spouse comfortable he/she will be able to make ends meet if you were to pass away?

No one likes to have these conversations, but they are necessary for your spouse to feel more comfortable with you being the “money spouse.”

1) Discuss what income sources will be available to help your spouse continue meeting their monthly financial needs.

2) Discuss and create a plan to help your spouse still reach financial goals that you two have decided on.

Is everything titled in the most advantageous way?

Is your spouse’s name on the assets you both technically “own” or is everything in your name? It’s a good idea to make sure that the titling of things like your home, vehicles and even bank accounts is the best way to have it legally set up. You’ll also want to make sure that the two of you on the same page with that.

Don’t wait for your spouse to speak up

“Non-money” spouses don’t always express concerns they have about the family’s financial picture. They sometimes have questions that they don’t want to bring up or really don’t know how to initiate the conversation. Try letting this guide your discussion and at least provide an opportunity for conversation, a chance to address any concerns, and make sure you have a solid plan in place.

Avoid Making These 4 Mistakes During Open Enrollment

November 16, 2018

Fall is a time of leaves changing colors, children going back to school, families enjoying Thanksgiving dinners, and… open enrollment. Yes, it’s the opportunity for most employees to select which benefits they will choose for the following year. Here are some of the most common mistakes we see people make:

1. Not fully understanding the value of an HSA-eligible health insurance plan

According to a recent study, HSA-eligible high deductible health plans have gotten 400% more popular over the last decade. These plans tend to come with lower premiums (what you pay per month or paycheck for your coverage) but higher deductibles (what you pay out-of-pocket before most of the insurance benefits kick in) than more standard health insurance plans. In addition, they make you eligible to contribute pre-tax dollars to an HSA (health savings account) that can be used tax-free for qualified medical expenses at any time.

Possible free money

While it’s easy to compare the difference in premiums and deductibles, don’t forget to factor in the value of the HSA. First, many employers will actually make contributions to your HSA for you. That’s free money! If you contribute on top of that, you also get a break on your taxes.

For example, I recently spoke with an employee who would save almost $1,900 a year in premiums by choosing the high deductible health plan. In addition, he would receive $1,000 in his HSA from his employer and would save almost another $2,000 in taxes by contributing another $6,000 to the HSA. The $4,900 in total savings dwarfed the difference in deductibles.

2. Under or over funding an FSA

FSAs (flexible spending accounts) let you put money away pre-tax that can be used tax-free for health or dependent care expenses. If you’re in the 24% tax bracket, that’s like getting a 24% discount on those eligible expenses! Not taking full advantage of these accounts could cost you hundreds or even thousands of dollars in lost tax breaks.

However, there is a catch. Unlike HSAs, FSAs are “use it or lose it” so you don’t want to contribute more than what you’re pretty sure you can spend. (Having a general health care FSA also precludes you from contributing to the more valuable HSA in the same year.) If you do end up with extra money in the account at the end of the year, try to use it by stocking up on qualified supplies like contact lenses and prescription drugs. You can find FSA-eligible items here.

3. Not taking advantage of a prepaid legal plan for estate planning

Do you have updated estate planning documents like a will, durable power of attorney, advance health care directive, and living trust? If not, you can save a lot of money by using your employer’s prepaid legal service to have these documents drafted or updated. You pay a fee per paycheck, but the legal services are free or heavily discounted. You can then choose not to renew it the following year after you’ve gotten your documents in place.

4. Ignoring insurance benefits you may actually need

Disability insurance

Disability insurance is often overlooked even though about 25% of 20-yr olds are likely to be out of work for at least a year due to a disability. If your employer doesn’t provide it, you may want to purchase it. The good news is that employee-paid disability benefits are tax-free.

Life insurance

Your employer may offer you life insurance coverage equal to one or more times your salary, but you may want to purchase supplemental life insurance if you have dependents. You can use this calculator to estimate how much you need. Then compare the cost of purchasing it through your employer with the cost of a policy in the individual market. (See if your coverage at work can be converted to an individual policy once you leave the job.)

Your benefits can be a significant part of your total compensation and open enrollment can be your only chance to take full advantage of many of them. When in doubt about your selection of benefits, see if your employer offers a financial wellness program with free guidance and coaching from unbiased financial planners who are trained on your particular benefits. Then go and enjoy the holidays knowing that your family is protected.

 

A version of this post was originally published on Forbes