Archives for February 28, 2020

One wonderful thing about my job — and there are many wonderful things — is that people are willing to spend the time to educate me and my colleagues about products not currently on our radar.

Our most recent visitor was focused on health savings accounts (HSA), which allow people covered by high-deductible health insurance plans to save for uninsured medical expenses on a tax-preferred basis.

And what heavenly tax preferences. Contributions made by the employer are exempt from both federal income and FICA taxes (for the record, employer contributions to 401(k) accounts are not exempt from FICA taxes). Similarly, contributions made by employees — if made through an employer Section 125 salary reduction plan — are also exempt from federal income and FICA taxes. (If the employee contributions are outside of a Section 125 plan, they can be deducted from the employee’s federal income tax but are not exempt from FICA taxes.) In addition, any investment earnings on employee/employer contributions accrue tax-free. Withdrawals are also tax-free as long as they are used for medical expenses, which are defined very broadly to include dental, eyeglasses, hearing aids, etc. And, after age 65, participants can withdraw their funds for any purpose and pay ordinary income tax. This last provision makes them equivalent in tax treatment to 401(k) plans and IRAs at a minimum, and the no-FICA tax and no-tax for medical expenses makes HSAs a much better option.

To qualify for an HSA, an individual’s employer must offer a high-deductible health insurance plan. Individuals can also purchase such a plan in the individual insurance market. Qualifications for “high deductible” in 2020 include a minimum deductible of $1,400 for individual coverage and $2,800 for family coverage.

Those qualifying for an HSA in 2020 may contribute up to $3,550 for an individual and $7,100 for a family. Account holders ages 55 and older can contribute an additional $1,000. The contribution limits are indexed annually for inflation. Any unused balances can be carried over from one year to the next without any limit. This provision makes HSAs much more valuable than flexible spending accounts, which have to be exhausted by the end of each year.

My understanding of the rationale behind HSAs is that giving workers very generous tax breaks to save for medical expenses makes it easier for employers to offer high-deductible plans. These high-deductible plans, in theory, encourage people to be more cost-conscious shoppers for medical care and eventually lower the nation’s overall health costs. It’s not clear things are working out quite as intended, however. While some evidence suggests that those with high-deductible plans are less likely to use health care services, a new study indicates that people with larger HSA balances tend to have more health care activity.

In the meantime, who benefits from these generous tax preferences for HSAs? The higher paid, of course. They face higher tax rates, so the exemptions of contributions and investment earnings and tax-free withdrawals are much more valuable to them than to the lower paid. Also, higher earners are more likely to be constrained by the contribution limits on retirement accounts and look to HSAs as an additional means of tax-preferred saving. Indeed, tax return data show that the percentage of households with HSA contributions increases sharply with income. (See figure below.)

In short, as a policy person, HSAs are not where I would pile on tax preferences. Fortunately, to date, HSA balances are tiny — $62 billion — compared with 401(k)/IRA holdings — $16 trillion. If I were in charge, I would dial back the preferences. But, in the meantime, any eligible high earner out there should certainly take advantage of the opportunity.

No doubt you’ve heard the phrase “dying of a lonely heart.” It’s true, many people do. In fact, here’s a staggering finding: In terms of dying early, being lonely is worse—two times worse, in fact, than being obese.

That’s how unhealthy being lonely can be.

That’s according to researchers from the University of Chicago, who tracked more than 2,000 people aged 50 and over for more than six years. They found that the average person in the study who admitted being lonely had a 14% greater risk of dying an early death. In terms of mortality, the only thing worse was living in poverty. Sadly, some people fall into both categories.

Why is loneliness such a killer? Numerous studies link being alone—persistently alone and isolated, with little if any contact with family or friends—to everything from heart attacks, strokes, depression and anxiety.

How big of a problem is loneliness among older Americans? Very big, according to another survey on healthy aging, this one conducted by the University of Michigan’s Institute for Healthcare Policy and Innovation. It says that one in four people aged 50 to 80 feel isolated at least some of the time, and one in three lack regular companionship.

Contributing to this isolation, points out the Institute’s Erica Solway, Ph.D., are major life events like retirement, the death of a spouse, children moving away or becoming a long-distance grandparent. All can separate people from loved ones, former colleagues and neighbors who were once integral parts of a person’s daily life.

“Some people may not anticipate the challenges that this might bring for their social environment,” Solway says. “We found that 28% of people reported having social contact with people (e.g. meeting a friend for coffee) outside their home once a week or less, and 13% said it was every two to three weeks or less that they had social contact with people.”

It’s important to make a distinction between solitude and loneliness. Everyone needs time alone, and some enjoy it more than others. But solitude (like staying in to read a book) is a choice, while loneliness (being cut off from others) often is not. Humans are social animals, after all, and over time, the lack of interaction can inflict a physical and mental toll.

“We know there is an association,” says Solway. “But it’s unclear whether the loneliness is effecting the health, or the health is effecting the loneliness.”

But Solway says there’s one health issue that is absolutely driving loneliness, and that’s poor hearing. “We found that people who had fair or poor hearing were more likely to report a lack of companionship and feeling isolated.” Get your ears checked, folks.

Meantime, do things like email, social media and video chats count as social interaction? It’s subjective. For some, a Skype call with a friend or grandchild may be enough to stave off loneliness. Still, holding that grandchild’s hand can’t be beat.

People dealing with one or more of the above-named life events—retiring and moving away, recovering from the loss of a spouse etc.—have remedies. One has four legs and a tail.

“We found that over half of adults 50 to 80 had pets, and a very high percentage of them reported that the pets helped them connect with others,” Solway says. This in turn, can support better mental and physical health.

And pay it forward: consider volunteering somewhere in your community. It’s a good way to meet new people and doesn’t it feel good to help others?

Older Americans with mobility issues might find owning a dog or out-of-the house volunteerism difficult. But there are still things they can do to feel useful—and engaged. How about using your skills to be an online mentor for others? Or hosting tutoring sessions for children? These are just some of the opportunities you can find on AMAVA, an organization that helps people engage with their community. Take a look and you just might find something that fits.

AMAVA focuses on social engagement because, its website says, “it can be more important to wellness than genes, nutrition or fitness. It’s downright scary how dangerous isolation can be.”

After years of planning and saving, it’s finally here: your retirement. If you’ve achieved financial freedom and can afford to stop working full time this year, congratulations!

Retirement planning was no easy task. Now, it’s time to transition from preparing for retirement to being retired. If you’re planning to retire later this year, you should take the following five steps as soon as you can to prepare yourself to flourish financially over the coming years.

1. Maximize your savings. 

If you’re not already doing so, maximize your contributions to your tax-deferred accounts such as your 401(k) or 403(b) plans and traditional individual retirement account, or IRA. You want to make sure you at least contribute enough to get the full employer match. You should also be maximizing your after-tax retirement accounts, such as your Roth IRA or Roth 401(k) plan. The next few months may be the last ones in which you can contribute to these accounts. Retirement contributions require earned income during the year, so if you plan to stop earning money, then you can no longer fund many of your investment accounts.

Additionally, this may be your last year to take advantage of the tax benefits these accounts offer. Traditional IRAs and 401(k) plans, along with brokerage investment accounts and interest income, are all taxable when you withdraw the money. For about half of Americans, even Social Security can constitute taxable income. By setting aside as much as you can this year, you put off having to pay those taxes.

Finally, if your employer is matching any of your contributions, you’ll want to capitalize on that benefit one final time. Since a retirement match forms part of your compensation package, it’s smart to take full advantage of it while you’re still employed.

2. Review Social Security numbers. 

Review all Social Security changes for 2020 to make sure you are getting the most out of your money. The Social Security Administration (SSA) puts out an official Fact Sheet that announces cost-of-living adjustments and relevant Social Security tax rates for the year.

In January, U.S.A Today outlined four changes affecting Social Security recipients in 2020. First, the tax structure altered slightly, and that means about 11.8 million American workers will pay nearly $300 extra in Social Security taxes this year. Second, if you turn 66 this year and continue to earn money, SSA will deduct $1 from your benefits for every $3 you earned over $48,600. Third, the number of Americans paying taxes on their Social Security will increase a little. Finally, the SECURE Act will allow those who turn 70½ after 2019 to delay taking required minimum distributions from their retirement accounts until they are 72. If any of these changes affect you, you need to be prepared.

3. Look at the potential 401(k) conversion strategies. 

It may make sense to convert some or all of your qualified money into a Roth. This strategy can allow you to benefit from some tax advantages. Yes, you’ll owe taxes now, but in the future, you can enjoy your withdrawals tax-free.

If you think this approach may work for you, check with your employer to see if such a conversion is an option, because not every company permits this kind of transfer. If yours doesn’t, you can start making all future 401(k) contributions to a Roth instead of a traditional plan. On the other hand, if you can transfer your current 401(k) to a Roth, be sure to run the numbers on your tax bill first to determine if it’s a good choice for you. Then, set aside enough cash to cover the amount you’ll owe when you file your taxes.

4. Review Medicare changes. 

Medicare offers tremendous benefits to older Americans, but it can be a tricky system to navigate. Before taking yourself off your employer-provided insurance plan, make sure you’re going to pay the right amount for Medicare and not more than you should. Start by going to the Medicare website and checking their annual review guide.

You may also receive notices in the mail during the fall about any changes ahead for your plan in the next year. Be sure to take a look at these, and contact your local Social Security office if you have any questions or concerns. If you need to enroll for Medicare coverage in 2021, you can do that between October 15 and December 7 of this year.

5. Get your estate plan set up. 

An estate plan is not a luxury. It’s a critical part of making sure your family is taken care of according to your wishes. For some people, a simple will takes care of their estate. Other retired adults may benefit from more complex forms of estate planning. An attorney and a financial advisor can offer assistance in these matters.

If you need to build your estate plan from scratch, schedule time now to meet with these professionals. If you already have an estate plan, sit down with your attorney, advisor, executor and family members to review it. You want to make sure all your official documents reflect the best practices in the industry and your own wishes for end-of-life decisions, power of attorney designations and directions for your assets after you are gone.

Many people find their retired years full of meaningful and interesting activities. That’s why it’s important to keep up with your financial planning during the transition between work and retirement so you can make the most of the coming decades.