3 Things 3-7

03/07/2022 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One Everybody Should Have And Benefit From An HSA (But Not Everybody Can) As with the above post, a recent question prompted this entry. First, let’s define what an HSA is: It is essentially a savings account that lets you set aside pre-tax money to pay for qualified medical expenses such as deductibles, copayments, coinsurance, and other expenses. You — not your employer or insurance company — own and control the money in your HSA. Your control is established through a custodian like a bank or a broker like Bank of America or Fidelity. Once your funds are in the account you can invest them in securities (stocks, bonds, mutual funds, etc.). As far as qualifying for an HSA, you are eligible if:

  • You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.

  • You have no other health coverage except what is permitted under Other health coverage, later.

  • You aren’t enrolled in Medicare (or Tri-care or Medicaid)

  • You can’t be claimed as a dependent on someone else’s 2021 tax return.

As for the benefits, per IRS publication p969, here they are:

  • You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).

  • Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

  • The contributions remain in your account until you use them.

  • The interest or other earnings on the assets in the account are tax-free.

  • Distributions may be tax-free if you pay qualified medical expenses. See Qualified medical expenses, later.

  • An HSA is “portable.” It stays with you if you change employers or leave the workforce.

Now, do you see why everyone should have and benefit from one? There is one significant item to be aware of though and that is, even if your insurance plan has a high deductible, which is defined as being at least $1400 for an individual and $2800 for a family, there may be specific attributes in your plan that make you ineligible to make qualified contributions to an HSA. In fact, many HDHPs (by definition) are HSA-ineligible for one technical reason or another. To be certain of your own plan, you should call or email your insurance provider and ask specifically if it is HSA-qualified. If it is, you should seriously consider opening and funding one. And if it is not, you should keep this all in mind when open enrollment comes back around in November.

Thing Two Why Annuities Are A Bad Idea For Almost Everyone (Revisited in light of some recent questions on the topic) The title above was taken verbatim from a Marketwatch article from a few years ago. Before we summarize, let us first describe what an annuity is with some help from investopedia.com: "An annuity is a financial product that pays out a fixed stream of payments to an individual, and these financial products are primarily used as an income stream for retirees. Annuities are contracts issued and distributed (or sold) by financial institutions, which invest funds from individuals. They help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time." Now, why does the article say they’re bad for almost everyone? Well, “bad” is a relative term here. So, relative to the returns that could be made investing in equities (either individual stocks or low fee funds) annuities come up short. The typical annuity set-up and sales pitch is no downside risk with a modest upside potential. In a fixed indexed annuity, for example, if the stock market goes up 20%, the annuity holder might get to participate in 4% of that while, if the market went down by 20%, the annuity holder would not see any reduction in his principal balance. That sounds like a good idea in bad times, and there are definitely bad times, but the market has tended to go up over time and, in fact, the S&P 500 has only been down seven times in all the 10-years periods since 1940. It should be noted that the target annuity customer is someone at or nearing retirement who may be more sensitive to the near-term volatility that is inherent in the stock market. The author suggests that a reasonable alternative to an annuity, in that case, would be to invest it in a perpetual dividend raiser. We suggest you consider your options carefully and get some help if you think you need it.

Thing Three Just A Thought “The shoe that fits one person pinches another; there is no universal recipe for living.” – Carl Jung