Dec 16, 2021 | Employee Benefits, Health Insurance, Investing, Retirement, Taxes
One of the top 10 questions I get from clients is should I open an HSA (Health Savings Account)? It is open enrollment season and HSAs have risen in popularity over the last few years, so let me take the opportunity to address the question here.
First, what are HSAs?
HSAs are personal savings accounts that can only be used for qualified health care expenses and out-of-pocket costs not covered by health plans. They offer tax benefits, spending flexibility, and portability.
Second, who is eligible?
To contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan (HDHP). For 2022 the HDHP for individuals must have a deductible of at least $1,400 and an out-of-pocket medical expense limit of $7,050, and the HDHP for families must have a deductible of at least $2,800 and an out-of-pocket medical expense limit of $14,100.
Third, how do I get one?
You can enroll in an HDHP and an HSA through your employer if available, or find an HDHP on the health insurance marketplace and an HSA through a financial institution.
Here is a summary of the advantages and disadvantages of HSAs:
Advantages:
- If you make contributions with pre-tax dollars, they are excluded from your gross income.
- If you make contributions with after-tax dollars, you can deduct them from your gross income on your tax return.
- Contributions can earn interest and be invested.
- Your investments can grow and compound on a tax-deferred basis, which means there are no capital gains taxes on earnings.
- Withdrawals are tax-free for qualified health care expenses.
- You don’t have to make withdrawals in the year that the expenses are incurred (just save the receipts for the year in which you do make the withdrawals).
- Any unused money at the end of the year rolls over to the next year (unlike Flexible Spending Accounts (FSAs)).
- The account is always owned by you even if you change employers or terminate employment.
- When HSA money is used to pay for health care costs in retirement, it has more buying power than money from retirement plans like 401ks where you will owe income taxes on withdrawals.
Disadvantages:
- It can be challenging to budget how much to save as medical expenses are often unpredictable.
- HSAs have low contribution limits – the 2022 contribution limit is $3,650/year for individuals with additional catch-up contributions of $1,000 between ages 55 and 65. (This amount is reduced by any employer contributions excluded from gross income.)
- Once you enroll in Medicare at age 65 you can no longer contribute.
- If you withdraw funds for nonmedical expenses before age 65, you will have to pay income taxes on the money and an additional 20% penalty. If you withdraw funds for nonmedical expenses after age 65, you don’t have to pay a penalty but you will have to pay income taxes on the money.
For an HSA to be worth it, you should be relatively healthy and good with recordkeeping. If this describes you, consider adding HSAs to your financial to-do list. “I don’t like tax savings” said no one ever.
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Apr 26, 2021 | Banking, Ethics, Microfinance
Did you know that over 1.7 billion people worldwide do not have a bank account with a financial institution? (World Bank Global Findex Database 2017) The vast majority of these unbanked people live in the developing world, and overwhelming evidence demonstrates the positive correlation between financial inclusion and development. Without access to financial services, unemployed or low-income people are far worse off. Cash can be hard to manage, loans from family, friends, and loan sharks can come at a high cost, and the ability to manage financial emergencies can be severely compromised.
Microfinance addresses this basic unmet need. The goal of microfinance is to provide people who are typically excluded from the traditional banking system access to it, in the form of savings accounts, individual and group loans, agricultural loans that can be paid back when the harvest comes in, insurance, and education, among other services. These small working capital loans are also known as microloans or microcredit. Microloans do not require collateral, and can be distributed in small amounts and paid back over long terms. Like conventional lenders, microfinance lenders charge an interest rate and establish a repayment schedule. However, there is no profit motive.
What is the global reach of the microfinance movement? In 2018 $124 billion was distributed to 140 million borrowers, of which 80% were women and 65% were rural borrowers, and it is growing every year. (Microfinance Barometer 2019) With cash infusions from microfinance programs the data shows that borrowers are better able to feed their families, send their children to school, improve their homes, reinvest in their businesses, leave farming and become entrepreneurs, and put money aside for savings goals or to serve as an emergency fund.
The impact of technological innovation in this space cannot be overstated. With increasing ownership of cell phones and access to the internet in the developing world, the fast-growing fintech industry is better able to deliver financial platforms to rural populations. These software applications remove old obstacles and create new efficiencies. For example, the ability to make digital payments or send money transfers can eliminate travel time and cost, administrative work, and also reduce corruption.
Above and beyond financial inclusion, microfinance organizations seek to promote self-sufficiency and economic justice for underserved populations. In a global pandemic our struggles are amplified and this message resonates more than ever. To find out more, check out the crowdfunding site Kiva (I have no affiliation) to see how one of the largest and most well-regarded microfinance organizations embodies this spirit.
Jun 3, 2020 | Investing
It is a time of tremendous contradiction in the economic world. Stocks and bonds are moving more in tandem than ever. Unemployment is at a high not seen since the Great Depression yet the market is only in correction territory, which means a drop of 10% that happens on average every 12-24 months. The level of personal savings has surged and personal income has increased, but personal spending has fallen drastically. What can account for these disconnects?
Another way to put it is, why on earth is the market doing so well when the economic forecast is so dismal? It could be that health data has leveled off and the vaccine narrative has accelerated so psychological panic has subsided. It could be the short-term effect of trillions of stimulus dollars the Federal Reserve is pumping into the economy to shore up liquidity. It could be that today’s stock market prices accurately reflect the post-Covid economic landscape. It could be the unflagging optimism that is the warp and woof of human nature.
The federal government acted swiftly and massively in their monetary and fiscal stimulus efforts and it made a difference. For now deflation is winning over inflation. The supply chain has not seized up. The Federal Reserve has indicated their willingness to provide more stimulus and Congress is currently negotiating the HEROES Act, which may include more help for state, local, and tribal governments, an extension of unemployment benefits, and more household payments. There seems to be no end in sight for relief as long as the need persists.
We know that the stock market discounts future earnings to yield today’s prices, which means that the recovery is already priced in. The Efficient Markets Hypothesis (EMH), a cornerstone of modern financial theory, states that at any given time stock market prices reflect all available information. The EMH rules out the possibility that investors can time the market or use fundamental or technical analysis to identify securities that are over- or undervalued. However, we know that EMH is inadequate if we consider Warren Buffet’s outperformance of the market over long periods of time.
Investor optimism makes things even rosier. Behavioral finance theory, which addresses the psychology of investors and how their cognitive biases affect stock market outcomes, could help to explain the gap between perception (the stock market) and reality (the economy). Behavioral finance states that investors are not rational or self-controlled and as such make emotional decisions that defy economic theory. We could be seeing hints of Alan Greenspan’s “irrational exuberance” here, although we are far from a speculative bubble.
What happens next? No one has a crystal ball and the best we can do is make educated guesses. Many financial experts predict that the stock market bottom we saw on March 23 will be retested due to increased mobility and a consequent second wave of infections. But that second wave has not yet come. With restrictions lifted across the county, people have been slow to return to past habits. We have not seen appreciable increases in TSA checkpoint travelers, hotel occupancy rates, or dine-in restaurant attendance in locations that have reopened. It is possible – and I am hopeful – that the increased mobility will be mitigated by a beneficial combination of warmer weather, differences in individual susceptibility to infection, social distancing, hygiene practices, and widespread testing and follow up.
