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:
- 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.
- 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.
For many contemporary investors, portfolio construction goes beyond diversification and asset allocation. At the beginning of 2018, more than a quarter of professionally managed portfolios in the U.S. used socially responsible, sustainable, or impact investing strategies, accounting for $12 trillion in assets overall, according to the Forum for Sustainable and Responsible Investment (also known as US SIF). To the surprise of many, this growing trend is not limited to the millennial demographic, extending across all age groups as more investors seek to align their portfolios with their values.
What is all the excitement about? Here are the three models that generally define the social investment movement:
Socially Responsible Investing
Introduced in the early 1970s, this model of investment was based on screening out or excluding problematic companies from portfolios. Companies were excluded based on their involvement in negatively viewed topics such as weapons, alcohol, tobacco, gambling, fossil fuel production, and so on.
Introduced in the early 2000s, the focus shifted from the exclusion of offending companies from portfolios to the inclusion of companies based on positive screens. These screens are known as ESG screens, which stands for environment, social justice and corporate governance. Positive ESG company profiles can emphasize environmental sustainability, human rights, consumer protections, and diversity, among other issues.
In 2007, the term impact investing emerged. Impact investing refers to investing in companies that are developing solutions to global sustainability challenges. These challenges include climate change, sustainable agriculture, renewable energy, access to education, affordable housing, and improved health care, among other topics. The impact investing platform also recognizes companies that promote women’s leadership and gender equality, and companies that support community investing, including microfinance services. Notably, these companies also engage in shareholder advocacy and solicit public engagement.
Investors today have more investment choices than ever before, and the dynamic social investment realm is compelling. Investors truly can make a difference by tilting their portfolios toward companies prioritizing the triple-bottom line of people, planet and profit. And the profit component should not be underestimated – since US SIF began tracking the data in 1995, social investments have had a compound annual growth rate of 13.6%. This should prove once and for all that there doesn’t have to be a compromise on returns compared to conventional investments, and depending on the benchmarks, the social investments may even outperform.
For sources, see Bloomberg News.
Election season is fast approaching and eleven propositions are on the California ballot. The perennial challenge is to find the time to learn enough about each one to make informed choices, so I hope that providing a historical context for Proposition 5, currently on the ballot, is useful. Proposition 5 addresses the transfer of a home’s taxable value, in a long line of predecessor propositions addressing this same issue. Here is a brief survey of the related propositions, each of which amended the well-known and hotly-debated Proposition 13 to change who can transfer their home’s taxable value and how the transfers work.
Proposition 13 (1978): Decreased property taxes by using 1976 assessed property values, set tax rates at 1% of a property’s sale price, and capped annual increases at no more than 2%. Reassessment of a new base year value was prohibited except in the case of a change in ownership or the completion of new construction.
Proposition 58 (1986): Allowed the transfer of a primary residence between spouses or between parents and children without a reset on the home’s taxable value. In other words, the recipient of a house, whether a spouse or a child, would continue to pay the taxable value based on the limit set following the 1976 tax assessment.
Proposition 60 (1986): Allowed homeowners age 55 or older to transfer the taxable value of their present home to a replacement home, assuming the replacement home was of equal or lesser value, located within the same county, and purchased within two years of selling the original home.
Proposition 90 (1988): Allowed homeowners age 55 or older to transfer the taxable value of their present home to a replacement home in another county, but only if the county in which the replacement home is located agrees to participate in the program.
Proposition 193 (1996): Extended Proposition 58 by allowing grandparents to transfer their primary residence to their grandchildren without a reset on the home’s taxable value, when both parents of the grandchildren are deceased.
Proposition 5 (2018): Extends Propositions 60 and 90 by allowing homeowners age 55 or older, severely disabled, or who have contaminated or disaster-destroyed property, to transfer the taxable value of their present home to a replacement home, no matter the value of the replacement home, its location, or how many times the buyer has moved. The difference in market value between the present and replacement home would adjust the taxable value upward if the replacement home is worth more than the present home and downward if the replacement home is worth less than the present home. From Ballotpedia, the calculations are as follows:
Upward adjustment: (taxable value of present home) + [(replacement home’s market value) – (present home’s market value)]
Example: An individual sold her house for $500,000. The house had a taxable value of $75,000. She bought a replacement house for $800,000. The taxable value of the replacement house would be ($75,000) + [($800,000) – ($500,000)] = $375,000.
Downward adjustment: (taxable value of present home) × [(replacement home’s market value) ÷ (present home’s market value)]
Example: An individual sold his house for $500,000. The house had a taxable value of $75,000. He bought a replacement house for $300,000. The taxable value of the replacement house would be ($75,000) × [($300,000) ÷ ($500,000)] = $45,000.
It is once again up to the voter to decide if this is a ballot initiative that will continue to ease the homeowner’s tax burden and promote a culture of homeownership, or if it will continue to build up the tax disparity between older homeowners who pay lower tax rates and are disincentivized to move, and younger renters who want to buy but can’t afford the cost of entry at higher tax rates and suffer from a housing shortage. Affecting both sides, Californians are some of the most highly taxed people in the country, and the loss of revenue created by lower property taxes has resulted in higher taxes everywhere else.