This Week In Your Wallet: 401(k)s, HSAs, IRAs, Oh My!
Last week, I taped an interview with aging expert Ken Dychtwald for his upcoming PBS special, and he asked (among many other things) what questions I get asked again and again. I listed them. The questions about how to find a financial advisor you can trust. How to raise kids who launch. How to know if you’re on track for retirement or your other goals. And who needs long term care insurance (more on that in a moment). But the one I get asked most often is what I’ve come to think of as the “next-dollar” question. If you’ve got money to save and/or invest, how do you rank order where you put it? How do you decide where that next dollar goes?
But the pandemic has shifted the landscape here a bit. So let’s take a short pause and parse this question. First, with unemployment still raging and more and more businesses (sigh, Regal Cinemas) shutting or re-shutting their doors, there is no debate about the need to maintain a substantial emergency cash stash at all times. But let’s assume you have one, what then? If you answered: I’ll take free money for $400, Alex, you’re right on target. We grab incentive dollars whether they come in the form of 401(k) matching dollars, or money your employer or health insurer grants when you open or contribute to a Health Savings Account or HSA.
This is the point at which things get tricky. USA Today is reporting that 401(k) contributions are up 20% from last year according to a recent survey, an indication that people are stockpiling some of the money they’ve freed up by not commuting, eating out less and other COVID-era spending reductions. You know this warms my heart. But is that the best place to put the money?
Not always. If you have an HSA (which you are allowed to open if you have a qualifying high deductible health insurance policy), you may want to think about loading that up instead. As with a 401(k), you get a tax-deduction for putting money into an HSA, the money can be invested and growth is tax-free, and when you use it for qualifying medical expenses it’s also not taxed on the way out. When used to pay for medical expenses year-in and year-out, the net effect of this is that it saves you a percentage on healthcare equal to your tax bracket — which can be 25% or more. But you can also think of it as a supplemental retirement account. You put money in and invest it for growth. Through the years, you pay for healthcare out of pocket and save your receipts along the way. Then, you pull the money out years down the road, laying off those withdrawals against years of receipts and pay no taxes. (Want to learn more? I’m hosting a free panel discussion for National HSA Day on October 15 here.) The other choices? Roth IRAs in particular have a lot going for them in terms of providing a) flexibility in getting money if you need it and b) tax diversification heading into retirement. All in all, just a nudge to remember that you have options and you may want to consider them all before you make your choices.
And While We’re Talking Acronyms… Here’s Another One
QLAC. Say: Q-Lack. What is it? A Qualified Life Annuity Contract. QLACs are one of those things I have always thought should be much more popular than they are (yes, it would have helped if they had a better name.) Here’s the deal. Once you hit age 72, you have to start pulling money — in the form of required minimum distributions or RMDs — out of your retirement accounts. You have to do this even if you don’t need the money to live on, which can be frustrating if you are trying to make sure that you have enough for your 80s, 90s and beyond. (The Roth IRA is the exception here. You don’t have to make withdrawals ever, and can even pass the money onto your heirs.) A QLAC gives you an alternative. You can invest up to 25% of your funds ($135,000 max) in this type of deferred income annuity which provides an income stream that you turn on down the road (you can delay it until age 85) — and anything you put into the QLAC gets subtracted from the RMD pool, which means you don’t have to pay income taxes on it. Yes, it’s complicated. And you should ask lots of questions like: Q: What happens if I die before I start receiving the income. A: You can make sure the money goes to your heirs by purchasing what’s called a “Return of Premium Rider.” But if you think you’ll have enough to live on from your Social Security and other sources of income without worry, it’s something to consider. Read more, here.
When Is A Life Insurance Policy Not A Life Insurance Policy?
When it’s converted into a hybrid long-term care insurance policy. The past decade (because, again, longevity) has only increased the interest in long-term care insurance. Long-term care can be both frustratingly complicated and frustratingly expensive. And unlike car insurance and homeowners insurance (which we don’t mind pouring money into while praying we never have to use them), long term care often gets a bad rap for being a revenue suck with benefits you may never use. (Yes, that is the definition of insurance, but in this case people seem to mind.) That gripe resulted in the explosion in hybrid life insurance-long term care policies, which are essentially life insurance policies in which the benefits can be used for care during life or — if they’re not used — passed to heirs. As Money notes, hybrid policies are more expensive than both plain cash-value life insurance and long-term care because they’re doing double duty. But reporter Ingrid Case also teed up another interesting option: If you have a permanent life insurance policy that you no longer need to insure your family, you can use a transaction called a 1035 exchange to swap it for a hybrid policy. It may be a cheaper way to have your cake and eat it, too.
Have I Mentioned That I Hate Wires?
Finally, in the ongoing saga that is my apartment renovation, a lightbulb went off. We took the place down to the studs and are slowly rebuilding. Among the steps — wiring for cable, sound, wifi, etc. Our tech genius seemed to scratch his head as my husband went through the list of the cable boxes we’d need. “You want cable boxes?” he asked, shrugging as we answered affirmatively. Turns out — in some places, and with some TVs, you can now bag the box. That’s great news for your utility bill (they’re notorious energy hogs) but also for wire-haters like me.
Have a great week,