Category: WORK & RETIREMENT

No matter your age, you should begin saving for your retirement as soon as you land your first job. According to a 2017 Federal Reserve survey, less than two-fifths of adults age 18 and older believe they are on track with their retirement savings.

Participating in an employer-sponsored retirement program is the easiest way to begin your retirement plan. Moreover, most employers match a portion or all of employee contributions up to a certain percentage with most matching around 6%. By not participating in an employee-sponsored retirement plan, you might be turning down free money!

But, what do you do if your employer doesn’t offer retirement benefits, you’re not eligible to participate, or you’re self-employed? You can still save for your retirement by opening an individual retirement account (IRA). While there are several types of IRAs available, we’re going to focus on the more common traditional and Roth IRAs that individuals usually open.

• What is a traditional IRA?
• What is a Roth IRA?
• How to select an IRA?
• Final Words

What is a traditional IRA?

The traditional IRA was established in 1974 with the passage of the Employee Retirement Income Security Act. The traditional IRA allows you to deposit pre-tax income into an investment account until you reach the age of 70½. Any interest earned in the IRA is tax-deferred. Furthermore, contributions to a traditional IRA may be tax-deductible depending on your income and tax filing status, if you contribute to an employer-sponsored retirement program, and other factors.

You can withdraw from your IRA anytime, but you’ll pay tax on the money. Also, if you are age 59½ or younger at the time of withdrawal, you may be subject to a 10% tax penalty unless you meet certain exceptions defined by the Internal Revenue Service.

You are required to begin making withdrawals by April 1^st the year after you turn 70½. The required minimum distributions (RDA) amount is calculated based on your age each year.

What is a Roth IRA?

The Roth IRA was established under the Taxpayer Relief Act of 1997. Named after Delaware Senator William Roth, the Roth IRA allows you to contribute to your account regardless of your age. However, eligibility and the maximum amount you can deposit annually depends on your modified adjusted gross income.

Unlike an individual IRA, you can’t deduct Roth contributions from your income tax. However, the interest you earn in your Roth is tax-free, meaning you won’t have to pay taxes when you withdraw from your account.

Withdrawals remain tax-free as long as your Roth account has been opened for at least five years and you are age 59½ or older or become disabled. Otherwise, as with the individual IRA, you may be subject to a 10% tax penalty. Finally, you are not required to take an RDA if you are the original owner of the account, i.e. you did not inherit it.

How to select an IRA?

Both the traditional and Roth IRAs have benefits and drawbacks, so how do you choose between the two? Your age and tax bracket now and at retirement age can influence your decision. Your goal should be to select the IRA that will leave you with the most money after you pay taxes.

If you’re just starting out in your career, your salary and your tax rate are probably going to increase over the next 40 or so years until you retire. With that in mind, a Roth IRA may be the better choice.

If you’re older or are getting a late start on your retirement savings plan, you may be better suited for an individual IRA. This is because you will most likely move to a lower tax bracket by the time you retire.

Final Words

These are only guidelines. Consider your current financial situation as a whole and consult with a financial advisor for guidance. Whichever route you decide to go, with both types of IRAs, you have until Tax Day, April 15^th, to make a contribution for the previous year. For 2019, individuals can contribute up to $6,000, $7,000 if you’re age 50 or older. In 2020, individual contribution limits will increase to $6,500 and $7,500.

Whether you get your health insurance through your employer or the open market, in addition to understanding the various coverage options and deductibles, you’ll also run into deciding whether to enroll in a plan with a health savings account (HSA) or flexible spending account (FSA). Here is a brief explanation of the similarities and differences between the two accounts.

• Introduction
• Health Savings Accounts (HSAs)
• Flexible Spending Accounts (FSAs)
• Final Words

Introduction

Healthcare expenses, even with insurance, can still be expensive when you add up the annual deductibles and co-pays that you pay out of pocket in addition to your premiums. This is where an HSA or FSA comes into play.

Both accounts are funded by pre-tax dollars from your earnings. You can use the funds to pay for your deductible and co-pays for medical, dental, and vision visits. However, you cannot use the money to pay for your insurance premiums.

The good news is that you can buy hundreds of other health-related expenses, including prescription and over-the-counter medications, bandages, birth control, sunscreen, contact lenses and prescription glasses, medical devices, and more. Depending on your plan, you might need a prescription, a doctor’s directive, or a letter of medical necessity for items to be covered under your HSA or FSA.

With both accounts, you are given a debit or credit card that can be used at the point of sale, like any other debit or credit card. If you pay for covered items with your own money, you can submit a claim along with the receipt for reimbursement.

Health Savings Accounts (HSAs)

HSAs are available through both an employer-sponsored plan as well as a self-insured plan. However, you are only eligible for this type of account if you have a high deductible health plan (HDHP) and aren’t enrolled in Medicare.

For 2020, you can contribute up to $3,550 a year into your HSA for an individual plan. For a family plan, the maximum contribution is $7,100. Although you can specify how much your employer withholds from your salary to place in your HSA, you can make additional payments anytime. The funds withheld by your employer are tax-free while the payments you make are tax-deductible.

An HSA has two attractive features to consider. The first is that the funds in your HSA may be invested, and the interest earned is not subject to tax. The second feature is that money in your HSA rolls over at the end of each benefit year so that you get to keep unused funds. Also, if you leave your employer or become covered in a non-HDHP, you can continue to use your HSA — you just can’t make further contributions.

Flexible Spending Accounts (FSAs)

FSAs are only available through an employer-sponsored plan. For 2020, you can contribute up to $2,750 for the year by telling your employer how much you want to be withheld from your paycheck. Unlike an HSA, you cannot make additional contributions to your account aside from what you instruct your employer. However, some employers may opt to make an additional contribution up to $500 a year to your account.

Regardless of how much you have contributed to your account, the total annual election is pre-funded, meaning the full amount is available immediately at the beginning of the benefit year.  However, if you end your insurance coverage and have spent more than you have contributed to your FSA, you may have to pay the balance.

The downside of an FSA is the use-it-or-lose-it policy. While you can roll over up to $500 into the next benefit year, you will have to forfeit any unused funds in your FSA at the end of your benefit year.

Final Words

When weighing your decision to enroll in a health insurance plan with an HSA or FSA, you should consider your health and medical needs You’ll have to assess the trade-off between having lower premiums for a higher deductible and vice versa.