HSA/Insurance
In 2014, my school district switched to an HSA medical plan versus our old PPO plan. An HSA (Health Savings Account) is a high-deductible, tax-advantaged health plan that can also be used as an investment vehicle. There are several major differences between this and a PPO plan.
In a standard PPO plan, you and/or your district pay your premium, you pay any co-insurance or co-pay amounts and a deductible for the first dollars of medical expenses. In an HSA, you and/or your district pay a much lower premium per year, but pay a much higher deductible (sometimes provided by the district). You may contribute the deductible amount, plus additional funds, up to the annual contribution limit into your HSA account pre-tax. Since the money rolls over each year, this allows you to let the money grow in your HSA checking or investment account tax-deferred, and you can withdraw for qualified medical expenses at any time tax free. This is a triple tax advantage that isn't available anywhere else. Choosing to roll any unused deductible dollars into an HSA investment account every year allows the money to grow and compound much like a Roth IRA or 403(b) investment. At age 65, you can also withdraw money from your HSA for any reason at your ordinary income tax rate.
Employer and employee total contributions to an HSA are limited to $6,650 per family in the year 2015 ($1,000 catch-up provision at age 55 also available) and there are no income limitations. If you want to, you can pay medical expenses out of your pocket, allowing your money grow in the HSA, and keep the receipts in a file forever. Any unreimbursed (but qualified) medical expenses can be "cashed in" completely tax free and that money can be used for anything you want no matter what your age is. To do this, simply run your insurance card the same as you normally do to get any discounts, but ask to be billed instead of having the HSA pay the bill.
Letting your money grow in an HSA is good for several reasons. First, the tax savings (TRIPLE tax advantage!), second you can have a nice account for your retirement health care costs, and third, you can withdraw the money at age 65 just like a 403(b) at your ordinary tax rate. Since a lot of teacher retirement insurance plans have been "under attack" for the last few years, having an investment account for your future health care costs is a great idea. The days of having all of your retirement health care costs covered by the state are pretty much over.
Investment accounts offered by each individual HSA company vary greatly. Our district uses Health Equity, which provides a standard list of funds for investments. These funds are expensive, actively traded funds. I can elect to purchase "Investor Choice" funds outside of the Health Equity network to own passive index funds (many are Vanguard). They do charge .033% per month (.396% annually or $3.96 per $1,000 invested per year) on top of the fund's expense ratio. I purchased a few of these funds this year because it's still cheaper than the active funds they offer. If I own the Vanguard Institutional Index with a .02% annual expense ratio and add .396% charge from Health Equity, I'm only paying .416% total expenses for investing. That's still about 1/3 to 1/4 of the average cost of an actively traded fund and about how much I would be charged to move my money out of Health Equity to another custodian. The investment account is still managed by Health Equity which offers some great features including account management, free trades, and being able to lock in your allocation percentages until you wish change them.
Health Equity does not offer a total stock market index in their Investor Choice funds, however, you can approximate a total market ownership by purchasing the Vanguard Institutional Index (S&P 500 index fund) and the Vanguard Extended Market Index (Mid-Cap Blend) with 80% in the S&P and 20% in the mid-cap. Other possible combinations to approximate the total US stock market can be found here.
With broad-based total market offerings in Health Equity's Investor Choice funds, I own the following 4 funds with respective allocation percentages. I split my domestic stock holdings 80/20 to approximate the total stock market and about 20% of my stock portfolio is International. I kept my "Age in Bonds minus 15" rule here.
Vanguard Institutional Index - 52%
Vanguard Extended Market Index - 13%
Vanguard Total International Index - 15%
Vanguard Total Bond Market Index - 20%
Because our district currently pays for our deductible, they deposit the $2,600 deductible amount into our HSAs on January 1. I plan to take the previous year's remaining contributions (the district's plus my own) and move it into the Health Equity investment account. You certainly do NOT want to use your employer-provided deductible for investing in the same tax year unless you can pay your deductible completely out of pocket if a big medical event occurs.
You could even use your HSA as a low-fee, tax-favored retirement account after maxing out a Roth or Traditional IRA. Unlike the Traditional IRA or 403(b), the HSA contributions lower your taxable income INCLUDING your FICA taxes paid (Trad. IRA and 403(b) only lower Federal and State taxes, not FICA). Also, the 403(b) is notorious for higher fees and bad choices for investments, so you could use this opportunity for low-cost savings. Remember, you can't access HSA money for retirement income until after age 65, and that income is then taxable if not used for medical reasons just like a Trad. IRA or 403(b). This is still an option I would consider once I get to the point of investing beyond 15% of my income.
Other insurance "Musts":
Life insurance - choose low-cost Term Life and stay away from cash value life (Whole, Universal, Variable).
Homeowners/Renters insurance
Auto insurance - raise deductibles if you have a 6 month emergency fund to save on premiums
Disability insurance if not covered by your insurance plan. Most cover 67% - 75% of current income. Buy only long-term disability insurance and consider a 90-180 day elimination period if you have a 6-month emergency fund to save on premiums.
Long-term care insurance after age 60 unless you either 1) have little or no assets or 2) are very wealthy and can pay for long-term care on your own. Long-term care in a nursing home can crack and scramble a nest egg in just a few years!
Identity Theft protection - don't buy credit monitoring coverage, you can do this for free at annualcreditreport.com. Pay only for restoration coverage after your identity has been stolen (go to zanderinsurance.com to check out their ID Theft protection).
In a standard PPO plan, you and/or your district pay your premium, you pay any co-insurance or co-pay amounts and a deductible for the first dollars of medical expenses. In an HSA, you and/or your district pay a much lower premium per year, but pay a much higher deductible (sometimes provided by the district). You may contribute the deductible amount, plus additional funds, up to the annual contribution limit into your HSA account pre-tax. Since the money rolls over each year, this allows you to let the money grow in your HSA checking or investment account tax-deferred, and you can withdraw for qualified medical expenses at any time tax free. This is a triple tax advantage that isn't available anywhere else. Choosing to roll any unused deductible dollars into an HSA investment account every year allows the money to grow and compound much like a Roth IRA or 403(b) investment. At age 65, you can also withdraw money from your HSA for any reason at your ordinary income tax rate.
Employer and employee total contributions to an HSA are limited to $6,650 per family in the year 2015 ($1,000 catch-up provision at age 55 also available) and there are no income limitations. If you want to, you can pay medical expenses out of your pocket, allowing your money grow in the HSA, and keep the receipts in a file forever. Any unreimbursed (but qualified) medical expenses can be "cashed in" completely tax free and that money can be used for anything you want no matter what your age is. To do this, simply run your insurance card the same as you normally do to get any discounts, but ask to be billed instead of having the HSA pay the bill.
Letting your money grow in an HSA is good for several reasons. First, the tax savings (TRIPLE tax advantage!), second you can have a nice account for your retirement health care costs, and third, you can withdraw the money at age 65 just like a 403(b) at your ordinary tax rate. Since a lot of teacher retirement insurance plans have been "under attack" for the last few years, having an investment account for your future health care costs is a great idea. The days of having all of your retirement health care costs covered by the state are pretty much over.
Investment accounts offered by each individual HSA company vary greatly. Our district uses Health Equity, which provides a standard list of funds for investments. These funds are expensive, actively traded funds. I can elect to purchase "Investor Choice" funds outside of the Health Equity network to own passive index funds (many are Vanguard). They do charge .033% per month (.396% annually or $3.96 per $1,000 invested per year) on top of the fund's expense ratio. I purchased a few of these funds this year because it's still cheaper than the active funds they offer. If I own the Vanguard Institutional Index with a .02% annual expense ratio and add .396% charge from Health Equity, I'm only paying .416% total expenses for investing. That's still about 1/3 to 1/4 of the average cost of an actively traded fund and about how much I would be charged to move my money out of Health Equity to another custodian. The investment account is still managed by Health Equity which offers some great features including account management, free trades, and being able to lock in your allocation percentages until you wish change them.
Health Equity does not offer a total stock market index in their Investor Choice funds, however, you can approximate a total market ownership by purchasing the Vanguard Institutional Index (S&P 500 index fund) and the Vanguard Extended Market Index (Mid-Cap Blend) with 80% in the S&P and 20% in the mid-cap. Other possible combinations to approximate the total US stock market can be found here.
With broad-based total market offerings in Health Equity's Investor Choice funds, I own the following 4 funds with respective allocation percentages. I split my domestic stock holdings 80/20 to approximate the total stock market and about 20% of my stock portfolio is International. I kept my "Age in Bonds minus 15" rule here.
Vanguard Institutional Index - 52%
Vanguard Extended Market Index - 13%
Vanguard Total International Index - 15%
Vanguard Total Bond Market Index - 20%
Because our district currently pays for our deductible, they deposit the $2,600 deductible amount into our HSAs on January 1. I plan to take the previous year's remaining contributions (the district's plus my own) and move it into the Health Equity investment account. You certainly do NOT want to use your employer-provided deductible for investing in the same tax year unless you can pay your deductible completely out of pocket if a big medical event occurs.
You could even use your HSA as a low-fee, tax-favored retirement account after maxing out a Roth or Traditional IRA. Unlike the Traditional IRA or 403(b), the HSA contributions lower your taxable income INCLUDING your FICA taxes paid (Trad. IRA and 403(b) only lower Federal and State taxes, not FICA). Also, the 403(b) is notorious for higher fees and bad choices for investments, so you could use this opportunity for low-cost savings. Remember, you can't access HSA money for retirement income until after age 65, and that income is then taxable if not used for medical reasons just like a Trad. IRA or 403(b). This is still an option I would consider once I get to the point of investing beyond 15% of my income.
Other insurance "Musts":
Life insurance - choose low-cost Term Life and stay away from cash value life (Whole, Universal, Variable).
Homeowners/Renters insurance
Auto insurance - raise deductibles if you have a 6 month emergency fund to save on premiums
Disability insurance if not covered by your insurance plan. Most cover 67% - 75% of current income. Buy only long-term disability insurance and consider a 90-180 day elimination period if you have a 6-month emergency fund to save on premiums.
Long-term care insurance after age 60 unless you either 1) have little or no assets or 2) are very wealthy and can pay for long-term care on your own. Long-term care in a nursing home can crack and scramble a nest egg in just a few years!
Identity Theft protection - don't buy credit monitoring coverage, you can do this for free at annualcreditreport.com. Pay only for restoration coverage after your identity has been stolen (go to zanderinsurance.com to check out their ID Theft protection).