On June 11th the Windward Private Wealth Management advisors held an advisory panel discussion online.
The first part of the webinar we discussed:
- Planning opportunities around Health Savings Accounts (HSAs)
- Tax saving strategies around home office planning and more
- Investment mistakes to avoid in today’s environment
The second part of the webinar was open for attendee questions and panel discussions around these topics.
Welcome to Windward’s second webinar. We are thankful. Whoa, going way too fast there, my PowerPoint here. OK, we are thankful that you took the time to join us today. We really appreciate it.
I lost my notes.
OK, good afternoon and welcome to Windward’s second webinar. We’re thankful you took the time today to join us and hopefully we can provide you with some ideas to help make a plan, reduce tax, and preserve capital.
We’ll cover a variety of subjects today, all of which might not directly apply to you, but if you walk away with 1 or 2 new ideas, we consider that a success.
I’ll also mention, as I just demonstrated, while we have done a webinar before, we’re not experts. So, if we experience any technical difficulties along the way, please bear with us.
First, I would like to introduce our panelists for the day.
Matthew Bellomo or Matt is a Certified Public Accountant and Wealth Manager.
Emily Petty is a Certified Financial Planner and also a Wealth Manager.
Steven Osborne, or Steve, is a CPA and Senior Wealth Manager.
I’m Brandy Ward an Associate Wealth Manager here.
Darrell Tierney is a CPA, PFS, and CFP, is also a Senior Wealth Manager. And finally, we have Drew Osborne.
He’s a CFP and a Wealth Manager at Windward as well.
Today we’ve carved out the first portion of our webinar into three topics. Matt and Emily will be discussing Health Savings Accounts. Steve and I will talk about ways to reduce tax in the current pandemic.
And Darrell and Drew will be discussing investment mistakes to avoid in today’s environment.
The second portion of our webinar we will spend answering your questions. So if you have any questions, please drop them in the question box, as they come up.
You can see on the screen what the question box looks like. Just type the question in your box and hit Send. Don’t be shy and don’t feel like your questions have to be limited to the talking points we have outlined. You have other planning questions. We’re more than happy to answer those, as well.
With that, I will turn it over to Matt Bellomo.
Thanks, Brandy. Good afternoon everybody. We’re going to start today talking about HSAs.
First, a little history lesson, HDHPs, High Deductible Health Plans, and HSAs.
Developed about 15 years ago to mitigate rising healthcare costs and promote consumer driven health care decisions.
A high deductible health plan is similar, it’s a traditional health insurance plan with higher deductibles, but lower premiums than say a PPO that were used. Those savings on the premiums are directed into an HSA for use in meeting future medical expenses.
An HSA is a tax-preferred savings account that we put money in to fund those future medical expenses.
The one thing to note is that the HSA is always your account.
And as we’ll see, HSAs are hybrid accounts. That is, they can be used for medical expenses. But in the right circumstances can be treated as enhanced IRA accounts. So a little tease about some of the good things that Emily’s going to speak about here in a minute.
How are these animals funded?
The first funding source is the participants’ contributions. Usually, via paycheck withdrawal, each pay period.
Although, you can contribute directly to the HSA as well.
And the employer oftentimes makes a contribution each year, in up to a certain amount.
For 2020, the limits for those who cover just themselves, $3550. For a family, $7100.
And catch up provisions are available for those participants 55 years and older.
One thing to note, though, if both husband and wife, both spouses are 55 and older and each would like to make the thousand dollars contribution, each must have an HSA into which to contribute that additional thousand dollars.
One of the really neat things about the funding of HSAs is that the funding is triple exempt.
That is, the year the contributions are exempt from federal income tax, state income tax, and payroll taxes.
So very preferential treatment so that people utilize HSAs.
And we’re going to move forward with just a handful of frequently asked questions that we get from clients as we discuss HSAs with them.
The first is “how do I use an HSA account?”
Typically, you use a debit card issued by the financial institution where the account is held, and you just swipe it just like a credit card when you have a medical expense. You can also get direct reimbursement from the account.
In either case, it’s best to keep the receipts with the statement that you get periodically and just retain those in your records going forward.
Another great question and very relevant question is: What are qualified expenses?
Generally, medically necessary expenses are qualified expenses.
And it’s important to note too, that dental expenses that are necessary are also qualified expenses as our vision expenses, commonly, eyeglasses, contacts, et cetera.
And you can check out the IRS website Pub 502 for the laundry list of all the medically qualified expenses.
Another question we get regularly is, what happens if I don’t use all the funds contributed to my account in a given year?
One of the best features of the HSA is it to the extent they are not used, they rollover. It can be used in the future.
Another common question we get is do I have to use my HSA for medical expenses? And the answer is no. Commonly, people will use the HSA for larger expenses, but not for smaller expenses, co-pays or generic drugs, just because they can cover those out of their natural cash flow and let the funds accumulate in the HSAs as more of a catastrophic emergency fund.
What happens if you change jobs or you go on your spouse’s insurance or you retire? What happens to your HSA account?
The neat thing again about the HSA is that it is your account. And any balance that remains in the HSA is yours to use in the future to cover qualified medical expenses.
The last question we get oftentimes is can I use it for premium payments? And the answer is yes, in limited circumstances. Most commonly Medicare premiums, parts B and D, and long term care insurance premiums.
So with that, I’m going to turn it over to Emily to talk about some of the planning aspects of having an HSA.
Thank you, Matt.
So there are a few different ways that you can utilize a Health Savings Account.
Most of us have out of pocket medical costs and so if you’re eligible and have a high deductible health plan, why not utilize an HSA to pay for your expected out of pocket medical expenses? You get a tax deduction for what you put into the account and then you can turn right around and spend that money on medical expenses tax free.
Like Matt mentioned, despite the name savings account, you don’t have to necessarily save anything in there. You can use the funds for current medical expenses at your discretion.
One really neat thing about Health Savings Accounts is even if you are the only one in your family that has the HSA compatible health insurance and the Health Savings Account, you can still use the funds not only for yourself but for your spouse and your dependents.
These accounts are really great for expenses that are not covered by insurance. So co-payments, deductibles, prescriptions. Maybe you go to therapy or the chiropractor regularly. These are great things to use the HSA for.
Another thing you can do is stockpile funds in there as kind of a medical emergency fund.
Maybe you have a family of children and you take regular trips to the Emergency Room and have out of pocket costs. Or maybe you have a planned upcoming surgery that you can utilize the HSA to help reduce your tax.
So, if you don’t have out of pocket medical expenses or if you start to accumulate funds in your Health Savings Account, you could look at it as an additional retirement savings vehicle. So, this is frequently referred to as an enhanced IRA. It’s one of the many tools in your retirement toolbox that you can utilize.
So, why it’s called an enhanced IRA is because you get a tax deduction for what you put in.
You can invest the funds in the HSA, and they can grow tax deferred.
Then you can use the funds anytime for medical expenses, tax free.
But also when you hit age 65, you can use the funds for anything you want. You pay tax.
The bonus is unlike most retirement accounts, there’s no Required Minimum Distributions on Health Savings Accounts.
If you’re in a high tax bracket, funding an HSA is a great way to reduce your taxable income. Especially because there’s no phase outs for contributions into the Health Savings Accounts, which people in high tax brackets typically brush up against.
Because of this, some advisors advocate prioritizing funding HSAs over typical retirement accounts.
So, to summarize, HSAs are frequently confused with FSA’s flex savings accounts, and there’s also MSAs, HRAs, it’s an alphabet soup and what does all this mean?
Big picture: there are planning opportunities around you and your family’s health situation and your health care choices. And we can help assess if an HSA is right for you.
So, next we’re going to hear from Steve and Brandy who are going to talk about tax planning around home offices and more.
Alright, thanks Emily.
Thanks Matt. It sounds like considering an HSA is a great way to enhance your plan.
Founded by a CPA, tax planning is in our blood, and always on Windward’s mind.
Today, Steve and I will be discussing ways to reduce tax. I wanted to talk to Steve about tax considerations if you’re officing at home. Steve, with social distancing recommendations in place, a lot of employers are letting employees work from home. What income tax considerations are there if an employee has been or is still working from home for several months or more?
Thank you, Brandy. So, possible issues are how to handle any possible reimbursements of those out of pocket home office expenses and any possible income tax deductions that might be applicable.
So if an employee has incurred some expenses, I’m sorry, if an employee incurs expenses to set up their home office and their employer reimburses them, is that taxable?
No, it shouldn’t be taxable. So the general rule is if they get reimbursed, if they’ve paid for money out of their pocket to set up their office or they’re using their cell phones or personal computers more or whatever and they’re getting some reimbursement, and if they didn’t do that through something like an expense reporting, what’s called an accountable plan through their employer and get timely reporting, that won’t actually go through their payroll, it will literally be a separate reimbursement. So that’s the ideal way to handle it if it works for both parties.
That definitely sounds like a good deal. What if the employer won’t reimburse the expenses? Are there any other ideas you have to recoup those costs?
Well, then like say not ideal (ideal is getting reimbursed) but in the next level, would be partly because of financial pressures that some companies might be having now. So maybe that employees had to incur $500 out of pocket to get a better monitor and maybe get a scanner to use while they’re working from home. But the company says, we’re just not really in a position to reimburse that right now and we’re sorry but that’s just what you’re going to have to do. And yeah, you might be able to use it some for personal use to.
So the next best thing might be to say would the employer be willing to do a one-time reimbursement of that where they actually reduced your payroll by $500 which doesn’t sound attractive but then they reimburse your $500 of expenses. So now you’ll get a net payment of $500, rather than the net of tax payment that you would get through payroll. So a little bit less income tax/payroll tax for the employee. And on the employer side, they would actually save the matching payroll taxes that go with that. So, that would be maybe the next best step possibility.
That’s a good idea.
If an employer won’t directly reimburse the expenses and they won’t take our salary idea, are there any deductions available for employees who incur expenses themselves?
Well, in some instance, so the two instances where there might be, or I’m sorry, for the employees, no, unfortunately not. The employee is not going to be able to take any deduction. The employee, the deduction that existed until several years ago for so-called employee business expenses no longer exists, so there’s no benefit there.
OK, I know we sometimes get that question because of the old tax law.
What about, we have a lot of clients who are self-employed. What if you are a sole proprietor, a member of an LLC, or a corporation?
So if you operate your business as a sole proprietor or as a member of an LLC and you normally work from an off-site business location but you’ve been working from home recently, there is a possibility of doing some deductibility through your income tax return for 2020, when you file that return in 2021. So the details are probably beyond the scope of this conversation, but you need to communicate that to your tax preparer at that time. If it’s Windward or whoever and then, in the instance where you operate your business as a corporation and you take a salary from that corporation. Whether it’s a C-corp or S type corporation, there’s again, you’re back to that employee situation, where there’s no favorable treatment for that. So that’s how it works if you’re in one of those business situations.
OK, so it sounds like if you’re self-employed as a sole proprietor or a member of an LLC, there is some tax planning opportunities with the home office.
We also have a lot of clients are retired. Are there any deductions available for them?
So the retiree, so obviously, they’re not being employees from home because they’re retired. But the question we get sometimes is you know and maybe more so now, “I’m at home all the time so I’m using my computer to look at my investments and to do investment research and (excuse me) read The Wall Street Journal and some of these other things. So where can I deduct these expenses?” And unfortunately these so-called investment type expenses are no longer deductible whether it’s pre-pandemic or during pandemic whatever, so no, no relief there.
- I was talking to a client earlier this week. She typically works in Kansas City proper but she’s working from home right now, outside of KC proper. Is she still subject to the Kansas City earnings tax and is there anything she can do about it if she’s not?
Yeah, we’ll talk about that briefly. So I know we have some people on our call today who are from outside the area, so you folks can check your e-mail or get more popcorn or something just real briefly. Don’t turn us off. We’ll talk for a minute about the Kansas City, Missouri earnings tax. So if you either live or work in Kansas City, Missouri as a wage earner or as a self-employed person, you pay a 1% tax to the city of Kansas City, Missouri. What’s different about the so-called pandemic period is if you, there’s no relief if you’re a resident of Kansas City, Missouri but if you’re a resident of one of the suburbs around Kansas City, Missouri and you’d normally work in Kansas City, Missouri but now you don’t because you’ve been working from home, there is some potential refund there. So a quick example.
So if you make $80,000 this year and you end up working three months of the year or one fourth of the year from home in Overland Park, Kansas, for example, one fourth of your 1% earnings tax, which of 800 which would be withheld potentially $200 could be refunded by filing an RD 109 form with Kansas City that you normally wouldn’t have to file in Spring of 2021. So again, have your tax preparer help with that. The city of Kansas City has acknowledged that they will honor that kind of situation. So, you just have to do the appropriate paperwork. So that’s kind of the limited opportunity.
Good, well, I think every little bit helps and I know Windward will be thinking about that as we prepare 2020 income taxes next tax season.
In addition to potential earnings, tax savings, some clients have experienced a drop in expenses.
If a client is fortunate enough to still receive their normal paycheck, but they’ve been able to do their job from home, they might have a little more wiggle room in their budget now that they’re not paying for gas of a commute or maybe they’re not eating out for lunch like they would when they’re going into the office.
If this was the case for you, you could take advantage of the extra funds by saving a little more for retirement. One easy way to do this would be to contact your HR department and increase your 401(k) contribution.
Not only does this add to the retirement pot, which Windward loves, it also reduces your current taxable income.
Money you contribute to your 401(k) or similarly qualified employer plan is tax deferred, meaning you don’t pay tax on the money now. Instead you defer it until you withdraw the funds from the account.
It’s also really easy to switch this off.
If the switch…it’s easy to switch off the additional contribution if or when you end up going back to the office and your expenses revert to normal, all you have to do is call your HR department again and repeat the process.
It sounds like a good strategy, Brandy, excuse me. What if the client is in a fortunate position that either have or will by the end of the year max out or reach their full 401(k) contribution limit, any opportunities there?
Yeah, there is. First, if you’re on track to max out your 401(k) contribution for the year, good job.
Great job saving. But there, if you’re doing that and still looking for additional funds to save for retirement, you could consider a Roth IRA.
A Roth IRA is different from your 401(k) or a Traditional IRA in that you pay tax on the money you put into the account now, but the account grows tax-free and withdrawals in retirement after age 59.5 are for tax free.
This option wouldn’t necessarily save you tax now, but it could provide a lot of other benefits to retirement planning.
So can anyone take advantage of this Roth IRA strategy?
No. To be eligible for a direct Roth contribution, there are some income limitations in place.
But even if you are over the income limit, this could still be a consideration for you. Windward gets really excited about planning opportunities like this.
So if that’s something that might fit your circumstances, we would love to help you.
So one other question, Brandy, on this, what about the, are there any opportunities connected to what Emily and Matt discussed earlier about HSAs for this kind of situation?
Yeah. So like Matt Emily talked about earlier, HSAs can also be an excellent option, a way to save and reduce tax. But since you’ll need a compatible health insurance plan, this might be better to think about during open enrollment.
What about retirees’ opportunities?
Yeah, without wages, you’re not eligible to make retirement plan contributions.
However, if you’re retired and you’re noticing your checking account balance creeping up higher than normal, there’s still some considerations like there’s still some planning considerations. If you’re not eating out as much or going on trips, you might have a little extra, you might not need the same amount of money you were previously taking.
So reducing withdrawals off the portfolio even temporarily is a great idea.
It’s taking money, if you’re taking money from your IRA, every dollar you withdraw is taxable. So even a temporary reduction in distributions can help your tax situation.
So one provision of the CARES Act that passed several months ago was the suspension of RMDs, which is short for Required Minimum Distributions, for 2020. Now, RMD rules for those who aren’t familiar with that are the IRS requirement that after age 70.5, and actually this year, that’s been moved to age 72, you must begin distributions from your IRA and similar accounts need and pay an income tax on them. So, go ahead and pick up from there Brandy.
Yeah, so what this means for this year is retirees who need less than their RMD amounts to make ends meet, you’re not forced to take those funds out this year. Taking out less from the IRA means less taxable income, like I mentioned, and it can make more room for financial planning.
Another idea I had is, once clients are in the RMD phase they often have their monthly withdrawals coming from that account so they can meet that required distribution. If you’re someone who also has taxable assets like a trust or a joint account, maybe a nonqualified account.
It might be a good idea to move your distribution from the IRA to the nonqualified account for the remainder of the year. This would reduce your taxable distributions from the IRA.
There are some caveats to this, so Windward would love to help you walk through that decision process if it applies to you.
All right. So all this talk of reducing distributions or reducing money that would be taken out of the account, leaves money for it be invested longer.
Withdrawal planning is something Windward thinks very carefully about because unsustainable withdrawals can really blow up a plan. Here to talk about other ways to avoid blowing up a plan are Drew and Darrell.
Thank you, Brandy. We are excited to talk a little bit about investment mistakes to avoid in today’s environment.
So Darrell and I have been talking and thinking about it and want to run through a couple hazards; things to avoid. So the first is, Darrell, you know, we had talked about the way that sometimes people can mistake the timeline of different types of investments. And how I wanted to frame it are two different types of investments. So, number one, we have like a certificate of deposit or a CD. Most people understand this. It’s that you can get a fixed income stream for a specific amount of time. So, was researching interest rates, which as you likely know, are really, really low. You know, I, Darrell, I can go get a three-year CD and get 1.44% on that annually, how does that sound to you?
Well, I’m not that impressed but it’s more impressive than the 6% drop in the market today. As we speak. So.
We’ll talk about volatility of the markets, but my CD interest rates are very, very low. If you had a million dollars, if I had a million dollars for my three year 1.44% CD, that would mean that I would get $14,400 a year of income or $1,200 a month. And I would know that I’m going to get that every month for three years. It’s a fixed income stream. It isn’t volatile. I know what I’m dealing with and at the end of that three years, I’m going to get my principal back. So that’s one end of the spectrum when it comes to a timeline of different types of investments. But the other end of the spectrum is stocks. It’s the market, equities. So, what we know is that it’s not consistent in terms of the return of profit from the stock market.
But when we look backwards, when we look historically at equities over a long period of time, the return of profits in 30-year chunks looking backwards, has relatively consistently been about 7%. Now, we don’t know what’s going to happen going forward.
But what we do know is that in the short-term, equities do not provide a consistent rate of return. You referenced, you know, just a couple of minutes ago, it’s volatile. And we see that today! Markets are way down today.
But what’s important is if you frame equities with the timeframe, that really is probably more appropriate to view them as a 10-, a 20-, a 30-year instrument, then when we think about what happens in the short-term, it can create big time risk if you’re misinformed as an investor. And that often shows up in the form of either panic or greed, which you can speak to, you know how we’ve seen that relatively recently.
Well, it makes me laugh thinking about the headline article in The Wall Street Journal this week of all the people investing in Hertz, a bankrupt company, and one of the guys, I think was a sports investor and since there’s no sports, he said “stock market is way better because it just goes up”. I thought, “wow!”
So the uninformed investor can get greedy. But more often we see people instead panic and it’s natural to panic in the short term because the headlines are brutal. And the volatility can be difficult to stomach, but the flip side of it is that there can be opportunity for the informed investor. The one who has a framework of understanding it’s a long time frame with equities.
So, there can be opportunities to potentially buy low and the flipside, there can be opportunities to sell, when in the short-term it’s returned way above the kind of long-term average. So, more than anything, that timeline is so important. Is your plan thinking about the long term of equities? And if it’s not, man, do we think it’s important to work with an advisor, to work with Windward, so that your plan does connect to that. So, that was mistake number one. Mistake number two is the potential to try and substitute dividends for conservative investments. So, why don’t you speak to that?
Well, you know, that’s exactly right. So Jay Powell yesterday, I think you know, they always try to come up with the reason for what’s going on in the market, but the Chairman of the Fed talked about, we probably are in for difficult economy going forward and kind of set the market tumbling. But, one of the things he said was, they are going, their intention is to keep rates low for awhile. So, no, I never, in a million years in 2008 and 2009 expected the Fed to have rates. So, low for so long. And here we are again, I mean, it’s going forward and my fear is, what people do is they look at the dividend yield on stocks. I mean, there are some stocks that have pretty good yields and they look at that as a substitute for, say, fixed income investments.
If I can get that attractive, 1.44% on the Drew Osborne CD, then, you know, I’d rather get three or 4% on a stock. And maybe seven or 8%, or whatever it is.
I think there’s some, some difficulties with that. So, so, one, you know, and speaking of just retirees now, I kind of put them into two categories. We have some people that are fortunate enough, they’ve accumulated enough money, that they can live off the yield off their investment. So, literally, the interests and dividends that the portfolio generates, they can live off of those.
The vast majority of people, though, they get some benefit from the yield off their portfolio, but really what they’re doing is liquidating their portfolio out over time over the rest of their lives with the hope that their money lasts them the rest of their lives.
Well, the big risk is if you become much more interested in dividend-yielding investments, put more money in the stock market, and you’re in this, you know, slow motion liquidation mode, your timing can be really bad, you know. And so the worst thing in the world is you need $10,000, you have to liquidate $20,000, what used to be worth $20,000 in assets that have fallen to $10,000.
And basically, your portfolio, the plan can blow up very, very quickly. And so there’s a tendency to that. Now, the flipside of that, let’s say you’re fortunate, you have enough money to live off the interest and dividends.
What can happen, we saw this in 2008 and 2009, companies may or may not be able to sustain their dividends. And so if companies cut their dividends, then, you know, and I think the answer for this mistake, in both cases, whether you’re in slow motion liquidation or you’re living off the dividends in your portfolios, you need enough safe assets that if you’re in the liquidation mode, you can liquidate something that’s holding its value.
Or if you’re in the dividend, living off your dividends and dividends are cut, then you can supplement that with something else that’s not going to going to drop in value.
So, you know, either case, it speaks to having some, some degree of safe assets.
Right. And the danger is, it can be really attractive just to say, wow, if dividends are paying more than interest, then I really need to load up there and just go all dividends all the way. So, there should be a curse in doing that, though, and you can kind of speak up to that.
Well, and you know that’s right because, you know, what, one thing about it, is, if you get, get it, think about it from the company’s standpoint. There are some companies that are natural dividend payers. So you know, if you think about it, if you’re a CEO of a company and you’re generating operating cash flows, there is really about three things you can do with it. Or four maybe. You can re-invest the money in the company, you can try to retire debt, you can do acquisitions or you can return it to the shareholders. You can return it in the form of dividends or you can, you know, in terms of stock buybacks let’s say. The problem is not all companies that pay dividends are in the category where they should be returning money to shareholders. You know, we talk about, it’s kind of the curse of the dividend aristocrats. The dividend aristocrats are the companies that, you know there’s different benchmarks, but let’s say it’s a company who has raised their dividends every year for the last 25 years.
I would not want to want to be the CEO of one of those companies. They’re under tremendous pressure. They have committed a chunk of money that’s got to go out and dividends. The price they pay if they cut their dividend, the stock is going to really take a beating because of that. And so, you know, we’ve seen scenarios through the pandemic where for example, some of the energy companies are literally losing money in negative cash flow situations. And because of their history, their continuing to pay dividends when, you know, and maybe it’s temporary but that might not be a great idea. I mean, that’s kind of a slow motion liquidation of the company. So there just, there is a problem with it. The lesson is not all dividend paying companies are the same. Some should be paying them, some shouldn’t, and so finding suitable companies is really, really important piece of that to make sure it’s sustainable.
So. Yep, absolutely. Next mistake that is out there is that changing your plan, based on what the market is doing is usually the wrong thing to do. So if your plan is long-term oriented, why would you change your plan based on what is happening in the short-term? And I asked that question because we often know the answer. It’s because it’s so painful emotionally and just visually to see when the market drops hard. That, whoa, this is my real money. And it’s going way down. And I can’t let it go all the way down or else I have no plan. I have no money. And so, it’s not a rhetorical question because it’s real. Science tells us that we feel, as human beings, we feel pain twice as hard, twice as strongly than we do feel pleasure. So, we, we see that in the market, all the time.
We don’t get.
When the market goes dramatically up, we get more calls than when it goes dramatically down.
I’m going to get off and cry after we get off.
You’re human. You’re normal. But a lot of times, people often will underestimate their time horizon. Especially folks, as they get closer to retirement. No doubt. That’s when the plan becomes real because the accumulation plan kind of starts to become a decumulation plan. But the time horizon for, you know, a couple or a relatively healthy person is still hopefully 20 or 30 years. You still need equities in your plan, which are going to be volatile in the short-term, to still make your plan work. So a lot of times, what we realize is that people, they maybe just need a really concrete and a better short-term plan. What is their cash flow plan for the next year? What, are there, is there enough cash?
Is there enough income-producing things that are there? Are there enough safe assets so that we don’t have to liquidate the equities if they’re in a volatile, short-term, temporary swing?
So, are you saying, so, you know, one of the things we hear all the time is, the older you get, the more conservative you should be. So we have people come in all the time and say, “I’m retiring next year, I probably need to get more conservative.” Is that not the right answer?
Not always. You know, sometimes it might be, but what’s most important is making sure that there’s a short-term plan and that short-term plan gets reviewed on a consistent basis to make sure that it’s still appropriate.
And, you know, you’ve seen this and we see this often is that, there often will become a point when a family has gotten to the point where, you know, they’re in their eighties or nineties and they realize, “we don’t need a good chunk of this money”. And we have the opportunity to potentially become more aggressive because it’s going to be for charity, or it’s going to be for our family members. And so there’s, you know, the big picture point is, you know, there’s never one right answer. Your situation and your plan is going to be unique based on what’s going on.
And ultimately we know this, is that if you change your plan based on what the market is doing, people stink. Professionals, amateurs, individuals, people stink about the timing of when to get in or out of the market. If you had success one time or two times or three times, then congratulations, you got lucky. Because over the long-term, it is too hard. It’s too painful. So many studies have shown the impact of missing and trying. Missing the good days in the market and trying to predict what’s going to happen in the market. So, more than anything…
The last four months have been that in a microcosm. So if you got out when the market started tanking in March or just really decided to jump back in the last couple of weeks, maybe even get back out this afternoon. But that’s just the way goes. I mean, it is unbelievably difficult to time.
So last mistake that we sometimes see relates to concentrated positions that sometimes can really change a person’s plan towards upside and, more importantly, towards downside.
Well, that’s right. So, so for those of you who were on the last webinar, that’s really what we were talking about in terms of the market is, I feel like any strategy where you’re reducing choices, so whether it’s going all in on an up market or getting super conservative in a bad market, you know the future is unknowable. And so the best way to deal with that is to try to cover your bets and make sure that, you know, you’re adequately diversified in lots of parts of the market. I think that, that, that’s, that’s a really good way to do it.
Any extreme position where you’re limiting your choices is probably not a great idea. And, you know, we see that sometimes. I’ve had conversations with people, “well, I’ve got, you know, some bonds and cash for my safe assets and I’m invested in the S&P 500. Is that enough?” And it’s certainly better than being invested in a handful of stocks. And there’s nothing wrong with the S&P 500. You’ve got growth companies, you’ve got value companies. They’re global so, you know, international global type exposure. But the truth is, there’s lots of part of the markets. There are small company stocks that tend to perform differently in economic recoveries. You’ve got international stocks. You’ve got emerging markets. So there’s things that are more energy or futures and commodities related. There’s just lots and lots of pieces. And so, you know, the idea, and there’s some real science in how to construct the portfolio. Which assets go best together so that when one zigs the other zags? And so, you know, that’s, that’s, I think that’s all important and that’s all kind of positioning yourself for the upside and the downside.
And, you know, we think diversification is such, it’s the key tenet of investment management but it can be so tempting to see success stories of concentrated positions that have made people rich overnight or had, you know, strong performances because they bet real, you know, on either one security or a small basket of securities. But there’s so much risk there that rarely does that make sense?
No and you know, one that comes to mind to me is, we’ll see somebody working for a company and it’s in the company’s, the company’s incentive is to get you as tied in as they can. So they’ve got discount stock purchase plans and they’ve got ESOPs. They’ve got all kinds of things.
So not only is your wealth tied up in the company, but so is your livelihood. That’s great from a company standpoint but typically it’s not a great idea from the employee standpoint. And we work hard on getting them diversified. If it’s a good company, you know, there’s a lot of great success stories about that but you don’t hear about the stories that aren’t so successful.
Yeah and those situations can be complicated because oftentimes there’s going to be a lot of tax to be paid and so it’s hard to say, gosh, what’s the right thing to do? But we love working with clients to help try to figure that out because balancing that is a hard act but it’s a really important act because your plan is too important to take too much risk.
Yep, I agree. I think that sums it up pretty well. So, with that, bring Brandy and the rest of the crew back up as we transition kind of to the last portion of the webinar here.
All right. So all our panelists are all hopping on. I will remind you once again to please let us know if any question you may have. You can put them in the box. I’ll switch the slide here. You can see where that is again.
We’re here to answer your questions
We have already received a couple.
I’ll start with this one: I have a chunk of money. When should I invest it?
Well, let me jump in on that one. So, because I think I might differ from some of the other people in here.
So if you look historically and this, let’s, let’s just assume, one, that we have, you’re going to invest in a diversified portfolio.
If you look at it historically, you’re better off implementing that in one lump sum.
Now then, what, I think there’s a couple other people on the panel who are going to tell you to dollar cost, average dollar cost average that in and I think there’s nothing wrong with that. And what I mean by that is, I’m going to put in a third now, and a third later, and a third later, or whatever.
Statistically, that’s not on your side historically. But I think sometimes that’s better for people mentally to go into that. Go into it that way. And again, keep in mind, if you’re going into a diversified portfolio. You’re not putting it all into the market, hopefully, it’s going into some safe assets, some, some higher risk assets. So, the rest of these guys might disagree with me, but that’s my, that’s my opinion.
I think it’s a good, I think it’s a good take. The other thing that I would just add is we, we see some folks who do want to do a dollar cost average approach. And, like Darrell said, there’s pros and cons to it but what I just emphasize with people is to say, make a real, like concrete plan. Otherwise, people change the plan as they start to go along with it, based on what’s happening with short-term volatility.
If you say, I have $100,000 and I don’t want to put it all in today, well, let’s make a real plan to say, what makes some sense? Is it 25,000 this month? And then we do that for the next three months? Or is it the next three years or the next three weeks? Let’s make the plan so that you don’t have to agonize every time the short-term volatility of the market changes and think, “Oh, shoot. Should I change it? Should I do something different? Should I do something now?” It wears people out and sometime, then they just don’t have a plan. They just keep sitting on it.
Well and I would just say this.
The nature of that question, that’s a short-term question. I would get, I would say, most of the time if we get 10 years down the road, probably how you did that’s not going to be nearly as important is it might be six months or a year from now. So.
Yep, how does it fit with the plan?
Well and as you mentioned earlier, the, you know, over the last 20 years, there’s been 60 days that drove the market.
So you know we’ve all seen that slide. It talks about that as well so it’s really more time in the market versus timing the market.
So is tomorrow the day? Is tomorrow the day we should be in, Matt?
I will not opine to that, Darrell.
OK, that’s good.
Make a plan and follow it.
Good advice, OK. Next question is are there investment choices available for funds that are sitting in an HSA account?
I can answer this one. So, yes, there are investment choices for funds that are sitting in an HSA.
And how it works is typically an HSA is set up at a bank and then you do have the ability typically to set up kind of an extra account. That’s kind of the investment portion of the HSA.
And some banks link with custodians that probably have pre-selected funds that you can choose from.
And then you can also work with an advisor like Windward where like we use TD Ameritrade. TD Ameritrade uses HSA Bank where you could set up the HSA at HSA bank. If you wanted to invest funds and have them managed by an investment advisor from Windward, you could set them up with an HSA at TD Ameritrade. So and you can invest in anything with the funds there.
And I think the important point on that is, once you go into an investment mode, you’re kind of back to what Drew has been talking about. You’re making a decision that that’s longer-term money.
And so, you know, we don’t want it in the stock market day today and Johnny has to go to the emergency room and we need the money. That’s not good. So, you know, the HSA is just like a retirement portfolio. You have to make a decision. If you’ve made a decision, this is really going to be my long-term money that I’m going to use for long term care, 30 years from now, fantastic. Get it invested.
But you know, a good rule of thumb is if you’re going to need the money in the next five years, stock market is probably not necessarily a good answer.
So, one of the questions that is right in line with that, so I’ll kind of plug it in right now.
What? At what balance should someone consider investing their HSA?
I think that comes down.
I was just going to say, I think it really comes down to your personal financial situation, your goals, and you and your family’s health expenses.
It’s really hard to give a general answer to that but you typically want to have some in cash in the HSA and then consider investing. So you don’t want to not have any cash in the HSA portion and they do sometimes charge fees for not keeping a certain balance in there.
So, my general answer is, it really comes down to your personal situation.
Then, I wanted to add, I would just add, I might think in terms of if the deductible is, say, $5,000 a year, to have two years, maybe three years in there, knowing that you’re probably funding the fourth year. And then you kind of get back to that five years Darrell’s talking about.
In terms of, you know, the fact is, you might need it.
I think that’s a great point and then leave that part in cash. If there’s extra you to consider investing what’s above that cash balance.
No we, we hear about such lousy interest rates and people don’t like having emergency funds or HSAs in cash. I encourage people, don’t think about that as an investment. That’s insurance. That’s really more insurance than an investment. Don’t worry about what you’re going to make on it. Just make sure you have it when you need it.
The old adage, cash is king.
If your employer offers an FSA flexible savings account, which this client uses, is there any benefit to divert that money to her HSA?
If an HAS is available, yes, because the HSA is your account and the balance can go forward.
And in an FSA, a flex savings account, as, you know, when we’re talking about a medical FSA, it’s one of those things. If you don’t use it, you lose it.
So the HSAs, certainly a better alternative if both are available and assuming, of course, you’ve got an HDHP you know qualifying health plan.
I was just going to add to what Matt specified a medical FSA flexible spending account because the flexible spending account is the only tool used for you can run some of your dependent child care through if you had that situation with the younger folks who have daycare considerations. So, the HSA is not an option for that. So, that’s particularly good for that. I agree with Matt for the, the medical part. The HSA probably has certain advantages over the FSA that he mentioned.
So if you have a chunk of change, is it better to add so you have extra money right now. You’re deciding where to put it. Is it better to put it in a 529? So short-term financial goals or retirement account, a long-term financial goal?
Yeah, I like that question. It’s a really good question. You know, the 529 relates education plans a lot of times for folks thinking about saving for college. For their kids or someone else.
And, you know, my quick thought comments are, I would first look and say, hey, how does my retirement plan look? Because I got to take care of my retirement plan first. And if I’m behind, I’m going there, probably, without question first.
If I say, boy, I’m in a room, I’m in good shape, then I’m saying, and I want to add to the opportunity for the education for whoever I’m planning for. That’s the point when I would add to the 529 Plan.
But it’s almost always a good thought to say, I want to make sure that my plan is in really good shape first but that’s, that’s the nature of planning and gosh, we’re having to juggle multiple goals at the same time. So my answer is really simple. Oftentimes, it’s not that simple. And oftentimes, I like to hedge my bets by saying, “hey, great chance to put some in retirement. Great chance to also put some towards education also.”
Yeah I hear a lot of advisors say, you know, there are a lot of answers to education expenses. There are not a lot of answers to retirement. So we want to make sure retirement is on a sturdy foundation before we start funding education.
There is no retirement fairy.
Should I save my HSA or spend it?
Well, I repeat myself, but I really think that the answer to that comes down to your personal financial situation, your financial goals, and you and your family’s health expenses.
Maybe you have plenty of cash flow and you can pay for medical expenses out of pocket.
Then that’s a great opportunity to use the HSA as an enhanced IRA. But maybe you don’t. Maybe you have ongoing medical expenses and it just makes sense to use that as a kind of a conduit account to generate a tax deduction.
And it also depends on your current tax bracket and what you think the future, your future tax bracket may look like, which can sometimes be a crapshoot, but you may know. So that factors into the answer as well.
One other stress that sometimes comes into play, that’s just a thought and applies to folks my age is, if you have the ability to build up some balance in the HSAs over the years, and that’s obviously a luxury, but, if you have that opportunity, it can also help with things like, for a lot of folks who might have a gap between when they retire and when they start their Social Security benefits.
So, even if they start on Medicare at 65, but they’re retired but it may be advantageous to wait on their Social Security benefits until 66 or later, that can be a good use of funds. And Matt and Emily talked about how it can be used for, HSA money can be used for Medicare premiums. So it’s a good way to bridge that gap without having to take additional distributions out of the fund, and that kind of thing. So, if you have that luxury, it gives you some options at that retirement point. And it also gives you some options, you know, Darrell threw out the possibility of helping with long term care, or, or other options. So you need to have that luxury to be able to do it. Most people probably are caught up in the in life and need most of that money to help with cashflow and medical expenses and obviously, those are high deductible plans so there are a lot of out of pocket expenses generally.
Agreed, I would say, most people I see with HSAs are using it and spending the balance because most people have out of pocket health care expenses. So I agree with that.
Awesome. So last question I have here is, are the stimulus checks taxable?
No, they’re not.
OK, well, I think that covers it for today. That was a short and sweet answer.
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