Betterment Resources | Original Content by Financial Experts | Nick Holeman, CFP® | Director of Financial Planning, Betterment

Backdoor Roths and beyond: The four camps who can benefit

The five types of investing accounts you need to know

The five types of investing accounts you need to know Jul 14, 2023 1:38:00 PM From 401(k)s to 529s, investment accounts vary in purpose. Learn which are better suited for your long-term financial goals. Investment accounts are valuable tools for reaching your financial goals. But they’re not all the same. You have choices to make, but we’re here to help. Why it matters: Choosing the right investment accounts could mean reaching your goals ahead of schedule. Conversely choosing the wrong accounts could mean you don’t have the money when you need it. Know your goal: Whether you’re simply trying to build wealth or you have a specific goal in mind, knowing what you want to do will guide what account type you choose. Three of the most common goals are: Saving for your retirement Saving for a major purchase such as a house Saving for your own or a loved one’s education The big five: Once you know your investing goal, one of these five types of accounts should likely do the trick: IRAs 401(k)s Health Savings Accounts (HSAs) Individual (or Joint) Brokerage Accounts 529 plans Saving for retirement? Look at these tax-advantaged accounts: IRAs are used to save for retirement, offering unique tax advantages. Unlike a 401(k), your contributions don’t automatically come from your paycheck and the annual contribution limits are lower, about three times lower in fact. An IRA can be an excellent choice. They also may be subject to penalties for early withdrawals. 401(k)s are retirement accounts offered by employers, providing tax advantages similar to an IRA. Contributions are automatically deducted from your paycheck and sometimes employers match a percentage as an added benefit. Keep in mind, you’ll usually incur penalties for early withdrawals. HSAs are designed primarily to help individuals pay for health care costs but once you turn 65, you can use them for anything you want without incurring penalties. Plus, you enjoy triple the tax advantages. Things to know about retirement investing accounts: There are limits: Retirement accounts have different contribution limits (the amount you can deposit each year) based on account type. If you’re looking to save an uncapped amount each year, a brokerage account can be used after maxing out retirement accounts. Did someone say tax-advantaged? The tax advantages of 401(k)s and IRAs come in two flavors: Roth and Traditional. A Roth account may be better if you think you’ll be in a higher tax bracket when you retire. But if you expect to be in a lower tax bracket when you retire, a Traditional retirement account may be better. (Exciting Disclaimer: Always consult a licensed tax advisor.) Did someone say triple-tax-advantaged? With HSAs, contributions, potential earnings, and withdrawals (with a few key stipulations) are tax-free. This is what we mean when we say HSAs enjoy “triple” the tax advantages. The more you know: You can have a 401(k), a Traditional IRA, a Roth IRA, and an HSA at the same, so you can contribute as much as possible toward retirement through tax-advantaged means. Saving for a major purchase? Check out this account: Individual (or Joint) Brokerage Accounts let you purchase stocks, bonds, exchange-traded funds (ETFs), mutual funds, and other financial assets. A joint account is commonly used by married couples to consolidate their investments. Brokerage accounts lack tax advantages but are available to virtually anyone to invest any amount. Saving for education? Then try this account: 529 plans are an ideal choice because earnings are tax-free, as long as you use them for qualified education costs. You can withdraw from the plan as needed for education-related expenses. Hot Tip: Stash your cash until you’re ready. Choosing the right investing account can take some thought. While you're deciding, a high-yield Cash Reserve account can help you earn more from your cash until you’re ready to invest.

Optimize your investing by optimizing your deposits

Optimize your investing by optimizing your deposits Jul 13, 2023 1:41:00 PM There’s an art to investing money. We can help you determine how much to save and the deposit strategies to help reach your goals. How much you need to invest and how you do it changes with your circumstances. With the right techniques and tools, you can be equipped to make the choices that are best for you, whatever your situation. Why it matters: If you simply invest money when you have “extra” or make deposits randomly when you remember to, you may be missing out on growing your investments or even reducing your taxes. When you open an investing or Cash Reserve goal, we’ll ask you what you’re saving for, your target amount, and the date you want to reach it by (your time horizon). Then we’ll recommend how much to save each month and give you resources to show projections since we can’t predict the future. There are two deposit strategies to choose from: Lump-sum investing is depositing the entire balance of cash at once. Dollar-cost averaging is depositing the same amount of money at fixed intervals (weekly, monthly, etc) over a period of time. Lump-sum investing may be better if you have extra cash and are looking to maximize the time your funds are invested which can result in higher long-term returns. But know that it can require strong discipline during volatile markets. You might see sizable unrealized short-term losses during market declines, making it hard to resist the urge to sell. Dollar-cost averaging may be better if you want to take less risk with a lump sum of cash and protect against short-term market declines, or if you only have money to save after each paycheck. But know that you may be forfeiting potential long-term upside by not investing a larger amount right away. On the positive side, this method helps you avoid timing the market and can be easily coordinated with the timing of your paycheck. You end up buying more shares of an investment when the price is low and fewer shares when the price is high which can result in paying a lower average price per share over time. Pro Tip: The easiest way to start dollar-cost averaging is by automating your deposits. To get started with dollar-cost averaging, simply log in to your Betterment account, click the Deposit button, select an account, and adjust the frequency to meet your needs. If you’re dollar-cost averaging, consider this: The timing of your deposits matters. Scheduling deposits to occur the day after each paycheck can be an effective strategy. There are three reasons for this: Paying yourself first. From a behavioral standpoint, this protects you from yourself. Your paycheck goes toward your financial goals first, and then toward other spending needs. Avoiding idle cash. When your cash sits in a traditional bank account, it typically earns very little interest. In times of inflation, your cash is actually losing value. Idle cash could cause you to miss out on investment growth. Reducing your taxes. Regular deposits can help us rebalance your portfolio more tax-efficiently, keeping you at the appropriate risk level without realizing unnecessary capital gains taxes. We use the incoming cash to buy investments in asset classes where you’re underweight, instead of selling investments in asset classes where you’re overweight.

How To Plan For Retirement

How To Plan For Retirement Oct 21, 2022 11:56:00 AM It depends on the lifestyle you want, the investment accounts available, and the income you expect to receive. Most people want to retire some day. But retirement planning looks a little different for everyone. There’s more than one way to get there. And some people want to live more extravagantly—or frugally—than others. Your retirement plan should be based on the life you want to live and the financial options you have available. And the sooner you sort out the details, the better. Even if retirement seems far away, working out the details now will set you up to retire when and how you want to. In this guide, we’ll cover: How much you should save for retirement Choosing retirement accounts Supplemental income to consider Self-employed retirement options How much should you save for retirement? How much you need to save ultimately depends on what you want retirement to look like. Some people see themselves traveling the world when they retire. Or living closer to their families. Maybe there’s a hobby you’ve wished you could spend more time and money on. Perhaps for you, retirement looks like the life you have now—just without the job. For many people, that’s a good place to start. Take the amount you spend right now and ask yourself: do you want to spend more or less than that each year of retirement? How long do you want your money to last? Answering these questions will give you a target amount you’ll need to reach and help you think about managing your income in retirement. Don’t forget to think about where you’ll want to live, too. Cost of living varies widely, and it has a big effect on how long your money will last. Move somewhere with a lower cost of living, and you need less to retire. Want to live it up in New York City, Seattle, or San Francisco? Plan to save significantly more. And finally: when do you want to retire? This will give you a target date to save it by (in investing, that’s called a time horizon). It’ll also inform how much you need to retire. Retiring early reduces your time horizon, and increases the number of expected years you need to save for. Choosing retirement accounts Once you know how much you need to save, it’s time to think about where that money will go. Earning interest and taking advantage of tax benefits can help you reach your goal faster, and that’s why choosing the right investment accounts is a key part of retirement planning. While there are many kinds of investment accounts in general, people usually use five main types to save for retirement: Traditional 401(k) Roth 401(k) Traditional IRA (Individual Retirement Account) Roth IRA (Individual Retirement Account) Traditional 401(k) A Traditional 401(k) is an employer-sponsored retirement plan. These have two valuable advantages: Your employer may match a percentage of your contributions Your contributions are tax deductible You can only invest in a 401(k) if your employer offers one. If they do, and they match a percentage of your contributions, this is almost always an account you’ll want to take advantage of. The contribution match is free money. You don’t want to leave that on the table. And since your contributions are tax deductible, you’ll pay less income tax while you’re saving for retirement. Roth 401(k) A Roth 401(k) works just like a Traditional one, but with one key difference: the tax advantages come later. You make contributions, your employer (sometimes) matches a percentage of them, and you pay taxes like normal. But when you withdraw your funds during retirement, you don’t pay taxes. This means any interest you earned on your account is tax-free. With both Roth and Traditional 401(k)s, you can contribute a maximum of $23,000 in 2024, or $30,500 if you’re age 50 or over. Traditional IRA (Individual Retirement Account) As with a 401(k), an IRA gives you tax advantages. Depending on your income, contributions may lower your pre-tax income, so you pay less income tax leading up to retirement. The biggest difference? Your employer doesn’t match your contributions. The annual contribution limits are also significantly lower: just $7,000 for 2024, or $8,000 if you’re age 50 or over. Roth IRA (Individual Retirement Account) A Roth IRA works similarly, but as with a Roth 401(k), the tax benefits come when you retire. Your contributions still count toward your taxable income right now, but when you withdraw in retirement, all your interest is tax-free. So, should you use a Roth or Traditional account? One option is to use both Traditional and Roth accounts for tax diversification during retirement. Another strategy is to compare your current tax bracket to your expected tax bracket during retirement, and try to optimize around that. Also keep in mind that your income may fluctuate throughout your career. So you may choose to do Roth now, but after a significant promotion you might switch to Traditional. Health Savings Account (HSA) An HSA is another solid choice. Contributions to an HSA are tax deductible, and if you use the funds on medical expenses, your distributions are tax-free. After age 65, you can withdraw your funds just like a traditional 401(k) or IRA, even for non-medical expenses. You can only contribute to a Health Savings Accounts if you’re enrolled in a high-deductible health plan (HDHP). In 2024, you can contribute up to $4,150 to an HSA if your HDHP covers only you, and up to $8,300 if your HDHP covers your family. What other income can you expect? Put enough into a retirement account, and your distributions will likely cover your expenses during retirement. But if you can count on other sources of income, you may not need to save as much. For many people, a common source of income during retirement is social security. As long as you or your spouse have made enough social security contributions throughout your career, you should receive social security benefits. Retire a little early, and you’ll still get some benefits (but it may be less). This can amount to thousands of dollars per month. You can estimate the benefits you’ll receive using the Social Security Administration’s Retirement Estimator. Retirement accounts for the self-employed Self-employed people have a few additional options to consider. One Participant 401(k) Plan or Solo 401(k) A Solo 401(k) is similar to a regular 401(k). However, with a Solo 401(k), you’re both the employer and the employee. You can combine the employee contribution limit and the employer contribution limit. As long as you don’t have any employees and you’re your own company, this is a pretty solid option. However, a Solo 401(k) typically requires more advance planning and ongoing paperwork than other account types. If your circumstances change, you may be able to roll over your Solo 401(k) plan or consolidate your IRAs into a more appropriate retirement savings account. Simplified Employee Pension (SEP IRA) With a SEP IRA, the business sets up an IRA for each employee. Only the employer can contribute, and the contribution rate must be the same for each qualifying employee. Savings Incentive Match Plan for Employees (SIMPLE IRA) A SIMPLE IRA is ideal for small business owners who have 100 employees or less. Both the employer and the employee can contribute. You can also contribute to a Traditional IRA or Roth IRA—although how much you can contribute depends on how much you’ve put into other retirement accounts.

What To Do With An Inheritance Or Major Windfall

What To Do With An Inheritance Or Major Windfall Oct 21, 2022 11:50:00 AM You may feel the urge to splurge, but don’t waste this opportunity to move closer to your financial goals. It’s hard to be rational when thousands of dollars appear in your bank account, or you’re staring at a massive check. You might be excitedly thinking about what to buy with a tax refund. Or mourning the loss of a loved one who left you an inheritance. Whether you were expecting this windfall or not, it’s important to slow down and think about the best way to use it. Many people might let their impulses get the better of them. But used wisely, every windfall is a chance to give your financial plan a boost. In this guide, we’ll cover: Why it’s so easy to waste a windfall Why taxes should always come first What to do with the rest of your windfall Why it’s so easy to waste a windfall We tend to treat windfalls like inheritances differently than we treat other money. Many of us naturally think of it like a “bonus,” so saving may not even cross our mind. And even if you’ve worked hard to develop healthy spending habits, a sudden windfall can undo your effort. Here’s how it might happen: An inheritance makes your cash balance spike. You spend a little on early splurges, and start to slack on saving habits. This behavior snowballs, and a few months or years later, you face two consequences: you’ve completely spent the inheritance, and you’ve lost the good fiscal habits you had before. You may also fall into the trap of overextending your finances after using an inheritance for a big purchase. Say you use the inheritance for a down payment on a bigger house. Along with a bigger house comes higher property taxes, home maintenance costs, homeowner’s insurance, and monthly utilities. New furniture, too. Your monthly expenses can expand quickly while your income stays the same. The moment you find yourself with a lot of extra money, you should also think about taxes. Why taxes should always come first You don’t want to spend money you don’t have. If you burn through your windfall without setting aside money for taxes, that’s exactly what you could be doing. You’re not going to pay taxes on a tax refund, but if you receive an inheritance, win the lottery, sell a property, or find yourself in another unique situation, you could owe some hefty taxes. The best thing to do is consult a certified public accountant (CPA) or tax advisor to determine if you owe taxes on your windfall. What to do with the rest of your windfall Once taxes are taken care of, look at your windfall as an opportunity to accelerate your financial goals. Remember, if you created a financial plan, you already thought about the purchases and milestones that will be most meaningful to you. Sure, plans can change, but many of your responsibilities and long-term goals will stay the same. Still stuck? Here are some high-impact financial goals you can make serious progress on in the event of a windfall. Pay down your debt Left unchecked, high-interest debt can often outpace your financial gains. Credit card debt is especially dangerous. And while your student loan debt may have low interest rates, paying it off early could save you thousands of dollars. Paying off debt doesn’t have to mean you can’t work toward other financial goals—the important thing is to consider how fast your debt will accrue interest, and make paying it off one of your top priorities. Depending on the size of your windfall, you could snap your fingers and make your debt disappear. Boost your retirement fund It’s not always fun to plan years into the future, but putting some of your windfall to work in your retirement fund could make life a lot easier down the road. Put enough into retirement savings, and you may even be able to adjust your retirement plan. Maybe you could think about retiring earlier, or giving yourself more money to spend each year of retirement. Refinance your mortgage Paying off your primary mortgage isn’t usually a top priority, but refinancing can be a smart move. If you’re paying mortgage insurance and your equity has gone up enough, refinancing might mean you can stop. And locking in a lower interest rate can save tens of thousands of dollars over the life of your mortgage. Taking this step means your goal of home ownership may interfere less with your other financial goals. Revisit your emergency fund Any time your cost of living or responsibilities change, your emergency fund needs to keep up. Whatever stage of life you’re in, you want to be confident you have the finances to stay afloat in a crisis. If you suddenly lost your job or couldn’t work, do you have enough set aside to maintain your current lifestyle for at least a few months? Start estate planning Wherever you’re at in life, it’s important to consider what would happen if you suddenly died or became incapacitated. What would happen to you, your loved ones, and your assets? Would your finances make it into the right hands? Would they be used in the right ways? When you find yourself with a major windfall, it’s a good time to create or reevaluate your estate plan. Take time to double-check that you’ve set beneficiaries for all of your investment accounts. If you haven’t already, create a will and appoint a power of attorney. If you have children, you may want to set up a trust. Estate planning isn’t fun, but it can start paying immediate dividends in the form of peace of mind.

What Is A Fiduciary, And Do I Need One for My Investments?

What Is A Fiduciary, And Do I Need One for My Investments? Oct 21, 2022 11:32:00 AM When it comes to getting help managing your financial life, transparency is the name of the game. When you seek out financial advice, it’s reasonable to assume your advisor would put your best interests ahead of their own. But the truth is, if the investment advisor isn’t a fiduciary, they aren’t actually required to do so. So in this guide, we’ll: Define what exactly a fiduciary is and how they differ from other financial advisors Consider when it can be important to work with a fiduciary Learn how to be a proactive investment shopper What is a fiduciary, and what is the fiduciary duty? A fiduciary is a professional or institution that has the power to act on behalf of another party, and is required to do what is in the best interest of the other party to preserve good faith and trust. An investment advisor with a fiduciary duty to its clients is obligated to follow both a duty of care and a duty of loyalty to their clients. The duty of care requires a fiduciary to act in the client’s best interest. Under the duty of loyalty, the fiduciary must also attempt to eliminate or disclose all potential conflicts of interest. Not all advisors are held to the same standards when providing advice, so it’s important to know who is required to act as a fiduciary. Financial advisors not acting as fiduciaries operate under a looser guideline called the suitability standard. Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but they neither have to put the clients’ best interests first nor disclose or avoid conflicts of interest so long as the transaction is considered suitable. What are examples of conflicts of interest? When in doubt, just follow the money. How do your financial advisors get paid? Are they incentivised to take actions that might not be in your best interest? Commissions are one of the most common conflicts of interest. At large brokerages, it’s still not uncommon for investment professionals to primarily rely on commissions to make money. With commission-based pay, your advisor might receive a cut each time you trade, plus a percentage each time they steer your money into certain investment companies’ financial products. They can be motivated to recommend you invest in funds that pay them high commissions (and cost you a higher fee), even if there’s a comparable and cheaper fund that benefits your financial strategy as a client. When is it important to work with a fiduciary? When looking for an advisor to trade on your behalf and make investment decisions for you, you should strongly consider choosing a fiduciary advisor. This should help ensure that you receive suitable recommendations that will also be in your best interest. If you want to entrust an advisor with your financials and give them discretion, you may want to make sure they’re legally required to put your interests ahead of their own. On the other hand, if you’re simply seeking help trading securities in your portfolio, or you don’t want to give an advisor discretion over your accounts, you may not need a fiduciary advisor. How to be a proactive investment shopper Hiring a fiduciary advisor to manage your portfolio is one of the best ways to try and ensure you are receiving unbiased advice. We highly recommend verifying that your professional is getting paid to meet your needs, not the needs of a broker, fund, or external portfolio strategy. Ask the tough questions: “I’d love to learn how you’re paid in this arrangement. How do you make money?” “How do you protect your clients from your own biases? Can you tell me about potential conflicts of interest in this arrangement?” “What’s the philosophy behind the advice you give? What are the aspects of investment management that you focus on most?” “What would you say is your point of differentiation from other advisors?” Some of these questions may be answered in a Form CRS, which is a relationship summary that advisors and brokers are required to give their clients or customers as of summer 2020. You should also know the costs of your current investments and compare them with other options in the marketplace as time goes on. If alternatives seem more attractive, ask your advisor why they haven’t suggested making a switch. And if the explanation you get seems inadequate, consider whether you should continue working with your investment professional. Why is Betterment a fiduciary? A common point of confusion is whether or not robo-advisors can be fiduciaries. So let’s clear up any ambiguities: Yes, they certainly can be. Betterment is a Registered Investment Advisor (RIA) with the SEC and is held to the fiduciary standard as required under the Investment Advisers Act. Acting as a fiduciary aligns with Betterment’s mission because we are committed to helping you build a better life, where you can save more for the future and can make the most of your money through our cash management products and our investing and retirement products. I, as well as the rest of Betterment’s dedicated team of human advisors, are also Certified Financial Planners® (CFP®, for short). We’re held to the fiduciary standard, too. This way, you can be sure that the financial advice you receive from Betterment, whether online or from our team of human advisors, is in your best interest.

Financing An Education: A Guide For Students And Parents

Financing An Education: A Guide For Students And Parents Oct 20, 2022 3:41:00 PM There’s more than one way to finance your education. Learn more about two common ways: 529 plans and student loans. Whether you’re looking at university or trade school, education is expensive. And if you’re like most people, you probably don’t have that kind of cash on hand. Some manage to work their way through college, but depending on the school, even a full-time job will barely put a dent in your expenses. So how should you pay for school? The answer depends on how much time you have, where you live, and where you want to go. If you have money to set aside for school, a 529 plan might be your best bet. Student loans are always an option, too—you just have to be careful. In this guide, we’ll cover: Investing in a 529 plan Financing responsibly with student loans What’s a 529 plan and how do you choose one? A 529 plan is a specialized investment account with tax benefits. It works similarly to a Roth IRA or Roth 401(k). You put money into the account and pay taxes up front, and if you withdraw for education expenses, you usually don’t have to pay taxes on anything you earned. While IRAs and 401(k)s help you plan for retirement, 529 plans help you plan for education expenses. Oh, and every state has its own plan. There are two types of 529 plans: Prepaid tuition plans With a prepaid tuition plan, you pay for tuition credits upfront, using today’s tuition rates. Fewer and fewer states offer these plans, but since tuition costs are always increasing, they can be a good option. Who knows how much tuition will cost in the coming years! The downside is that this money can only be used for tuition, and there are plenty of other education expenses. Education savings plans An education savings plan is more like a traditional investment account. You invest in funds, stocks, bonds, and other financial assets, and your account has the potential to grow through compound interest. You can also use this money on more than just tuition. Depending on your state, you could use your account for education fees, living expenses, technology, school supplies, or even student loan payments. Use it on anything else, and there’s a 10% penalty. 529 plan limitations Every 529 plan needs a specific beneficiary. It could be yourself, your child, a grandkid, a friend—whoever. Their age doesn’t matter. The only limitations are what the funds can be used for and how much you can contribute. Everything you put into a 529 plan is considered “a gift” to the beneficiary. And there are limits to how much you can gift to a person each year before being subject to gift tax rules. But you also have a lifetime limit in the millions of dollars. After that, there’s a gift tax. Gift tax rules are complex, so we recommend consulting a tax professional. Every state is different 529 plans can vary widely from state-to-state. And since you can choose plans from other states, it’s worth shopping around. While some plans let you apply your account to in-state or out-of-state education, others don’t. If you’re looking at a plan you can only use in-state, make sure you’re comfortable with the available schools. Some states offer a match program, where they’ll match a percentage of 529 plan contributions from low- and middle-income families. This could substantially boost your savings. Your state might also offer a full or partial tax break on your contributions—but that usually only applies if you live in state. And of course, each 529 plan is an investment account, so you’ll also want to review the investment choices and consider the cost of fees. For every plan, the account’s total worth can only be equal to the “expected amount” of future education expenses for each beneficiary. But that’s going to vary widely from state to state. The exact limit depends on which 529 plan you choose, but it’s typically a few hundred thousand dollars for each beneficiary. If you’re wanting to save for a private college or grad program, that may not be enough. And if your state’s limit is lower than what you think you’ll need, that may offset the benefit of a state tax break or match program. And according to Federal law, you can use up to $10,000 from a 529 plan to pay for “enrollment or attendance at an eligible elementary or secondary school.” It also lets you apply $10,000 toward student loans. But some states don’t follow these federal laws. If they don’t, and you use your funds like this anyway, you’ll have to pay a 10% penalty. Bottom line: Do your research, and make sure you’re familiar with the specifics of your 529 plan. How to choose a 529 plan The best 529 plan for you depends on: Where you live Where you or your beneficiary will go to school How much you want to save What you want to spend this money on But if you’re wondering how to tell which plan is likely to make the most of your money, it really comes down to just three things: tax benefits, fees, and investment choices. Be sure to look at all plan details and compare these factors before choosing one. Student loan basics Student loans have a bad reputation. And it’s understandable. About 43 million Americans owe an average of $39 thousand in student loans. The average student needs to borrow about $30,000 to earn their bachelor’s degree. But when it comes down to it, if you don’t have money to contribute to a 529 plan or investment account (or your account doesn’t have enough money), your options are: Work your way through college Take out student loans Even with a job, you may need to take student loans. Used wisely (and sparingly), student loans don’t have to consume your finances or derail your other goals. But as with 529 plans, you can’t assume every loan is the same. Types of student loans There are two main types of student loans to consider: Federal Private Federal student loans often (but not always) have the lowest interest rates, don’t require credit checks, and come with benefits like pathways to loan forgiveness. You don’t need a cosigner to get most federal loans, and nearly all students with a highschool diploma or GED are eligible for them. However, there’s a cap on how much money you can take out in federal loans, and some types of federal loans require you to demonstrate financial need. Financial institutions like banks can also provide private student loans. These typically require a good credit score, and you can take out as much as you need (as long as you’re approved for it). Another big difference: with private loans, you typically start making payments immediately and have a fixed repayment schedule set by your lender. With federal loans, you may not have to pay while you’re in school, you get a six-month grace period after you graduate, and you can choose from four repayment plans. Federal loan repayment options Federal loans give you flexibility with repayment. If you’re struggling to make monthly payments, you can choose one of four Income-Driven Repayment (IDR) plans that may work better for your situation. Each of these plans allows for payments based on your income, usually 10-20% of it with a few exceptions, which makes individual payments more manageable. Unfortunately, this usually also means you’ll be making payments for longer. Check out the Federal Student Loan website for more detailed information on each plan. If you want to pay off your loans faster, you can also select a Graduated Repayment Plan, which increases your payments periodically, ensuring you pay off your loans in 10 years. There’s also another way to ditch your federal loan payments ahead of schedule: loan forgiveness. Student loan forgiveness With federal loans, there are two pathways to loan forgiveness: Public service Income-Driven Repayment Go into the right line of work after college, and you could be eligible for Public Student Loan Forgiveness (PSLF). This is available to students who pursue careers with nonprofits, government agencies, and some public sectors. If you make monthly qualifying payments for 10 years, then you can apply for forgiveness. If you don’t qualify for PSLF, but you’re on an IDR plan, you have another potential pathway to forgiveness. After 20-25 years of monthly payments, you may qualify for forgiveness, too. Unfortunately, on this path, you have to pay income taxes on the amount that was forgiven. (This is referred to as a “tax bomb.”) Consolidating and refinancing student loans Sometimes it’s tough to juggle multiple repayment schedules, interest rates, and payment amounts. If you’re having a hard time keeping track of your student loans, you may want to consider consolidating them so you have one monthly payment. Consolidating through a private institution could also give you a new interest rate (the average of your old ones, or sometimes lower, depending on your circumstances) and let you adjust your payment time horizon. The federal consolidation program won’t change your interest rate, but it will still group your loans into a single payment for you. Whatever loans you wind up with and whatever your repayment plan, make sure you stay on top of your minimum payments. Fees and penalties can significantly increase your debt over time.

How To Use Your Health Savings Account (HSA) For Retirement

How To Use Your Health Savings Account (HSA) For Retirement Oct 20, 2022 3:31:00 PM Once you turn 65, you can use them for anything you want—without incurring penalties. Health Savings Accounts (HSAs) are designed to cover future medical expenses. But that’s not the only way to use them. Thanks to their tax benefits and withdrawal rules, HSAs can make a valuable addition to your retirement plan. In this guide, we’ll cover: HSA eligibility The benefits of HSAs HSA contribution limits HSA withdrawal rules Using an HSA for retirement Am I eligible for an HSA? To be eligible for an HSA, you have to: Be covered under a high deductible health plan (HDHP). Not be enrolled in Medicare. Not be claimed as a dependent on someone else’s tax return. Have no other health coverage except what the IRS covers under “Other Employee Health Plans.” Your employer may have information on HSA providers available to you. The expanded IRS rules can provide more detailed eligibility information. What are the benefits of an HSA? Health Savings Accounts have a couple tax benefits that help you make the most of your assets. Your contributions are pre-tax, meaning you can deduct them from your income taxes. You can use these funds at any time to pay for qualified medical expenses without paying taxes or penalties. And when you turn 65, you can use your HSA for anything without incurring a penalty. While you must have a high deductible health plan in order to contribute to your HSA, your HSA isn’t tied to a specific employer. It stays with you when you change jobs or retire. The money doesn’t leave the account until you use it. Also, your employer may contribute to your HSA—and since the contribution is pre-tax, it doesn’t count toward your gross income. Some HSAs are specialized savings accounts. But some are actually investment accounts. Any interest and earnings that come from these HSAs are tax-free provided you don’t use them on unqualified expenses before you turn 65. So HSAs can rank amongst the best ways to save for retirement, on par with some 401(k)s and IRAs depending on factors such as an employer match, fees, and/or investment choices. HSA contribution limits In 2024, the HSA contribution limit for self-only HDHP coverage is $4,150, while the limit for family HDHP coverage is $8,300. HSA withdrawal rules Need some money to cover unexpected medical costs? Make a tax-free withdrawal. Don’t need it? Save it for your retirement. Withdrawing from an HSA for non-medical expenses comes with a 20% penalty . . . unless you’re over 65. Once you turn 65, withdrawals from an HSA work a lot like withdrawals from a traditional IRA or 401(k). Your withdrawals count toward your annual income, so you’ll pay income taxes based on your tax bracket. However, if you use your withdrawal to pay for medical expenses, it’s still tax-free. Basically, there are three possible outcomes when you withdraw from an HSA—and it all comes down to your age and what you use the money for. Your age Qualified Medical Expenses Other Expenses Less than 65 years old No taxes, no penalty Taxes are applicable, 20% penalty 65 years old or older Taxes are applicable, no penalty How to use your Health Savings Account for retirement When you reach retirement age, medical bills can start to add up quickly. Use your HSA to cover these expenses, and you’re triple-dipping on the tax benefits! Your contributions are tax free, your interest and earnings are tax free, and so are your withdrawals. From a financial planning perspective, that’s hard to beat. And it can make expenses like long-term care a lot less frightening. But an HSA is also a great supplement to your IRA or 401(k). Since the 20% penalty disappears when you turn 65, you won’t have to worry about whether an expense is qualified—just use your money as you see fit. Considerations before you choose an HSA An HSA is like a financial Swiss Army Knife. But while it’s highly versatile, it’s not the right choice for everyone. So, before you switch health plans and open an HSA, there are a few things to consider. Know the fees When it comes to fees and other costs, HSAs are often less transparent than accounts like 401(k)s. Look at the full fee schedule for your HSA before contributing. Also, sometimes your employer will cover all, or a portion, of your fees—so find out about that, too. Explore the investment options Ideally, you want an HSA with investment options that fit your goals. Some providers only allow investments with low risk and low returns, like money market funds. Other HSAs offer multiple mutual fund listings with higher returns and more risk exposure. Some HSAs have minimums before you can start investing. For example, you might only be able to invest your money once you’ve contributed $1,000 to the HSA. Stay current on withdrawal rules Withdrawal rules around taxes and penalties can change with new regulations, so it’s important to stay up-to-date with any new changes that take place. Don’t just switch to an HDHP A high-deductible health plan isn’t right for everyone. Before switching to an HDHP so you can use an HSA to save for retirement, make sure that works for you and your family. A high-deductible health plan brings with it the potential for higher out-of-pocket medical costs.

Nick Holeman, CFP®

Nick Holeman, CFP®

Articles by Nick Holeman, CFP®