Month: June 2024

This is not going to be a “how to” blog.  This is more of a “get you to think” blog.  We discuss financial goals planning quite a bit with our clients. What we have noticed, is more often than not, most people have not thought about their financial goals. And worse yet, have not put pen to paper on their financial goals.  Believe it or not, this is a hard topic. Why, because there are no correct answers and it puts us in a very vulnerable state. 

Start pondering your financial goals.

Right now, if I asked you what is your purpose? What do you want to be remembered for? What are your financial goals? You’d be speechless, right? (Don’t worry so were we when we started out). It is a mind boggling thought and could take years to truly understand what that is.  And then with the blink of an eye your perspective can change and that purpose or goal no longer serves you.  

Let’s say your financial goal or your purpose is to work your way up to CEO of a company.  It gives you immense joy thinking about running a company. The CEO salary helps to fund your financial goal of purchasing a $3 million dollar mansion with an outdoor oasis.  Becoming CEO takes many years of hard work. Let’s say during year 6 of working towards CEO, you are diagnosed with a life changing medical condition. Just like that, with a blink of an eye your purpose and financial goals change.  You no longer want the stress of the CEO role. And the $3 million dollar mansion does not align with your current needs.  You completely shift your goals to find a job that pays substantially less. With this shift, it gives you flexibility to spend more time doing the things that are more purposeful to you.  

As you can see from this fake scenario-purpose and financial goal setting is fluid.  They most likely will change multiple times in your life.  And that is ok.  We help our clients dream, and dream bigger.  And then we help when those dreams change we help them ponder and dream again.

Put your financial goals on paper.

Even with knowing there will be changes to your purpose, dreams, and financial goals, don’t be afraid to write them down.  One of our families favorite activities is after the first of the year looking back at our goals. We start the year wrigint down our 6 month, 1 year, 3 year, and 5 year goals. At the end of the year or start of the new we go through and read each one. If we met it we cross it out and discuss how we achieved our goal. If we did not, we decide if it still does or does not align with our purpose and financial goals.   Try this activity and you will be surprised how many goals you had forgotten about, yet achieved. It’s your subconscious doing the work!

The stages.

When you look at your financial goals, think of multiple stages.  We like to have 6 month targets, 12 month targets, as well as 3, 5, and 10 year targets.  That’s a lot!  We get it.  This takes practice so get your pen and paper out and start thinking of a few.  We bet you’ll think of a few more throughout the weeks to come.  

Please don’t skip the short goals!  If you only write down your 5, 10 year goals you may start to feel a little defeated as you look back on them.  It is too easy to give up when you are starting to feel defeated or have the “it is impossible” attitude. So the shorter goals give you the “heck yeah!” excitement along the way. 

If you really want to get crafty you can take a 10 year goal and break it down into smaller chunks.  Going back to the $3 million mansion example; you may have as a small 6 month chunk to start an account specific to the mansion and set up monthly savings towards that goal.  Then your 3 year goal may be to have saved $750k in that account.  Your five year goal may be to have saved $1.5 million in that account.  And so forth.  This helps you stay excited and aligned with what you want to achieve long term.  If you want ideas on where to save extra cash check out our blog-Where Should I Save Extra Money?

Write them down.

You HAVE to write them down.  Life is busy and there are one thousand other things at any given moment that will steal your time and attention.  If those thoughts only live in your head, your head will forget them and years will go by without progress.  We recommend putting the target dates on your calendar.  When that date arrives it’s fun to see if you’ve accomplished a few of the goals and also it’s fun to laugh at the ones where you are like, “what was I thinking”.  

Goals are written, now what?

Find joy.

Find joy in living your life and adjusting daily habits to help achieve goals. Or find joy in adjusting your goals to keep certain daily habits that take away from your goals. It’s too easy to say I’m going to save every penny for retirement and then wake up one day in retirement and wish you would have enjoyed your years prior a little more.  We want you to find happiness in living for today while knowing you also have a roadmap to get where you want later on in life as well. 

It’s ok to change.

Once you have your goals written down, don’t be surprised if all of a sudden your mind shifts and things that you thought brought you joy no longer do.  Going back to the mansion example again.  Let’s say you spend $100 a week on lunches. You mindlessly spend it everyday until one day you are eating that delicious sandwich that cost $15 and are dreaming of your mansion.   Quick math-buy lunch 52 weeks out of the year times $100 a week  and you spend roughly $5,200 a year!  You think about it and realize ok, $5,200 a year isn’t going to move the needle a ton but every penny counts.  So you decide to eat out every other week instead and are able to save the extra into your mansion account.  The funny thing is, you will probably find more joy in eating out less often, so it’s a win-win!  

Lean on us.

It’s not easy to achieve your goals alone. Lean on financial advisors who care, like us, to help craft roadmaps to achieve your personal goals.   Do not let fear of failing hold you back from achieving a more purposeful life!

Ps. When we say dream big, we don’t mean it has to be something that costs a lot or something someone else would find as big. We just mean step out of your comfort zone and think bigger than today.

Health Savings Accounts (HSA) are specific accounts for healthcare savings and expenses. They have multiple benefits like tax advantages, healthcare savings, and potential retirement benefits.

Let’s take a quick dive into Health Savings Accounts (HSAs or HAS if your autocorrect is on!). 

• What are they?
• Why should you care?
• What are some of the nitty-gritty details?
• Short story time

What is a HSA? 

Think of a HSA as a special savings or investment account tailor-made for healthcare expenses.  They are a fantastic way to manage medical costs if you have a high-deductible health plan (HDHP).  Unfortunately, you have to qualify for a health savings account by having a high-deductible health plan.  The determination for a high-deductible health plan is dependent on a few factors, so make sure to verify your health plan meets the definition.  Usually, a HDHP means you are paying lower monthly premiums but would have to tackle higher deductibles compared to the standard health insurance deals.  Essentially, you are taking on more upfront costs in exchange for the sweet, sweet savings on your premiums.  

Why should you care? 

Let’s rephrase this: you should care if you’re eligible, and here are a few reasons why. 

First, tax perks. 

Do I even have to say more?  HSAs come with some serious tax benefits.  When you save money into your HSA, it’s like snagging a tax break because typically your contributions are tax-deductible.  That means you can trim your taxable income by the amount you put into your HSA.  Don’t get overly excited, as there are limits to how much you can add!  The limits are dependent on multiple factors, so we would be able to help determine how much you can contribute.  

Second, tax perks. 

Yes, it needed to be said.  When you contribute to your Health Savings Account and your money is invested in an asset, any interest or investment earnings you rack up are tax-free.  When we work with clients that have had HSAs prior to our advice, they have had all their contributions sitting in cash and not earning any additional income. They missed a big opportunity.  We will work with you to determine what that looks like in your situation, with lots to consider, like big medical expenses coming up, risk tolerance, retirement, the current emergency fund balance, etc.  

Third, tax perks. 

Promise, this is the last time!  The best part is that you can use your HSA funds for all sorts of medical needs, like doctor visits, prescriptions, dental care, vision checkups, and more.  The tax cherry on top?  When you use your Health Savings Account for qualified medical expenses, the distributions are tax free!

So essentially, the HSA is a tax jackpot three times over! 

What are some of the nitty-gritty details?

Hold on, there are some details you need to consider before running out and starting your own HSA.   

Eligibility.

 Remember, you have to qualify to open and fund a Health Savings Account.  One factor is that you need to be on a high-deductible health plan (HDHP).  You cannot have any other healthcare coverage except what is permitted. If you are enrolled in Medicare or are claimed on someone else’s tax return you are not eligible. You also need to have coverage for the time period you are contributing (these rules are complex, so ask us). 

Contributions.

 They are limited depending on eligibility, type of HDHP coverage, your age, your employer contributions, and when you became eligible and when eligibility ceases. If you are more career experienced, i.e., 55+, you do have additional catch up contributions. Contributions must be in cash, meaning you cannot contribute stock or property (sorry, no real estate for you real estate lovers).  You have a few options on how to contribute, the easiest is through your employers payroll services.  You can also contribute on your own without it being through your employer.  Contributions can be made throughout the year and up until the tax filing date for that calendar year.  Generally, you can claim contributions you make as a deduction (not employer contributions).

Distributions.  

Generally, paid medical expenses that have not been reimbursed are qualified distributions from your HSA.  If you paid for the expense, you would take a distribution to reimburse yourself.  You can receive tax-free distributions from your HSA for qualified medical expenses that were incurred after you established your HSA, not for expenses incurred before. 

If you take distributions from your HSA for any other reason, you will be subject to income tax and may be subject to an additional 20% tax—avoid at all costs.

Keep all records to show that a distribution was exclusively made for a qualified medical expense.  Keep these records with the tax return associated with the year the distribution took place.  If you’re one of the lucky ones and don’t end up needing your HSA for healthcare, you can take distributions starting at 65 without the penalty; however, income tax will still apply similarly to a traditional IRA distribution.         

Typically distributions cannot be used for insurance premiums as they do not qualify.  However, there are a few exceptions to this rule.  Qualified long-term care coverage, COBRA, and Medicare premiums are exceptions and are considered qualified distributions.  Keep in mind that Medicare premiums qualify; however, supplemental Medicare (Medigap policies) are not qualified distributions.

Now who has to have the expense for it to be qualified?  Another great concept to understand.  Qualified medical expenses can be paid on behalf of the HSA owner, spouse, and/or beneficiaries.  So if you the Health Savings Account owner can pay for your spouse’s expenses and they will be a qualified expense even if they are not covered under the high deductible health plan. 

One more important thing to remember, if you were reimbursed for that expense or deducted that expense it is no longer a qualified medical expense!  No double dipping!

Investing. 

Typically, you can invest your Health Savings Account dollars; however, it depends on your Health Savings Account provider.  Healthcare will most likely be one of the bigger expenses you’ll have throughout your life, so investing these dollars could make sense to achieve your goals. 

Portability. 

Your Health Savings Account is all yours.  It is not tied to your job or health care plan.  So, even if you switch jobs or insurance plans, you keep your HSA.

Flexibility.

It is not a use-it-or-lose-it account.  If you don’t use any of the money by the end of the year, that’s ok; your funds are yours and can roll over from year to year.  So stashing this account and letting it ride until a big expense or retirement is a solid, smart plan.

Death of HSA owner. 

There are some very unique rules when it comes to the death of a Health Savings Account owner.  You are the HSA owner and you pass, your spouse is your beneficiary- the spouse will inherit the HSA and the account will stay as a HSA.  No tax occurs (until they take out money). 

Now if you have a non-spouse beneficiary elected, when they inherit the HSA it will NO longer stay as a Health Savings Account.  Meaning the account will be liquidated as a full market value taxable event.  It is taxable to the non-spouse beneficiary-ouch!  If the HSA is inherited by a Revocable Trust /Estate the HSA is again liquidated (it does not stay a HSA) and the HSA owner is taxed on their final tax return for the full market value of the account-double ouch!  You can elect a charitable organization and it would not be taxable to that organization.  

You need to be very mindful of who you elect as a beneficiary. 

Short story time.

Yogi is a small business owner, he came to us wanting to make sure he was tracking well on his financial goal of a work optional lifestyle before age 50.   This was his 12th year in business and had been very successful the last few years with excess cash to save.  After looking at his tax return and getting information on his healthcare plan it was obvious he had a HDHP and was eligible for a health savings account.  Unfortunately, he had never been advised to open a HSA and of course never have heard of that type of account.  What a huge opportunity we were able to uncover and now he sleeps better knowing he is starting to rack up those smart healthcare monies!

Today we are jumping into all things 401(k)-well maybe not all things since that’d probably be an entire day read. So we will keep it simple and take note of the worthy points.

• What is a 401(k) plan?
• Some pros (in our opinion)
• Some cons (in our opinion)
• Story Time

What is a 401(k) plan? 

It’s an employer sponsored retirement plan where it allows employees to contribute a portion of their income into their own 401(k) account.  Your own 401(k) plan means that your name is directly tied to the account.  This is different from the pension plans of years past…most of us aren’t lucky enough to have one of those anymore.  The name 401(k) is after the section from the Internal Revenue Code.  There are different types of 401(k) plans that employers can choose from.  Today we will focus on the traditional 401(k) plan that you often see.  

The pros/positives/the high fives (in our opinion)-

First and foremost you get to contribute your decided amount into your 401(k) plan-with a limit of course!  Your contributions are deferrals from your income and are always 100% vested immediately.  This just means that if you left your employer the next day the money you contributed is still yours in your 401(k) account.  You are in control of the management of your 401(k) or another way to put it, is that you have the responsibility to invest your money.  Don’t get overly pumped as most of the time you are still beholden to the investment options your employer plan allows, and well let’s just say they ALL aren’t great. There are limits to the amount of money you can contribute to your 401(k) plan.  The good news is you have control on how much or how little you put in.  And in most plans you are able to change that amount often.  Another positive is, if you have 50+ years of living on this earth you are rewarded with a catch-up contribution each year-experience pays off!  

Positively exciting is the tax advantages, ehh it may not be super exciting for everyone.  You may be asking yourself, why don’t I just keep all of my income and go save money somewhere else?  Good question.  One advantage (again depends on your situation) is your contributions to your traditional 401(k) are not taxed as income for federal income tax purposes, so that’s a nice treat.  Again, don’t let your excitement get away from you as the income is  still subject to Social Security, Medicare, and federal unemployment taxes.  But, back to the positives, you essentially are reducing your taxable income now, and deferring the tax on those wages to a later time.  Now, let’s say you are in a fairly high income tax bracket, and you expect your income tax bracket to be lower when you take your money out (in retirement), then deferring those taxes could be advantageous-high five for that!

One more high five-you typically will have a matching contribution from your employer.  Yes that’s good icing on the cake as it is additional money!  Each employer is different in their matching so you have to pay attention to the details.  Please make sure you are contributing enough to receive the match as you are forfeiting hard earned money if you do not.  Now remember how I said there are different plans?  This comes into play here as each employer plan will have a different vesting schedule for their lovely matching contributions.  So pay attention to the details again, or don’t and let us handle that for you.  

The cons/negatives/no high fives (in our opinion)-

Being able to contribute is a big positive; however, the shortfall is there are limits.  Each year the new limits are given and the limit could be a pretty small percentage of your overall compensation.  If you are a good saver, it may leave you with a gap on where to save more (super easy con to fix by the way).  Another, is you have control of how much you’re putting away for YOUR retirement. In other words it is up to you to have the discipline to set money aside for yourself.  Your employer is not going to force you as they do not necessarily care what your retirement looks like.   Do not panic if you have not set this up yet; that’s why we are here,  to help you get comfortable with whatever amount helps get you to your vision.  

The not so exciting stuff, taxes.  Now we know we just got done telling you how the tax deferment is a positively exciting advantage.  We didn’t lie, it’s just that it may not be advantageous for everyone.  Let us look at a simple example.  Say you are contributing $1,000 of your income into your 401(k) plan and your overall income tax rate is 5% (these are made up numbers for simplicity sake).  If you had not saved that money into your 401(k) you would have paid $50 in tax (again, real life is not this simple).  Now let’s say when you retire and decide to take that $1,000 out of your 401(k) your overall income tax rate is 20%- you now have to pay $200 in tax.  In this scenario it would not have been advantageous to defer that income.  Don’t go freaking out on us, there are so many other factors to take into consideration before you stop 401(k) contributions.  This is just to get you thinking that your 401(k) plan is technically yours; however, there is a chunk of it that will go to tax (ie. isn’t yours anymore).  

Some more not so exciting stuff- taxes on withdrawals.  Not paying tax on that deferral income feels so so good, until you take it out and have to pay tax on it.  Then it doesn’t feel as nice.  Withdrawals from your 401(k) will be taxed unless it’s a qualified rollover (topic for another day).  That means all the contributions, gains, and interest you may have earned are going to be taxed as well,  when you take it out.  Another downside is you should wait until 59 ½ at least before you take withdrawals.  Generally if you take it prior to that age, you will pay a penalty in addition to the income tax.

Now for the no five!  You remember the employer match, and how nice it is to have that.  Well there could be a vesting schedule, meaning you have to stay working there for a certain amount of time before it’s truly your money.  Let’s put it another way.  If you left the company before the vesting period is complete you forfeit their employer matching contributions.  Still, not a reason to not contribute to your 401(k); however, gets you thinking about that job move and timing. 

Now that we have the basics down let’s look at a story.  

Yogi started working with us a few years back.  When we sat down with Yogi he was contributing 4% to his 401(k).  We asked why he chose the 4%, in which he said that his employer would match 100% of his contributions up to 4%.  Great job, Yogi, right?  Well, after reading through his benefits plan we found his employer is a rare company and matches dollar for dollar …..meaning they will match 100% of his contributions!  What a find!  He said he heard the 4% when he first started and never thought anything of it.  This is not extremely common where the gap is so large; however, we do see that most people save into their 401(k) whatever they hear is a good amount and will go years without double checking if that is still appropriate for their financial goals.  We are here to help take that research off your plate and confirm you are doing the right thing, for you and your family.