May 26

When I worked for a large company, my wife and I enjoyed the use of a Flexible Spending Account, otherwise known as an FSA. This account allowed us to save up to $5000 pretax, and use it for medical expenses during the course of the year. Doctor copays, medicine copays, and expenses that our insurance didn’t cover, such as chiropractic care. For the most part, I had no complaints about this program. The FSA was a use-it-or-lose-it plan, so members needed to plan carefully, and as the year drew to a close, if there was going to be much money left, it was time to go eyeglass shopping. That purchase was always good for a few hundred dollars. Recent changes to the plan reduced the family maximum to $2500, and tempered the use-it-or-lose-it provision to permit $500 to carry into the next year. Better, but not great.


Now, the Mrs is retired and I’m working for a small company whose health insurance is an HDHP, a high deductible health plan. This means that we have at least a deductible of $1250 per person ($2500 for the three of us) and a family maximum out of pocket of $12,700. What this also means is that I was eligible to open an HSA, a health savings account. The HSA offers a maximum pretax deposit of $6,550 per year. Most important, there’s no risk of losing what you don’t spend. In fact, the account offers investment options so if you are young you can use this as a long term savings account, invest it in stocks (whatever funds your custodian offers) and have these funds available for expenses in the future. In a sense it offers the best of both the traditional IRA with money going in pre-tax, and the Roth IRA, as qualified spending allows you to make withdrawals tax free. Unlike the FSA, this account does not need to be sponsored by your employer. So long as your health insurance meets the above criteria, you can open the HSA at a bank that offers it. If your insurance qualifies you for an HSA, check it out. Many of my coworkers were unaware they could use an HSA, and I saved them over $1500 for just a quick conversation and a bit of paperwork.

written by Joe \\ tags: , ,

Oct 22

My friends at the IRS have announced…. wait a second, did I just call the IRS folk ‘my friends’? Well, yes. I don’t like taxes any more than the next guy, but I hpe that by now my readers know that it’s congress that has created our incomprehensible tax code. The IRS just enforces it. From where these guys (and gals) sit it’s “don’t shoot me, I’m just the messenger.” The IRS is actually doing a fine job, making information readily available on their web site and keeping us up to date in real time by offering different newsletters. As I was saying, they announced some numbers for 2013!

Gifting – If you are giving money to friends or family each year, the annual exclusion for gifts has risen from $13,000 to $14,000 per year. If you are a couple giving your partnered child a gift, this multiplies up to $56,000 from 2012’s $52,000. The 529 College Savings account permits gifting ahead up to 5 years worth of deposits, meaning you and your spouse can each gift $70,000 into the 529 account. This requires a Form 709 to declare your transaction, and then no gifts are permitted over the next 4 years (unless the gift exemption rises beyond $14,000.)

Kiddie Tax – This is the tax that uses the parents’ tax rate on a child’s unearned income. The reduction of this income has been raised to $1000 from $950. Simply put, your child can receive $1000 in unearned income with no tax due, and an additional $1000 taxed at their rate, most often, 10%, based on online tax calculators and estimators. A topic worthy of more detailed discussion.

Retirement – The 401(k), 403(b), and 457 account deposit limit has been raised to $17,500 with the same $5,500 catch-up deposit for those 50 and older. We’ve discussed whether the 401(k) decision is the right one for most investors, and it’s safe to say, grab the match. Many employers will match the first 4-6% of your income dollar for dollar, so if you earn $60,000, a 5% contribution to your account is worth 10% on day one. $6,000 deposited pretty painlessly. The IRA limit has also been increased from $5,000 to $5,500, up to $6,500 if 50 or older. Great to take advantage of the IRA especially if the fees in your 401(k) are pretty high.

Flexible Spending Account – This is the money you can have withheld pre-tax to pay for unreimbursed medical costs, including doctor copays, prescription drugs, and a number of items your insurance doesn’t cover. In 2012, there was no limit, although employers most often limited the amount you can put aside at $5,000. In 2013, Federal regulations put the limit at $2,500.

More details and comments on these changes to follow.

written by Joe \\ tags: , , ,

Jun 10

Our friends to the north aren’t immune to the same bad spending habits that we USers are prone to. Robb Engen offers some great advice to break these habits with 7 ways to avoid buying stuff you don’t need. Avoiding the impulse buys and spending money you don’t have is the first step to getting your financial life in order.

In a similar vein, Peter Anderson at Bible Money Matters asked Are You Behaving Like A Future Millionaire, Or Aiming To End Up Broke? He goes on to discuss the observations of Dr Thomas Stanley, author of The Millionaire Next Door and Stop Acting Rich, sharing some of the habits of those who have successfully accumulated wealth.

Next, a tax related article. I hate the alternative minimum tax (AMT). But I love the work of financial blogger Miranda Marquit. Her article A Basic Overview of the AMT was an excellent  introduction to how the AMT came to be, how it’s calculated, and what items make it worse for you. As always, nice work Miranda. If anyone in congress happens to be reading, please kill the AMT, it’s not just taxing millionaires, but hurting, well, the average Joe.

At Financial Wand, Jonny asks Is it worth applying for a 0% Credit Card? And as is often the case, it depends. Jonny suggests that its worthwhile as long as you use it for the right reason. Indeed. Read the article before you apply for another card.

My friend Len Penzo Just Made the Biggest Impulse Purchase of [His] Life (but It’s OK). And I have to say, he wins. My last impulse buy was about 4 years ago, a pair of tickets to see Sting. $600 at a local charity auction. Len’s purchase puts that sum to shame.

Iam1% declares that Money Does Buy Happiness. But it’s not what you’d think. It’s more about giving than getting.

And to wrap up this week, two posts on the Flexible Spending Account – Five Cent Nickel wrote IRS to Modify FSA Use-It-or-Lose-It Rule? And Kay Bell House OKs pro-consumer FSA changes, but they’re not likely to become law…yet. Two excellent articles about the potential changing in store for the FSA. I have a strange feeling whatever congress decides, it won’t make anything better. Only more convoluted.

Have a great week.

written by Joe \\ tags: , , ,

Jan 13

I hope my friends at Save Flexible Spending Plans will forgive me for saying this, but I think it’s time to kill the FSA. Really.

In case you have no idea what I’m talking about, the Flexible Spending Account is an account that lets you take money out of your paycheck, pretax, and get it back when you have a co-pay, or any unreimbursed medical expenses. Prior to 2011, you could also use it for OTC (over the counter) medicine or other first aid products. Now, aside from insulin, you must have a prescription for any medicine you wish reimbursed. Once you have an expense, you need to submit a copy of your bill to your administrator, as companies usually outsource this process, sometime to the insurance company, other times to another company specializing in this. If approved, you get a check in the mail a few weeks later. Sounds like a lot of effort, doesn’t it? Time and effort by both you and the guy reviewing your bills. Somebody is paying for this, and the expense is wasted, spent on paper pushing not on healthcare.

There’s more to this, as if it weren’t complex enough, you have one chance to decide how much money to put in for the year, usually early November the year prior. Your kid needs braces, and you find out in February? Either Junior waits until next January or you miss using your flex account to fund the braces. The spouse need a $1500 root canal? There’s no planning for this. To top it off, any money you don’t spend by the end of the year (plus grace period if your company allows it) is lost. Presumably this offsets those who got back money they never deposited, perhaps leaving the company before the end of the year.

In my daily travels, I frequently find myself driving past Walden Pond, and the above quote comes to mind. With this in mind, I suggest that every change congress wishes to enact to the tax code must always create less code, not more. Instead of creating new accounts, create fewer. With regard to the FSA, kill it, and in its place offer a deduction, even for non-itemizers. The current FSA rules are a disservice to those who may need it most, those with unexpected expenses, and those who are fearful they can’t predict their cost and don’t want to risk losing their deposit.The alternative is the continued tinkering. More rules, more adjustments, more unhappy participants and employers. Stop this craziness. Simplify, simplify, simplify.

Are you a user of the FSA? Have you lost money by not spending your deposits by year end? What do you think of my plan to simplify?


written by Joe \\ tags: , ,

Jul 28

“Use it or lose it” is a provision of the Flexible Spending Account (FSA). The FSA is an account that permits you to use pretax dollars to pay for unreimbursed medical expenses. This can include copays for doctor visits, dental procedures, eye care, and prescribed medicine to name a few. With many employers allowing you to put as much as $5000 into the account over the course of the year, the tax savings can be substantial, $1250 if you are in the 25% bracket. Worth the bit of effort to request the funds be withheld and then fill out the paperwork for reimbursement. But as I started this article, stating that whatever you don’t spend by year end, you lose, many people avoid the FSA for just that reason. Trying to plan this type of spending isn’t easy.

Now, our friends in the Senate (when they are trying to get a bill I like passed, they are ‘friends,’ and I am their fair-weather friend) have introduced the Medical Flexible Spending Account Improvement Act, S. 1404 which would allow plan participants to withdraw their unused money at year end and pay the tax on it.

I like the idea of getting rid of the “lose it” part of the FSA, but the text of this bill leaves me a bit concerned. When an employee leaves, either voluntarily or is fired, and he had spent more from his FSA than he deposited, he is not liable to pay back the difference. My understanding was that the employers weren’t seeing a windfall from leftover money as their were those who spent more than they deposited before leaving. Note, you tell your employer in October/November how much you want to put in during the upcoming year, and are eligible for the entire annual amount as soon as you incur the medical bills regardless of how little you deposited by then.

Unless the bill addresses this feature of reimbursing before collecting, I can see a crazy “unintended consequence” brewing. Employers who decide to lower the FSA limits even lower than the upcoming $2500 limit congress has authorized.

How will this impact you? Do you have access to an FSA, and take advantage of it? Will this bill help you use it more than you did before?

written by Joe \\ tags: , ,