Financial Lessons for College Students

A college education holds the promise of a great career start for many students.  The excitement of choosing a college, getting accepted, and actually starting classes will eventually die down. Then your student is likely to encounter some financial lessons that won’t be taught in the classroom.  Lessons like:

• How continuous spending can take a bank balance to zero and then the bank piles on additional service fees 

• Or how spending on small things like getting a pizza or a school sweatshirt can quickly add up

Here are three time-tested financial tips to help students develop habits that will serve them well during college years and into their adult life.

Keep Track of Spending

If you don’t know what you are spending, you don’t know what is left or what you can afford or not afford. The key is to create a spending plan for necessary purchases like food, gas, and cellphone service before spending on discretionary items. Take the guesswork out of budgeting by using an online tool like Mint.com to automatically categorize transactions.

Don’t Underestimate the Importance of Managing Debt

While credit cards are great for convenience and emergency situations, be wary of running up a balance that you cannot pay off every month.  Use the plastic cautiously.  Establishing good credit during college will make it easier to apply for a car loan, rent an apartment, or even purchase a first home. If student loans are needed to fund college expenses, take the time to read the fine print.  Don’t take more than you need today because piecing together student loans for 4 or more years can add up. Your student may not realize they are easily signing up for substantial payments for twenty years or more after graduation.

Think Twice before Lending Money to a Friend

Everyone has had an experience where a friend comes up short and says, “Can I borrow some money?  I promise I’ll pay you back!” Recognize that lending money is a risk, even if a friend is completely trustworthy.  Just because your friend is asking you don’t have to say yes. Many of life’s lessons your student will have to learn on their own, but if they think carefully before they lend, are cautious of debt, and track spending, they can avoid some common financial mistakes.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served. A14-025160

Tips for College Students on School Year Spending

College students are finishing up summer jobs and internships and heading back to school with the money they’ve earned ... that is, if they didn’t blow it all this summer. But for those who budgeted and saved, it is time to look at how to spend.  I sat down with one of The Center’s summer interns, Nick Boguth, a senior statistics major at the University of Michigan. Over the summer, he worked primarily with our investment department but has also been involved in other areas of financial planning. He helped give his perspective as a college student on the flip slide of saving: school year spending. 

Before You Spend, Set Some Goals

Many students take summer jobs/internships to save money for the upcoming school year because they may not have the ability to work while attending class. So the first tip is to think back to that first paycheck. Remember how tempting it was to spend it all? I certainly made this mistake a few times when I was in Nick’s shoes! But hopefully you decided to take a more disciplined approach. Now that you’re heading back to campus, it’s time to dig down for another dose of discipline: Don’t blow it all at once! Nick suggests that you set a realistic goal before you touch a penny of the money you saved over the summer. Ask, “What do I need the money for?”  Simply put, how much can you spend and how much do you need to save to make it last until Christmas or the end of the school year?  Doing this from the onset will give you a much greater chance of reaching your goal as opposed to “winging it”. 

Dinner Out, New Clothes, or a Roth?

As you’re setting those goals, consider putting a chunk of your money into a Roth IRA. It might seem pointless because we’re not talking about a large dollar amount, but the more you save early in life, the more it can add up to later. Sure, it might seem like more fun to spend it going out or shopping and, take it from me, when you do that it will vanish in no time. But if you contribute 5-10% of your summer savings to a Roth, you are starting an excellent habit. By making such a responsible choice, your parents may even offer to throw in a "match" the same way many employers do to incentivize employees to save for retirement.

Let’s be honest, when you’re a college student working in the summer, you typically are not earning a large paycheck. WHO CARES?!  What you’re earning as far as experience, knowledge and interaction with others in your field of study is worth far more.  Best of luck to everyone returning to school this year – we wish you nothing but the best! 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Unqualified withdrawals may be subject to ordinary income taxes as well as a penalty tax. C14-026213

Paying for College at Your Expense

We all want the best for our children.  In an ideal world, if we could pay for 100% of their college and allow them to graduate with no student debt, most parents would gladly do it. However, anytime you use cash flow to pay for college there is an opportunity cost.  “What else could I have done with that money if I had not used it to pay for my kid’s college?”  The simple answer is that you could be using that money now to put toward your retirement.  You can take loans for college, but you can’t take a loan for retirement.

Opportunity Cost of College Tuition

For some of you reading this, opportunity cost might seem like a foreign idea or an abstract concept that can’t be measured.  However, it is very real and although it can’t be measured to the exact penny, you can make some educated estimates about the potential growth of your savings.

For illustrative purposes, let’s take a look at a hypothetical scenario and measure the potential opportunity cost of paying for college.     

Scenario: John and Jane Smith (both age 35) have 1 son Joe Smith and intend to fully fund 4 years of undergraduate school for Joe.  Their son was born in December of 2013. John and Jane are both U of M graduates and, assuming Joe is as bright as mom and dad, they would like him to go there as well.   In any case they intend to pay for 4 years of U of M starting in 2031. The Smiths consider these costs:

• The cost of U of M for tuition, room, and board is approximately $20,000 in today’s dollars and is estimated to inflate at 6% annually over the next 18 years.

• So the Smith’s estimate the first year of college will cost $57,086, 2nd year $60,511, 3rd year $64,142, and 4th year $67,991. 

• The total estimated cost for 4 years of college is $249,730.

Adding Up the Opportunity Cost

Unfortunately, the cost doesn’t end there.  This is where the concept of opportunity costs comes in. You see, the Smiths didn’t have to set aside these funds for Joe. They could have put them in their retirement accounts instead.  To fully understand the true cost of utilizing those dollars to pay for education, you also have to measure what that money could have potentially grown to at John and Jane’s retirement age of 65.  When Joe starts college John and Jane would be 53.  That means the $249,730 they have set aside could have the opportunity to grow for another 12 years. Assuming a 6% rate of growth the hypothetical account would compound to $502,505.   John and Jane would have the opportunity to add an additional $250,000 to their retirement account.

Having said all of this I’m not advocating kicking the kids out at 18 and changing the locks.  However, I am advocating being informed about the ripple effects of the financial decisions we make.  For people under the age of 40 with no pensions (and social security looking like a shaky proposition) it is imperative that you be efficient with financial decisions.  One of the benefits of working with a professional planner is putting these decisions under a microscope and creating a plan to decide what you can truly afford to do while still maintaining your financial independence.  

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. All illustrations are hypothetical and are not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investing involves risk and investors may incur a profit or a loss. C14-017739

Raymond James Bank Deposit Program simplifies FDIC coverage

If you’re not familiar with the Raymond James Bank Deposit program, a quick read here could save you a big hassle. The program is designed to help you take advantage of up to $2,500,000 of FDIC coverage without putting any extra work on your plate.

What is FDIC?

The FDIC (Federal Deposit Insurance Corporation) covers cash deposit accounts, dollar for dollar, including principal and accrued interest up to a limit in the event of a bank failure.  It is funded by the premiums paid into the corporation by banks on the deposits they hold.  Historically, in the event of a failure, funds are available to depositors within days after the closing of the bank.

How much does FDIC cover?

Until October 2008 coverage was limited to $100,000 per depositor.  During the financial crisis in the fall of 2008 the government stepped in and increased the insurance limit temporarily to $250,000 to prevent bank runs from occurring as the financial crisis and subsequent bank failures accelerated.  Later in 2010 the increase in the limit was made permanent. 

How do you calculate the coverage you have?

For example, let’s say Joe has $250,000 at a bank between his checking, savings, CDs and money market accounts maximizing his coverage there.  If Joe was married to Sally, and these accounts were titled jointly, then they could have a combined coverage of up to $500,000.  The coverage is per bank meaning if Joe and Sally had $500,000 at 10 different banks they would have $5,000,000 in FDIC coverage.  But, for Joe and Sally, or anyone, having money spread out between multiple banks could be very confusing and time consuming to keep track of everything.

Gone are the days of playing games to maximize your FDIC insurance coverage on bank deposits! 

Insuring more than $250,000 per depositor

One account at Raymond James through the Raymond James Bank Deposit Program (RJBDP) can provide up to $2,500,000 ($5,000,000 for joint accounts) of total FDIC coverage.  The work is done behind the scenes by Raymond James as available cash is deposited into interest-bearing deposit accounts at up to 12 banks automatically for our clients.

Another way to qualify for more coverage is by holding deposits in different ownership categories (account types).  Below is a table of the categories and limits.  The RJBDP can then increase these limits according to the above numbers as well.

Source: Raymond James

As with all insurance, you hope you never need to use it.  Cash can play an important role in an overall financial plan and knowing it is protected can lend confidence.  When it comes to FDIC insurance coverage you likely have much more than you realize!

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Laws, coverage, and program rules are subject to change. Hypothetical example is for informational purposes only, and does not represent and account or investor experience.

Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, a federally chartered savings bank. Unless otherwise specified, products purchased from or held at Raymond James & Associates or Raymond James Financial Services are not insured by the FDIC, are not deposits or other obligations of Raymond James Bank, are not guaranteed by Raymond James Bank and are subject to investment risks, including possible loss of the principal invested. The FDIC insurance limit per depositor is $250,000. Coverage applies to total holdings per bank per depositor. Visit fdic.gov for more information.

Is 40 the “Magic” Age for Financial Planning?

When is Financial Planning, on your own or with the help of a professional, appropriate? The correct answer is you should probably begin saving the first day that you receive your first paycheck.  However, in my 23 years of experience, folks tend to get “serious” about planning near the age of 40.  I do not by any means want to discourage anyone younger than 40 to put off planning until they hit that “magic” 40 milestone. Just about anyone that has achieved financial success will tell you to start as early as possible.

Some questions and issues that the 40+ crowd might consider: 

• How much should I be saving? I have heard rules of thumb such as 10% or 20% but what does that mean for me and my specific goals?

• I’m busy. What are the options to pay bills other than the standard envelope and stamp method?

• Life insurance: Salespeople have been hounding me for years to buy life insurance. I couldn’t afford it in the past and secretly didn’t see the value, but I’m ready now. What type and amount should I get to protect my family so I am not insurance rich and cash poor?

• College: My kids are getting closer to college age. How do I pay the ever-increasing tuition?

• I am ready to invest my wealth. What are best options for me?  Should I max out my 401k or 403b or is a ROTH a better option?

• Estate planning: I’m all grow’d up now and ready (I think) to consider a Will and perhaps a Living Trust. How do I know which one I need?

• My parents are aging and I am not sure if they have the resources for their care. What should I be doing now to prepare or help them prepare?

• I have heard about the “Boomerang kids” phenomenon. Should I move to a one bedroom condo now?

• Employer retirement plans (401k/403b): Whoa, I have real money now! How should it be invested?

• I give to charities that are making a difference in the world. Is there a way to maximize my donations and perhaps even get a tax break?

• Income taxes: I don’t mind paying … I just don’t want to pay a cent more than my share. How can I limit my income tax exposure?

• If I choose to work with a professional financial planner whom should I contact? I have not have worked with a professional advisor yet so I am a bit leery, and maybe even a bit scared to share my financial picture (not sure how I stack up with others).

If you’ve been asking yourself some of these questions, no matter your age, you are ready to get “serious” about your financial life.  Think about some of the issues and questions that you find yourself facing and feel free to give me an email. If my 23 years of working with similar folks can be of help, I’d love to share my insight because you don’t need to wait for some “magic” age.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

C14-019069

Utilizing your Financial Advisor in a Divorce

There are times in life when it’s best to just part ways. Someone once said that the most common reason of divorce was… wait for it… marriage. That’s the lighter side of what can be a very touchy subject. I recently attended a conference that gave me new insight into helping clients through the process.

Divorce Rate Statistics

Over 50% of married Americans have experienced divorce and for couples with a disabled child, the divorce rate jumps to 90%.  Experts say it comes down to stress and growing apart and divorce can provide a time to reflect and start over.

Some of these splits are amicable and, if they can be done with a clear head and fair planning, I believe that the financial costs can be reduced in a material way. But this is also a very emotional time and it’s even more difficult to keep a level head when emotions run their course. It can help to have an intermediary who understands both parties and the finances.

Dividing Assets

Consider a situation where there are multiple pensions, IRAs, retirement plans with old employers, education funding, vehicles and joint accounts … plus a home and other personal property. Well, try to take a deep breath and tackle one item at a time.  Place each item in a category and deal with them one by one (i.e. income from pensions can be handled by a lump sum, income from one spouse to another for some fixed period of time or through a Qualified Domestic Relations Order (QDRO) process). 

• Asset value differences and the tax implications can be aligned to provide for a fair split

• Qualified plans can be combined with IRAs to simplify things in some cases

• Liquidity can be generated from qualified plans without penalty

• Properties and tangible possessions can be appraised and split

• Social security differences are typical and can be managed

My best piece of advice is to talk to each other, come to an understanding of values, and arrange things fairly prior to talking with your attorney. Once you’ve done that, go and ask for their advice on what you might be missing.  If you can, utilize your Certified Financial Planner to best organize the items above because they already understand the money issues and can help to potentially reduce your legal fees considerably.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This materials is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal advice. C14-017271

New Rule for IRA Rollovers

 At some point in your life, you’ll most likely have to complete what’s known as an “IRA rollover”.  It’s a pretty straightforward concept.  If you have a 401k with an old employer or an IRA with a firm and you want to move what you saved to different management, you complete a rollover.  Paperwork is completed and funds are moved over to the new IRA.  Simple enough, right?  Usually.  Rollovers are usually simple to complete, but if the ball is dropped, it can result in substantial taxes and penalties that can lead to a less-than-pleasant situation. Recently, the plot has thickened due to an IRS ruling now limiting the frequency of IRA rollovers.

Trustee-to-Trustee Transfer 

To keep things simple, most rollovers are completed by way of “trustee-to-trustee” transfers.  Meaning funds are sent from one institution to another, without the investor ever “touching” the money.  This may happen electronically or a check might be issued to the investor, made payable to the new financial institution, not the individual.  You are able to complete an unlimited amount of these types of transfers during the year. 

60-Day Redeposit

The other type of rollover allows funds to be sent directly to you in your own name or electronically to a checking or savings account, but you must deposit the money into an IRA or eligible 401(k) within 60 days.  If the funds are not deposited within the 60-day window, the distribution will be deemed as a taxable event, which could cost investors a significant amount in taxes and penalties.  This type of rollover is only permitted once a year. 

Rollover Short-term Loan

As my colleague, Tim Wyman, explained in a recent blog, this 60-day rollover rule could also be used for a short-term loan.  So, if you were closing on a new home and needed some cash because your current home wasn’t sold yet, you could take a distribution from your IRA and, as long as you put the money back into the IRA within 60 days, there would be no tax consequences – essentially, a short-term bridge loan.  Previously, the 60-day rollover was permitted once every 365 days for each IRA you own. 

Stopping the Rollover Merry-Go-Round

Think about this:  If you had multiple IRAs, you could feasibly take a distribution from IRA #1 and use funds from IRA #2 to pay back the first distribution within 60 days.  The 60-day clock would then start over with IRA #2.  If you did this every sixty days, you would only need six different IRA accounts to do the 60-day rollover “merry-go-round” and give yourself an ongoing tax-free loan from your IRA.  However, the US Tax Court recently ruled that you are now only allowed one 60-day rollover every 365 days as an aggregate for ALL of your IRAs.  Meaning no matter how many IRAs you have, only ONE 60 day rollover is permitted in a 365 day time period. 

It seems as if our tax laws change faster than Michigan weather.  There is always something new and it’s important to work with an advisor who is up to speed on the ever changing landscape in financial planning.  If you ever have questions about your personal situation, don’t hesitate to contact us. We are here to help!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-013208

Real Estate Rebound: Time to Buy a Home?

As the real estate market starts to climb out of the doldrums and consumer demand begins to increase, you may be thinking of buying. Before you start a house hunt, let’s take a look at some general financial planning rules with regards to what could be the biggest purchase of your life.

Picking Your Price Point

Probably the most important rule to keep in mind when you are deciding which house is right for you is determining what you can afford.   The general rule of thumb is that your principal, interest, taxes, and insurance (commonly referred to as PITI) should not exceed 28% of your gross income.  So to put that into perspective, if your total household income is $100,000 ($8,333/month), you should try to keep the PITI to no greater then $2,333 (28% of $8,333).   Please keep in mind this is a general rule and not an absolute truth.  To make a truly responsible financial decision, you should have a good understanding of your monthly cash flow and determine how much of that $2,333 you can take on without being “house poor”. 

Unless It’s Long Term, Rent

Length of time you plan to be in the home is also a big consideration.  In fact, if you plan on being in the home less then 5 years it’s probably better just to rent. The reason for this is in the first 5 years of a typical amortization schedule, you hardly pay down the principal.  The majority of your monthly payment is going to interest and, unless there is substantial appreciation in the real estate market over that 5-year period, you probably won’t have much equity in the home when you try to sell it.

Prepare for PMI

If you aren’t putting 20% down, then you’re probably going to be subject to private mortgage insurance (PMI), which will increase your monthly payment.  Once you have 20% equity in the home, and a period of two years has passed since the initial purchase date, you can apply to have PMI removed from the loan.  Until that time, you need to be prepared for the additional burden on cash flow.

Moving isn’t cheap! 

The average moving company charges between $1,000 and $5,000 for transporting all your precious possessions from one house to the next so plan on setting aside a little cash for this expense.

Most Common Questions

Purchasing a new home can be fun, but it can also be very stressful. Some common questions that we get a lot from our clients at The Center are:

• Where do I take the money from for the down payment?

• Should I do a 15 or 30-year loan?

• How much should I put down on this house?

Whether this is your first house or your tenth, take a deep breath and be sure to consult with trusted advisors. When you talk through all of these issues, it’s easier to decide if it really is your time to start shopping for a new home sweet home.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-009197

Where Do I Take Cash From Next? The 72(t) Option

A longtime client, we will call her “Joan”, called last month needing to set aside money for her 2014 income needs. She had nothing left in the bank.  She had been through a life transition recently, out of work for over a year, and helping family with some health concerns.  Nearing retirement but not quite at the point at which she could access her retirement moneys without penalty (she was in her late 50’s, but not quite 59 1/2), she was concerned because her only choices were a Roth IRA and a traditional IRA.  So her normal reaction was to go for the Roth because it had fewer penalties or tax (she had established the Roth over 5 years ago and could access her contributed portion without penalty; she would likely experience a penalty if drawing on earnings portion). 

Penalty-free IRA Withdrawals

I offered a rarely used suggestion to establish a section 72(t) distribution (as authorized under the IRS tax code). This rule allows for penalty-free withdrawals from an IRA account. The rule requires that, in order for the IRA owner to take penalty-free early withdrawals, he or she must take at least five "substantially equal periodic payments" (SEPPs). The amount depends on the IRA owner's life expectancy calculated with various IRS-approved methods.

Rule 72(t) allows you to take advantage of your retirement savings before the age of 59 1/2, when there is otherwise a 10% penalty on early withdrawal. The withdrawals, however, are still taxed at your income rate.

How to Use Rule 72(t)

The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011.

This works well for Joan because she did not have any earned income in 2013 so we actually started her distribution in December for the 1st of 5 distributions.  We plan to take the next one immediately in January of 2014 and this should fulfill her income requirements needed for 2014.  She also does not plan on finding work in 2014 so the taxes on these dollars will be small since she had no other income.   The Roth arguably would also have fewer tax implications, but we suggested taking from the Roth IRA after this if additional income was needed in the year as she climbs the tax bracket wall.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. A 72(t) distribution may not be right for everyone. Investors should take into consideration the possibility of depleting their retirement account before the end of their life expectancy. In addition, any withdraws are taxed at the investor’s income rate and may raise their tax bracket. Please discuss any tax or financial matters with the appropriate professional before making a decision. #C14-001634

Health Savings Account Basics

With the Affordable Care Act becoming effective in 2014, healthcare seems to be top of mind with a lot of people.  But there are still many kinks to be worked out and many questions left unanswered.  In a world of uncertainty, why not consider utilizing a savings vehicle to help with medical costs that you can control? 

Using an HSA

A Health Savings Account, or HSA, is a fairly new type of account that is available to those who are enrolled in a high deductible health care plan.  Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake!  A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, something a Flex Spending Account does not offer – it is a “use it or lose it” plan. 

What an HSA Can Cover

Many employers who offer high deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match.  Dollars contributed to the account are pre-tax and earnings accumulate tax deferred.  Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free.  The list of qualified medical expenses can be found at irs.gov, however, just to give you an idea, a few include:  expenses to cover your deductible (not premiums), co-payments, prescription drugs, various dental and vision care expenses, etc.  As always, consult with your financial advisor, tax advisor and health savings account institution to verify what expenses are considered qualified.  If you make a withdrawal that is considered “non-qualified”, you will be subject to taxes and a 20% penalty on the withdrawal amount. 

Here are the details for 2014:

Individuals

• Must have a plan with a minimum deductible of $1,250

• $3,300 contribution limit ($1,000 catch-up contribution if 55 or older)

• Maximum out-of-pocket expenses cannot exceed $6,350

Family

• Must have a plan with a minimum deductible of $2,500

• $6,550 contribution limit ($1,000 catch-up contribution if 55 or older)

• Maximum out-of-pocket expenses cannot exceed $12,700

Withdrawing from an HSA

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA.  However, once you are 65, funds can be withdrawn for any purpose, medical related or not, and you will no longer be subject to the 20% penalty.  However, the withdrawal will be included in taxable income, like an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money but have already maximized their 401k plans or IRAs for the year.  Although you have to wait 5 ½ years longer to access the funds from a HSA than a traditional retirement plan (age 59 ½) to avoid penalty, this is just another investment vehicle that could reduce taxable income in the year contributions were made while earnings have the opportunity to grow tax-deferred and tax free.  

As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high deductible health plan.  No one likes medical expenses; this can be a vehicle that can potentially soften of medical expenses. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional. #C13-002464