With Sandra Block, Senior Editor at Kiplinger’s Personal Finance
Many people wait until the annual ritual of New Year’s resolutions to take stock of their finances. But, as Sandra Block says, there are compelling year-end financial moves that can help you save big. Sandra is Senior Editor of Kiplinger’s Personal Finance.
Year-End Financial Moves: Don’t Lose It… Spend Your FSA Now
One year-end financial move is to spend money in your Flexible Spending Account (FSA). FSAs have a “use it or lose it” provision. Some companies may let you carry over $500 through the first quarter of the next year. But if you don’t use the money on time, you forfeit it.
FSA’s allow a broad range of healthcare-related expenses. Consider stocking up on medications such as contact lens solutions and non-prescription drugs, last-minute dental expenses, etc.
Health Savings Accounts
With a Health Savings Account (HSA), you contribute pre-tax money toward the same types of expenses as an FSA will cover. Thankfully, HSA funds carry over year after year, with no “use it or lose it” provision.
As year-end financial moves go, opening an HSA is a smart option, provided you have a high-deductible health plan (HDHP).
HSA’s Triple Tax Advantage
For 2018, you can put up to $3,450 into an HSA if you’re single and up to $6,900 for family coverage. HSA funds can be invested in mutual funds, allowing your money to grow tax-free.
Let’s say you put about $5,000 into an HSA each year. Five years later, you’d have $25,000 in your HSA, tax-free. If you invested HSA funds, your money could grow tax-free, with no taxes on withdrawals used to pay for allowed medical expenses. So HSAs give you a triple-tax advantage.
Moreover, when you retire, you can use HSA funds for all kinds of medical and dental expenses.
Steve recommends another smart year-end financial move. If your income is below $49,000 for singles, below $65,000 for couples, and below $100,000 for a family of four, see if you qualify for a subsidy where the government helps pay for your insurance.
If needed, you can take steps to legally lower your income so you qualify for a subsidy. For instance, as part of their year-end financial moves, retirees can monitor the amount they withdraw each year or hold off on taking capital gains or IRA distributions. This way, they could meet income requirements for subsidies and lower their premiums from thousands of dollars to only a few hundred dollars per month.
Cash In Credit Card Rewards
Another smart year-end financial move is to take stock of your credit card rewards. If you have Christmas gifts to buy, consider redeeming your rewards for gifts or gift cards. This is also a good time to see what perks your cards offer so you can use them throughout the year.
Maximize Your Bank Savings Rate
Year-end financial moves should focus on tax savings and other key benefits.
Steve also suggests getting a better rate on the money in your bank savings accounts. With interest rates still quite low, most banks offer terrible rates on savings accounts. Fortunately, if you shop online, you could increase your bank savings rate from, say, 0.25% to as high as 2.25%, while still getting FDIC insurance.
For example, $100,000 at 2.25% will earn $2,250 by year-end and keep pace with inflation. If instead, you stuck with the 0.25% rate, you’d earn $250. So with just a tiny bit of research, you could earn an extra $2,000 by transferring your money from one bank to another.
Fortunately, you still have a few weeks to go before 2019 starts. So read up on Kiplinger’s year-end financial moves, make a few changes to your finances, and watch your savings add up in 2019.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Many people wait until the New Year and the annual ritual of New Year’s resolutions to take stock of their finances. But there are compelling reasons to attend to some financial tasks before December 31st. Sandra Block joins me to discuss some strategies to start 2019 in a better financial state. She is Senior Editor of Kiplinger’s Personal Finance. Hey, Sandra, thanks for being here.
Sandra Block: Hey, thanks for having me.
Steve Pomeranz: Let’s begin with some end-of-year steps we can take to save taxes, take advantage of certain programs, or fix our portfolios before end of the year. And I think the first thing you say is don’t wait until 2019 to implement some New Year’s resolutions. There’s compelling reasons to attend to some of these financial tasks before December 31st. Let’s talk about the first one. If you work and have an FSA, you should spend that money, right?
Sandra Block: That’s right. Flexible spending accounts have a use-it-or-lose-it provision. Which basically means if you committed to put a certain amount of money into your account at the beginning of the year, you either have to spend it by the end of the year or some companies will let you carry over $500 through the first quarter of the next year. Basically, if you don’t spend that money by the deadline, you will forfeit, you’ll give it back to the company. And it’s usually not that hard to find things to spend the money on because the list of things that you can use these accounts for is pretty broad.
Steve Pomeranz: Yeah, and the idea is if you didn’t use it officially, you can reimburse yourself for a lot of these expenses, like eyeglasses, dental care, and so on, right? So there’s kind of a list that you can go through, and say, hey, what was medically related? What can I reimburse myself with?
Sandra Block: That’s right. And the list is really broad, and I’ve done this myself. I’ve walked into a drug store with a list because I knew I had a ton of money left over, even things like contact lens solution qualify, certain non-prescription drugs. And certainly, anyone who has contact lenses, you can stock up on those for the next year. Any last-minute dental expenses. So just don’t waste that money because it’s your money.
Steve Pomeranz: That’s right.
Sandra Block: And it is a good thing to have because it is tax-advantaged. It basically lowers your out-of-pocket cost, but you don’t want to give it away.
Steve Pomeranz: Now, there is a plan available in most and by most employers and insurance companies that is not an FSA, which is a flexible spending account, but an HSA, a health savings account, and they are very different. How are they different?
Sandra Block: Well, actually we’re pretty high on these. Because as more and more people are either ending up in a high deductible health insurance plan, either by choice or by necessity, because that’s all that their employer offers. A health savings account offers a way to contribute pre-tax money towards the same types of expenses that an FSA will cover. The advantages is the money rolls over. You don’t have to spend that money by the end of the year. You can carry it over; you can even build up a large balance. So you have that money there for perhaps a major medical bill or your medical bills in retirement. So I think if you have an HSA, you definitely want to use that money for things, but you don’t have to. And now that it’s open enrollment season, if you are in a high deductible plan, you should definitely consider setting one up. You can’t have both. You can’t have a flexible spending account and a health savings account. But, I think if you’re in a high deductible plan, a health savings account is the better choice.
Steve Pomeranz: Well, you can put $3,450 into an HSA if you’re single, up to $6,900 if you have family coverage. If you’re over 55, you can make an additional $1,000 contribution. So let’s just use that for a second. Let’s say you can afford to put in $4,450. And let’s say that you can also afford not to use it, to kind of save it for the future and pay your current expenses currently. Four or five years, what are you talking about, $20,000 sitting in this plan for you for your retirement, for the future. And you got a tax deduction for it. And if you get it invested properly, and if it does grow, all the earnings are tax-free, as long as you start to use it appropriately for medical expenses. So it’s kind of a really great deal.
Sandra Block: It is a good deal. We call it a triple-tax advantage because as you said, you don’t get taxed on the money put in, you don’t get taxed on any earnings that you earn, and you don’t get taxed on the money you take out as long as it’s used for qualified expenses. And I think what we’re seeing more and more is people recommending just what you said. Go ahead and pay your expenses out-of-pocket, let that account grow. When you retire, you can use it for all kinds of retirement-related medical expenses. And as we know, health care is a huge expense in retirement. So it’s nice to have this pot of money there for you when you need it.
Steve Pomeranz: We’re going to do one more healthcare-related idea here. This is making sure, if you can, that you qualify for the health care subsidy in 2019. We’re talking about kind of Obamacare. We’re talking about the fact that if you make under certain thresholds of income, the government will help to pay your premium. Let’s go through those numbers really quickly.
Sandra Block: Yeah, that’s, I’m sorry, I don’t have them in front of me.
Steve Pomeranz: Well, I do.
Sandra Block: [LAUGH] Apologize.
Steve Pomeranz: [LAUGH]
Sandra Block: But I wasn’t prepared for this Steve, I’m sorry.
Steve Pomeranz: Okay.
Sandra Block: [LAUGH] But the most important thing I would say here is to see if you qualify for the subsidy. And one of the things that we recommend is there are certain things you can do to your income that will lower it. If you’re retired, for example, monitor the amount that you withdraw from your pre-tax plans and things like that. Because from my own experience in talking to people who’ve signed up for Obamacare, the difference between buying a plan with a subsidy and without a subsidy is huge.
Steve Pomeranz: Yeah.
Sandra Block: The subsidy literally can lower your premiums to a few hundred dollars a month versus several thousand dollars a month if you don’t qualify. So I think it’s really important to look at things. And actually, this late in the game, it might be hard to do that, but the subsidized plans are very affordable. The unsubsidized plans can be really expensive. Now, that may be all that you have. It still may be less expensive than buying a plan on the open market, but-
Steve Pomeranz: Yeah, but still, if the government’s going to pay the lion’s share, and you’re at those thresholds—which by the way, for single is around 49,000., for couples, it’s 65,000—these are levels of income over which you don’t get the subsidy, under which you do. And then for a family of four, it’s 100,000. I think the idea here is to take stock of what your income’s going to be. And if there’s anything that you planned on doing that would create more income for you in this year, you may want to delay it, like taking capital gains or taking a distribution from an IRA because that will push you over the threshold level. So we’re just telling you to be smart about this, think this through, because you don’t want to go into 2019 and say, I should’ve done it.
Sandra Block: Right, and you don’t want to go into 2019 without health insurance either. And I think what people may be missing because they’re not publicizing these exchanges anymore very much is that, as you said, if you qualify with the subsidies, the plan can be quite affordable. And it covers a lot, it’s not like some of these older plans that had all these things that they didn’t cover. These plans are required to cover a good amount of anything that you need. So I hate to see people go without health insurance. This is still an option for people who don’t have a plan through their employer, and people should definitely look into it and see if they qualify.
Steve Pomeranz: Okay, mom, I heard you, will do.
Sandra Block: [LAUGH]
Steve Pomeranz: So let’s talk about different kinds of money that you can take care of. But let’s talk about your credit cards. Looking at the end of the year, you may have accumulated some credit card rewards. I personally like having a cash-back card, and I try to find the card with the highest cash back, and I like that. I get a nice amount of money at year end, or I save it for vacations. What are some of the other rewards that you should take a look at and maybe spend this year rather than next?
Sandra Block: Well, and I’m guilty, we hear from readers all the time who are like you, who really keep track of their rewards. They have cash-back cards, and they’re just very vigilant about making sure that they’re getting the most. And then there are a lot of people, I would say, like me, who have a credit card that does offer rewards but just sort of quietly accumulate. And you kind of forget about it because you’re not really focused on that’s why you have a credit card. So what I would say is go to your credit card’s website, go to the loyalty link or the redeem your awards link, and see what you have. I mean, I know what I’ve done in the past is one of the things I can use my rewards for is an Amazon gift card. So I can cash in my rewards, get a gift card, and use that gift card to buy people gifts for Christmas. So I think it is a good idea to look at all of your credit cards and see what rewards may have been quietly building up that you might be able to use. I think sometimes if you’re not really playing this game, the rewards may be disappointing. They’ll throw all these things in there that you might be able to buy, but then you look at how much points you have and you’re not there.
Steve Pomeranz: Yeah.
Sandra Block: But if you can get a few gift cards, maybe get a discount on a hotel or rental cars, something like that, why not take advantage of it? Especially this time of year when people spend so much money.
Steve Pomeranz: Some of the cards offer, let’s say, savings for travel. Maybe free baggage and other things like that. And some of them are based on a calendar year, rather than a year based upon your adoption of the card. And if it’s a calendar year, and we’re talking about December, that would be the time to kind of get a new card that has a calendar year rewards option. So you can kind of capture that by the end of December and then get a double benefit, basically.
Sandra Block: Yeah, that’s a great strategy. And the other thing I would say, especially for travelers, is just review and see what perks your card offers. A lot of times people don’t realize that their card, as you said, might offer free baggage check-in. Some of them have concierge services. If you read the fine print, sometimes you find out, and certainly, if you’re renting a car, it may cover your insurance. So I think it’s a really good idea to look and see, like you said, what points you had that you might be able to use. Whether you could open a new card and capture some new points, or just see what services your card offers that you may not have been paying attention to.
Steve Pomeranz: Okay so, we’re really telling a story of paying attention, right? And focusing in very, very laser-like on this year-end thing and how can you take advantage of all these things. One last thing that I talk to a lot of my clients about and really, anybody who will listen, is that when you’re saving money, there are different savings rates available all over the country in different kinds of banks. And to have just have your money sitting in a bank that’s paying you fractions of 1% these days, it’s just wrong. And it’s up to you, the consumer, to start shopping around. So some money market savings types rates, where you can get your money at any time. Some of the rates are as high as 2.25%, right?
Sandra Block: That’s right, because interest rates have been rising. But banks often are very slow to respond to rising interest rates, particularly if you have your money in a traditional bank. They just aren’t going to jump on it. They have so much cash that they’re not having to pay interest on. And it’s just not in their interest to raise rates.
But if you look at some of these online banks, they are very competitive. They, as you said, are offering 2% or more. And this is on your cash. This is on money that maybe hasn’t been earning anything for years. So I think that’s one of the most effective ways to earn more money with no risk. If it’s FDIC covered, you don’t have to worry about losing anything. And it’s just a matter of going through the trouble. I think banks really count on inertia, they count on people not paying attention to this. And as a result, people have billions of dollars sitting in accounts that aren’t earning anything at all.
Steve Pomeranz: Right, okay everybody, so pay attention to your stuff, and this is a good one here: $100,000 at 2.25%, that’s $2,250 at the end of the year, keeping pace with inflation, as opposed to some fractional return of a quarter of 1%, which is $250 a year. That’s $2,000 extra in your pocket, for what? Doing nothing. Transferring your money from one bank to another. My guest, Sandra Block, senior editor for Kiplinger magazine.
And don’t forget to hear this and all of our interviews. And if you have a question about anything that we’ve discussed, we’d love to hear from you, and we love to answer any question, financial, that you may have. So contact us, go to our website at stevepomeranz.com. And of course, while you’re there, sign up for our weekly update. This is where we’ll send you the show into your inbox, you can choose a particular segment that you want to hear or listen to the whole show. We have transcripts, we have summaries available, everything to make it very easy for you to access and to get the most out of your money. Sandra Block, thank you so much for joining me.
Sandra Block: Thank you for having me.