Castles & Moats

Insurance and Investment Planning...Simply Explained

Time Lining Your Savings2018-07-05T21:26:03+00:00

Chapter 14

Time-Lining Your Savings

Now we’re getting a little sexier…there are three specific plans to discuss in this chapter: Health Savings Accounts (H.S.A), 529 College Savings Plans, and basic ordinary savings & investment accounts.

Let’s start with the last one first. See the picture below? This is how we’re going to start allocating your savings & investment plans.

What’s the first financial domino that will fall? Simple…this should include short term needs that could occur within 1-2 years, deductibles for insurance claims, car maintenance, vacations, & gifts. How much do you need in this area? $1000, $5000, $10000, more? There you go. A new set of tires is not an emergency! That money needs to stay liquid, so set up either a savings account at a bank or credit union, or an investment account with a money market fund.

If you’re single, it’s an individual brokerage account. If you’re married it should be a Joint Tenant with Rights of Survivorship (JTWROS). Any competent financial advisor will know what this is by the way.

What’s the second domino that will fall? Maybe it’s 2-5 years out? You just had your first child and private school meets that time frame. Work with an advisor to help you match your money to your time frame and see if something a little more aggressive will meet that need. The third domino could be 5-10 years out, and so on and so forth. How much money goes into each domino? That’s for you and your advisor to map out, but you should be matching your investments to your future needs.

The other plans in this chapter our firm refers to “single use assets” in that they can be used for only one purpose. Health Savings Accounts are awesome. I love them. I own one that accompanies my health plan. My plan is a High Deductible Health Plan (HDHP) so I can utilize my H.S.A.

The government says for 2017, I can contribute $3400 annually to the account PLUS since I’m over Age 55, I can add another $1000 to total $4400 into the account. These contributions are 100% TAX DEDUCTIBLE. Here’s the cool part. I can tax deduct the contribution and withdraw it for qualified medical expenses in the same year…even in the same month! I also use mine to pay for my long-term care premium as that is an eligible expense. But there’s a catch that I’ll discuss in a few paragraphs.

529 College Savings Plans have become enormously popular in the last decade. You can invest in a variety of mutual funds with several well-known money managers, such as American Funds, Vanguard, and Fidelity.

They are for eligible educational institutions which are generally any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.

You make a contribution to the plan in the name of a child or a grandchild. The contribution grows tax-deferred and if used correctly for eligible college expenses, the withdrawals are 100% tax free. But once again, there’s a catch!

I think 529 plans are great investments for grandparents to give as gifts in addition to that birthday, Christmas, or other gift that might come along. They will forget the toy in 2 weeks, but the $$$ will be there when they might need it most.

The picture below tells a somewhat sad tale of college costs in today’s environment. If you are a parent, and you are passionate about your children going to college, then the 529 plan is the way to go. If you are not sure what your children will do, then maybe a regular investment account, like I discussed earlier is better. BUT, remember the dominoes, and the priorities of saving and investing.

Depending on your age, and the age of your children, you might be facing both college education and retirement at the same time…and you must choose which is more important. It’s a difficult conversation to have with my clients.

In looking at this cartoon, I’m reminded of my nephew & niece’ graduations from the University of Tennessee. I saw approximately 1000 students at each ceremony…I’m assuming under-graduate only…and this is strictly hypothetical, but at $35,000 per student, there was roughly $70 million of total student debt in both ceremonies…and 1) that doesn’t include graduate and/or post-graduate schools and 2) how many of these graduates had jobs waiting for them the following Monday?

Per a Wall Street Journal article in March 2017, graduates left college with an average of $37,172 in debt. This was based on federal student loan data. It’s a problem that the next generation will be dealing with for years to come. I have a good friend who graduated from medical school at Vanderbilt University. His student loans total over $250,000! However, in his case, he’s now getting into private practice and making well into six figures…but still, a quarter million $$$ in debt?

“The best time to plant a tree was 20 years ago, the second-best time is now.” – Chinese Proverb

Here’s the catch for the H.S.A. and the 529 plans. Remember if the Government created it, there’s a catch somewhere. Usually the catches are on the backside. You’ll notice I used the terms “eligible expenses” in both explanations.

The H.S.A contribution is tax deductible and the withdrawal is tax free if used for qualified medical expenses only. If I should have to use it for regular non-medical expenses, the contribution becomes taxable and there’s a 20% penalty assessed as well (if you’re under age 65).

The 529 plan contribution is not tax deductible but the withdrawal is tax free if it’s used for qualified higher education expenses. If I should have to use it for non-education expenses, any gains in the plan are taxable and subject to a 10% penalty.

See why we call them “single use assets”? If you forewent the tax advantages of these plans, and had them in a regular investment account, managed like the dominoes, and adjusted to your time frame and risk tolerance, you might pay some taxes, but you avoid all the penalties.

I am not saying either of these are bad decisions…In fact they are great decisions as they work beautifully for the purpose that they were created. But only if managed correctly, and only if you’ve completed the steps I’ve outlined so far in this book.

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If you’re in need of auto, home, landlord, or life insurance, I look forward to getting to know you and becoming your partner in protection.

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