Monday, October 22, 2007

Happy New Year: Your health premiums will go up 35% in '08

I just returned from my company's benefit fair. As I was chatting up one of our benefits specialists, he casually mentioned that the yearly cost of one of our medical plans was increasing 35% next year.

More of a curiosity than anything... anyone else seeing anything like this? The worst increase I've seen in past years is 15%.

401k - How to save money... without spending a dime of your own

It's amazing to me how many folks neglect to put money into their 401k plans, saying that they can't afford it.

I'll give the standard bromide about how you're passing over 100% (or 50%) returns by not contributing up to the level of matching by your company. If you're not doing this, you're giving up an instant doubling (or 50% increase or whatever) of your money.

If you're still not convinced, read on. I have a method for you to save a (modest) amount in your 401k without really contributing a single dollar.

All it will cost you is the time to withdraw your money immediately after it's contributed.

It's easiest to show how to do this with an example.

Assume you have a 401k where my employer matches $1 for $1 on the first 3% and $0.50 on the dollar for the next 2%. (As an aside, this is known as a Safe Harbor Plan and is gaining in popularity for reasons I'll discuss in a future post). Let's say you put 5% toward your 401k and you make $60,000 a year.

Each month, $5,000 * 5% = $250 will be put into 401k along with an employer match of $200 for a total of $450.

Now, you want to get your $250 back so you request an early withdrawal.

Therefore, I withdraw about $280 from my 401k, since there's an additional 10% penalty on early withdrawals above and beyond the normal tax rate.

Net, I have the same amount of after-tax money as I did before... but now I have $170 in my 401k.

Do this every pay period, and at the end of the year you will have over $2,000 in contributions... with no financial contribution on your part. At all.

(Note that your employer's matching funds have to vest immediately in order for this to work. Not sure if they do? Ask your HR representative, but more and more companies are moving to instant vesting).

Amazing, but true. Spread the word!

Health Savings Accounts (HSAs) - A great deal if you're in a high tax bracket

I've just started working for a new company. One of the health care benefits they offer is an HSA plan. Under the terms of this plan, which is a high-deductible plan, you can shield up about $6,000 a year from taxes while creating a nest egg for any potential health care costs.

Anything not spent can be used after age 70 1/2 as a de facto retirement account, thus creating some interesting opportunities for savings if you're already tapped out on your 401k and looking to shield more money from taxes.

In my case, for example, I can take the HSA Medical option, with all preventative health items covered at 100%, for about $130 per month. In addition, I can fund my HSA for co-pays, deductibles, etc.

Since contributions are pre-tax and (very important) are not "use it or lose it" funds like Flexible Spending Account (FSA) dollars, the tax savings are enormous. In my case, the combined federal + state savings is almost 40 cents on the dollar. For most folks, it's still 30-35 cents on the dollar, which make this an attractive option to say the least.

Assuming your family stays in (relatively) decent health, and you have the extra money to save, this will provide a nice enhancement to your retirement savings in future years.

Consistency is the Hobgoblin...

Ok, so I'm ripping off Emerson but I really needed to justify the fact that I haven't blogged in, oh, months.

Hat tip to Barry Barnitz over at the Diehards group for getting me off of my duff. I've taken a new job in a new city, so I'll have plenty to talk about. Stay tuned.