Within the next two months, the average American worker will likely see an estimated increase in their take home pay of $70 a paycheck, or $2,000 a year, due to the 2017 Tax Reform Act. It’s anticipated that most Americans will immediately absorb the extra money as part of their normal budget spending; $70 per pay period could easily justify a nice dinner out or a new phone or cable upgrade for many individuals.
While these instant gratification upgrades are rewarding in the short-term, there are options to consider that will make these extra dollars work harder and last longer. These extra funds can go a long way in helping to ensure financial wellness; which is paramount to overall health.
Take a holistic approach towards financial wellness by examining healthcare savings, savings accounts and retirement funding when considering how to help those hard-earned funds have a more meaningful long-term financial outcome.
Invest in the triple tax advantage1 of an HSA
As healthcare costs continue to soar, so should individuals’ interest in saving for these expenses. If you’re one of the estimated 30 million people enrolled in an HSA eligible health plan, consider enrolling in a health savings account (HSA) or increasing contributions to help better manage these expenditures. HSAs not only cover planned out-of-pocket costs, but allow users to be better prepared financially when an unexpected injury or illness comes along. In 2018, an individual can contribute a maximum of $3,450 to their HSA and a family can contribute a maximum of $6,900 with an additional $1,000 catch up contribution allowed for people 55 or older.
When deciding how to use these extra funds, it is important to understand the potential triple tax advantages that an HSA offers. HSAs offer tax benefits at deposit1, during the account’s life and upon withdrawal for qualified medical expenses2. Money contributed to an HSA can be rolled over from year-to-year—there is no “use it or lose it” clause. HSA money can be used on a variety of medical expenses — according to a recent study by UMB, nearly 45 percent of HSA dollars were spent at medical providers such as doctors and hospitals, nearly 18 percent was spent at dentists and more than 11 percent was spent for vision-related expenses. Additionally, more than 16 percent of HSA dollars were used at drug stores, pharmacies and grocery stores.
HSAs also can be used like traditional retirement accounts, with some working as simple savings accounts and others allowing employees to invest money in mutual funds3, similar to a 401(k) or traditional IRA. After retirement age, individuals can use the HSA funds for non-medical expenses without paying any penalty and with similar taxation to withdrawals from other retirement savings accounts (e.g. 401(k)s). Earnings in invested HSA funds grow tax free making your dollars stretch even further.
HSAs can serve as a powerful tool for long-term savings and as a key part of an overall financial wellness strategy to build wealth for both medical and other general expenses. A 2017 Employee Benefits Research Institute (EBRI) study estimates some couples will need as much as $370,000 to cover out-of-pocket medical expenses during retirement.
While a triple tax advantage can be a great way to maximize these extra dollars, every financial situation is unique and other avenues may need to be explored.
Below are a few other ways to contribute to overall financial wellness.
Build an emergency fund
Building an emergency fund for unexpected costs is important to an overall financial wellness plan. In case of an unexpected event, it’s recommended that individuals have at least six months of income that can be lived on comfortably. This amount needs to account for everyday needs and expenses, such as monthly bills, including an individual’s rent or mortgage payments. While six months’ worth of money can seem like an unattainable amount, saving an extra $2,000 in an emergency fund this year is a great place to start.
Pay off debt
Depending on the type of debt accumulated, working toward paying off debt with these extra dollars could be a beneficial strategy. If an individual has high-interest consumer debt, it is always recommended to pay off that debt first. While making additional payments on traditional loan debts, like student loans or mortgages, will save money in the long run, it won’t lower monthly payments. By chipping away at high-interest debt, individuals can save money by cutting down on their interest payments.
Increase your 401(k) contribution
401(k) plans are a popular tool used to set aside money for retirement. They are traditionally tax-free and have high annual contribution limits, an $18,500 max in 2018, allowing employees to set aside money that will earn interest and compound over the years until they can withdraw. Contributing an extra $70 per paycheck can have a huge impact over many years—particularly if there is an employer match involved.
When deciding how to utilize the extra take home pay from the 2017 Tax Reform Act, consider what will benefit you the most. Carefully evaluate your financial options, and then take action to avoid these extra dollars being absorbed into another bill payment or everyday living cost.
This material is provided for educational purposes only and all opinions represent UMB Healthcare Services’ judgment as of the date this material is published and are subject to change at any time without notice. You should not use this material as a substitute for your own judgment, and you might want to consult with professional advisors before making any tax, legal, financial planning or investment decisions. This material contains no investment recommendations.
1All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state’s tax laws to determine the tax treatment of HSA contributions, or consult your tax adviser. Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice and this document is not intended as tax or legal advice.
2 Withdrawals for non-qualified expenses are subject to income taxes and a possible additional 20% penalty, if you’re under age 65.
Begonya Klumb is CEO of UMB Bank Healthcare Services.