An article I recently read about the 401K plans ( The Great Stock Myth ; The Atlantic) concludes that betting only on your 401K saving may not be a good idea as the historic returns are not even close to whatever we all have in our minds. With the kind of fluctuations we observe in the stock market(In other words, zero sum game), what makes the 401K attractive is the tax differed contribution and the employer match. Surprisingly Health Savings Accounts(HSA)s also come with similar features and hence provide a good avenue to park your savings for any future medical expenses.
Health Savings Accounts (HSA) are available since 2003 for the Americans who are holding high deductible health plans and more recently companies are encouraging the employees to sign up for HSA by contributing lump-sum dollars on their behalf. Of course it helps the companies to save on the premium they are paying to insurance companies but I think this plan overall helps in reforming the halthcare system ( Since this was introduced in 2003, the credit probably goes to George Bush but Obama did modify this plan to plug some of the misuses)
HSA is not available to everyone and its contributions are always associated with a high deductible health insurance plan . For example, if your health insurance plan requires you to pay-up the initial family medical expenses up to $2,400 (as of 2010) you are eligible to participate in an HSA. By opening an HSA account, you could transfer up to $6,150 a year tax free for meeting your medical expenses in the future. HSA is offered by most of the banks and are just like a savings/investment account with a debit card and check book. There are a few features I found very attractive as compared to a traditional plan.
1. Premium for your health insurance is lower because of the high deductibles and normally the out of pocket maximums are also lower than a traditional plan. You can use your tax advantaged HSA account to meet the deductibles/Out of the pocket maximum. Normally , employers contribute a percentage of the deductibles so there is always some funds to start with.
2. HSA balances are like a savings account and any unspent money is for you to keep for the future. Since young people tend to incur less of medical expenses, this help them to accumulate whatever unused funds from previous years to the future. Even if you switch to a low deductible plan in the future, you could still use these funds for eligible medical expenses for you or your family.
3. Your contributions are tax differed and based on you income this could be up to 30% return. Most of HSA providers allow you to invest these balances in Mutual Funds and other eligible instruments. So it works just like your 401K. In case you make a withdrawal for non medical expenses, you will have to pay a penalty of 10% and the income tax. Normally such withdrawals are made when you have less or no income so you will end up paying less income tax.
The best part I liked in HSA is that it makes you more responsible in spending on health care. For example, I now want to know how much the doctors are charging me . Some of my colleagues are negotiating better rates with physiotherapists and Chiropractors and the money is going from their savings. And of course I have a peace mind that if the expenses are exceeding the out of pocket maximum, insurance is going to take care of that.
Frankly, most of the working people can meet their expenses for primary care but its hard to be prepared for catastrophic medical situations and HSA seems provide just that.
Saturday, November 20, 2010
Sunday, November 7, 2010
Confused new home buyers
New home buyers first stumble at the decision point of buy or continue to rent and it invariably ends up in an elaborate spreadsheet exercises to compare the tax benefits, cost of renting, expected appreciation and outside the spreadsheet, the thrill of pursuing the American dream. Once decided, the next grinding stage was looking for a dream home -good neighbourhood, good school districts, commuting distance to workplace and daycare , construction quality and the number of bedrooms and a host of other things. But recently the complexity of this process increased due to recession, changed terms of loans and the new foreclosure and other laws. I think the recent shake-ups in the industry got the new buyers confused to the core.
The recent foreclosure mess is a good example for things that added to such confusion. Its true that most of the banks did not do the due diligence before every foreclosure as their status as a mortgage servicing company did have more benefit in foreclosing a loan rather than modifying it . In other words, Obama administration did know that as a result of the securitization process ( Wall Street taking over the mortgage receivables and selling it to varied investors as a packaged investment ) there was less incentives for the mortgage servicing companies to modify the loans and hence offered a $700 Million package for doing the loan modification. The recent fiasco in foreclosure and the fact that all 50 state attorneys suing the major banks would change this incentive system. Now the foreclosure means more paper work and legal process where the cost of this will outweigh the benefit of the foreclosure in comparison with the loan modification. May be its good for the current mortgage holders and industry in general as every foreclosure adds a home to the already surplus inventory of the homes.
New buyers are puzzled at two things
1. are the prices at bottom? Moody's say its not and people are just waiting for a right time. Also, the income levels did not change in last five years so buyers feel that prices will eventually have to correct to justify the income levels in a no growth economy.
2. Will the rates change? There is a feeling that's the interest rates are probably at the bottom now but the mortgage prices are not.
In addition, there are more foreclosed homes that are added to the supply of homes and there is always a better deal in waiting. May be the new foreclosure messs will help remove that confusion.
The recent foreclosure mess is a good example for things that added to such confusion. Its true that most of the banks did not do the due diligence before every foreclosure as their status as a mortgage servicing company did have more benefit in foreclosing a loan rather than modifying it . In other words, Obama administration did know that as a result of the securitization process ( Wall Street taking over the mortgage receivables and selling it to varied investors as a packaged investment ) there was less incentives for the mortgage servicing companies to modify the loans and hence offered a $700 Million package for doing the loan modification. The recent fiasco in foreclosure and the fact that all 50 state attorneys suing the major banks would change this incentive system. Now the foreclosure means more paper work and legal process where the cost of this will outweigh the benefit of the foreclosure in comparison with the loan modification. May be its good for the current mortgage holders and industry in general as every foreclosure adds a home to the already surplus inventory of the homes.
New buyers are puzzled at two things
1. are the prices at bottom? Moody's say its not and people are just waiting for a right time. Also, the income levels did not change in last five years so buyers feel that prices will eventually have to correct to justify the income levels in a no growth economy.
2. Will the rates change? There is a feeling that's the interest rates are probably at the bottom now but the mortgage prices are not.
In addition, there are more foreclosed homes that are added to the supply of homes and there is always a better deal in waiting. May be the new foreclosure messs will help remove that confusion.
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