With so many different types of insurances and retirement plans, it may seem like you need a Master’s degree to make sense of them all. If you are wondering which benefits you should sign up for at work, read this first! I have some tips that might surprise you.
Open Enrollment Season is almost here! While the info in this post can apply to everyone, I want to give a special Congratulations to those who recently graduated or completed fellowship.
This post was inspired by Patty who recently completed her post-doc and will be starting her first job in two weeks! She has been looking over the benefits offered by her employer, and is feeling overwhelmed by all the choices. Here are some of the things she may want to consider.
decide whether to save for retirement or 1st pay off debt
Some people recommend contributing to your 401k up to the point of your employer’s match regardless of your outstanding debts. The reason for this is to not leave free money on the table.
However, other people argue against saving for retirement until all your non-mortgage debt is paid off. The reason for this is that when you try to do everything, you won’t make meaningful progress on anything. To get rid of debt quickly (especially if you have large student loans), you need to have a clear focus and throw every cent you have toward your debt snowball. The 5% you are sending to your retirement account is 5% less that you have to put toward getting out of debt.
You can make your own choice about whether to save for retirement. I agree with paying off debt before saving for retirement for the following reasons:
1. I would not take out a student loan to invest for retirement (which is what I would essentially be doing if I invested before paying off debt).
2.The amount of interest you will pay toward loans is a Guaranteed Cost while the amount of interest you may make in a retirement account is a Possible Gain.
3. Wages (and Social Security) can be garnished if your student loan is not repaid. Sadly, I know people who are retired and still have not paid off their student loans. I wanted my student loans out of my life as quickly as possible!
4. By trying to both pay off debt and save for retirement, you will make slow progress on both. Instead, I paid off my loans within three years of graduating, then contributed up to the max in my retirement accounts.
contribute in this order
When you are ready to save for retirement, most personal finance experts agree with doing so in the following order.
NOTE: Check with the IRS, as rules can change each year, including contribution limits and Roth IRA qualifications.
First, contribute to an employer-sponsored retirement plan (401k, 403b, TSP) up to the point of the match.
Second, max out an Individual Retirement Plan (IRA, Roth or Traditional).
- Traditional IRA contributions can be deducted from your taxes if certain conditions are met.
- Roth IRA contributions are taxed now (so contributions cannot be deducted from your taxes), but the growth is tax-free.
- Consider a Roth IRA if you qualify (there are income limits).
- Because Roth IRAs are after-tax, money you contributed (but not any gains) can be withdrawn any time.
- A certain amount may be withdrawn for the purchase of your first home or higher education costs.
- You do not need a financial planner to open an IRA. This can easily be done on your own (e.g., Fidelity, Vanguard).
- If you are unsure where to invest your money, you can look into a “Targeted Retirement Fund.” Targeted accounts have different allocations of stocks and bonds based on your retirement date.
Per 2018 tax rules, the max IRA contribution is $5,500 per individual ($6,500 for those age 50 and older) OR your taxable wages (e.g., if you only made $4,000, then that’s the max you could contribute)
Note: If you are married and filing jointly, your non-wage-earning spouse can also contribute the max to their IRA. For example, my husband is a stay at home dad. But I contribute $5,500 to my Roth IRA and he also contributes $5,500 to his Roth IRA each year.
Third, contribute whatever else you can to your employer-sponsored account (401k, 403b, TSP) up to the maximum limit.
Per 2018 tax rules, the max contribution is $18,500 per individual (with a catch-up contribution limit of $6,000 for those age 50 and older).
don’t touch your retirement
Once you start saving for retirement, do so with the intention that you will not touch your retirement account until you reach retirement age. Not only can you be hit with penalties (i.e., actually receive less money than you take out due to penalty fees), you will also pay taxes on it.
- Even 401k loans have a number of limitations, and are advised against.
- Meet with your HR rep and accountant before considering even borrowing money.
- An exception to this may be a Roth IRA. Money you put in can be withdrawn without penalty.
- But remember that tax laws can change from year to year, so check with the IRS or your accountant before making a withdrawal.
Note: Some people are tempted to cash out or borrow against their retirement for a down payment on their home. Having a plan and following it in that specific order (repay debt, build emergency savings, save for a down payment on a house, then save for retirement) will help prevent you from cashing out or borrow against your retirement savings. This is another reason that I believe in paying off debt before saving for retirement.
Health Insurance and Health Savings Accounts (HSA)
When looking into health insurance, consider whether a High-deductible plan with a HSA is a good choice for you. High-deductible plans can have much higher deductibles than standard plans. However, once the deductible is met the co-pay is often much smaller than in the standard plan. And preventive care/well visits are usually still covered 100% (with no deductible).
The co-pays for your high-deductible plan can be paid using money in your HSA.
With an HSA, most employers make a contribution to your account each month. You can (but usually don’t have to) also contribute money to your HSA. Any money you contribute is not taxed (lowering your taxable income). Plus, it can earn interest.
NOTE: HSA contribution limits and qualified expenses can change every year, so check with the IRS.
HSA maximum contribution
When we were talking about retirement accounts above, the maximum limits were for the employee’s contributions (excluding the employer’s contributions). However, when talking about HSAs, the contribution limits are for the employee and employer combined.
- For 2018
- $3,450 for single plan
- $6,900 for family plan
- For 2019
- $3,500 for single plan
- $7,000 for family plan
Qualified medical expenses
HSAs can be used for qualified medical expenses (including co-pays, prescriptions), and some expenses your health insurance might not cover, such as dental procedures, glasses/contacts, fertility enhancement (e.g., in vitro fertilization), drug addiction treatment, acupuncture. Again, the list of qualified expenses can change year to year, so check the IRS rules.
After age 65, money can be withdrawn for any reason (though you’ll pay income tax on nonqualified expenses). This is why some people consider a HSA to be an additional vehicle for retirement savings.
If you need dental work and will be starting a new position halfway through the year, this is the BEST TIME TO GET DENTAL INSURANCE! Get the best plan your company has to offer. The premium will be higher, but you’ll only be paying for it a few months rather than the entire year.
From the moment you start your job until the end of December, get as much if not all of the dental work you need done while you have this fantastic insurance. Start with the major work.
Then, when open enrollment comes, you may want to cancel the plan for the next year.
Many health insurances will cover routine preventative dental care (dental check-ups, cleanings, some x-rays). Check your policy!
You should have enough life insurance to pay off non-federal student loans (federal student loans are discharged upon death, some private student loans have a death discharge, but not all), funeral expenses, and care for any dependents.
If you do not have any dependents or private student loans, you may only need enough to cover funeral costs.
Want to donate your body to science? Look into whether there is a “body farm” near you. You will need to fill out the paperwork ahead of time, and let your family know your wishes. I understand that many places will pick up your body and have no costs for you or your loved ones.
Term versus Whole life insurance
Most of the personal finance experts agree to stick with Term life insurance and be cautious of Whole life insurance policies.
- Whole life insurance often are thought of as not only insurance, but an “investment” that builds “cash value.”
- People can make hefty commissions selling these and other “cash value” policies (e.g., universal life, variable life, endowment).
- Use investments for investing. Keep insurance separate.
I was surprised to learn that you’re more likely to become disabled than you are to die while employed. Yet many people sign up for life insurance, while few obtain disability insurance.
Disability insurance (short-term and long-term) can be expensive. Because of the high premiums and low pay outs, I decided not to purchase it for myself. However, I have kept my expenses so low that it is not worth the cost for me. Many of my colleagues, however, have opted to purchase disability insurance.
Of note, many of my patients have used their disability insurance while they were undergoing medical treatments, and they were grateful they had it.
One tip I learned is to obtain disability insurance before becoming pregnant. Women can use short-term disability insurance during maternity leave. I wish I had known this sooner. It would have prevented me from having to take leave without pay!
Flexible Spending Accounts (FSA)
Don’t confuse HSA with FSA. Both are deducted pre-tax (reducing your taxable income). However, with an FSA, you lose any money you don’t use at the end of each year.
There are different types of FSAs. Health Care FSAs for medical expenses do not require a high-deductible plan (as HSAs do). But again, you lose what you don’t use with an FSA.
There is also a Dependent Care FSA which can be used for childcare costs.
I do not have any FSAs. However, if I did have childcare expenses, I might consider the Dependent Care FSA.
Check with your HR department regarding what types of FSAs are available through your company.
I know this is a lot of info. The take-home messages are:
- Consider pay offing debt before saving for retirement
- But after your debt is gone, max out your retirement accounts.
- Start with getting the employer match for your 401k/403b/TSP
- Then max out a Roth IRA
- Then max out your 401k/403b/TSP
- But after your debt is gone, max out your retirement accounts.
- Consider getting a High deductible savings plan with an HSA
- Money in a HSA can be rolled over year after year. It earns interest, and you can take it with you when you leave your job
- HSA can also be used for expenses your health insurance may not cover
- Get a great dental plan and have all your work done within the year, then cancel the plan during the next open enrollment period
- Check whether your health insurance covers preventative dental care
- Only get as much life insurance as you need
- Be wary of any policies other than Term life plans
- Consider purchasing disability insurance
- Short-term disability insurance can be used during maternity leave
- Don’t confuse a Flexible Spending Account (FSA) (which you use or lose at the end of each year) with an HSA (which rolls over at the end of each year)
What other tips do you have for someone considering benefit choices?