August ACap Recap – Your Financial Questions Answered
1. What is a HSA and do I need one?
A Health Savings Account (HSA) is like a supercharged Roth IRA for those individuals who qualify and who have a High Deductible Health Plan (HDHP). The HSA is like a Roth IRA because your money grows tax-free if used for health care costs; it’s supercharged because your HSA contributions are tax-deductible whereas your Roth IRA contributions are not. To qualify for a HSA, you must have a HDHP; cannot be on Medicare; cannot be claimed as a dependent; and have no other health coverage. A family can save $6,450 each year (set annually by the IRS) in an HSA and unlike a Flexible Spending Account (FSA) whereby the account balance must be spent each year, the balance in a HSA can accumulate over time. The great part is that the money can be used to pay for expenses you already incur each year; examples of eligible expenses include: prescription drugs, eye exams, glasses, teeth cleanings, etc. – the list is very generous. Also, if you are 55 or older, you can contribute an additional $1,000 to your HSA. Lastly, just like a Roth IRA, you can make your contribution in the year following the tax year.
2. Does my employer match count towards my annual $17,500 maximum limit?
Good news, your employer’s matching contributions do not count towards your $17,500 annual limit. So if your employer is generous, your annual savings can easily exceed the annual limit. Keep in mind that if you contribute to a Roth 401k (a good idea), your employer’s matching contributions will be allocated to a pre-tax (like a regular 401k) account, not a Roth account.
3. What is the difference between forbearance and deferment on my student loans?
With the growing cost of higher education and the myriad of student loan types, questions on student loans remains one of the tops concerns for many professionals investing in their careers. Deferment is when your lender lets you temporarily postpone making payments on your loan. Interest still accrues even though you don’t make payments, but depending on the type of loan you have (subsidized versus unsubsidized), the government may pay the interest on your loan during deferment. If you do not qualify for loan deferment, you may qualify for forbearance. During forbearance, you stop making payments or reduce your payments for up to 12 months; interest still accrues regardless of the type of loan, but at least it gives you some breathing room. There are two types of forbearance: discretionary and mandatory. In a discretionary forbearance, the lender determines if you qualify based on financial hardship or illness. In a mandatory forbearance, the lender is required to grant you forbearance based on several factors such as serving in the military, medical internship/residency programs, teaching, etc.
4. What is lendingclub.com and should I invest in it?
Lending club is a web-based peer to peer company that allows savers to lend money to borrowers. An investor can essentially lend money to several borrowers in small increments at high rates. The investor is diversified because they spread their money among several borrowers and hopefully earn a good return. The idea is especially appealing the past couple of years because interest rates are so low and Lending Club touts returns between 7.64 percent for low risk loans and over 23 percent for higher risk loans. Of course this is attractive to investors hungry for yield. However, as discussed in previous posts, risk and return are related – if a U.S Treasury bond is paying less than 3 percent and a “low risk” borrower gives you 7.64 percent, the difference is the riskiness of that “low risk” borrower. Diversification is the cornerstone of modern portfolio theory which states that owning different types of assets reduces risk and enhancing returns. Hence adding Lending Club like investments to one’s portfolio may not be a bad idea, but investors should remember to not put all their eggs in one basket.
Have a financial question? Contact ACap Asset Management at email@example.com or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com