September 2012 ACap ReCap
1. My employer offers a Health Savings Account (HSA). What is an HSA and should I contribute?
An HSA is a great way to help pay for medical expenses, reduce your taxable income, and even save for retirement. HSAs are similar to Flexible Spending Accounts (FSA) whereby you can save money, pretax, to pay for medical expenses during the year. The advantage of an HSA over an FSA is that unlike an FSA, any unused money in your HSA will carryover to the next year. An HSA is also portable, so it stays with you if you leave your employer. You can qualify for an HSA only if you are covered under a high deductible health plan, have no other health coverage, are not enrolled in Medicare, and you are not claimed as a dependent on someone else’s tax return.
2. I need a new car. Should I buy or lease?
This is a very common question among the general public, and the answer is not purely financial. If you own a company and pick up clients in your company car (i.e., limo service or realtor), it may be important to have the latest model. However, if your car is solely for personal use, it does not make financial sense to lease a car. Some people prefer to drive a new car every couple of years and perpetually make payments; that may be a personal decision, but it is not a fiscally sound decision. If you choose to lease a car because you cannot afford to purchase the car with regular payments, then consider purchasing a less expensive car.
3. Should I borrow money from my 401k?
That depends on how you use the loan proceeds. If you are using the loan proceeds to help with a downpayment on a house, then it might be a prudent decision. However, if you are borrowing from your 401k to payoff credit card debt, I would advise against it. Before zeroing out all your credit card balances at the expense of your retirement, carefully assess whether you can keep them at zero after paying down…will you be able to withstand the temptation to charge purchases you cannot pay for? The last thing you want is for your credit card balances to creep up again after borrowing from your precious 401k. If you have credit card debt, make an aggressive effort to pay it down quickly without jeopardizing your retirement nest-egg.
4. How much should I save in my 401k and how should I invest my contributions?
How much you should contribute to your 401k depends on a few factors. First, does your company have a matching program? If yes, then you should contribute at minimum to the matching amount because any match is essentially free money; don’t walk away from free money. Whether you can save beyond the minimum depends on your personal and financial circumstances. The maximum you can contribute to a 401k this year is $17,000, which equates to approximately $1,417 per month. I typically recommend my clients save 20 percent of their gross income. So if you make $85,000 a year, you should be putting the maximum into your 401k. How you invest those contributions depends on your financial goals and risk tolerance. I would recommend you choose a handful of diverse funds in your 401k; in other words, they should not be in the same category (i.e. international, large, small, etc.), and allocate your money among those categories based on how much risk you want to take. Try not to put all of you contributions into one fund that promises to do everything for you. Be careful because if it seems too good to be true, it probably is.
5. I found a bank overseas that offers a savings account earning 8 percent. Should I put my savings there? Is it safe?
There is an adage, “there is no such thing as a free lunch.” There is a positive relationship between interest rates and risk, meaning the higher the interest rate, the greater the risk. If a foreign bank is offering you an 8 percent return on a savings account versus .20 percent domestically, that additional return is to compensate you for the added risk you are taking. There is no inherent problem with having a foreign savings account; in fact, it is a good way to obtain currency diversification. However, it would not be prudent to put all of your savings into that account, just as it would not be wise to put all of your money into a single investment. Also keep in mind that foreign accounts have special U.S. Treasury reporting requirements.
Have a question or need advice on how to manage your retirement accounts? 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