In our last blogpost, we described HSA as the ideal retirement planning tool. However, there are several hundreds HSA plans on the marketplace today, most plans charge monthly maintenance fee and investment fee, as well as mandating minimum cash balance, if your HSA account has a small balance, it's important to shop around and don't let fee eat most of your returns.
Morningstar analyzed 10 of the largest HSA plans - evaluating such criteria as monthly maintenance fees and mutual fund offerings - found only 1 plan "compelling" for use both as a spending vehicle to cover current medical costs and as an investment vehicle to save for future medical expenses, that plan is HSA Authority, offered through Old National Bank.
Q. Should HSA be part of my long term retirement portfolio?
A. Generally the answer is yes, but let's first see when HSA should not be held for long term -
HSA is only available in conjunction with high-deductible health plans, however, if you have high medical expense and would be better off with a lower-deductible plan, HSA might not be the best plan for you.
Other than the above situation, everyone should keep HSA as part of the long term retirement portfolio, which means you should pay medical expense out of your current cash flow rather than using money inside HSA to pay for it, because HSA is the only account that offers you tax-free contribution, growth, and withdrawal, making it an ideal retirement planning tool.
Even if you withdraw money from an HSA after age 65 and use it for non-medical purposes, you do NOT incur a penalty, although you do have to pay taxes.
What's the best HSA plan? We will discuss Morningstar's finding in next blogpost.
Q. How to avoid steep price for Medicare?
A. Not all Medicare premiums are equal - while the standard Medicare premium is $134 a month, for couples filing jointly, for MAGI between $170K and $214K, monthly premium for Medicare is $187.50, for MAGI between $214K and $320K, monthly premium for Medicare is $267.90, for MAGI between $320K and $428K, monthly premium for Medicare is $348.30, and above $420K, monthly premium for Medicare is $428.60, and this premium is destined to raise each year.
How to avoid high Medicare premium?
The trick lies how MAGI is calculated- it is based on 2 years ago's income. For example, your income in 2017 will be reported for 2018 tax return, and will be used to determine 2019 Part B premium
For people who just retired, it is possible to pay high premium for 2 more years. It is important to appeal IRMAA (income related monthly adjustment amount) immediately after retirement, this is a legit reason to drop IRMAA.
Q. Should I buy Gold to protect myself against the risk of US dollar losing values?
A. Unfortunately if you look at historical data, there is NO correlation between gold and dollar values, so buying gold or other previous metals won't help you achieve your goal. It's more a marketing propaganda by the promoters of gold, silver and other precious metals to get you to buy what they’re trying to sell.
The only way to protect against fluctuations in currency is through options and futures - you can trade contracts that are bets about the future value of the dollar. However, if you are not a pro, you are merely contributing to the brokerage house's gains by engaging the trading of options and futures.
The truth is, if you live in America and buy American products, currency fluctuation is mostly not a concern for you, it's more a concern for people who use foreign currencies in business or travel.
Q. How can I guarantee retirement income for essential and lifestyle expenses?
A. AIG has a Retirement Income Analyzer which provides a step-by-step guide on identifying, evaluating, and learning how to guarantee income for essential and lifestyle expenses during retirement time.
It is worth checking it out if you are serious about your retirement planning.
Q. Which will be better: invest in a total market index such as Vanguard's VTSMX or divide the money into the three index funds that track small cap, mid cap, and large cap stocks?
A. This is a very interesting comparison, for the same amount of money, an investor can invest it in Vanguard's Total Stock Market Index fund (VTSMX), or divide it into 3 index funds that track different market caps: Vanguard 500 Index (VFINX), Vanguard Midcap Index (VIMSX), and Vanguard Small cap Index (NAESX). Which portfolio will have a better return?
Someone did a comparison, using data between Jan 1, 1999 and Dec 31, 2016, the results are very interesting:
1) Vanguard's Total Stock Market Index fund performs just like Vanguard 500 Index (VFINX), and quite different from the small cap and midcap index funds' performances.
2) If you allocate the fund based on market cap of each market segment, it will be 70% to large cap fund, 20% to midcap fund, and 10% to small cap fund, then rebalance each year, the result is that the combo portfolio performs slightly better than the total market index fund.
3) If you allocate the fund equally among the three market segment funds, the result is far superior than total market index fund's performance, while volatility is at similar level.
4) Finally, the added benefit of divide and concur strategy is that in each year, if you need to take money out of the market, if you invest in just one total market fund and you are in a bad year, it will be a bigger hit to the portfolio. However, if you invest in 3 different funds, not all funds perform poorly in a bad market year, so you can always avoid taking money from the fund that down the most.
The bottom line - spread your money equally into the three market index funds based on market caps is a great strategy than putting all money into the total market index fund.
Q. Which signals can I use to determine if the market is near the top or not?
A. Here are 5 signals you can watch out to tell if the market is ready to turn:
1. 10-year PE ratio
This measures how much investors are willing to pay for profits. You can find this PE ratio from Robert Shiller's site here.
2. Consumer Confidence
The Conference Board's Consumer Confidence Index gauges how Americans feel about their economic situation. Readings above 100 show high spirits.
3. Misery Index
The Misery Index is the total of civilian unemployment rate and inflation. A low reading could signal a peak. You can find both readings DoL.gov.
4. Exposure Index
This weekly survey by the National Association of Active Investment Managers shows what percent of pros' portfolios are invested in stocks. Readings above 95 indicates extreme optimism.
5. Put/Call Ratio
The lower this ratio, the more bullish investors are. A 0.5 or below ratio indicates high optimism. To find this ratio, go to CBOE.com and search daily market statistics.
Q. How can I avoid paying capital gain taxes?
A. If you are near retirement, you have an unique chance to avoid paying 15% capital gain tax, although it takes careful planning.
Many retirees waste this opportunity by pulling money from their IRAs instead of from their taxable accounts. The 0% rate is only available to those at the bottom two IRA income tax brackets - below $75,900 for married couples or $37,950 for individuals in 2017.
So if you just started retirement, with no paycheck (or a much smaller paycheck), not taking social security checks, and not yet 70.5, you can plan your selling of appreciated equities in your taxable account so your total income (after standard deduction of $12,700 and $8,100 exemptions) falls within 10% or 15% tax brackets, you will pay $0 long term capital gain tax!
If your solo income is from long term gains, you can effectively realize $96,700 of gains and pay nothing in federal income tax because your standard deductions and personal exemptions would land you at the top of the 15% bracket for married couples. You can take even more gains by using other deductions to stay below the threshold, such as mortgage interest, medical expenses, and charitable contributions.
Q. I run my own business with no employee. What is the best retirement plan I could use?
A. If you run your own business, your choice of retirement plan could be complicated, because there are several different choices you could consider - SEP-IRA, Solo-401(k), and SIMPLE IRA. Here is how to decide the best one for you.
SEP stands for simplified employee pension, it is easy to set up with little paperwork required, best fit for one-person business (it allows employees, but requires you contribute the same percentage for all employees as you contribute to yourself).
You can open a SEP-IRA and fund it up until your next tax-filing deadline including extensions. Your contribution is limited to 25% of net income after deductions - effectively 20% or a 2017 maximum of $54,000.
2. Solo 401(k)
If you want to contribute more, you can consider Solo 401(k), its paperwork is more complex, but you could contribute more, because with Solo 401(k), you can contribute both as the employer and employee.
In 2017, the basic employee limit for all 401(k) is $18,000, with a separate employer contribution of up to 25% of compensation. The maximum for the two combined is the lesser of 100% of compensation or $54,000 (not including the catch up contribution for those over 50).
3. SIMPLE IRA
You can't participate a Solo 401(k) if you have employees (independent contractors are not considered employees). The SIMPLE IRA lets employees decide how much to contribute, with the employer matching up to 3% of compensation.
Combined contribution limits for SIMPLE IRA cannot exceed $12,500, or $15,500 for somone 50 or older. Alternatively, the employer can contribute 2% of compensation to this IRA up to a maximum of $5,400.
In our previous blog posts, we have discussed in general who are foreign nationals and tax implications when it comes to purchasing life insurance in the U.S. As you can see, the requirements are very rigid.
Attached below is a very detailed guideline from AIG for Chinese and Filipino non-resident aliens who are interested in purchasing life insurance in U.S.
As always, please contact us if you have any specific questions.
Gift & Estate Tax Implications
Your gift and estate tax responsibilities will depend on your status as a resident or non-resident alien. This is determined a bit differently than your status regarding income tax.
For gift and estate taxes, the IRS will determine whether you are domiciled in the U.S. at the time of the gift or the death. This is tricky, because being domiciled requires “no definite present intention of later removing therefrom,” according to the U.S. Treasury.
If you’re scratching your head, you’re not alone.
It’s hard to legislate intent, but that’s what this statement boils down to. If you have no intention of leaving the U.S. at the time of the gift or your death, you're considered domiciled here. Of course, a country with a tax treaty might have its own rules established. The tax treaty would take precedence in that case. You should have an advisor and/or attorney in your home country to advise on the issue.
Resident AliensIf you are classified as a resident alien, you must usually follow the same gift and estate tax rules as U.S. citizens. Most importantly, your entire estate is subject to the U.S. estate tax when you pass away. You may also have to pay tax in your country of citizenship, unless a tax treaty removes this obligation.
If the IRS classifies you as a non-resident alien, your gift and estate tax will depend on where you're domiciled. To be domiciled somewhere, the IRS will look at things like your driver’s license state of issue, home bank, voter registration records, and how much time you spend traveling abroad. If you are a non-resident alien not domiciled in the U.S.:
Income Tax Implications
I am not a CPA, so I can't give you specific tax advice – but I can provide general guidelines to help set your expectations. Please make sure to consult your accountant and/or attorney to get specific questions answered.
In general, resident aliens must follow the same income tax rules as U.S. citizens:
If, however, you are classified as a non-resident alien, the rules are different:
References to keep on hand, all from IRS.gov:
In our next blog post, we will discuss Gift and Estate Tax implications.
Foreign Nationals & U.S. Tax Classifications
In the U.S. tax code, there are two distinct classifications: resident aliens or non-resident aliens.
A resident alien has a green card or meets a residence requirement: 31 days during the current calendar year, or 183 days during the preceding 3-year period (with a specific number of days required for residence during each of those three years). You can find the specific days-per-year requirement below, at the substantial presence test link.
If you don’t meet this residence requirement, you will be classified as a non-resident alien. There are occasional exceptions for a non-resident spouse, or citizens of a country whose U.S. tax treaty specifies a particular classification. Keep in mind that these exceptions could change based on updates to our laws and tax codes.
References to keep on hand or provide to your clients, all from IRS.gov:
Substantial presence test
Nonresident spouse treated as a resident
Income Tax Treaties – List of Countries A-Z
In our next blog post, we will discuss Income Tax implications.
In our previous blog posts, we went over the basic eligibility for foreign nationals applying for life insurance in the U.S. Essentially, a foreign national's eligibility depends on his or her country of citizenship, where else to travel, and whether having a physical and financial presence in the U.S.
In this post, we’ll go over a few planning concepts that can help foreign nationals to protect their loved ones and preserve as much of their wealth as possible.
Tax Implications: The Basics
One of you first questions about life insurance will probably be "what happens if I pass away while I'm outside the U.S.?"
The good news is that as long as the policy is in force, it doesn't matter where you are when you pass away. Your beneficiary is entitled to the death benefit whether or not you were living in the U.S. at the time of death. Better still, that money isn't subject to U.S. income tax, even if you are classified as a nonresident alien.
It’s important that you tell your beneficiary about the policy, and what to do when you pass away. It will be up to the beneficiary to contact the carrier and file a claim for the death benefit. Make sure you have the carrier's contact information, along with the steps required to file a claim. You should leave a copy of that information with each of your beneficiaries. This is especially important if you beneficiary doesn't speak English, or spends time outside the U.S.
In our next blog post, we will discuss foreign nationals and U.S. tax classifications.
Finally, you should know what to expect – including a few additional requirements imposed by the carriers.
That's our take on the basic eligibility requirements for foreign nationals to purchase life insurance in the U.S..
In next blog post, we’ll go over some tax implications for foreign nationals.
Now that you’ve proven that you are eligible and have a physical and financial presence in the U.S., your next step is to show the underwriter your travel plans and any other countries you reside in part-time. Carriers may not approve applications from applicants who reside in or plan to visit countries:
Physical & Financial Presence
Next, as a foreign national, you have to demonstrate that your physical and financial presence in the United States. Here are some common criteria:
Did you answer yes to all of the above? If so, keep going with the purchase process. If not, it’s a good idea to evaluate your situation further. Is your time in the U.S. the main issue? Keep in mind that now may not be a good time to apply. Once you are aware of the requirements, you may be able to plan your travel accordingly and apply at a later date.
Country of Residence
To determine a foreign national's eligible, it's important to note that full- or part-time residents of certain countries won't be offered coverage due to their country’s risk classification. Additionally, some countries don't allow full-time residents to buy life insurance outside their home country. Since these rules may change over time, check with us or a specific carrier to be sure if you are qualified for life insurance in U.S.
In addition to legal and governmental restrictions, U.S. insurance carriers won't offer coverage to citizens of some countries due to risk classification. Afghanistan, Colombia, Cambodia, Haiti, Iraq, Lebanon, and Russia fall under this classification. Sometimes, risk classifications will differ between cities and outlying areas in the same country. For example, Prudential's current ratings show the metro Manila area of the Philippines as a "B region," while the rest of the country is a "C region."
If you live in a country with a low risk classification, like Australia, Canada, or Mexico, you’ll have a wider range of options for policy types (term, whole, or universal) and may be able to get preferred best rates.
Feel free to contact us so we can help you better evaluate your situation.
Who Are Foreign Nationals?
Foreign nationals are people who live in the U.S. at least part of the year, but are not citizens. For tax purposes, the IRS classifies them as resident aliens or non-resident aliens, depending on how much time they spend in the U.S.
One of the biggest draws for foreign nationals is U.S. property. According to the National Association of Realtors®, foreign buyers bought $102 billion in U.S. residential property from April 2015 to March 2016. Other foreign nationals come to the U.S for jobs, schooling opportunities, to be with family members, or because they married a U.S. citizen. They may also be able to get better coverage options here than in their country of citizenship. As a demographic, their growing portfolio of real estate and investments make them great candidates for life insurance protection.
What Are the Eligibility Requirements?
Every case needs to be evaluated individually, but the guidelines below will give you an idea of the carriers' minimal requirements. Keep in mind that, as world events occur, the degree of risk associated with particular countries will change. If you're not sure how to proceed, contact us - we're happy to help.
Q. Can I sell my permanent life insurance policy?
A. Yes, you can.
Life settlement companies would be interested in buying your permanent life insurance policy, based on some conditions, such as your age (need to be old) or health (need to be poor).
There are other options, such as having a relative pick up the premiums, setting up your policy to fund the premium, or cashing it in for surrender value.
Q. Is there any downside to passive index investing?
A. The rising stock market, and the fact that index funds have beaten every variety of their active rivals, has propelled the popularity of passive index investing, but there are two rising dangers associated with the fact that index investing will take over the entire investing world -
a. Rising volatility
Imagine the extreme case, if the entire market is passive, there will be no stock market, at least no individual stocks, the market would move in lockstep when people bought or sold an index fund. Along the way, as more shares are locked up in ETFs and index funds, even small trades could cause bigger price swings for stocks.
b. Income inequality for corporate executives
A recent study has found that as index fund ownership of a company rose, the pay of top executives was more closely tied to the performance of the industry than that of their own company. The idea of pay for performance will be pushed away along with the rising popularity of passive investing.
Q. If I didn't sign on my wife's credit card application, and later on she defaults, will I be liable for anything?
A. It depends on which state you live -
If you live in one of the 9 community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), then you generally will be held liable for any debt a spouse incurs.
If you live in none of the above 9 states, then you generally will not be held liable for the debt of a spouse unless you explicitly co-signed for the credit card or loan.
Q. Why the "sandwich" generation needs disability insurance protection?
A. I came across a good article that lays out the compelling reasons why individual disability insurance can help family caregivers, follow this link to read it, you will have a better idea about why you might need to give it a consideration.
PFwise's goal is to help ordinary people make wise personal finance decisions.