Tips From Donna ( May 2016 Wesban Monthly )
by Donna Gordon on July 21st, 2016

‚ÄčA Guide to College-Savings Options

Is setting up a college-savings account for a child or grandchild an item on your to-do list? You know you should get it done; that matriculation date just keeps creeping closer. But finding the right vehicle to save for college can be daunting. There are many choices, and it can be difficult to discern the differences between each type of account.
Below, we've outlined a few salient features of a few of the most common college-savings vehicles, including the tax treatment for each, how much you can contribute, who can contribute, the rules governing distributions, and a summary of the types of individuals who will tend to benefit most from each investment vehicle.
529 College-Savings Plan
Tax Treatment: Contributions not deductible on federal income tax. Contributions may receive a state tax break (either a deduction or a credit). Money compounds on a tax-free basis and withdrawals to pay for qualified college expenses are tax-free, too.
Tax Benefit: Possible state tax break; tax-free compounding; tax-free withdrawals. Contributions treated as completed gifts; apply $14,000 annual gift-tax exclusion (per person, so $28,000 per married couple) or up to $70,000 ($140,000 per married couple) with five-year election (click here to read the IRS rules on this).
Contribution Limit: Per IRS guidelines, lifetime contributions cannot exceed the amount necessary to provide education for beneficiary. What this actually means varies widely by state and by plan--anywhere from $235,000 to $425,000 for non-prepaid tuition plans. Deduction amounts vary by state, and gift tax may apply to very high contribution amounts.
Income Limit: None.
Withdrawal Flexibility: Medium. Investors can withdraw contributions at any time without taxes or penalty. Withdrawals of investment earnings must be used for qualified college expenditures or will incur taxes and a 10% penalty. Those withdrawing funds for noncollege expenses may also be required to pay back any state tax deduction they've received on contributions. They can, however, change the beneficiary of a plan, as long as the new beneficiary is a family member of the former beneficiary.
Investment Flexibility: Low. Investors in 529 plans must choose their investments from a preset menu offered by the plan.
Required Distributions: None.
Pros: High allowable contribution amounts, state tax breaks on contributions, and tax-free compounding and withdrawals. The plans reduce the financial-aid impact compared with money held in the student's name.
Cons: States may impose an extra layer of administrative costs, and investment choices may be costly and/or subpar.
Best for: Individuals who are aiming to stash a significant sum for college while also enjoying tax benefits.
Coverdell Education Savings Account
Tax Treatment: Contributions not deductible on federal or state income tax. Money compounds on a tax-free basis, and withdrawals to pay for qualified educational expenses are tax-free, too. Contributions don't have to be made with earned income, meaning grandparents can contribute even if parents are ineligible due to income limits.
Tax Benefit: Tax-free compounding; tax-free withdrawals for qualified educational expenses.
Contribution Limit and Time Frame: $2,000 per beneficiary, per year; must make contributions by the time beneficiary is age 18. (Any amount exceeding $2,000 per year per beneficiary is subject to a 6% excise tax penalty.)
Income Limit: For 2016, single income tax filers with modified adjusted gross incomes of more than $110,000 and married couples filing jointly with incomes greater than $220,000 cannot make contributions to a Coverdell.
Withdrawal Flexibility: Medium. Withdrawals of contributions are tax- and penalty-free. And in contrast with 529 assets, in which withdrawals will incur taxes and a penalty unless used for qualified college expenses, Coverdell assets may be used for elementary and high school expenses, too. You can also change the beneficiary of a plan, as long as the new beneficiary is a family member of the former beneficiary.
Investment Flexibility: Medium. Coverdell ESA investors can, in theory, invest in a broad swath of assets, but fewer and fewer investment providers offer the accounts.
Required Distributions: Funds must generally be distributed from an account by the time the student reaches age 30, though they may be rolled over into a Coverdell ESA for another eligible family member.
Pros: Ability to use funds for elementary and high school expenses; flexibility to invest in a broad variety of securities, including mutual funds and individual stocks.
Cons: Limited contribution amounts and lower MAGI thresholds; investment providers may not offer this account type.
Best for: Individuals aiming to invest relatively smaller sums for education--including elementary, high school, and college--who are seeking more investment flexibility than 529s afford.
UGMA/UTMA
Tax Treatment: Aftertax contributions. Earnings and gains taxed to minor; for children under age 19 and full-time students under age 24 (whose unearned income does not provide half their support), first $1,050 of unearned income is tax-exempt, the next $1,050 is taxed at the child's rate, and over $2,100 is taxed at parents' rate.
Tax Benefit: First $2,100 of earnings and gains subject to lower tax rates. Transfers treated as completed gifts; apply $14,000 annual gift tax exclusion.
Contribution Limit: None. Gift tax may apply to contribution amounts above $14,000 per child for single filers; $28,000 for married couples.
Income Limit: None.
Withdrawal Flexibility: Greater. There is no penalty for using assets to pay for non-educational expenses, regardless of the child's age. However, even though custodian retains control of assets until beneficiary reaches 18 or 21 (depending on the state and type of account), the assets may be used only for the child's benefit (that is, not to cover basic parental obligations such as food and shelter). When the minor in whose name the UGMA/UTMA account is established reaches age of termination, he or she assumes control of all the assets.
Investment Flexibility: Greater. UGMA/UTMA investors can invest in a broad swath of assets.
Required Distributions: Minor takes custodial ownership of assets at age of termination (18-21)--varies by state and account type.
Pros: No penalty for not using earnings for educational expenses; can be used for any purpose that benefits beneficiary.
Cons: Counted as student's assets, heavier impact on financial aid eligibility. Cannot transfer beneficiary. Contributions are irrevocable. At age of majority, beneficiary is entitled to account assets.
Best for: Individuals who may not attend college.
Roth IRA
Tax Treatment: Aftertax contributions; tax-free compounding and withdrawals after five years, at age 59 1/2.
Tax Benefit: Tax-free compounding and withdrawals.
Contribution Limit: $5,500 (under 50); $6,500 (over 50).
Income Limit: Single filers with modified adjusted gross incomes below $132,000 can make at least a partial contribution for 2016. Married couples filing jointly can make at least a partial contribution if their modified adjusted gross incomes are less than $194,000. Investors of all income level can contribute to a Roth with the 'backdoor' maneuver.
Withdrawal Flexibility: Medium. Roth IRA contributions can be withdrawn tax-free for any purpose. And while you'll typically face taxes and a 10% early withdrawal penalty if you take out investment earnings from your Roth before age 59 1/2, the 10% penalty usually assessed for early withdrawals from an IRA is waived if funds are used to pay for college tuition, books, fees, and other qualified expenses.
Investment Flexibility: High. Most investment types can be held inside an IRA, with a few exceptions.
Required Distributions: None.
Pros: Investors can choose low-cost and best-of-breed investments with limited administrative costs. For financial aid: not counted as asset in need-based calculations. Money not spent on college can be used for retirement instead.
Cons: Limited contribution amounts. If you are depending on the Roth IRA to help fund your retirement you may be depriving yourself of years of tax-free growth and distributions by removing funds from the account to pay for college. For financial aid: Distributions taken from Roth IRA (even if contributions only) are counted as income the year after they are taken.
Best for: Savers aiming to invest relatively smaller sums and who desire more flexibility in terms of investment options and use of assets (can be used to pay for college and to fund retirement).


Disclosure: 529 plans are tax-deferred college-savings vehicles. Any unqualified distribution of earnings will be subject to ordinary income tax and subject to a 10% federal penalty tax. 

A Crash Course in Long-Term Care

If you've helped an elderly friend or relative find and figure out how to pay for long-term care, or you've done so yourself, you likely confronted a bewildering maze of unfamiliar terms as well as extreme financial complexity.


What's the right type of care given the person's needs? What type of care is covered by Medicare? When does your private insurance--either health or long-term care insurance--pick up the slack? And what expenses must be paid out of your own coffers? Can a spouse hang on to any assets before Medicaid kicks in and provides coverage for long-term care needs?


Unfortunately, many people are navigating the long-term care maze at times when they're contending with other major challenges. Older individuals may be confronting declining physical health and/or mental faculties at the same time they're attempting to make important long-term care decisions. And because long-term care may also bring a loss of independence, contemplating it can cause emotional distress for both older individuals and their loved ones.


Rather than having to sort out long-term care on the fly, it helps to be pre-emptive. Get familiar with the various types of care, as well as the financial ramifications, before you actually need to put the information to use. This article explains the key terms and variables that consumers should be aware of when navigating long-term care.


Activities of Daily Living (ADLs): Basic activities that are used to measure a disabled or elderly individual's level of functioning. The key ADLs are bathing, dressing, eating, ambulating/transferring (moving from place to place, or from standing position to chair), grooming, and toileting.


Skilled Nursing Facility (sometimes called a SNF or 'Sniff'): A type of facility that provides skilled nursing care, usually medical care and/or rehabilitation services. Medicare covers, in full, the first 20 days of care in a skilled nursing facility following a qualifying hospital stay (defined as three days in a row in the hospital as an inpatient). For days 21-100 in a skilled nursing facility (again, following release from a qualifying hospital stay), you must pay a copayment (often covered by your supplemental health-insurance policy) while Medicare covers the remainder of the cost. For days 101 and beyond, Medicare does not cover the costs of care in a skilled nursing facility.


Nursing Home: A facility that helps individuals with the activities of daily living, including eating, bathing, and getting dressed. Nursing homes are also likely to coordinate and/or provide medical care for individuals who need it, but their central focus is to help residents with their daily lives. In contrast to care provided in a skilled nursing facility to people who have had a qualifying hospital stay, nursing-home care (sometimes called 'custodial care') is not covered by Medicare. Instead, costs are covered out of pocket, by long-term care insurance (for those who have such policies), or Medicaid for individuals with limited assets.


Assisted Living Facility (ALF): A type of facility geared toward people who need assistance with the activities of daily living but who do not need the type of extensive care provided in a nursing home. Most assisted living facilities, like nursing homes, help patients coordinate medical care, but providing medical care to sick individuals is not the central focus. Many ALFs now have locked 'memory care' units geared toward people with Alzheimer's disease or dementia. As with nursing homes, stays in ALFs are not covered by Medicare; instead, such care is covered out of pocket, by long-term care insurance (for those who have it), or Medicaid.


Continuous Care Retirement Community (CCRC): A type of community geared toward providing a gradation of care to older adults--from independent living to assisted living to nursing-home care. The goal of the CCRC is to help older individuals reside in the same community for the remainder of their lives. Such communities tend to be the most costly of all elder-care options, often requiring an upfront sum as well as monthly charges that will vary depending on the level of care the individual is receiving. As with nursing homes and assisted living facilities, most of the care provided within CCRCs is not covered by Medicare, unless it's medical care or skilled nursing care that is normally covered by Medicare (see 'Skilled Nursing Facility,' above). The financial arrangements of CCRCs can be devilishly complicated; this article delves into some of the particulars.


Custodial Care: Non-medical care provided to assist older adults with the activities of daily living. As a rule, custodial care alone is not covered by Medicare; instead, such costs must be covered out of pocket with long-term care insurance, or by Medicaid for eligible individuals.


Hospice Care: Care provided to individuals at the end of their lives; the focus is on keeping the patient comfortable rather than extending life. Such care may be provided at home, in the hospital, or in a skilled nursing facility. Hospice care is covered by Medicare if your doctor and the hospice director certify that you're terminally ill and have less than six months to live. To be covered by Medicare, hospice care cannot be delivered in conjunction with any curative treatment. This document provides more details on the interaction between hospice and Medicare.


Palliative Care: Care geared toward providing pain relief and emotional support to individuals with serious illnesses. In contrast to hospice care, which is for terminally ill patients, palliative care can be provided to individuals undergoing curative treatment. Medicare Part B may cover some of the prescriptions and treatments offered under the umbrella of palliative care.


Adult Day Services: Services, including social activities and assistance with activities of daily living, provided during the day to individuals who otherwise reside at home. Approximately half of the individuals who take part in adult day services have some form of dementia, according to the National Adult Day Services Association; thus, adult day services frequently focus on cognitive stimulation and memory training. Medicare may cover adult day services in certain limited instances, but generally does not.


Institutionalized Spouse: A spouse who has moved into a nursing home or other long-term care setting.


Community Spouse: A healthy spouse who remains in the community even after the other spouse has moved into a nursing home and requires Medicaid benefits.


Exempt (or Noncountable) Assets: Assets that can be owned by the institutionalized person without affecting Medicaid eligibility. Specific parameters depend on the state where you live, but exempt assets typically include $2,000 in cash, a vehicle, personal belongings, and household goods. In most states, a primary residence is also considered an exempt asset, even if an individual ends up moving into a nursing home, so long as a spouse or child lives there. The individual's equity in the home cannot exceed certain limits, usually $552,000 in most states. Moreover, the state can attempt to recover any money paid out through Medicaid when the owner dies and the home is sold.


Countable Assets: Assets that are counted when determining Medicaid eligibility. The specific parameters depend on the state in which you reside, but countable assets usually include checking and savings accounts, retirement-plan assets, and additional vehicles (in addition to the one vehicle that is considered exempt).


Community Spouse Resource Allowance (CSRA): The amount of assets that the community (in other words, healthy) spouse can retain, even as the institutionalized spouse qualifies for Medicaid. Those assets typically include a house, a car, and financial assets equal to one half of the couple's assets, subject to minimum and maximum thresholds. (The maximum allowable figure was recently $119,220.)


Lookback Period: The five-year period prior to an individual's application for Medicaid benefits. If assets were transferred to children or any other individuals during this five-year period, it will trigger a period of ineligibility for Medicaid benefits. The length of the penalty period is calculated by dividing the amount of the transfer by the average monthly nursing-home costs in the region or state where the individual resides. The goal of this provision is to keep otherwise-wealthy individuals from transferring assets to qualify for long-term care coverage under Medicaid.


Elimination Period: Similar to a deductible for other types of insurance, this is the amount of time during which one must pay long-term care costs out of pocket before insurance kicks in. The longer the elimination period, the lower the premiums will be.


Benefit Triggers: Triggers used by insurers to determine whether a long-term care policy will begin paying benefits. These triggers typically depend on the individual's ability to complete a certain number of activities of daily living.

3 Tricks for Getting the Most Out of Your HSA

According to a survey by America's Health Insurance Plans the number of Americans covered by high-deductible health plans (HDHPs)--and who are, in turn, eligible for HSAs--rose by two million between 2014 and 2015, a more than 10% growth rate.


Many workers who are eligible to contribute to HSAs don't take full advantage of them. Even though HSAs offer the best tax treatment of any savings vehicle--pretax contributions, tax-free compounding, and tax-free withdrawals for qualified healthcare expenses--only 4% of HSA holders choose to invest their funds, according to research from HelloWallet, a Morningstar company.


Of course, not everyone has the wherewithal to use an HSA as an investing vehicle; most people need to spend the amounts they've accumulated in their HSAs to cover out-of-pocket healthcare costs. But even those where workers who use a 'spend as you go' approach probably aren't saving enough: The HelloWallet study found that the average HSA deferral was $1,600; the median deferral was $700. Families, especially, are apt to blow through that amount in a hurry in a given year.


If you're considering using your HSA as an investment vehicle, here are three strategies to help get the most mileage out of this valuable account type.


Trick 1: Obtain a payroll deduction while also getting away from a lousy employer-provided HSA.


High-deductible healthcare-plan participants are free to use any HSA custodian they choose, not just the one their employers have chosen. To do so, they would simply steer their contributions into their own HSA, then deduct the contribution on their tax return. (Note that HSA contributions don't fall under the heading of qualified medical expenses, the latter of which can only be deducted to the extent they exceed 10% of adjusted gross income. Rather, HSA contributions are an 'above-the-line' deduction, so they help reduce your adjusted gross income directly, thereby reducing your income to enable Roth contributions and the like.)


But from a practical standpoint, that can be cumbersome and won't likely yield exactly the same tax benefits as having your contribution extracted from your payroll. For one thing, using the payroll deduction enables you to get the tax break right away versus waiting to reap the benefit of the deduction on your tax return. Additionally, HSA dollars extracted via payroll deduction are not subject to Social Security and Medicare taxes, provided the plan is a Section 125 or cafeteria plan.


A workaround is to contribute to your employer's chosen HSA for convenience and tax benefits, then annually roll over or transfer that money to the HSA of your choice. (A rollover, which is allowed once a year, means that you get a check from the first HSA custodian and must get it over to the second HSA custodian within 60 days. A transfer means the two custodians deal with one another on the transaction; you don't receive a check. You can complete multiple transfers per year.) That strategy lets you enjoy the best of both worlds: You get the tax benefit of payroll deductions as well as the long-term benefits of steering your HSA investments to a custodian with better and/or lower-cost options.


A couple of caveats: You can have more than one HSA going at one time, but like IRAs, your combined HSA contribution for a given year cannot exceed the limits--in 2016, that's $3,350 for individuals and $6,750 for families. And if you're employing the two-part strategy I outlined above, it's worth thinking through your investment approach to the employer-provided HSA. Because it's essentially a short-term parking place under the two-part strategy, you'd either want to keep your money liquid while you hold it there or make sure that your hand-chosen HSA includes analogous investment products that you hold in your employer-provided HSA. That way, if one of the investment choices in your employer-provided HSA happens to be in the dumps at the time you plan to transfer your money, you can swap into a similar investment option to maintain like-minded market exposure.


Trick 2: Take a hybrid 'spend/invest' approach.


HSAs offer prodigious tax features--tax-free contributions, tax-free compounding, and tax-free withdrawals for qualified healthcare expenditures. That explains why HSA-eligible investors are often advised to let their HSA assets ride while using non-HSA assets to defray their healthcare costs as they arise. (Doing so has the salutary effect of not triggering point-of-purchase fees that some HSA debit cards carry.)


Yet, even as that makes all the sense in the world by the numbers, from a practical standpoint, paying healthcare expenses with non-HSA assets can be disruptive to a household's budget. For employees who have spent most of their careers covered by traditional healthcare plans like PPOs, it's disconcerting to be suddenly on the hook for hundreds or even thousands of dollars of out-of-pocket healthcare costs.


In that instance, it can be comforting to split the difference: Contribute the maximum to your HSA if you can swing it, park enough in the savings-account option to cover your expected healthcare outlays and pay for them from that account, and invest the rest in long-term investments. If you have had an HDHP for the past few years, your previous out-of-pocket outlays can help you figure out how much to hold in cash.


Trick 3: Use your HSA to cover emergency non-healthcare costs later on.


Despite the very good case to be made for paying healthcare expenses with aftertax assets and letting the assets build inside an HSA, some investors might demur. The HSA is, after all, a single-purpose vehicle--that is, you only enjoy the full range of tax benefits if you earmark your withdrawals for healthcare expenditures.


That's mostly true, but there's actually a workaround in case you need to crack into your HSA for non-healthcare expenses later on. Even if you paid out of pocket (using non-HSA assets) for healthcare expenses in previous years, you can still make a tax-free withdrawal later on for non-healthcare expenses, provided you hung on to receipts for the earlier healthcare costs. An unlimited amount of time can elapse between when you actually incurred the healthcare cost and when you reimburse yourself; the withdrawal will be tax-free as long as you have the proper documentation of the prior expense.


To use a simple example, let's say a person paid $5,000 out of her taxable monies to cover healthcare expenses incurred at the end of 2015. Throughout 2015, she racked up the maximum family contribution of $6,650 in her HSA, letting the money build up rather than spending from it. If she needed a new roof in 2016, she could pull $5,000 from her HSA to steer toward that expense, and that withdrawal would be tax-free provided she could document the 2015 out-of-pocket healthcare costs.


That's not ideal, of course, because she's better off letting the money grow. But a tax-free HSA withdrawal beats other forms of emergency funding, such as credit cards, HELOCs, or 401(k) loans.


The key to preserving this escape hatch, as noted above, is to maintain scrupulous documentation of healthcare expenditures. It's also worth noting that the HSA participant must have established the HSA and made the contribution before she incurred the healthcare cost.


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