Should I enroll in a health savings account?

A health savings account (HSA) is a tax-advantaged account that you can establish and contribute to if you are enrolled in a high-deductible health plan (HDHP). Because you shoulder a greater portion of your health-care costs, you'll usually pay a much lower premium for an HDHP than you would pay for traditional health insurance. This allows you to contribute the premium dollars you're saving to your HSA. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds. An HSA can be a powerful savings tool, especially if your health expenses are relatively low, since you may be able to build up a significant balance in your HSA over time. Before you enroll in an HSA, ask yourself the following questions:

What will your annual out-of-pocket costs be under the HDHP you're considering?Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.

How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building a cushion against future expenses. For 2018, you can contribute up to $3,450 for individual coverage and $6,900 for family coverage.

Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you're assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.

Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.

How does the coverage provided by the HDHP compare with your current health plan?Don't sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.

What tax savings might you expect? HSA funds can be withdrawn free of federal income tax and penalties provided the money is spent on qualified health-care expenses. Depending on the state, HSA contributions and earnings may or may not be subject to state taxes. Consult your tax adviser for more information.

How Does Working Affect Social Security Retirement Benefits?

If you're thinking about working as long as possible to increase your retirement savings, you may be wondering whether you can receive Social Security retirement benefits while you're still employed. The answer is yes. But depending on your age, earnings from work may affect the amount of your Social Security benefit.

If you're younger than full retirement age and make more than the annual earnings limit ($17,040 in 2018), part of your benefits will be withheld, reducing the amount you receive from Social Security. If you're under full retirement age for the entire year, $1 is deducted from your benefit for every $2 you earn above the annual limit.

In the year you reach full retirement age, $1 is deducted from your benefit for every $3 you earn above a different limit ($45,360 in 2018).

Starting with the month you reach full retirement age, your benefit won't be reduced, no matter how much you earn.

Earnings that count toward these limits are wages from a job or net earnings from self-employment. Pensions, annuities, investment income, interest, and veterans or other government benefits do not count. Employee contributions to a pension or a retirement plan do count if the amount is included in your gross wages.

The Social Security Administration (SSA) may begin to withhold the required amount, up to your whole monthly benefit, as soon as it determines you are on track to surpass the annual limit. However, even if your benefits are reduced, you'll receive a higher monthly benefit at full retirement age, because the SSA will recalculate your benefit and give you credit for any earnings withheld earlier. So the effect that working has on your benefits is only temporary, and your earnings may actually increase your benefit later.

These are just the basics, and other rules may apply. The Retirement Earnings Test Calculator, available at the Social Security website, ssa.gov, can help you estimate how earnings before full retirement age might affect your benefit.

Helping Your Child Make the Transition from High School to College

Though you won't be able to ride along in your child's suitcase, there are ways you can help him or her make the adjustment to college. You can start by talking with your child about certain subjects before he or she leaves for college and familiarizing yourself with the emotions that he or she will likely face in the first few weeks and months. Then, you can provide a comforting shoulder to lean on. In doing so, you'll need to walk a fine line between offering support and encouragement, and actually telling your child what to do. After all, finding the skills to adapt and thrive is part of what college is all about.

Things to do before your child leaves for college


Here are some things that you and your child can do before the first day of college:

  • Your child's college may have provided him or her with the name, address, and telephone number of his or her prospective roommate. If so, your child may want to contact this person simply to say hello and/or to coordinate the common items that they'll want to bring.
  • Until your child sees the size of the dorm room and meets his or her roommate (and sees what he or she has brought), your child should avoid buying large or hard-to-store items like a big-screen television, floor speakers for the stereo, skis, three winter parkas, and so on. These items can always be picked up on a return visit home, or they can be shipped by you.
  • Talk with your child about money management. Does your child have an account set up with a bank that has an ATM on campus? Will you be providing a certain amount of spending money to your child each month? Have you set up a budget? Does your child have a credit card? If so, is it to be used only for emergencies (preferable) or for everyday expenses? Have you agreed on a reasonable monthly spending amount? It's important to discuss these matters now, because once at college, your child may be tempted to overspend or may be too distracted to pay close attention.
  • Talk with your child about alcohol and drugs. Though you may have had this conversation already with your child during high school, the stakes are higher now because you won't be around every day to see what's going on. Make sure that your child knows the dangers of certain drugs and the potentially volatile mix of drugs and strangers.
  • Make sure that your child knows that he or she can call you at any time if something comes up.
  • The day before your child leaves for college, spend time together doing something fun!

Settling in — the first week


During the first week of college, your child will probably attend a lot of orientation meetings. The welcoming committee, as well as your child's dorm leader, academic advisor, and upper-class mentor, will likely all have meetings to introduce your child to a particular aspect of the college and answer questions. During this time, your child will also be trying to find his or her way around the campus — the dorms, the classrooms, the dining halls, the recreation center, the office that handles course registration, the student center, the bookstore.


Not surprisingly, the first week can be overwhelming. It's common for students of all backgrounds to feel a range of emotions from exhilaration and happiness to anxiety, confusion, nervousness, and exhaustion as they take everything in (and try to appear cool in the process). It can help your child to know that everyone else is probably feeling the same way.


Now the hard part — the first eight weeks


Once the adrenaline rush of the first week wears off, reality sets in, and it can hit hard. There are so many things for your child to get used to. Perhaps he or she's not hitting it off with his or her roommate. Or perhaps everyone likes to hang out in your child's room night after night until 2 A.M. Maybe your child misses your chicken pot pie and lasagna. Or maybe he or she feels lost academically because every professor assigns hundreds of pages of reading each week with no additional guidance. Whatever it is (and there's bound to be something), your child will need to adapt.


The first eight weeks of college are often regarded as the hardest, a time when your child must adjust to many new people and situations in every facet of his or her life. Yet this time is also the most important, because the academic, social, and personal skills that your child develops during this period will help lay the groundwork for a successful college experience. During this time, your child will develop lasting habits, attitudes, and ideas. Here are some of the issues that your child may be struggling with during the first eight weeks:

  • Homesickness and loneliness
  • Difficulty managing unlimited freedom and time
  • Academic pressure
  • Social awkwardness
  • Feelings of self-doubt and inferiority, trouble finding sense of self
  • Peer pressure related to alcohol, drugs, and sex
  • Roommate conflict
  • Encourage your child to use campus resources for help when necessary — for example, resident advisors for dorm issues, counselors for anxiety and/or depression issues, tutors for academic help.


As a parent, you'll want to be as supportive as you can during this period. At some point, you may want to discuss with your child his or her expectations regarding frequency of communication. Would your child prefer to be the one who initiates contact? Would he or she like to be in touch daily, weekly, infrequently? It's important to respect the level of communication your child desires as he or she tries to adjust during this critical period. And keep those care packages coming! Your child will probably make daily trips to the mail room, and he or she will be glad every time a letter or package arrives from you.


The importance of good study habits


Sure, college is about late-night snowball fights and pizza parties. But it's also about academics, and unless your child develops good study habits, making the grade will be tough. Unlike high school teachers, college professors tend to be more sweeping in their assignments and provide less individual attention. So, your child will need to take the initiative and stay on top of the work. Here are some study tips for your child:

  • Try not to cram everything in at the last minute. Don't start papers the night before they're due (the computer is certain to crash, or the printer will inexplicably break), and don't start studying for an exam the night before the test.
  • When taking notes in class, write down only the concept of what the professor is saying and focus on key points. If you try to write down everything verbatim, you won't be able to keep up.
  • Study when you're most alert, if possible. Save the other parts of the day for exercising, relaxing, socializing, or doing laundry.
  • Try to study in a quiet place with minimal distractions. Reading in your dorm room with the television blaring and friends sitting on your bed won't be as productive.
  • Determine whether you like to tackle difficult projects first or last, then act accordingly.
  • For classes where participation is a part of your grade, review your notes right before class so you'll be able to contribute to the discussion.
  • Don't cheat. If you're caught, you could get expelled. And if you're not, you're only cheating yourself (now that you're in college, this is your life we're talking about).
  • If you get a poor grade on a paper or exam, don't despair and don't give up. Be persistent and dedicated in your studying efforts.
  • Seek out your professor during office hours if you need additional guidance — that's what he or she is there for.
  • Often there is no right or wrong answer; professors simply want to see if you can present a well-reasoned, articulate, and coherent answer.
  • Check your work over for mistakes before you pass it in.

Mind Over Model

Checking the weather? Guess what—you’re using a model. While models can be useful for gaining insights that can help us make good decisions, they are inherently incomplete simplifications of reality.

In investing, factor models have been a frequent topic of discussion. Often marketed as smart beta strategies, these products are based on underlying models with limitations that many investors may not be aware of.

To help shed light on this concept, let’s start by examining an everyday example of a model: a weather forecast. Using data on current and past weather conditions, a meteorologist makes a number of assumptions and attempts to approximate what the weather will be in the future. This model may help you decide if you should bring an umbrella when you leave the house in the morning. However, as anyone who has been caught without an umbrella in an unexpected rain shower knows, reality often behaves differently than a model predicts it will.

In investment management, models are used to gain insights that can help inform investment decisions. Financial researchers frequently look for new models to help answer questions like, “What drives returns?” These models are often touted as being complex and sophisticated and incite debates about who has a better model. Investors who are evaluating investment strategies can benefit from understanding that the reality of markets, just like the weather, cannot be fully explained by any model. Hence, investors should be wary of any approach that requires a high degree of trust in a model alone.

 

Mind the judgment gap

Just like with the weather forecasts, investment models rely on different inputs. Instead of things like barometric pressure or wind conditions, investment models may look at variables like the expected return or volatility of different securities. For example, using these sorts of inputs, one type of investment model may recommend an “optimal” mix of securities based on how these characteristics are expected to interact with one another over time. Users should be cautious though. The saying “garbage in, garbage out” applies to models and their inputs. In other words, a model’s output can only be as good as its input. Poor assumptions can lead to poor recommendations. However, even with sound underlying assumptions, a user who places too much faith in inherently imprecise inputs can still be exposed to extreme outcomes.

Given these constraints, we believe bringing financial research to life requires presence of mind on behalf of the user and an acute awareness of the limitations involved in order to identify when and how it is appropriate to apply that model. No model is a perfect representation of reality. Instead of asking, “Is this model true or false?” (to which the answer is always false), it is better to ask, “How does this model help me better understand the world?” and, “In what ways can the model be wrong?”

So what is an investor to do with this knowledge? When evaluating different investment approaches, understanding a manager’s ability to effectively test and implement ideas garnered from models into real-world applications is an important first step. This step requires judgment on behalf of the manager, and an investor who hires a manager to bridge this judgment gap is placing a great deal of trust in that manager. The transparency offered by some approaches, such as traditional index funds, requires a low level of trust on behalf of investors because the model is often quite simple, and it is easy to evaluate whether they have matched the return of an index. The tradeoff with this level of mechanical transparency is that it may sacrifice the potential for higher returns, as it prioritizes matching the index over anything else. For more opaque and complex approaches, like many active or complex quantitative strategies, the requisite level of trust needed is much higher. Investors should look to understand how these managers use models and question how to evaluate the effectiveness of their implementation. When doing so, rigorous attention must be paid to how any such strategy is implemented. To quote Nobel laureate Robert Merton, successful use of a model is “10% inspiration and 90% perspiration.” In other words, having a good idea is just the beginning. Most of the effort required to make an idea successful is in effectively implementing that idea and making it work.

In the end, there is a difference between blindly following a model and using it judiciously to guide your decisions. As investors, cutting through the noise around the “latest and greatest” investment products and identifying an approach that employs sound judgment and thoughtful implementation may increase the probability of having a positive investment experience.

 

 

 

Source: Dimensional Fund Advisors LP.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Robert Merton provides consulting services to Dimensional Fund Advisors LP.

College Savings: How Does a 529 Plan Compare to a Roth IRA

529 plans were created 22 years ago, in 1996, to give people a tax-advantaged way to save for college. Roth IRAs were created a year later, in 1997, to give people a tax-advantaged way to save for retirement. But a funny thing happened along the way — some parents adapted the Roth IRA as a college savings tool.

Tax benefits and use of funds

Roth IRAs and 529 plans have a similar tax modus operandi. Both are funded with after-tax dollars, contributions accumulate tax deferred, and qualified distributions are tax-free. But in order for a 529 plan distribution to be tax-free, the funds must be used for college or K-12 education expenses. By contrast, a qualified Roth distribution can be used for anything — retirement, college, travel, home remodeling, and so on.

In order for a distribution from a Roth IRA to be tax-free (i.e., a qualified distribution), a five-year holding period must be met and one of the following must be satisfied: The distribution must be made (1) after age 59½, (2) due to a qualifying disability, (3) to pay certain first-time homebuyer expenses, or (4) by your beneficiary after your death.

For purposes of this discussion, it's the first condition that matters: whether you will be 59½ or older when your child is in college. If the answer is yes (and you've met the five-year holding requirement), then your distribution will be qualified and you can use your Roth dollars to pay for college with no tax implications or penalties. If your child ends up getting a grant or scholarship, or if overall college costs are less than you expected, you can put those Roth dollars toward something else.

But what if you'll be younger than 59½ when your child is in college? Can you still use Roth dollars? You can, but your distribution will not be qualified. This means that the earnings portion of your distribution (but not the contributions portion) will be subject to income tax. (Note: Just because the earnings portion is subject to income tax, however, doesn't mean you'll necessarily have to pay it. Nonqualified distributions from a Roth IRA draw out contributions first and then earnings, so you could theoretically withdraw up to the amount of your contributions and not owe income tax.)

Also, if you use Roth dollars to pay for college, the 10% early withdrawal penalty that normally applies to distributions before age 59½ is waived. So the bottom line is, if you'll be younger than 59½ when your child is in college and you use Roth dollars to pay college expenses, you might owe income tax (on the earnings portion of the distribution), but you won't owe a penalty.

If 529 plan funds are used for any other purpose besides the beneficiary's qualified education expenses, the earnings portion of the distribution is subject to income tax and a 10% federal tax penalty.

Financial aid treatment

At college time, retirement assets aren't counted by the federal or college financial aid formulas. So Roth IRA balances will not affect financial aid in any way. (Note: Though the aid formulas don't ask for retirement plan balances,they typically do ask how much you contributed to your retirement accounts in the past year, and colleges may expect you to apply some of those funds to college.)

By contrast, 529 plans do count as an asset under both federal and college aid formulas. (Note: Only parent-owned 529 accounts count as an asset. Grandparent-owned 529 accounts do not, but withdrawals from these accounts are counted as student income.)

Investment choices

With a Roth IRA, your investment choices are virtually unlimited — you can hold mutual funds, individual stocks and bonds, exchange-traded funds, and REITs, to name a few.

With a 529 plan, you are limited to the investment options offered by the plan, which are typically a range of static and age-based mutual fund portfolios that vary in their level of risk. If you're unhappy with the market performance of the options you've chosen, under federal law you can change the investment options for your existing contributions only twice per calendar year (though you can generally change the investment options on your future contributions at any time).

Eligibility and contribution amounts

Unfortunately, not everyone is eligible to contribute to a Roth IRA. For example, your income must be below a certain threshold to make the maximum annual contribution of $5,500 (or $6,500 for individuals age 50 and older).

By contrast, anyone can contribute to a 529 plan; there are no restrictions based on income. Another significant advantage is that lifetime contribution limits are high, typically $300,000 and up. And 529 plan rules allow for large lump-sum, tax-free gifts if certain conditions are met — $75,000 for single filers and $150,000 for married joint filers in 2018, which is equal to five years' worth of the $15,000 annual gift tax exclusion.