November 04, 2021
I know the majority of you who are working get valuable benefits through your job. Yet according to a recent survey from the Employee Benefits Research Institute, less than 1 in 3 workers say they are very confident in their ability to figure out the best options to sign up for.
With late Fall typically being the annual “open enrollment” period when employees can make changes to their benefits packages, I want to share some tips for how to make smart choices for you and your family.
Your annual deductible is just the first big cost hurdle you may have to cover. What I want you to do is to check your policy (or ask HR for help) as to what your maximum annual out-of-pocket costs could be next year. The OOP maximum will include your deductible plus any copays or coinsurance you will need to pay for care. A copay is a flat fee, say $20 to $50 for each doctor visit. Coinsurance is a percentage of the cost of a given test or exam. For example, if you have 20% coinsurance for an MRI that costs $2,500 you will be expected to pay $500 out of your own pocket.
Do you have enough money in a savings account that could cover at least one year’s worth of OOP costs? That’s the key to being confident you have the best insurance policy.
I know many of you now have the option of a high-deductible health insurance plan through work. An HDHP makes you eligible to contribute to a health savings account (HSA), which is a great way to save for medical costs. If your employer contributes to your HSA that’s an even better deal.
But it’s tricky. A high-deductible plan with an HSA can look extra alluring given it will typically have the lowest premium cost. But again, the question you need to ask yourself is if you have the cash tucked away to cover the higher deductible and copays/coinsurance.
If you find out you don’t yet have enough tucked-in savings that could cover your potential OOP cost for 2022, you have two choices.
You can boost what you are saving in the HSA to the point it covers at least a year’s worth of OOP costs. Or if your employer offers other insurance plans, take a look at whether paying a higher premium for a different plan would be a safer move, if it has a much lower OOP max that you can cover from savings.
For younger workers who have yet to hit their earnings prime, a Roth 401k makes sense because you’re likely in a lower tax bracket right now. That means your contributions are from money that was hit with a lower federal income tax, with the eventual payoff of no tax on that money in retirement.
For those of you who’ve been saving for years in a traditional 401k account, I also think it is smart for you to consider switching your future contributions to a Roth 401k. I want to be clear: I am only talking about where your future contributions are to be deposited. (This is not about moving money inside a traditional 401k to a Roth 401k. That is a different strategy that should only be considered after consulting with a tax pro.)
The advantage of building retirement savings in a Roth 401k is that in retirement this chunk of money will give you powerful flexibility. Withdrawals from a Roth 401k are 100% tax-free. That can be handy in any year when you want to withdraw more, not less. (For a bucket list trip, a new roof, extra help around the house, etc.) If you pulled the money from your traditional savings, it will all be counted as taxable income for that year. That means a higher tax bill and can potentially cause more of your Social Security benefit to be taxed, as well as causing your Medicare Part B premiums to rise.
Another important feature of Roth 401ks is that you can easily move the money to a Roth IRA before you reach age 72. Do that, and you will never be hit with a required minimum distribution (RMD) on the money.
If your plan doesn’t offer a Roth 401k option, I still want you to save in your traditional 401k if there is an employer matching contribution. Contribute enough to qualify for the maximum employer match. Once you save that much, my advice is to consider doing the rest of your retirement saving in a Roth IRA account at a discount brokerage. The income limits for Roth IRA contributions are high, so my bet is many of you will be able to contribute directly to a Roth IRA.