The Week on Wall Street
Stocks marched higher last week on an improving outlook for the passage of a fiscal stimulus package.
The Dow Jones Industrial Average rose 1.03%, while the S&P 500 tacked on 1.67%. The Nasdaq Composite index gained 2.12% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 0.78%.
FACT OF THE WEEK
National Handwashing Awareness Week takes place each year during the first week of December. According to the Centers for Disease Control and Prevention (CDC), handwashing can prevent 1 in 5 infections, including the flu. Calling it "a do-it-yourself vaccine," the CDC recommends following the five finger step process: wet, lather, scrub, rinse, dry. An excellent reminder that healthy hands are happy hands, and happy hands make for a happy and healthy home.
A Record Week for Stocks
After opening the week with moderate losses amid rising COVID-19 infections, stocks turned higher as the resumption of fiscal stimulus negotiation buoyed investor sentiment. As lawmakers discussed various proposals, stocks managed to grind higher.
A better-than-expected jobless claims report on Thursday added fuel to the market rally. Still, the gains evaporated in late-day trading following news by a major pharmaceutical company that it would be slowing its rollout of the vaccine due to logistical challenges.
A disappointing jobs report on Friday did not keep investors from bidding stocks higher as the week came to a close, sending the Dow Jones Industrials, S&P 500, and the NASDAQ Composite indices to record high closes.
The Start of Holiday Shopping
The start of the holiday shopping season provides important insight into the state of the economy and overall consumer confidence. In response to the pandemic, consumers avoided in-store visits over the Thanksgiving weekend. This translated into a 22.4% decline in spending from last year’s levels.
However, spending prior to the Thanksgiving-to-Sunday period surged 65.7% from a year earlier, thanks to large retailers introducing Black Friday-like deals as early as mid-October.
Of course, the pandemic has led to an acceleration in shopping online. Cyber Monday sales jumped 15.1% over last year’s levels as consumers spent almost $11 billion, making it the largest U.S. online shopping day ever.
FINANCIAL STRATEGY OF THE WEEK
HEALTH SAVINGS ACCOUNT | HOW AN HSA CAN SUPPLEMENT YOUR RETIREMENT
How an HSA can be a tax-efficient investment strategy for your retirement plan.
Have you maxed out on your 401(k) and IRA contributions, or are your current savings held in a taxable account? It may be worth considering your options while planning for a comfortable retirement by taking advantage of a tax-efficient savings plan—a health savings account (HSA).
An HSA offers triple tax savings, where you can contribute pre-tax dollars, pay no taxes on earnings, and withdraw the money tax-free now or in retirement to pay for qualified medical expenses. Pay qualified medical costs out of an HSA, and it's tax-free.
Assets held in an HSA plan can be cover non-medical expenses after age 65, such as buying a sailboat, while being taxed at the ordinary income rates on nonqualified withdrawals, just as a traditional IRA or 401(k). (If you are under age 65, you pay the tax on the 20% non-medical withdrawal penalty.) There are many ways to make HSAs work for you—whether you are still employed, getting ready to retire, or even retired and enrolled in Medicare.
To get started, consider these five ways that HSAs can help fortify your retirement.
Understand the triple tax advantage and how HSAs work
Individuals can participate in an HSA by enrolling through their employer-sponsored or the private marketplace health plan (an HSA-eligible health plan has a deductible of at least $1,350 for individuals and $2,700 for families). Many may look at an HSA plan to cover current medical costs not covered by such plans. But if you can pay for these costs out-of-pocket, the triple tax-free nature of an HSA makes it a powerful vehicle for retirement savings.
Many individuals contribute to HSAs pre-tax through payroll deductions at work, so their contributions also escape FICA taxes. An HSA can also be purchased outside of work and funded with after-tax dollars, which the individual then takes as a tax deduction on their taxes. These contributions accumulate and can be used tax-free to pay for current and future qualified medical expenses, including ones during retirement.
Unlike most flexible spending accounts (FSAs), the money in an HSA can remain in your account from year to year. You can earn interest or earnings with your HSA, and you can even take your HSA with you should you switch employers or retire. Because an HSA is one of the most tax-efficient savings options currently available, you should talk to your financial professional about contributing the maximum and paying for current health care expenses from other sources of personal savings. To take advantage of the HSA compounding benefits, leave it alone unless necessary. Also, consider investing a portion of your HSA in a noncash investment option for long-term growth potential.
In the case of healthcare, the majority of us will likely face a bevy of health-related expenses in the future —medical procedures, hospital bills, prescription drugs, maybe even home health care or nursing home expenses. Building a nest egg specifically designed to help cover future health care costs is a prudent move. How much should you save? It is estimated that an average 65-year-old couple who retired in 2019 will need to have saved $285,000 after taxes to pay for future medical costs. For affluent investors, that number can rise to $320,000 or more depending on state taxes.
Even if you don't have an HSA, it may be prudent to work with a financial professional to set aside certain assets to pay for health care. Health care is likely to be one of the top expenses for the majority of retirees. It may be worth it to consider earmarking a portion of your 401(k) or IRA accounts (and their potential future earnings) to help cover a range of predicted health care costs throughout your retirement.
Consider putting your HSA dollars to work by investing them
Although health care costs continue to rise, there are ways to begin planning for future medical expenses, starting with building your savings and adding to your investments today.
Suppose you are considering using some of your assets held in an HSA for near-term medical expenses; in that case, we recommend that you set aside some cash from your HSA and work with a financial professional to invest the rest for potential tax-free growth. This strategy can help to fortify your retirement.
Tip: Once you establish a cash cushion within your HSA to pay for short-term unanticipated qualified medical expenses and out-of-pocket maximum deductible limits, you may have a large enough account balance to invest in mutual funds, stocks, or bonds.
HSAs vs. other retirement savings options
How do HSAs compare to other savings vehicles? The tax treatment of HSAs provides the potential for more significant investment growth and greater after-tax balance accumulation versus other retirement or health care savings options. Assuming you use HSA funds to pay for qualified medical expenses, you do not pay any federal taxes. That's why it's at the top of the list for tax-efficient investment options for your retirement. In this hypothetical example, a customer invests $1,000 in their HSA.
Over the next 30 years, that single investment of $1,000 grows at 7% a year to $7,612. If that HSA account holder invested the same $1,000 in a tax-deferred account like a traditional IRA, their total investment return would also be $7,612. However, of that amount, only $5,938 remains after paying income taxes at a significant rate of 22% upon distribution.
Plan to use your HSA in retirement
You can always use your HSA to pay for qualified medical expenses like vision and dental care, hearing aids, and nursing services at any time. Once you retire, there are additional ways you can use the money:
Help bridge to Medicare
If you retired before age 65, you might still need health care coverage to help you bridge the gap to Medicare eligibility at 65. HSAs cannot cover costs for private health insurance premiums unless an individual falls under these two exceptions: cover costs for health care coverage purchased through an employer-sponsored plan under COBRA and paying premiums while receiving unemployment compensation.
Cover Medicare premiums. You can use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D prescription drug coverage, but not supplemental (Medigap) policy premiums. For retirees over age 65 who have employer-sponsored health coverage, an HSA can cover your share of those costs as well.
Long-term care expenses. An HSA plan can cover part of the cost of a "tax-qualified" long-term care insurance policy. You can do this at any age, but the amount may increase with age over time.
Pay for other expenses. Once you hit age 65, you can use your HSA to pay for any nonqualified medical expenses (including buying a boat, for example); however, you don't get to take full advantage of the tax savings, and you are required to pay state and federal taxes on those distributions.
An HSAs role in estate planning
If your medical expenses are much lower than average (or you don't live that long), you may have money in your HSA that you can pass along to your heirs. The rules are complicated, so it's best to consult your estate planning attorney. There are generally three categories to consider when determining how HSA assets are treated upon your death:
Spouse is the designated beneficiary
If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse's HSA after your death with the same triple-tax-free treatment.
Spouse is not the designated beneficiary
If your spouse isn't the designated beneficiary of your HSA, the account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.
Your estate is the beneficiary
Many would prefer to name the surviving spouse as the designated beneficiary of the three options listed. In a case there is no surviving spouse, a planning consideration could be tax-efficiency. Work with your tax and estate planning professionals to determine which option is right for you.
Tip: If you name your estate as the beneficiary of your HSA, it will likely become a probate asset, and it still needs to fit in with your overall estate plan.
Once you turn 72, you will need to take the required minimum distributions (RMD) from traditional IRAs and 401(k)s, and you would have to pay taxes on those distributions. For an HSA plan, there is no RMD distribution.
Since an HSA offers a triple tax advantage, it's an option you should consider prioritizing to fortify your retirement now and for years to come. Your financial professional can provide guidance based on your specific financial situation.
As always, please let us know if there is anything we can help with along the way or any financial concerns you may have.