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He Can Be Taught

Jonathan Clements  |  December 28, 2019

DEAR READER, I may write for you. But I also write for myself. Many of my articles grow out of intriguing ideas I stumble across or half-baked notions I want to explore further. The next thing I know, I’m scouring the internet for additional information and typing furiously on my laptop, all because I’m interested—and I hope you will be, too.

The good news is, after 34 years of writing about finance, I’m still learning things and still tripping across topics I’m curious about. Here are just six of the subjects that sparked my curiosity in 2019:

1. Health savings accounts. In recent years, I’ve had health insurance with a high deductible. But the insurance I’ve bought has never met the government’s official definition of a high-deductible plan, so I haven’t been able to fund an accompanying health savings account, or HSA. Result: I’ve largely ignored the merits of these accounts—a significant oversight on my part.

But over the past year, a number of HumbleDollar’s writers have mentioned HSAs, and it’s dawned on me what a bonanza they can be. You get a tax deduction for your contributions, which can be as much as $3,550 in 2020 if the health plan only covers you, and even more for households and those age 55 and older. All withdrawals for medical expenses are tax-free.

A smart strategy: Leave the account to grow tax-free and then use it to cover medical expenses in retirement. You can even save receipts for medical expenses that weren’t reimbursed by the insurance company and then use those old receipts to make tax-free withdrawals years later.

2. Health insurance. Just as I ignored HSAs, I didn’t bother much with the details of health insurance until I read an eye-opening article from one of HumbleDollar’s contributors, Rick Connor.

Rick’s suggestion: When looking at health insurance, calculate what your minimum and maximum payments will be over the next year. The minimum is the total annual premium. The maximum is that annual premium plus the out-of-pocket maximum. It’s an easy calculation—and it allows you immediately to grasp the best- and worst-case scenarios.

3. Paying down debt. I’ve long favored paying down debt over buying bonds. But it was only this year that I pondered a host of different scenarios, trying to figure out when it might make sense to buy bonds instead.

The answer: almost never. That’s true even if you’re considering mortgage debt, which typically carries a low interest rate and is potentially tax-deductible. Thanks to the higher standard deduction introduced by 2017’s tax law—and thus the limited gain, if any, that comes from itemizing—you’re almost always better off paying down your mortgage, even if the alternative is to buy bonds in a Roth account, with its tax-free growth.

4. Roth conversions. The 2017 tax law elongated federal income-tax brackets, so you can have a heap of income taxed at 10%, 12%, 22% and 24% before you leap to the 32% tax bracket. As HumbleDollar contributor John Yeigh noted in an article earlier this year, this opens up the chance to convert large sums from a traditional IRA to a Roth and still have the money taxed at 24% or less. It was an opportunity I hadn’t spotted, but I now hope to exploit.

For instance, in 2019, it takes some $346,000 in total income before a couple ends up in the 32% tax bracket, while for a single individual it’s $173,000. This assumes you take the standard deduction. Bear in mind that this opportunity could be time limited: Federal income-tax rates are currently scheduled to increase in 2026.

5. Saving ourselves. As with paying down debt, I’ve long stressed the importance of saving. But I finally ran the numbers—and even I was astonished by how much of our ultimate retirement nest egg will likely consist of the raw dollars we sock away. The reality: Perhaps half or more of the money we amass by age 65 will be represented by the actual dollars we set aside for retirement.

6. Stock market valuations. For not just years, but decades, I’ve written about the U.S. stock market’s rich valuations, including lofty price-earnings ratios and miserably low dividend yields. But what if the problem isn’t the price of stocks, but rather the yardsticks we use to measure them? In November, I explored whether fundamental changes in the way companies operate, including the use of stock buybacks and the emphasis on research and development instead of capital improvements, could partly explain today’s apparently nosebleed valuations.

When the article appeared, I expected a flurry of complaints from stock market bears, dismissing me as an apologist for overpriced stocks. But I heard barely a peep. The implication: Either there’s broad agreement that today’s valuation metrics are sending the wrong signal—or the market’s bears have been beaten into submission.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Hits 2017-19, Just Do It and Eyes Forward. Jonathan’s latest books: From Here to Financial Happiness and How to Think About Money.

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