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I BELIEVE MANAGING money should be kept as simple as possible. That’s usually the route to lower costs, fewer mistakes and greater financial peace of mind. But, alas, three crucial areas of our financial life defy simplicity: health insurance, taxes and paying for college.
This is hardly an original insight. Folks have complained for decades about the maddening complexity involved with all three. All are ripe for a total revamp, but there’s no sign that’ll happen any time soon. Instead, if we want simplicity, we’ll have to take matters into our own hands. To that end, here are some suggestions.
Income taxes. The tax code is not only baffling, but also arbitrary. For instance, on HumbleDollar, we’ve run articles about how the income thresholds for both the net investment income tax and Social Security benefits taxation aren’t inflation-adjusted, and about how the Medicare premium surcharge known as IRMAA can result in a 28,000,000% marginal tax rate.
For the past decade, I’ve paid someone to prepare my taxes. To me, it’s money well-spent to avoid the hassle and the worry that I’ve made mistakes. But at the same time, I like to think I’m a good client because I maintain meticulous records and I keep my finances as simple as possible. For instance, my taxable investment account consists of just one money market fund and one stock-index fund, and I rarely do any trading.
But it wasn’t always that way. At one time, I had many more investments in my taxable account. In fact, if I could go back and whisper in the ear of my younger self, I’d advise never buying anything in a taxable account except cash investments and total stock market index funds. What if you’re hellbent on messing around with your portfolio? Save all your trading for your retirement accounts.
Paying for college. This year, the Free Application for Federal Student Aid—or FAFSA, the federal government’s financial-aid form—is being simplified, so it no longer necessitates answering more than 100 questions. Good news? That depends on your definition. Apparently, the new form will still have 46 questions.
That’s hardly the only financial hurdle on the way to a college degree. Students applying to colleges don’t know what the real price is, how much aid they’ll receive and whether that aid will take the form of grants, loans or work-study. If they apply to select private colleges, they may also need to fill out the CSS Profile form, which further complicates the financial-aid picture, because the way assets and income are assessed under the so-called institutional methodology can differ from the federal aid formula.
Need help repaying your loans after college? The federal government just introduced a new student loan repayment plan known as SAVE, replacing the previous much-vaunted repayment plan known as REPAYE. This is on top of the two other federal government income-driven repayment programs. I, for one, have given up trying to understand how they differ. If you want to get a sense for how complicated the government’s income-driven repayment plans can be, check out Logan Murray’s recent article.
Where does that leave parents? Given the uncertainty over how the aid formulas will evolve in the years ahead, whether a family will qualify for aid and whether a child will even go to college, you might be tempted not to save for college—or, at least, not save in a special college account.
That could be a smart move for those likely to get heaps of aid, who might focus instead on funding retirement accounts and paying down debt. But for more affluent families, a 529 college savings plan still looks like the way to go. Let’s say you build up a 529 for your daughter to $50,000 by the time she’s age three, and then leave the account to grow without adding any further money. Assuming a 7% annual return and 15 years of investment growth, the tax savings would be $19,350, assuming you’re in the 22% federal income-tax bracket when you empty the account.
Health care. Buying health insurance is confusing and dealing with insurance claims is maddening. What to do? For me, Medicare is four years away. In the meantime, I’ve settled on a three-part strategy—but, I readily admit, it isn’t a strategy that’ll work for everyone.
First, inspired by Rick Connor’s 2019 article, I use a quick-and-dirty method for analyzing health insurance, which involves calculating the minimum and maximum cost I’ll likely incur each year. The minimum cost is represented by the total annual premiums I’ll pay, while the maximum should be capped by the out-of-pocket maximum. I buy the policy that has the most attractive combo of minimum and maximum cost.
Second, I try to avoid the frustrations of the health-care system by living a healthy lifestyle, including exercising every day and limiting things like booze, fried food and red meat. Still, no matter how careful we are, almost all of us will need to see a doctor occasionally, at which point we could face the frustration of dealing with our health insurer.
That brings me to my third strategy: I now buy a high-deductible health insurance policy and fund an accompanying health savings account, or HSA. As I see it, with a high-deductible policy, I don’t need to fret so much about how the insurance company treats my claims, unless it’s clear I’m going to have hefty health care expenses that exceed the current year’s deductible, at which point the insurer should start coughing up money to cover my medical costs. In the case of my current policy, that $5,800 deductible is the same as my out-of-pocket maximum. An added bonus of funding an HSA: The initial tax savings effectively reduces a health insurance policy’s minimum and maximum annual cost.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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I wish I had purchased more Roth funds. The HSA was also a difficult concept to get a handle on because the deductible can be daunting. I kept up funding throughout my last few working years as, once you have enough in the account to cover any deductible, worry is gone. HSA allows you to pay for the medical services you use without high premiums. I have also used the remaining funds during my years on Medicare for co-pays. (One cannot contribute to an HSA while on Medicare, but you can use the accrued funds)
My employer added a HSA to our benefits. It’s even better than a match; they pay in and it’s not optional.
Given that many medications are not covered by Medicare and cancer centers view the infusion business as moneymakers, this is very welcome.
Something to consider with education savings accounts is that you have to take the $ out in a narrow window and they have to be spent on education.
Not all kids will complete college within 6 years after high school.
But it’s the timing of the investments that I am writing about.
We opened education IRAs for our kids. When the first went to college, the market was down. At least we didn’t lose $. If it had been four years earlier, it would have been a loss.
We waited to tap the next IRA until the very end of college and the beginning of professional training with our second child and the account had doubled. In this case, the gains and tax savings were substantial.
The market is up even more now. What will the market be like in the narrow 4 years or so when you have to withdraw and close the account?
This needs to be factored into risk.
It’s a different calculation than retirement.
Another thought about college tuition: Some folks may qualify for loan forgiveness after 10 years of employment with a government or non-profit organization.
“….about how the Medicare premium surcharge known as IRMAA can result in a 28,000,000% marginal tax rate.”
But in the next paragraph you say you don’t actively manage your taxes, just keep good records. This is not a good idea – you might just end up $1 into an IRMAA bracket.
In my own tax accounting, I keep a running MAGI throughout the year as income comes into my accounts. I know exactly what my target is to go to the top of an IRMAA bracket, but not over it. Of course, you have to guess what the IRMAA brackets will be in 2025, but I am very conservative and assume only a 2.5% increase over 2024.