Hugh Wynn's Two Cents

While I'm not an investor by profession, I have been curating sound personal financial habits and practicing those techniques since I was a youngster. Although the focus of this blog is on our three youngest generations, I will ceaselessly emphasize to all investors the importance of an early and routine savings habit, a common sense buy-and-hold strategy, a diversified investment portfolio, the wisdom of shunning market timing, and a “stick to your guns” attitude regardless of negative outside influences. I believe it is imperative that you keep your investment strategy simple and your investment costs as low as possible. Like the small investor’s best friend, Jack Bogle, was quick to remind us, “In the fund business, you get what you don’t pay for.”

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past Posts

Covid-19: Impact On Healthcare FSAs
May 28, 2020
The IRS has relaxed healthcare FSA rules to allow employees to change their healthcare contributions, including dropping them altogether, going forward. But the employer can choose to amend its FSA, or not.
read more
Covid-19: Impact On Dependent Care FSAs
May 21, 2020
To provide flexibility for employees coping with the fallout from the Covid-19 virus, the IRS has issued new guidelines that allow employers to amend dependent care Flexible Spending Accounts (FSA)s, allowing workers to adjust dependent care plan contributions – including dropping contributions altogether.
READ MORE
COVID-19 Financial Lessons
May 14, 2020
A post-Great Recession Federal Reserve study of 5,000 people revealed that 46% percent of Americans admitted to not being able to cover an unexpected expense of $400 without resorting to a credit card loan, a loan from family or friends, or by force-selling a personal asset – perhaps one in a retirement plan. The current COVID-19 upheaval is a harsh reminder to all of us the value of putting money aside for a rainy day or two… or 20.
read more
CARES Act Emergency Withdrawals
May 7, 2020
Provisions of the recent CARES Act – which offers both $1,200 cash payments and bonus unemployment benefits to workers – also makes it easier for retirement plan participants to take early withdrawals and/or loans from those plans for Covid-19-related reasons.
READ MORE
Saving for the Gens
April 30, 2020
I don’t believe young people are disinterested in saving and investing. I do, however, believe they aren’t terribly interested in investing for retirement, a time in their lives that they view as a “a million years” down the road.
READ MORE
IRS Relaxes Rules on Healthcare Flexible Spending Accounts
May 28, 2020

Last week we discussed a recently revised IRS guidance that allows for mid-year changes to dependent care Flexible Spending Accounts (FSAs). The taxing agency also provided similar relief for the even more popular healthcare FSAs that allow pretax employee contributions to employer-sponsored FSAs to cover unreimbursed medical expenses. Fun Fact: Over 22 million workers participate in healthcare FSAs, four times as many as use dependent care plans.

Healthcare FSA Review

Healthcare Flexible Spending Accounts (FSAs) are popular among workers. However, like dependent care FSAs, they have become potential liabilities for participants who set aside hundreds… even thousands... of dollars to pay for medical care that might no longer be accessible due to the Covid-19 virus.  Healthcare plans allow for $2,750 in pretax contributions to cover out-of-pocket qualified healthcare expenses for the worker, his/her spouse, and dependents. A married worker’s spouse can contribute $2,750 to another healthcare FSA with his or her employer. This represents a significant savings to employees who avoid paying federal income and FICA taxes on the pretax paycheck withdrawals. Employers benefits, too, because they avoid paying the 7.65% employer FICA tax match.

Use It or Lose It

Like the dependent care FSA, the tax-advantaged healthcare version includes an onerous “use it or lose it” feature. Quite simply, if a healthcare FSA participant doesn’t use the money set aside for unreimbursed medical bills within the plan year, the unspent funds are forfeited to the employer. And here’s the Covid-19 rub. Because folks have delayed so many elective surgeries, dental procedures, and other non-emergency medical treatments during the height of the pandemic – and because so many have been reluctant to reschedule such treatments – money set aside in the plan could go unused… and forfeited.

COVID-19 Connection

The new IRS guideline allows – but does not require – employers to amend their plans. The revision allows employees to change their healthcare contributions, including dropping them altogether, going forward. But the employer can choose to amend its FSA, or not. And as to that innocent sounding “going forward” caveat, the employee must spend the money already deducted from his paycheck in the current plan year. Of note, most employers support this change and will likely participate.

The benefit of these rule changes allow the Covid-19 impacted worker to opt out of making contributions during a plan year, an option not previously permitted before, except under restrictive circumstances. At their option, employers may allow either a 75-day grace period after the end of the plan during which any remaining healthcare FSA funds can be spent or grant the ability to roll over up to $550 of unused funds into the next plan year, but not both.

With regard to the money already set aside but yet unused, workers can spend it on certain out-of-pocket medical care to include deductibles and co-payments (but not premiums), dental work, eyeglasses, prescription medications, medical equipment, transportation costs, parking and mileage expenses when making doctor visits, and the like. Also, the IRS healthcare rules had already been tempered a bit by the earlier Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which will allow workers to use “captive” contributions on such expenditures as over-the-counter medicine and feminine hygiene products.

Fair Or Unfair… To Whom?

A worker’s designated annual pretax contribution to a healthcare FSA is “preloaded”… available for use on day one of the plan year. Workers reimburse the employer FSA’s disbursed funds incrementally through paycheck deductions during the plan year. In short, an employee can be reimbursed for a full year’s plan contribution before paying back a penny. And the employer cannot recover unreimbursed funds if the worker is terminated before the balance is repaid. Seems unfair to the employer until we’re reminded that any unused worker contributions at the end of the plan year revert to the employer. Further, if a worker is terminated for whatever reason before all of a given year’s funds are spent, the remaining contributions revert to the employer.

IRS Guidance Summary

Here is the IRS notice in black-and-white:

IRS (2020-95, May 12, 2020) Notice 2020-29

Provides greater flexibility for [workers] by extending claims periods to apply unused amounts remaining in a health FSA for expenses incurred for those same qualified benefits through December 31, 2020; and by expanding the ability of taxpayers to make mid-year elections for health FSAs programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.

Notice 2020-33

Responds to Executive Order 13877, which directs the Secretary of the Treasury to "issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for FSA arrangements" from $500, to a maximum of $550, as adjusted annually for inflation.

IRS Relaxes Rules on Dependent Care Flexible Spending Accounts
May 21, 2020
To provide flexibility for employees coping with the fallout from the Covid-19 virus, the IRS has issued new guidelines that allow employers to amend dependent care Flexible Spending Accounts (FSA)s, allowing workers to adjust dependent care plan contributions – including dropping contributions altogether. Click here to watch the video.

FSA Review

Dependent care Flexible Savings Accounts (FSAs) are set up with an individual’s employer who has agreed to participate in such a program. Roughly 85% of employers with 500 or more employees offer them. In those cases, workers authorize their employers to withhold funds from their paychecks each pay period for deposit to an FSA. The worker pays for “qualified” expenses out-of-pocket, and then applies for reimbursement from the account administrator by completing a claim form with receipts or proof of payment attached.

Dependent care FSA funds can only be used for reimbursements that meet the IRS’s definition of an eligible dependent care service. (i.e., care necessary for the participant and/or spouse to earn an income). Qualified expenses include physical care, in-home care, daycare service, summer day camps, before- and after-school care, caregiver transportation, and fees associated with obtaining care. Expenses that do not qualify include overnight camps, housekeeping, music and sports lessons, and education (e.g., kindergarten, summer school, private school tuition, etc.).

The Covid-19 Connection

With millions of people currently out of work, dependent care has become an even more critical issue – perhaps even a looming liability – and a continuing burdensome expense for many American families. Families rely on childcare to facilitate their ability to work. Millions of others are responsible for the care of aging parents or disabled dependents. In short, workers who need care for children under age 13, or an adult incapable of self-care, who lives in their home and who can be legitimately claimed as a dependent on their federal tax form, may qualify for a dependent care FSA. Question is, in today’s Covid-19-plagued environment, how do workers spend FSA funds for dependent care if both their children’s school and/or their after-school facility is closed? The most obvious solution is to request that their employer stop deducting – or adjust – dependent care contributions. The new IRS guidelines make these requests possible… but do not require employer compliance.

In any event, FSAs in 2020 are more flexible for participants whose budgets have been upended by the Covid-19 pandemic. Under these revised (and probably temporary) IRS guidelines, employees can make mid-year changes – adjustments up or down – regarding their contribution amounts. But as before, no carryovers into the next dependent plan year are permitted.

Use It or Lose It

The primary benefit of a dependent care FSA is its tax treatment. All money contributed to the account by a worker is considered pretax, which means employees don’t pay federal, Social Security or Medicare taxes on contributions. (And employers benefit, too. They don’t have to pay Social Security and Medicare taxes on the portion of employee salaries set aside in FSAs.) This effectively reduces the amount of a participant’s income subject to taxation – a significant savings depending upon one’s tax bracket and the amount of the contribution.

However, the IRS does limit the amount of money per annum that a worker can contribute to a dependent care FSA. More specifically, dependent care FSA participants can automatically put away a specified amount of money from their paychecks to spend on child and other qualified dependent care. But there is a catch – a “use it or lose it” feature. Yep, all money in a dependent care FSA must be spent before the plan year ends. Unspent funds are forfeited to the employer. Each worker can contribute up to $2,500 of earned income per plan year to cover qualified dependent care, or $5,000 for workers who are married, filing jointly. If a worker and his/her spouse are divorced, only the parent who has custody of the child(ren) is eligible to use FSA funds for childcare. If a couple is still married, both must work and earn income to qualify for reimbursement (unless one spouse is disabled and unable to work). If not, money contributed to the account will be forfeited to the employer and applicable taxes will become due.

Helpful Adjustments

Before the IRS rule changes, account participants were not permitted to adjust their contributions mid-year except in specific circumstances, including if a school closes, if the employee shifts to working from home, a marriage or divorce, the birth of a child, or some qualifying event that added or subtracted a dependent or spouse. The new IRS guidance allows companies to amend their plans that allow workers to opt into, drop out of, or adjust their contributions mid-year. And to repeat, these new IRS guidelines apply only if the employer chooses to amend its FSA plan (it’s anticipated that most employers will adopt the IRS guidance quickly).

Regarding money already contributed in the plan year, it must still be spent on qualified programs for kids under age 13 and/or for older dependents unable to care for themselves. The agency’s rule changes regarding both dependent care and healthcare FSAs are part of a larger federal government effort to provide affected households “some maneuvering room” under tax rules due to a job loss and/or reduced cash flow. A companion adjustment was that federal filing deadlines and tax payments were also postponed – to July 15. More on the healthcare FSAs in a later blog.

COVID-19 Forces Far-Reaching Financial Lessons
May 14, 2020

If it seems like I have a hang-up regarding what I call MILLION-DOLLAR HABITS. Yes, yes I do. They often start to form and cluster at a young age. Perhaps we learn them from parents, or perhaps they simply derive from a youthful “put-it-off-until-tomorrow” attitude that ultimately results in a financial situation that brings us face to face with the cumulative effects of poor decisions. For way too many folks, such calamities have come early in life… the relatively recent Great Recession of 2007-2009 and today’s Covid-19 Pandemic. And way too many young folks (and older folks, too) have been left holding the proverbial bag.

The “Great Recession” Redux

A post-Great Recession Federal Reserve study of 5,000 people revealed that 46% percent of Americans admitted to not being able to cover an unexpected expense of $400 without resorting to a credit card loan, a loan from family or friends, or by force-selling a personal asset – perhaps one in a retirement plan. The current COVID-19 upheaval is a harsh reminder to all of us the value of putting money aside for a rainy day or two… or 20. I speak at length about Rainy Day funds in past WynnSights blogs, and in You, Me & the Tree - a nifty lifestyle blog where I make an occasional guest appearance as "Tips From Pops". Check it out!

Rainy Day Realities

Back to reality. Young people tend to avoid budgeting along with forestalling the saving of money for emergencies. Apparently, they don’t want to face the occasional reality of more outflows than inflows – a quandary that necessarily leads to eliminating some desirable luxury or the guilt of not eliminating such a luxury. Just remember, without the guidance of a budget, you are inviting the pain of financial distress without realizing it.

Credit Card Crutches

Without a financial plan (i.e., a personal budget), one clear signal that you’re living on the edge is not being able to pay off credit card balances each month, opting month after month to pay the minimum. Improper use of credit cards is the bane of intelligent financial planning. The possession of too many cards encourages folks to live beyond their means. My personal habit is to use only one credit card. To carry several helps us hide from the reality of how much we’re buying on credit. Putting all of our charges on one card eliminates the excuse of “I had no idea how much I was spending.” And the discipline of paying off that single balance each month helps you avoid the great black hole of credit card debt.

Another clear signal that you’re living on the financial edge is a reluctance to open monthly bills right away. Open them immediately. Do not let them stack up. And pay them as promptly as monthly cash flow allows. The stress associated with that looming stack of unopened bills is unhealthy. Paying them promptly promotes self discipline, a healthy outlook on life, and of course, a healthy credit rating.

Good Financial Habits

The long and short of developing good financial habits stems from having a good financial plan – one carefully followed to avoid the pitfalls of poor decision making. If you work for a company that provides access to 401(k) or 403(b)-type plans, be sure to participate and most certainly take full advantage of any matching offer by your employer (FREE MONEY)… an automatic 100% return on the matched contributions. How many other 100% returns on investment do you enjoy in life? And give serious consideration to opening a ROTH IRA (funded with earned, after-tax dollars) and dare to be average by building your investment portfolio around a low-cost, highly diversified index fund.

Remember, it’s never too late, but early is best!  And aim for 10-15% of your gross pay as a savings objective. Yeah, I know, that’s tough to do… but maybe not as tough as you think. By developing good (or eliminating bad) financial habits and displaying a good work ethic, you are almost guaranteed a financially stress-free life both before and during retirement. Knowing that you are growing a comfortable nest egg no later than in your late 30s and early 40s does two important things: it becomes a tremendous stress reliever, and it provides a sense of satisfaction that your future is more and more financially secure each day.    

CARES Act Allows Emergency Withdrawals from Retirement Accounts
May 7, 2020

Provisions of the recent CARES Act – which offers both $1,200 cash payments and bonus unemployment benefits to workers – also makes it easier for retirement plan participants to take early withdrawals and/or loans from those plans for Covid-19-related reasons. To qualify, individuals must fall into one of two main groups: If an individual, spouse or a dependent is diagnosed with Covid-19, or if a person can qualify by having experienced adverse financial consequences (i.e., due to being quarantined, furloughed, laid off,  reduced work hours, etc., related to the coronavirus pandemic).

The legislation temporarily waives the 10% early withdrawal penalty, doubles the amount permitted for a loan from $50,000 to $100,000, doubles the percentage limit from 50% to 100% of the total account balance, and eliminates the federal taxes on such withdrawals if the money is paid back within a prescribed period of time… with strings. The legislation also waives 2020 Required Minimum Distributions from tax-deferred retirement accounts for folks older than 72. See my blog "Did You Know? You Don't Have to Take RMDs in 2020" (4/02/2020) for more details.

Click here to view the Taking Stock video.

Strings Attached?

The CARES Act legislation temporarily waives the 10% early withdrawal penalty for taking early distributions up to $100,000 between January 1 and December 31, 2020, from tax-qualified defined contribution plans (401(k)s, 403(a)s, and 403(b)s, Section 457(b) plans and IRAs). Individuals have up to 3 years to re-contribute withdrawals to a plan. Income taxes will be owed on withdrawn amounts that are not repaid, but individuals are permitted to pay tax on this income over a 3-year period. In addition, COVID-19-related distributions are exempt from the mandatory 20% withholding that normally applies to retirement plan distributions.

Retirement plan loan rules are also modified. The maximum amount is increased for loans made between March 27, 2020 (the CARES Act enactment date) and December 31, 2020. During this period, the maximum loan amount is doubled from $50,000 or 50% of the vested account balance to the lower of $100,000 or 100% of the vested account balance.

Withdrawal or Loan?

The first decision a plan participant faces is whether or not to take advantage of this relief.

It’s a source of money – your money – but do you want to meddle with an important retirement account portfolio? Do you have a choice? If not, comes the second decision. Do you take out a hardship withdrawal or do you loan yourself money? What difference does it make?

At first glance, a withdrawal might appear to be the best course of action. It doesn’t have to be repaid, nor is an automated repayment system instituted. But if an individual can replace the withdrawn funds within three years (on no particular schedule), a tax refund is in order. A loan, however, must be repaid on a predetermined, fixed schedule. So, what’s the concern? History indicates that most folks tend not to pay back withdrawals from retirement accounts but are much more likely to make predetermined loan payments. Human nature, I suppose.

Consider it a Loan

If you absolutely intend to replace whatever amount you take out of a retirement account early, the loan approach might be the  better choice. Why? Primarily because a fixed, repayment schedule makes repayment more probable. To qualify, the loan must be made within 180 days after the March 27 CARES Act enactment date. And the participant won't owe income tax on the amount borrowed from the plan if it's paid back within 5 years. Point is… if you don’t trust yourself to pay back a withdrawal or if your job is in serious jeopardy, go the withdrawal route. Otherwise, consider the loan.

Start with Half

Once you make the loan versus withdrawal decision, you must then decide how much to take out (within the guidelines of the amounts and percentages mentioned earlier). Often, the degree of need for immediate cash is unknown or at best nebulous. A rule of thumb might be to take out less than half of what you “think” you might ultimately require. You can always go back for more once your cash needs gain more clarity. Clear this approach with your employer or plan administrator ahead of time should there possibly be limits on multiple loans. This approach will help you least disrupt your retirement portfolio in case cash requirements prove to be less than initially thought.

Post-Crisis Plan 

Once the crisis passes, individuals should reinstitute their former savings pattern as quickly as possible – and don’t forget that the crisis-related “missed” contributions should be made up. After the first year of re-enrollment begins, an individual can increase the annual savings rate by 2-3%, if affordable, until it reaches the revised 15% cap established by the 2019 SECURE Act. Employers can offer a safe harbor 401(k) plan with an automatic increase (or auto-escalation) feature that raises plan participants' contributions until they amount to 15% of pay (participants can opt out of such increases).

Hopefully, the Covid-19 dilemma will soon be resolved, but it’s especially important that individuals who withdraw or borrow money from retirement plans make wise decisions during the crisis – decisions that don’t create future financial stress, particularly of the sort that will negatively impact your quality of life in retirement.

Save and Invest...Or I'll Wash Your Mouth Out With Soap!
April 30, 2020

Early in this blog’s short life, I made clear that my focus would be on the younger crowd - Millennials and Gen Zers. Mostly because we are often negligent in teaching our youngsters even the basics of personal finance. I consider that a significant oversight… a shortcoming of our education system. And in reviewing my own blogs during the past year, I, too, have been somewhat remiss of the younger folks despite my good intentions. I plan to do better starting today.

Million Years Away

I don’t believe young people are disinterested in saving and investing. I do, however, believe they aren’t terribly interested in investing for retirement, a time in their lives that they view as a “million years” down the road.

“Right now, there are better places to spend money than for retirement,” a young person might argue. “I’ll worry about that later.” A perfectly understandable stance at age 15… or 20… or 30…or 40… well, maybe not 40. But then come comes along a mind-boggling, scary situation like the COVID-19 chaos the world is currently experiencing and it reminds us all - young and old - that saving (period) is key and it's best to start at a young age.

But if nothing else, market corrections and other unanticipated surprises should, at the very least, remind our younger folks of the value of “rainy day” funds – something we should all contribute to before heading down the road to building a retirement portfolio.

Reasons Why...Not

There are major challenges involved in attracting a young person’s attention to the world of saving and investing. Here are some common reasons for NOT dipping a toe in the investment pool:

1. I have a decent job. I still have virtually no money left over to enjoy life, much less save for retirement.

2. I’m just not all that interested in saving money right now.

3. I don’t know the first thing about investing.

4. I don’t have the time to learn how to invest.

5. Investing in the stock market is scary. If I have any surplus cash, I don’t want to lose it gambling on stock.

6. I don’t have enough money to properly diversify my investments.

7. Buy mutual funds… what are those?

8. I’m young - I have plenty of time to plan for my retirement.

9. I have a couple of bad habits that are hard to break. I’ll work on those down the road.

Etcetera, etc., etc.

Worth the Investment

My intent is not to be preachy or critical of other folks’ habits and objectives. My purpose is to convince young people to develop the discipline to save and invest early in life. And to accompany that discipline with the patience and fortitude to avoid joining the ever-present herd of panicky investors. This discipline… this patience… will serve them well throughout life.

And once The Amazing Power of Compounding and an ever-dynamic American stock market begins to reward those ingrained habits, leave that growing retirement fund alone! It’s resilience will be amazing. Yes, there will be setbacks along the way, but that’s why patience is so important. Market corrections like COVID-19 and the Great Recession are part of the deal. Accept that fact and keep on truckin’. Over a lifetime, the trendline will be ever upward. Count on it.