Last week was a wild ride, with the election, a great jobs report and the Federal Reserve indicating it will keep rates low for now. We’ve had the best two-day rally after an election and best start to the month of November ever, with the S&P 500 up 7.4% in just four days. Even more impressive is that the S&P 500 was up 1% or more four days in a row. The last time that happened was in October 1982. Blasts of strength like this can lead to potential future gains and shouldn’t be ignored. It appears the markets are responding to the likelihood of a split government.
Last week we talked about open enrollment, and we’ve gotten a few more questions about the different tax-advantaged accounts you can choose from. The three different accounts that you will see are Health Savings Accounts, Flexible Spending Accounts, and Dependent Care Accounts. If you’re working for a small company and don’t have access to these, it might be worth talking to HR or the owner. The cost to establish them is pretty minimal, and there are some tax savings for employers as well.
First, Health Savings Accounts, or HSAs. You are entitled to contribute to an HSA if you have a High Deductible Health Plan. You can learn more about those at healthcare.gov. An HSA allows you to contribute before-tax money, up to $7,200 for a family in 2021. If you take that money out for medical costs, such as co-pays, prescriptions, dental work, chiropractors, etc., the funds come out tax free. But the best part is that any unused money carries over. When your account reaches a minimum amount that is set by the account custodian, you can invest the money inside the HSA. This is a great way to save for medical costs in retirement. When you hit 65, you can even take the money out subject to ordinary income tax with no penalties, similar to an IRA.
You may also have the option of a Flexible Spending Account, or FSA. Unlike the HSA where unused money carries over, the FSA is use-it-or-lose-it. You can contribute up to $2,750 for medical expenses. Again, the money goes in before taxes and, if used for medical, comes out tax free. If you have an HSA, you can’t have a regular Flexible Spending Account as well. You can have a limited FSA, for dental and vision only. Either way, if you decide to fund an FSA, make sure you put some thought into how much you expect to spend. A useful feature is that, typically, 100% of the funds are available on the first of the year – so even though you’ll be contributing throughout the year, you can have that dental work done in January. And the FSA can be used for over-the-counter drugs as well.
Finally, you may have access to a Dependent Care Account, or DCA. You can fund the account with up to $5,000 a year pre-tax, depending on tax filing status. You and, if you are married, your spouse, must both work and have either a child under 13 or a dependent adult who needs care. This is a great way to help pay for before- and after-care and day camps. If you are caring for an elderly parent who lives with you, adult day care can be covered. Like the medical FSA, this account is use-it-or-lose-it, so budget carefully. Unlike the FSA, funds are not available until contributed, so you may find yourself waiting to be reimbursed for expenses you’ve already paid.
These are all tools that can help you no matter what your tax bracket. And they are just another example of why financial planning is something that can benefit everyone, regardless of income or net worth. We have a couple of great educational events coming up. You can find them on our website at covingtonalsina.com, or visit our Facebook page to learn about our line-up of educational events.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.