Financial Wellness

by Renee Miller
VP/Cashier, Continental National Bank

Spring is the time of the year to think about getting in shape after the cold winter months. Unfortunately, we don’t often consider what shape our finances are in when we think about health and wellness. Any type of exercise program requires commitment and consistency. Getting in shape is painful when we begin, but the results are worth the effort. The same is true of our finances. Financial discipline also hurts, when you are not used to doing it. Probably the most neglected part of our financial wellness program is our long term planning. Planning for a time when we can’t or don’t want that daily 8:00 to 5:00 work grind has to start years before you plan to retire. Unless you want to work until you die, or unless you want to live on assistance programs in your old age, saving is not an option. Statistics show that in America, the percentage of our income that we save is the lowest in history. Why not consider the advantages of a traditional IRA account? Even though the rates at banks are dropping every day, the good news about money in a bank, versus the stock market is that the FDIC guarantees that you will not lose the principal, and the FDIC recently raised the amount it guarantees on IRA’s to $250,000 per individual. Of course over the long haul, the market will probably provide a higher yield, but that is dependent on the number of years you have until retirement and how much risk you can comfortably handle and still get a good night’s sleep.  

One of the common misconceptions about traditional IRAs is that if your employer provides a retirement program, such as a 401K, you are not eligible to make an IRA deposit. Eligibility is not the same as deductibility. Just because you may have a retirement program at work, doesn’t mean you can’t contribute to an IRA. If you have compensation or earned income, such as net profit from self employment, wages, tips, professional fees, and bonuses you CAN make a contribution up to the annual limit,providing you have earned that much. For 2007 you can contribute up to $4,000 and if you are over 50 you can add another $1,000 for a total of $5,000. There are some benefits of being over 50. The annual limit for 2008 is $5,000, with the $1,000 catch up amount for those over 50. But it’s OK if you can’t afford to put $500 a month away into an IRA. There is no minimum. Just start small and you will be amazed how fast it will grow. Incidentally, you can still make a 2007 contribution to an IRA up until your tax filing date, which for most people is April 15, this year. There is a chart showing how much of a traditional IRA is deductible even if you have another plan. You would be amazed. For instance, a married couple filing a joint tax return can have a fully deductible contribution for 2007 if their adjusted gross income is less than $83,000 and a partial deduction if the MAGI is between $83,000 and $103,000. The earnings on a traditional IRA are tax deferred, which means you don’t pay income tax on the earnings until you cash it in years later. And even then you don’t usually cash it in all in one year, but over your expected lifetime beginning at 70 ?.  

Then there are the wonderful Roth IRA’s. The contribution isn’t deductible on your tax return this year, but if you hold onto it for five years, ALL  the earnings are tax free. This really is a no brainer. There is an annual adjusted gross income cap which makes you ineligible to contribute to a ROTH  IRA of $160,000 for married joint filers. I guess if you make that much you probably aren’t worried about your retirement. It’s hard for me to imagine even now, that the government would potentially let all this income go untaxed. I suppose they could change that sometime, but not on existing accounts. Figure it this way, if you begin putting $5,000 away each year when you are say 25, (out of college and finally have an income source other than your parents) you will have saved $170,000 principal by the time you are 59. Now, if you put this $5,000 into a ROTH IRA at a modest rate of return of 5% over 34 years until you are 59, your ROTH IRA will be worth $455,041! Of that amount, $285,041 will all be interest that is tax free! Depending on your tax bracket at that age you could be saving up to 40% or $114,000 that you would normally owe the IRS! Why didn’t someone explain this to us when we were 25?

One other way to look at it is this; if you and your spouse retire at 65, and you plan to eat three meals a day at McDonalds, or Taco Bell for about $15 per day, and you live until you are 85, you will need $109,500 just to eat. That doesn’t include rent, medications, or lattes.  

Another big concern for everyone is what to do about rising health care costs. Politics aside, any way you look at it, the health insurance problem is going to cost us a lot of money directly, or through our taxes, and there is no easy solution. The HSA or Health Savings Account  is one option that can possibly reduce your health insurance premiums. The whole concept of an HSA is to encourage us to save our own money, tax free, to cover the normal medical expenses we all have. Then, replace the high cost insurance plans we currently have with lower monthly premium health insurance plans that cover only the catastrophic major medical expenses.  

The trouble is, not everyone is eligible for an HSA. It depends on whether you are currently covered by what is called a high deductible health plan. An HSA offers the owner a great deal of flexibility in using the money. The difference  between a “FLEX” plan that you may have at work, where you have some money deducted from your pay each month that you can get back to pay out of pocket medical expenses, and an HSA is that there is no requirement to “use it or lose it”. It is really more like an IRA than anything, with tax deductible contributions and with a 10% penalty tax if you withdraw the money for something other than qualified medical expenses. But if you die, are disabled or when you turn 65 the money can be taken out with no 10% penalty for any reason. It’s something to look at seriously and although a bit complicated, will becoming more and more popular.  

Finally, if you don’t have any insurance at all, which is where a lot of Montanans find themselves; too much income for government programs, not covered by an employer plan and not enough money to afford the huge premiums, there is another option that can save from $180 to $300 in state taxes. This money can be used for all types of qualified medical expenses from insurance deductibles, prescription co-pay amounts, some types of travel costs, and dentist and eye doctor costs just  to name a few. Anything that is not covered by some type of insurance, or not used as a medical expense plan deducted from salary can be used. It’s simple, just deposit up to $3,000 in a Montana Medical Savings Account, either in monthly installments, or one check before year end.  Then when you pay medical expenses just save the invoices and transfer the same amount from your Montana Medical Savings into your checking account. At year end there is one form to complete with your state tax returns. In my opinion, everyone that does not have some type of insurance coverage should open a Montana Medical Savings account to establish a reserve for medical expenses, get the benefit of a little higher interest rate and the tax benefit as well. One closing thought comes to mind from many years ago when I was working at the bank in Livingston. One old gentleman, shabbily dressed, came in every evening to begin cleaning and upon talking to him I found out that he had been working for the bank as the maintenance man for years, but not many people knew him. This, he explained was because he rarely came into the bank during the day, because he felt that the help and the other bank customers looked down upon him because he was simple and poor looking. Come to find out he had like $2 million dollars in that bank. He said he was surprised that he didn’t receive better treatment because he had begun saving at that bank 30 years ago, saving just a little bit at a time, but very consistently.