September has historically been the worst month of the year for investors. So much for the notion of “Sell in May and Go Away.” If you subscribed to that so-called market strategy in 2020, here is what you would have missed:

The S&P 500 was up:

• 4.5% in May;

• 1.8% in June;

• 5.5% in July; and

• 7.0% in August.

And don’t forget, those four months of S&P 500 gains were on the heels of April’s 12.7% increase.

Five consecutive up-months for the S&P 500. And the S&P 500 just recorded its best August since 1986. If you need more stunningly good news, consider this:

• Over the past 5 months, the S&P 500 is up 35.4% – its best five-month run since October 1938.

The notion of “Sell in May and Go Away” seems downright absurd right now, doesn’t it?

But now we’re headed into September – historically the worst month for the stock market. Will this time be different?

The September Swoon

The “September Swoon” is a seasonal trend in the stock market and one that has been well documented by researchers and the press.  The fact is, September has historically been the worst month on the calendar for stocks – from 1928 through 2019, the S&P 500 Index has fallen an average of 1.0% in September, according to Standard & Poor’s and Haver Analytics.  February averages -0.1% and May averages -0.2%, the only other months with an average loss over those 90+ years.

Seasonal Trends

Seasonality is based only on the analysis of years of historical data.  A seasonal trend is discovered if a pattern emerges in this analysis, in terms of average performance in a certain month.

It’s important to remember, however, that due to financial, psychological, and political factors, stock market behavior can run completely contrary to the seasonal trend in a given year (as it did in 2019, 2018 and 2017). 

Because the stock market in September has shown markedly different behavior, on average, for 90+ years, these results are not coincidental.  There is a genuine seasonal trend.

Possible Reasons for the September Swoon

So, why does the stock market generally drop in September?  What causes the September Swoon?  Economists and financial analysts have studied this topic, but no one has reached a definitive conclusion.  Here are some of the hypotheses:

Summer vacation:  This hypothesis holds that traders and investors are more likely to sell their stocks after returning from their August vacations or long, Labor Day weekends.  Trading volume tends to decline during the summer, and then investors – especially professional investors – get back to trading from their computers.

Third-quarter:  Many mutual funds have fiscal years ending in the fall, provoking them to sell their losing stocks for “window-dressing” purposes.  This term describes the process of a portfolio manager making cosmetic changes at the end of the quarter because they list their holdings at the beginning of a new quarter – their list of holdings looks better without the poor performing stocks.

Tax losses: Investors begin to sell declining stocks to harvest their tax losses, getting ahead of other investors who sell at year-end.  This hypothesis also draws support from the observed “January effect,” where investors buy back the stocks that they sold for tax purposes. 

Tuition time:  With this hypothesis, many investors must sell large amounts of their stock holdings to pay their children’s tuition bills at colleges, universities, and prep schools.  And for most, the school year begins roughly in September.

Seasonal Affective Disorder (SAD):  A university study suggested that the sharp drop in the amount of daylight in New York City in September might trigger Seasonal Affective Disorder (SAD), a type of depression related to changes in seasons.  As a result, according to this hypothesis, some investors become more risk-averse, so they sell losing stocks, unwilling to wait for things to get better. 

Cultural trends (summer vacations, back-to-school in the fall), regulations and taxes (third quarter, tax losses), and even psychological effects of weather (seasonal affective disorder) have been offered as explanations for this strange September market trend. Unfortunately, none of these explanations has been proven, frustrating researchers who seek reasons for patterns in the stock market.  Maybe each of these factors contributes to the trend.  No one really knows the reason for the September Swoon.

Should You Change Your Portfolio?

If someone discovered a convincing explanation for the September Swoon, would this help investors?  Probably not.  Savvy investors might jump the gun, selling stocks in August, and then others might try to beat them by selling in July.  Of course, the seasonal September pattern would then disappear, replaced by some other trend. 

But even if there is no proven reason for this September Swoon, shouldn’t an investor make changes, anyway?  Because of this seasonal trend toward declining stock values in September, traders and investors might be inclined to alter their portfolios.

However, the September Swoon is based on an average, the average monthly performance of the stock market since before the Great Depression.  While September is, on average, the worst month for stocks, this doesn’t mean that each individual September is bad.  In fact, this “September Swoon” notion did not hold true in 2019, 2018, or 2017 (2016 was down 0.12%). No one knows the definite reason for this 90+-year “September Swoon”, so trying to guess which year will be bad is a fool’s game. 

Seasonality vs. Market Timing

Remember, there is a difference between market timing and seasonality.  Seasonal trends reflect how the market will behave in particular months as part of a long-term trend.  Market timing is based on short-term price patterns.  Timing the market perfectly is, of course, impossible.  As discussed above, seasonal trends are grounded in the analysis of years of data, but not every year is identical. 

It is important to remember that investors who trade frequently spend more time and pay more commissions, but they do not necessarily make more money.  The buy-and-hold strategy might be best for you. A knowledgeable financial advisor who understands you and your goals can help.

Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

CARES Act Benefits For Businesses  

The Coronavirus Aid, Relief, and Economic Security act – the CARES Act – is the largest economic bill in U.S. history and was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”

Spanning close to 900 pages, the CARES Act builds upon earlier versions of federal government support and is the third such bill, coming shortly after the “Coronavirus Preparedness and Response Supplemental Appropriations Act” and the “Families First Coronavirus Response Act” were approved.

Here are a few highlights that might be of interest to business owners, but it’s important to remember that not all provisions of the CARES Act are available to every business.

Protecting Paychecks

The Paycheck Protection Program offers loans to small businesses that are fully guaranteed by the federal government. The loans are designed to cover eight weeks of operating costs during the crisis – so that means covering payroll and the costs of rent, utilities, mortgage interest, etc. These loans may be fully forgiven so long as the business complies with the federal government rules.

Employee Retention Tax Credit

A refundable payroll tax credit up to $5,000/employee. But in order to qualify, a business must have closed completely/partially, or revenues had to have declined by more than 50% relative to the same time last year.

Sick and Family Leave Tax Credits

Credits for sick and family leave costs for businesses with fewer than 500 employees. Businesses with no employees (sole proprietors) are eligible to receive refundable tax credits as well.

Deferral of Social Security Taxes

Businesses can defer payment of the employer share of Social Security tax incurred from March 27th through December 31st, but the deferred taxes must be paid over two years.

It’s Complicated

As a business owner, you’ll have choices to make when deciding which benefit to use. For example, a business cannot apply both the Paycheck Protection program and the employee retention tax credit. There are a lot of nuances within the CARES Act to think through. Set up a CARES Act Benefits Consultation by clicking here or email me at ivan@otbfinancialplanning.com to see how these may apply to you.

CARES Act Benefits For Individuals

The Coronavirus Aid, Relief, and Economic Security act – the CARES Act – is the largest economic bill in U.S. history and was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”

Spanning close to 900 pages, the comprehensive aid package covers a lot, including direct payments to Americans, expanded unemployment insurance, changes to retirement rules and billions of dollars in aid to businesses.

The CARES Act builds upon earlier versions of federal government support and is the third such bill, coming shortly after the “Coronavirus Preparedness and Response Supplemental Appropriations Act” and the “Families First Coronavirus Response Act” were approved.

Here are a few highlights that might be of interest to individuals:

Rebate for Individuals

The bill would provide a $1,200 refundable tax credit for individuals ($2,400/joint). Additionally, taxpayers with children will receive a flat $500 for each child. The rebates would not be counted as taxable income.

The rebate does phase out as follows:

• Starts to phase out at $75,000 for singles and completely gone at $99,000

• Starts to phase out at $150,000 for married joint filers and completely gone at $198,000

• Starts to phase out at $135,000 for a head of household filers

Unemployment Expansion

Unemployment insurance assistance now includes an additional $600 per week payment to each recipient for up to four months plus extend benefits to self-employed workers, independent contractors, and those with limited work history. The government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend benefits for an additional 13 weeks through December 31, 2020.

Waiver of 10% Withdrawal Penalty

The 10% penalty for early withdrawals from IRAs and retirement accounts is being waived for 2020, subject to a maximum allowable withdrawal of $100,000.

Withdrawal amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.

Required Minimum Distributions

For 2020, individuals expected to take Required Minimum Distributions will not be required to withdraw that amount from their IRA or retirement plan.

Coronavirus-Related Distributions

The CARES Act allows for “Coronavirus-related Distributions” which allow participants in IRAs and retirement plans the ability to take a qualifying withdrawal and pay those funds back without tax or interest over a 3-year period. The withdrawal is subject to a $100,000 limit.

There are qualifications for Coronavirus-Related Distributions, however, including:

• Personal, spouse or dependent diagnosis with COVID-19

• Quarantined, furloughed, laid off, or work hours reduced because of COVID-19

• Unable to work due to lack of childcare due to COVID-19

• Own a business that is closed or shortened hours due to COVID-19

• Other factors later specified by the IRS

Retirement Loans

For those unable to meet the Coronavirus-Related Distributions criteria, withdrawals from retirement plans in the form of a loan exists.

Generally speaking, those loans need to be repaid over 5 years and cannot exceed $50,000 or half the vested account value, whichever is less. Now, however, the amount is doubled so that one can take a loan up to $100,000 or half of the vested account value, whichever is less. The loan still needs to be repaid, but payments can be deferred up to 1 year after the loan is taken.

Your Financial Advisor

As with all federal government programs, there are rules, deadlines, and qualifications that can be difficult to decipher. The fact is that while this is by far the largest economic bill in America’s history, it is near impossible for any bill to take into account every unique situation.

So, before you go down a path that might not be in your best interest, set up a CARES Act Benefits Consultation by clicking here or email me at ivan@otbfinancialplanning.com.

This is especially important as the CARES Act is bill number three. And Washington has been talking about bill number four, which will undoubtedly bring more economic relief and changes.

How this late-winter, coronavirus-induced market turbulence affects you depends upon how old you are. For people in or near retirement, it is scary – yet there are ways to offset a shrinking stock portfolio. Regardless of your age, look at market dips as opportunities, not threats.

Eleven Trading Days for the Record Books

For the last part of February and at least through the first third of March, the stock market could be described as “tumultuous.” The S&P 500 Index, the DJIA and NASDAQ are all off more than 10% from recent highs.

The nasty coronavirus is somewhat to blame, but that would be much too simple:

·       Oil was in free-fall

·       The Federal Reserve cut rates by 25 basis points in an emergency meeting

·       Fed-watchers think another 100 basis point rate cut is coming, pushing rates to almost 0

·       Every single one of the 11 S&P 500 sectors is in the red YTD, with the Energy sector off over 40% and the Financials and Materials sectors off over 20% YTD

And here are some history-making days to think about: from February 24th through March 9th, there were 11 trading days:

·       Those 11 trading days saw 5 of the 7 largest one-day-point-losses for the DJIA in history

·       Those 11 days also saw the two best-one-day-point-gains for the DJIA in history too

Now Might be a Good Time to Invest

How such market action, which is normal, impacts you financially and psychologically depends on where you are, age-wise. If you are younger and have long investment time frames relative to your goals, a market dip can be your friend. For example, let’s say you have young children and are saving for them in a 529 college savings plan, and college is a number of years away. If your account is down along with the market, compared to a previous high point, consider adding money.

Ditto if you are saving for retirement in a 401(k), individual retirement account or similar plan. If you save regularly, dollar cost averaging works. That’s where you invest a set amount on a regular schedule, perhaps at the first of each month. When stocks decline your contribution buys more cheaper shares and less expensive shares. Over time your average share cost is less than the current share price.

Is Opportunity Knocking?

If you are retired or some other life event has forced you to live off of your savings, naturally, you are nervous amidst scary headlines and histrionics of media commentators during significant market declines.

But consider heeding the words of the legendary investment manager John Templeton, who famously counseled, “Buy when there is blood in the streets.”

Occasionally you get event-driven market routs such as the aftermath of 9/11 in 2001 and the debt crisis of 2008. In your life span as an investor, you have hopefully saved for rainy days, kid’s educations, future retirement and life-enriching experiences like global travel. When markets dropped, you should have dropped in extra funds. It’s likely that you never bought at the bottom, as that is obvious only with 20/20 hindsight.

Your Investment Policy is Critical

The key is a sound investment policy that allows a cushion – in money market funds or other safe and low-volatility repositories that provides living expenses without having to sell stocks at low levels. Alternative investments in real estate, private equity and financing, energy infrastructure, etc., may also provide cash flows to supplement living needs without selling stocks.

You also may focus on value stocks with good dividends and reasonable P/E ratios. Such portfolios eschew aggressive growth stocks that pay no dividends and have no profits. A hot story may sell, but do economic fundamentals underpin the stock value?

Big Picture

No one likes to see markets continuing to set one-day point-drop records. And while the media continues to scream that the sky is falling, it’s not.

Remember that through the first few months of 2020, we see:

• Low and declining energy costs

• Low and declining interest rates

• Low inflation rates

• Easy monetary policy

• Low unemployment (50-year low)

• A stable housing market

The sky is not falling as winter 2020 comes to a close. But rain clouds and storm fronts can be vexing, unless you are prepared with rain gear. A comprehensive investment policy is the financial planning equivalent of rain gear. You may not be singing in the rain, but you will maintain peace of mind.

According to the College Board, the most recently published figures of the average annual cost of tuition and fees at a public university for a school year was $9,139 for in-state students and $22,598 for out-of-state students. The average cost of a private university was much higher at $31,231.

Thankfully, much like tax-advantaged accounts designed to help us save for retirement, there are
tax-advantaged accounts designed to help families set aside funds for future college costs. Named after Section 529 of the Internal Revenue Code and created in 1996, there are two types of tax-advantaged college savings programs: pre-paid tuition plans and college savings plans.

The attraction of 529 college savings programs is that both provide for investment earnings to grow on a tax-deferred basis. In addition, funds used to pay for qualified education expenses may be withdrawn free of tax. Nonqualified withdrawals, on the other hand, are subject to ordinary income tax and a 10% penalty on earnings. Let’s examine the differences.

Prepaid Tuition vs. College Savings Plans

One type of 529 programs is the prepaid tuition plan, which allows you to lock in tuition rates at eligible state colleges and universities.

Most are sponsored by state governments and allow account holders to “purchase” tuition at today's rates and “redeem” the credits in the future when your child is going to college. In effect, the state is absorbing tuition increases during the years in between.

Pre-paid tuition plans allow you to pay for tuition in one payment today or through installments, but generally don’t cover expenses such as room and board. Your contributions are then pooled with other plan participants and invested by the state, then transferred to the appropriate school when your child starts college. But since the state is managing the investments, you have no investment options.

In contrast, college savings plan typically offer several investment options, at varying levels of risk, depending on how close the child is to college. Plus, college savings plans allow students to attend any accredited post-secondary school, public or private, irrespective of the state where you live or where the college is located.

In addition, although the investments are managed by a state-designated professional money manager – typically through mutual funds – and are allocated to mutual funds based on the age of your child (the beneficiary), you generally get to determine which investment is appropriate or you, based on your risk tolerance and other factors.

The investment objectives of the mutual funds are also what most people are familiar with: equity mutual funds, fixed-income mutual funds, and money market mutual funds or age-based mutual funds that shift the allocation among stocks, bonds and cash depending on the age of your child.

The following chart was copied from the Securities and Exchange Commission and outlines many of the major differences between prepaid tuition plans and college savings plans:

College Savings Plan

Prepaid Tuition Plan

• No lock on college costs.

• Covers all "qualified higher education expenses," including:

• Tuition

• Room & board

• Mandatory fees

• Books, computers (if required)

• Many plans have contribution limits in excess of $200,000.

• No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.

• No age limits. Open to adults and children.

• No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.

• Enrollment open all year.

• Locks in tuition prices at eligible public and private colleges and universities.

• All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.

• Most plans set lump sum and installment payments prior to purchase based on the age of beneficiary and number of years of college tuition purchased.

• Many state plans guaranteed or backed by the state.

• Most plans have age/grade limit for the beneficiary.

• Most state plans require either owner or beneficiary of the plan to be a state resident.

• Most plans have a limited enrollment period.

 

Which is Right for You?

Your own financial situation will determine whether a prepaid tuition plan or college savings plan is the preferred vehicle to help someone through college. Part of this determination includes the effect that either will have on your student’s financial aid eligibility and your own estate planning. That being said, as a financial advisor I worry about prepaid tuition plans for a few reasons:

First, there just are not that many states providing prepaid tuition plans and accepting new applications. While this list is always changing, right now I found 10 that are accepting new applicants: Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington.

Second, I really don’t like to rely on a state to fulfill a financial guarantee, especially with shrinking state budgets.

New Mexico, for example, terminated its program altogether; Colorado is no longer open to new account holders; and Alabama froze its payouts at 2010 levels.

That doesn’t mean that college savings plans are not without flaws either. My “worry” with college savings plans are fewer, however: some college savings plans are very expensive and some don’t have great investment options from which to select. With a bit of homework, however, both of these worries are mitigated.

The Key to Saving for College

The reality is that depending on the number of children you have, saving for college will be the most expensive item you encounter, outside of saving for your retirement. So much like I counsel clients with their retirement, the key is to start early so that your savings have more time to grow. Feel free to email me at ivan@otbfinancialplanning.com if you have any questions or would like to start saving for college today. If you found this blog post helpful, subscribe below.

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Why You Need Commercial Umbrella Insurance

In our increasingly litigious society, business owners, especially those in the fitness industry, must be prepared for the possibility of lawsuits. You may have seen CrossFit, Inc. be involved in a number of lawsuits and think that something like this may not happen to you. Here is an example of Kansas City area CrossFit being sued and ultimately losing when a member hurt his back during a 1-rep max deadlift. The jury found the man 50% negligent, yet he was still awarded $400,000 in damages which were split between CrossFit, Inc. and the gym owner.

A lawsuit could result in large legal fees and settlements. In addition, negative publicity and lost time resulting from court-related activities can have a substantial impact on your business.

A commercial umbrella liability policy is designed to help protect you and your business from claims that can be catastrophic for your business. It can provide protection above the required liability limits of your commercial general liability, auto liability, and employer’s liability (workers compensation) policies.

How Commercial Umbrella Insurance Works

Umbrella coverage takes effect when the limits of your underlying policies have been exhausted, and may also cover what your current business policies exclude. Because it pays only after your underlying policy is exhausted, its usually very affordable. Typically, a commercial umbrella policy may offer extra protection for legal defense expenses, losses occurring outside the U.S., and personal injury or property damage claims. In addition to covering the named insured, it may also protect your coaches and others you agree to protect under a written contract, at least to the extent that losses occurred within the scope of business duties.

However, while umbrellas provide for losses and liabilities above and beyond the scope of other insurance, certain exclusions may still apply. In most cases, you will be expected to maintain your underlying insurance, without alterations in terms or conditions, during the term of the umbrella policy. You may also be required to carry certain amounts of insurance in these underlying policies in order to qualify for an umbrella. But, the cost for your umbrella coverage will likely be lower if your primary deductibles or policy limits are higher.

The Important of Regular Insurance Policy Reviews

Be sure to review your insurance policies regularly because the amount of umbrella coverage you need may change over time. For instance, changes in your underlying policies, such as new exclusions or limitations, may leave gaps in your umbrella coverage. Also, inflation and ever-increasing legal awards often necessitate an increase in coverage.I recommend using a fee-only advisor, such as Outside The Box Financial Planning, because fee-only advisors do not receive commissions or other compensation from insurance companies for selling their products. This way you get the most objective advice. 

Your primary insurance may not always provide all the protection you need, especially when an expensive court settlement is involved. Contact us at 312-554-5889 or ivan@otbfinancialplanning.com for more information on how you can help protect your business from lawsuits and other potentially catastrophic losses.

Dollar Cost Averaging - Creating Good Money Behavior

The increase in volatility to start 2018, coupled with the almost 9-year bull market run has caused many sophisticated investors to question when to buy and when to sell. So, it’s important to remember that there is a very simple investment strategy that doesn’t require you to stare at trading screens all day – Dollar-Cost-Averaging.

It isn’t new and exciting, but many a successful investor has proven its worth. The principle behind it is this: You put the same amount of money into the same investment on the same day each month. Those months when the investment’s price goes up, your set amount does not buy as many shares. But when the investment‘s price dips, you get to buy more shares at a cheaper price.

Guess what? When the price goes back up, all those shares you bought cheaply make you some money. Those shares you bought when the price was high look good, too.

There are a few reasons to invest this way:

Celebrate Twice

First, it takes the guesswork out of trying to predict what the stock market is going to do. It’s easy to lose money seeking to time the market. Even professional investors can be pretty bad at it. As long as you feel good about the investment you buy, you know that the fundamentals are right, and your situation has not changed, you shouldn’t care what the stock market is doing day to day.

In fact, maybe you should celebrate when the market dips and you buy because you get to buy more shares that you think have great long-term prospects.

And you celebrate again when the market rallies because all your shares are more highly valued. You win either way. Also, you won’t have to put so much time and energy into investing. You can focus on your career and family rather than obsess over your portfolio.

Disciplined Approach

Next, Dollar-Cost-Averaging creates a disciplined approach to building wealth. You are now on a path to save and invest regularly, building wealth one month at a time. Yes, we have all read about those hot stocks that made someone rich overnight. But for most of us, it’s going to take a working lifetime to accumulate our wealth.

It Doesn’t Take Much to Start

You can do this for as little as $100 per month and many platforms don’t even have a minimum. You don’t need thousands of dollars to get started or to continue your dollar cost averaging plan. So, no excuses.

Some Things to Think About

·       Start with a monthly amount that won’t break your bank. This is money you won’t miss on a monthly basis.

·       Commit to a Dollar-Cost-Averaging program of at least 12 months. It takes time to build wealth and see the results of your efforts.

·       Don’t wait for the price to go up or down. The key is consistency. Don’t vary the amount based on how much is in your savings account that day, either. Set it up for the same day, same amount, same investment.

·       Don’t stop it when the market retreats. If you still believe in your investment, keep investing. Remember, in a down market you are buying more shares for less money.

Final Thoughts

The Dollar-Cost-Averaging approach is about building wealth steadily, consistently and with discipline over time. It’s about creating and strengthening good money behavior. When you do this for 10 years and see your accumulated balance, you won’t care that you didn’t invest exactly on the best day in the market in 2018.

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How to Avoid Scams at Tax Time

Here’s what to know and how to protect yourself.

Identity thieves often swipe your bank or credit card account numbers, birth date information or Social Security Number (SSN) to steal from your accounts, open a new and phony account or make illegal purchases. Some 15.4 million consumers were victims of identity theft or fraud last year, according to a new report from Javelin Strategy & Research.

All sorts of nefarious schemers can come after you via the phone or email. Your tax return offers a trove of your personal information, and this time of year scammers also prey on your apprehension about paying taxes.

The Internal Revenue Service recently published its latest list of scam warnings, freely admitting, “It’s true: Tax scams proliferate during the income tax filing season.”  

Among IRS tips:

• Beware of unexpected communication at the start of tax season that claims to come from the IRS.
• Don’t fall for phone and phishing email scams that use the IRS as a lure. The fake messages typically probe you for personal information thieves often pose as the IRS offering a bogus refund or warning you to pay past-due taxes – sometimes, with phone scams, threatening you with immediate arrest if you hang up.
• The IRS sends letters by postal mail and initiates no contact with taxpayers by email to request personal or financial information. This means any e-communication, such as text messages and messages over social media.
• The IRS doesn’t ask for personal identification numbers (PINs), passwords or similar confidential information for your credit card, bank or other accounts.
• If you get an unexpected email, open no attachments and do not click links in the message. Forward the email to phishing@irs.gov. See more about reporting phishing scams involving the IRS at the agency’s website.

(Note: Only IRS.gov is the website of the U.S. government's Internal Revenue Service.)

Source: Federal Trade Commission, Consumer Sentinel Network.

To protect against scams and identity theft:

• Don’t carry your Social Security card or any documents that include your SSN or Individual Taxpayer Identification Number (ITIN). Don’t keep forms containing that information in your car, either.
• Don’t give any business your SSN or ITIN just because someone who claims to represent the company asks. Give such information only when required and when positive who you’re talking to.
• Check your credit report every 12 months. Stay aware of your credit status and learn quickly about any illegal use of your credit or accounts.
• Secure personal information in your home.
• Protect your personal computers with firewalls and anti-spam and anti-virus software, updating security patches and changing passwords for your home Internet accounts.
• Give no personal information over the phone, through the mail or on the Internet unless you initiated the contact and are sure of the recipient.
• Choose a tax preparer carefully. Most preparers provide excellent service a relative few are unscrupulous. The IRS recommends watching for preparers who try to manipulate or change your income figures or makeup deductions to qualify you for tax credits and unusually large refunds.

Tax season brings enough to worry about. Cross identity theft off your list.

When planning for retirement, most Americans think mainly about using tax-advantaged savings vehicles like 401(k) or individual retirement accounts, while failing to consider the triple tax advantages associated with saving for future health care costs using a health savings account, or HSA.

First established under the Medicare Modernization Act of 2003, HSAs are tax-exempt savings plans that must be paired with a high-deductible health insurance plan that meets certain criteria. An HSA owner can make tax-deductible (or pre-tax, if through an employer) contributions to the account, which can in turn be spent tax-free on qualified health care expenses, including on certain health insurance, Medicare, and long-term care insurance premiums. Moreover, any interest or other capital earnings from the account accrue tax-free as well. Thus, unlike any other tax-advantaged savings plan, the HSA offers triple tax benefits: tax-free contributions, tax-free earnings, and tax-free distributions.

Any taxpayer who is not enrolled in another health insurance plan is eligible to open a health savings account. Thus, HSAs are often used by self-employed individuals, small business owners, or those who otherwise lack access to a government or an employer-sponsored plan. Increasingly, however, high-deductible plans coupled with an HSA are being offered to employees as employers seek to shift their health care costs away from the company and onto workers. 

Yet even if the plan is offered through an employer and the company makes contributions to employee HSA accounts, all the funds in an HSA are held by the account owner, not the employer, and any unused balances in a worker’s account go with the employee when he or she leaves the company. The accounts are managed by a trustee or custodian, such as a bank, insurance company, or brokerage firm. Individuals looking to use all or a portion of the funds for retirement should consider opening an HSA with a financial institution that offers mutual funds or other long-term investment options.

While HSAs are similar in some ways to health care flexible spending accounts (FSAs), the maximum amount that can be carried over each year in an FSA is $500, whereas in an HSA there are no limits on the amounts that can be carried over, or on when the funds are used. Thus, HSAs are highly attractive vehicles for saving for medical expenses in retirement, when most people’s health care expenses are highest.

There are, of course, a number of restrictions associated with HSAs. The IRS stipulates that for 2018, the annual deductible of an HSA-compatible health plan cannot be less than $1,350 for self-only coverage or $2,700 for family coverage and that the annual out-of-pocket expenses (deductibles, co-payments, and other amounts; but not premiums) may not exceed $6,650 for self-only coverage or $13,300 for family coverage. The HSA contribution limits in 2018 are $3,450 for an individual and $6,900 for family coverage. Individuals over age 55 can put in an extra $1,000 per year in catch-up contributions.

Contributions to an HSA can be made only up until the account owner becomes eligible for Medicare, usually at age 65. However, an individual can continue to contribute after reaching age 65 if he or she has not yet signed up for Medicare. Conversely, an individual can no longer contribute if he or she qualifies for Medicare before reaching age 65.

Especially for higher-income savers who are generally healthy and do not need to draw down the funds to pay for medical expenses, HSAs are a potentially effective vehicle for saving for retirement. According to a study by the Employee Benefit Research Institute (EBRI), savers who contribute the maximum allowable amount in an HSA over 40 years and take no distributions over that period could accumulate up to $360,000 if the rate of return was 2.5%, $600,000 if the rate of return was 5%, and nearly $1.1 million if the rate of return was 7.5%.

Until the account owner turns 65 or becomes eligible for Medicare, the funds in an HSA can only be used to pay for qualified medical expenses. Withdrawals used for nonqualified medical expenses prior to this point are subject to income taxes and a 20% penalty. However, after age 65 or Medicare eligibility, withdrawals for non-medical expenses are not subject to the 20% penalty, though they are subject to income taxes as they would be from a traditional IRA. Thus, an HSA can be used as a back-up retirement plan—and one that has a number of added advantages, including no minimum distribution requirements and no income limits on contributions.

Another attractive feature of the HSA is that the tax-free distributions do not have to be taken in the year the qualifying expense is incurred. For example, the account owner could keep a list and receipts of the qualified health care expenditures he or she incurred while contributing to an HSA, but which were paid for at the time with after-tax dollars. The individual could then withdraw funds from the account for another reason, while reporting an equal amount of health care expenditures from prior years his or her tax return for the year in which the withdrawal was made.

In addition, an HSA owner between the ages of 59½ and 65 who also has IRA or 401(k) assets can take distributions from these retirement accounts and deposit the funds directly into an HSA. While the individual will owe tax on the distribution, he or she can reduce the tax owed by taking a deduction on the contribution to the HSA. This strategy provides a tax-efficient way to give the owner more funds that can be spent tax-free on medical expenses in retirement.