Wednesday, October 28, 2015

It's Open Enrollment Season!
It's that time of year again - open enrollment season! This is the period where employees are given the chance to sign up for or make changes to the benefits programs offered by their employers. You can add or change your insurance coverage and sign up for flexible spending accounts for both medical and child care expenses for 2016. It's these last two I want to talk about.

What Is A Flexible Spending Account?

A flexible spending account (FSA) is a special account you put money into via payroll deductions that can be used to pay for qualifying medical or dependent care expenses. The benefit is that you don't pay taxes on money put into these accounts. So if you earn $3,000 a month and put $200 total a month into these plans, you only pay income tax on $2,800 of income. Why is this good? Apart from the obvious answer of "paying less taxes is good," a medical FSA allows you to deduct more medical expenses than you otherwise could. (Although FSA contributions are not "deductions" you take on your income tax return, they allow you to pay for medical expenses with pre-tax dollars, which in effect, is what a deduction does.)

If you were to itemize your taxes and claim deductions for medical expenses on your income tax return, you would not be able to deduct medical expenses less than 7.5% of your total income. By using a FSA account, you can start saving taxes on the very first dollar of medical expenses. Let's look at our above example where you earn $3,000 a month. That's $36,000 per year. Without a flex spending account, if you decide to deduct your medical expenses on your income tax, you would only be able to deduct expenses over 7.5% of your income. In this case, that would be $2,700. A single person making $36,000 has an effective income tax rate of about 11.5% (using 2015 tax rates). Because that first $2,700 of medical expenses is not deductible, you pay tax on that money - which amounts to $310.50.

But if you used a medical FSA and put $2,700 into it, ALL of that money is tax free. So just by using a FSA, you've saved yourself $310.50. That's the benefit of FSAs.

There is also a flexible sending account that can be used for dependent care expenses and it provides the same tax benefits for child care expenses.

Note that these are two separate types of accounts. You cannot use funds from your medical FSA to pay for dependent care expenses and vice versa.

What Are The Drawnbacks?

Use It Or Lose It

The problem with these accounts is that they are "use it or lose it" accounts. When you set up your contributions during open enrollment, whatever amount you choose to contribute is unchangeable for the entire year and, if you do not use all the money you put into these accounts, you lose that money. (Some plans allow you the option to roll over unused funds to the next year's plan or let you use unused funds for the first couple weeks of the next year.)

So you have to be good at estimating your future expenses. For regular, recurring costs, like monthly child care payments, this can be fair easy to do. For things like medical costs, it can be a bit trickier. How do you know how many times you are going to see the doctor next year?

Contribution Limits

There is also a limit as to how much you can put into these accounts each year. For 2016, the contribution limits for a medical FSA are a minimum of $120 and a maximum of $2,550. The limits for dependent care contributions vary, depending on if you are single or married. Single filers can contribute up to $5,000. Married filers can contribute $2,500 per spouse. As with anything tax related, there are all sorts of other limitations and conditions, so check with your employer's HR department or your tax advisor for full details.

Limits On Use

What you can use the money for is also limited, You can't use funds from your dependent care account to pay for a baby sitter when you and your spouse go out to dinner. You can use it, however, to pay for a babysitter while you go to work. For medical expenses, most over the counter medicines are not eligible, but all prescription medicines are. Co-pays for doctor visits are, as are any insurance deductible payments. Costs for contact lenses, eyeglass lenses and frames, and diabetic supplies are also eligible.

Potentially Lots Of Paperwork
As you might expect, the paperwork for this can be a bit overwhelming. There is usually a third party company that manages the accounts and reimbursements. To make a claim, you have to send them proof of payment and proof of service. That means getting receipts for each doctor visit. Luckily, many plans provide a pharmacy card that can be used like a debit card at certain pharmacies. Since these pharmacies have flagged which items are eligible for a medical FSA in their computer systems, no paperwork is needed when buying these items. The purchase information is automatically sent to the plan administrator for you. Because you paid with your flex spending card, the money comes directly out of that account and you don't need to get reimbursed.

So How Do You Choose How Much To Put Into These Accounts?

For a dependent care account, this process is usually easy. You likely pay a monthly fee for before or after school care (or daycare if you child is not yet old enough for school). Just multiply that by 12 to get your annual contribution amount. If your child is in school, don't forget the summer months. Your costs may be more for those times they aren't in school and need care all day long. Also, keep in mind the school year and calendar year do not sync up. This bit me this year. My daughter was in fifth grade last year and I planned my FSA contributions based on her attending after school care for an entire year. But when she entered sixth grade in August, she starting riding her bike home after school and didn't need after school care. Because FSA contributions are fixed for the year, I could not change it and so I lost five months of contributions because I had no child care expenses to claim for August through December. D'oh!

Medical FSA contributions are a bit more challenging. First if you are taking any medicine regularly, at the very least contribute the amount your prescriptions cost for an entire year. Next, I figure at least 2 doctor visits per person per year, so add in co-pay amounts for those. Finally, if you wear contacts or glasses, consider if you want or need to get new ones in the coming year. Costs for eye exams, contacts, and eyeglass lenses and frames are eligible expenses. These can run into the hundreds of dollars, so if you know you're going to need some, add that to your contribution amount. Again, because of the use it or lose it nature of the accounts, if anything, it's best to under estimate rather than over estimate your future medical expenses.

If you use any kind of budgeting or expense tracking tool, such as, it might be really easy for you to look at how much you've spent on each type of expense over the past year and use that as a guide to selecting your contribution amount for the next year.


Using flex spending accounts can be a pain in the butt with all their paperwork requirements, but you can save hundreds of dollars in taxes by using them.

Wednesday, October 21, 2015

Don't Leave Money On The Table: When Maxing Out Your 401(k) Might Lose You Money

I came across this post on Reddit and it made me aware of a potential situation where you might lose money if you max out your 401(k). I'll recap the post here and try to explain things in a more clear manner (at least to me) than the original author has. The numerical examples I use are the same ones he used.

If your employer offers a 401(k) match AND you are maxing out your 401(k) contributions, you may find your self in a situation where you might miss out on some of that matching money. Now, to be sure, this is going to be a situation few people find themselves in - I personally don't know anyone who is maxing out their 401(k) contribution - but it's worth mentioning in case someday you are able to.

The Problem Scenario

Here's the setup: the IRS has set the maximum amount you can contribute to a 401(k) at $18,000 for 2015. (OK, technically Congress set the limit via law, but the IRS enforces it.) This limit does NOT include any matching funds your employer contributes. Let's assume your employer will match your contributions up to 5% of your salary. The actual amount of the match doesn't matter in this scenario, but we'll go with 5% to have some numbers to work with.

You're a great saver with a high income and have elected to contribute 25% of your $104,000 salary to your 401(k). You get paid biweekly, which means you get 26 paychecks per year. Your pre-tax per paycheck earnings are $4,000, so your 401(k) contribution is $1,000 per paycheck. Each paycheck, your employer matches your contribution up to 5% of your pay, which means they contribute $200 per paycheck (5% of your $4,000 paycheck).

Because the IRS limits you to $18,000 in contributions, after your 18th paycheck, your 401(k) contributions will stop. Once those stop, there is no contribution for your employer to match, so for paychecks 19 through 26, they don't contribute anything. So you've lost $1,600 in matching contributions (8 paychecks times $200 per paycheck).

Now, if your employer is on top of things, they should realize this and at the end of the year, they would make a final "catch-up" contribution to true up. This is because they have agreed to match 5% of your salary and, after their contributions stopped at the 18th paycheck, they have only contributed $3,600, which is less than the 5% of your salary ($5,200) that they promised.

The question then becomes - is your employer on top of things? Will they realize this and actually make the catch up contribution? Will you remember to check to make sure they did? The end of the year is a hectic time with the holidays and vacations and visiting family. It's easy to forget things. Is this one more thing you want to keep track of? I didn't think so.

Here's something else to consider: what if you leave the company after paycheck 23? You'll miss the end of year true up and I'd be willing to bet no one in payroll will remember to perform an end of employment true up just for you. If you forget to bring it to their attention (and you probably will), you'll have lost out on $1,000 in matching contributions (the company match for paychecks 19 through 23).

How To Fix It

There is a relatively easy solution to this problem: adjust your contribution rate so that you don't hit the IRS maximum until your last paycheck of the year.

The maximum contribution is $18,000, which represents about 17.31% of your pay. Change your 401(k) contribution amount from 25% to 17.31%. You'll still be contributing the maximum amount per year, but now, because you are contributing every paycheck, you'll automatically get your employer match each paycheck and won't have to worry about the missing match scenario, either at the end of the year, or if you leave the company.

Most companies only allow contributions to be specified in one percent increments, so you'll have to go with either 17% or 18%. (If you go with 17%, you'll miss maxing out your 401(k) contributions by about $322.)

Another benefit to this method is you can take a little more advantage of dollar cost averaging because your stock or mutual fund purchases will be spread out over 26 pay periods rather than 18.

Although you are doing great by maxing out your 401(k), don't leave money on the table by inadvertently missing some of your employer match!

Wednesday, October 14, 2015

Is The Model X Telsa's First Big Mistake?

The Model X is now finally in production and is shipping. People seem to love it. It's an amazing vehicle and a technological marvel. But did Tesla miss the boat on this one? Is this Tesla's first big mistake? I think it very well could be.

The first thing to note is the price. The Signature Series, which is fully loaded, checks in at $132,000. The low end, non-performance base model is going be about $93,000. Final details haven't been announced, but Musk has tweeted it will be about $5,000 more than a Model S, which is $88,000.

Musk has also said that they might have over-designed the car:

I’m not sure anyone should really make this car. There are far more things there than is needed to sell it.
 All that technology is awesome and makes one hell of a car, but it also drives the price way up.

Another possible misstep is the middle row of seats - they don't fold down. In February 2012, Musk presented the Model X to the world and said "All the seats fold down. You can practically fit a queen size bed in there." Except, now in the final production model, they don't. This cuts down on the amount of cargo that can be put in the car. To be sure, it can still hold a large amount of stuff, especially when you consider the Model X also as a frunk, like the Model S. But the inability to fold down the middle row of seats means you may have a hard time doing something like putting a bicycle in the back. Or a queen size mattress. People have cancelled their purchases because of this. Being able to haul large items like this is what many people want in an SUV.

There is no trailer hitch, so don't think about towing anything unless you add an after-market hitch. (Tesla has said a towing package will be offered in 2016.)

Given these issues, some internet commenters are saying the Model X isn't really an SUV - it's a minivan. I find it hard to disagree.

Almost all of the reviews I have read say the car handles really well. "Just like a Model S" is a common phrase running through almost every review. This exposes another problem: I think most Tesla cars will end up handling very similar to each other. The battery packs will give all models a low center of gravity and thus, great cornering and handling. The electric motor will give them crazy acceleration. So what's left to differentiate the models? Battery range, body style and features. This may be why Elon put so many gizmos into the Model X, but, as I mentioned, this raises the price.

The high price is causing concerns for investors. I don't see how another uber-expensive car is going to help Tesla grow. The Model X doesn't really open up new markets for the company. They are still only going to be able to be purchased by people who can afford a $100,000+ vehicle and there aren't too many of those people around these days. Yes, Tesla has a backlog of some 25,000 orders to fill. But remember that these reservations were placed starting way back in 2012, so it represents three years of pent-up sales. Once that backlog is worked through, I'm not sure what kind of yearly sales will materialize.

After reading Musk's biography, I believe he is driven to achieve perfection. That's great for producing fantastic vehicles and pushing the industry forward, but not so good for producing low cost vehicles. I honestly don't see how Musk can create a Model 3 in the $35,000 price range. I am predicting that will end up costing closer to $50,000.

Wednesday, October 7, 2015

Goal Update: End Of September 2015

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of September, 2015
Current value: $16,466
Change from last month: +$1,318
Percent of Goal:  15.14%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

Income this month from my online courses sales was $378. I also received $9.44 in book royalties.

Had a nice jump in value over last month, mostly due to stock price increases. I ended the month over $16,000, which is the first time that has happened. Also crossed the 15% of goal threshold for the first time.

Nothing much else of note happened this month. Standard weekly budgeted contributions continued. Dividend earnings from stock continued. Realty Income (O) announced their 82nd common stock dividend increase this month, effective with the October payment.

I did discover one interesting thing. I mentioned last month that my earnings for my online courses crossed the $5,000 threshold. My wife, who works at Arizona State University, informed me that this is more than what a basic college professor earns for teaching one class for an academic year. Good for me, but kinda disheartening if you care about the state of education.