Ask Julie

“Julie knows just about everything when it comes to personal finance – I have yet to see her get stumped.” – Cheryl D.


There are so many choices and so much information available on how to spend, save, and invest your money it can be hard to wade through all you see. If you have questions, please send me a note. I’ll reply to you directly, and post your questions and the answers here for others to see, unless, of course, you’d prefer I didn’t.

Here are a few questions I’ve received recently.

Question:  “My company allows me to participate in an HSA? Pro/cons to this? Already doing the 401k”.

Answer: I highly recommend saving to your HSA. If you have an HSA, you have a high deductible on your health insurance plan. So you’ll need some savings to cover out-of-pocket expenses. If those are no trouble for you, there are still several advantages.

Here are the pros with an HSA. 

  • It’s a good way to save enough to cover your deductible and other out of pocket expenses.
  • It is an additional way to save money tax free.
  • The healthcare you pay for with an HSA costs you less because your contribution was pre-tax.
  • Your employer is likely making a contribution for you – so free money! Though you will get that whether you contribute or not.
  • You can use the money for healthcare now or in the future. You don’t have to use the money in the year you contribute. Any interest on the account accrues tax free.

There are a couple of cons, but they are minor:

  • The money can only be used for health care expenses, but you’ll have them at some point.
  • If you change your job and still have a balance, it’s easy to lose track of the money. So you just need to be a bit vigilant on that.

Follow-up Question on Medicaid:Is there a document where it talks about the 6 month period (couldn’t find it in Save Yourself) but excellent nonetheless. And does that mean one will no longer qualify or need to repay? Thanks for all you do-sharing is the best.

Answer: Here is a document from DHCS that shows the allowance for up to six months to reinvest the proceeds of the sale of a home in a new residence. You will continue to qualify for Medicaid as long as you buy your new home within the six month period. If you won’t be buying a new home, or if the proceeds from the home you’re selling exceed what you need to buy a new home, the remaining proceeds would be counted as assets and could disqualify you from Medicaid. There are, however, strategies that could allow you to keep the proceeds and still qualify. But you would need to speak with an attorney who specializes in Medicaid to make sure you set that up correctly.

Question:Thanks for creating this website. My question is about Medicaid. If someone currently receives CA Medicaid but sells a home, would that qualify as income and therefore not longer qualify for Medicaid benefits/need to refund them? Is this route recommended? Many friends also have this question, so please feel free to post this online – refer them here as well. Thank you!!

Answer:

Thank you for visiting my web site. The money you receive from selling a home is exempt for Medicaid purposes for up to six months, if the proceeds are to be used to buy another home. If the proceeds will not be used for another home, or you won’t need all the proceeds, it could conceivably be counted as income for your Medicaid eligibility. 

However there are some strategies for protecting those funds. It’s crucial that you get an attorney’s help to make sure those are put in place correctly though.  Here is a web site that may be able to help you locate an attorney.

Question:  “I’ve maxed out my 401(k). Now what? I don’t meet the income requirements for a Roth IRA.”

Answer: Even if your company offers a 401(k), or other retirement savings option, you can still save in a traditional IRA. Current contribution limits are $6,000 for those under the age of fifty, and $7,000 for those fifty and over. Your contributions are after tax, but your earnings grow tax free until withdrawn. Your after tax contributions are not taxable at the time of withdrawal, but your earnings are.

That isn’t quite as good a deal as you get with a Roth IRA. There all your earnings are also tax free if you wait to withdraw them until after you turn 59 1/2.

There is a way to save in a Roth IRA, even if your income is above the Roth limit. You can contribute to a traditional IRA and immediately convert your contribution to a Roth IRA. Since there are no earnings on the traditional IRA, the conversion is tax free.

However, be careful. If you already have traditional IRA savings, due to previous 401(k) rollovers or your past contributions, this “back-door” Roth contribution probably won’t work for you. That is because, the IRS lumps all your traditional IRA holdings together, and will tax your current contribution according to the proportion of the balance that hasn’t already been taxed. This article explains the issue.

Congratulations on your savings, and remember, any savings are good savings, even if you have to pay a little tax in the future.

Question: “I’m transferring my IRA to a new financial institution, and they are asking me whether I have an option contract at my current institution. How do I know?

Answer: An option contract is a contract that allows you to purchase a company’s stock in the future for a given price, called the exercise price. In order to use this investment strategy, your financial institution will set up an account that allows you to do that. Ordinary accounts are not allowed to invest in option contracts.

You have to fill out forms and jump through some hoops to have an option contract, so if you don’t remember doing that, you almost certainly do not have any.

Question: “My company has given me a choice between receiving restricted stock units (RSU) or company stock options. Which should I take.”

Answer: Here are the pros and cons of each:

RSUs:

  • The primary advantage of RSUs is you have something that very likely will have some value in the future.
  • The tax treatment of RSUs is also simpler that with options. The award of RSUs is taxed as income in the year in which you receive them. In the future, when you sell your shares, you will incur capital gains tax if they are worth more than when they were awarded.
  • On the negative side, you are taxed on your award as income in the current year, which could boost you up into a higher tax bracket.
  • If you leave the company before they vest, your award will have no value.

Options:

  • With options, there are no immediate tax consequences to the award. You will be taxed when you exercise them.
  • The tax treatment is more complex. When you do exercise your options, the number of shares times the exercise price will be taxed as income, and the difference between the market value at the time and the exercise price will be taxed as a capital gain. There will be no losses, since you wouldn’t exercise the options if the stock value was less than the exercise price.
  • With options, there is a chance your award will be worthless. If the stock value remains below the exercise price between the time the options are vested and the expiration date, your award will have no value.
  • If you leave the company before the options are vested, your award will have no value. You may also be required to exercise any options that have vested within a short amount of time after leaving the company.

Usually, companies set up these awards so that RSUs and options are equally attractive at the time of the award. The main difference that could make one more attractive than the other is if they have different vesting schedules. Earlier vesting is better.

Congratulations on your award!

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