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How Should You Handle Roth IRA, HSA, and 401k Savings? – Doug’s Quiz Corner

Posted by Doug Hutchinson | CFA®, Director of Research and Trading

September 14, 2018

Saving for Retirement and Potential Health Care Costs

Your friend Jody has recently started a new job and she has several options for saving for her retirement and future health care costs.

Jody’s new employer offers a 401(k) with a match of up to 3% of her salary. They also offer a Health Savings Account (HSA) option. Jody lives in a state that does not tax withdrawals from HSAs for qualified medical expenses and contributions to HSAs may be deducted from taxable income for state income tax purposes.

In addition, Jody also has a Roth IRA which she is using to save for her retirement.

Jody is in very good health and would prefer to have a health plan that limited her upfront health care costs while allowing her to save for future expenses. She is comfortable with a high deductible plan. She is financially secure and doesn’t plan on touching the money in her Roth IRA until retirement.

Assume Jody meets the eligibility requirements to participate in her employers 401(k) program, enroll in a Health Saving Account, and simultaneously has enough to contribute to a Roth IRA.

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Doug's Quiz Corner Saving for Retirement

Evaluating the Most Efficient Way to Save for a College Education – Doug’s Quiz Corner

August 17, 2018
What Are the Advantages of Using a Roth IRA vs. traditional IRA vs. a 529 Plan When Saving for College Costs? Consider this Scenario: Your friends Dan and Ashley have a son who will start college in 7 years. They would like to save some money for his college fund, but they are unsure about the best way to do so. Right now they have $10,000 in cash set aside for this purpose. Over the next few years, they’d like to continue saving more money for his college education. To make the most of what they’ve already saved, they’re considering putting the $10,000 into a 529 plan, into a traditional IRA ($5,000 into Dan’s and $5,000 into Ashley’s), into a Roth IRA ($5,000 into Dan’s and $5,000 into Ashley’s) or doing some combination of these options. Assume that Dan and Ashley will receive a full state tax deduction on a $10,000 contribution into a 529 plan. Also assume that they meet eligibility requirements to contribute $5,000 each into their traditional IRAs and/or Roth IRAs. [+] Read More

Is it Better to Save for Retirement or Pay Off Student Loans? – Doug’s Quiz Corner

July 20, 2018
Determining Priorities When Saving for Retirement and Paying Off Student Debt Consider this Scenario: Your friend Stanley has recently completed college and has just started a new job. Stanley has $40,000 in student loans to pay off at an interest rate of 7%. Stanley’s starting salary at his new job is $50,000 per year. Additionally, his employer offers a 401(k) match of 2% of salary. Stanley understands the importance of saving for retirement and would like to save as much as possible toward his future. Stanley also understands that he is $40,000 in debt and he would like to pay off his student loans as quickly as possible. He isn’t certain how he should prioritize his budget though, and he’s heard a lot of conflicting advice. When he asks you, what would you recommend: Should he focus on paying off his student debt before investing for his retirement? Or should he save as much as he can toward retirement before paying off his student loan debt? What is the probably the best way to prioritize investing versus paying off student loan debt? [+] Read More

How Does a Stock Split Impact the Cost Basis of Shares? – Doug’s Quiz Corner

June 15, 2018
Understanding the Cost Basis Impact of Stock Splits & Reverse Stock Splits Consider this Scenario Your friend Bill owns a stock that just went through a 2-for-1 stock split and another stock that had a 3-for-4 reverse stock split. He is unsure how these actions will impact his cost basis per share for these stocks. Stock Split: A stock split is a corporate action that takes places when a company divides its existing shares into multiples shares to boost the shares liquidity. Although the number of shares outstanding increases by a specific multiple (such as 2-for-1 or 3-for-1) the total value of the shares held by a shareholder does not change. So, if you held 3 shares and the company held a 2-for-1 stock split you would now hold 6 shares, but the total original value would not change. Reverse Stock Split: A reverse stock split is a corporate action that happens when a company reduces the total number of its outstanding shares. A reverse stock split decreases the number of a company’s outstanding shares by a specific multiple (such as 1-for-5 or 1-for-10) and simultaneously increases the price per share. These are also known as a stock consolidation or share rollback. So, if you held 5 shares valued at $20 each and the company held a 1-for-5 reverse stock split, you would now hold 1 share valued at $100. A company may have their stock go through a stock split in order to make the stock seem more affordable to smaller investors. A company may have their stock go through a reverse split in order to meet the minimum share price for inclusion on a particular stock exchange. [+] Read More

How Does Exchange-Rate Risk Impact the Purchase and Coupon Payments of Foreign Bonds? – Doug’s Quiz Corner

May 18, 2018
Tackling Currency Risk When Purchasing Foreign Bonds Consider this Scenario Your friend Lucy is a US resident who bought a British bond at par with a £10,000 value at maturity. The bond was exactly one year from maturity at the time she purchased it and it pays a 2% semi-annual coupon. There are two coupon payments remaining including the payment at maturity. [+] Read More

Understanding How the U.S. Taxes Foreign Dividend Payments: Doug’s Quiz Corner

April 13, 2018
How Do Tax Credits and Tax Deductions Work for Foreign Dividend Payments? Your friend Emily made an investment in the stock of a company that is based outside of the U.S. This investment was made in her taxable individual account. She received $100 in dividends for this stock (net of foreign tax withholding) last year. She had no other investments in companies outside the U.S. [+] Read More

What’s the Best Way to Make Tax Efficient Gifts to Adult Children? – Doug’s Quiz Corner

March 16, 2018
Quizmaster, Doug Hutchinson, presents his quiz for the month. Here, Doug helps you navigate tax efficient gifting strategies to help a friend transfer wealth to his adult son for school tuition and a future home purchase. Consider this Scenario: Your friend Gus is considering helping his son, Walter, with the cost of paying tuition and purchasing a new home over the next couple of years. Walter has two years of school left (including this year) and he is planning to purchase a home next year. [+] Read More

Evaluating the Relationship Between Bond Investments and Rising Interest Rates: Doug’s Quiz Corner

February 16, 2018
What Happens to Bond Investments When Interest Rates Go Up? Consider this scenario: Your friend Bob is concerned about what rising interest rates could do to his bond portfolio. He asks for your assistance in evaluating his bond holdings. In his current bond portfolio, he has the following holdings: $10,000 face value AA rated municipal bond that matures in 3 months and is currently trading slightly below par. $15,000 of a mutual fund that holds investment grade, floating rate bonds. $20,000 of a short-term, investment grade corporate bond ETF which tracks a broad index of hundreds of bonds. $3,000 of a high yield bond ETF that tracks a high yield index of hundreds of bonds. Bob has a long investment horizon ahead of him and he won’t need any of the funds invested in his bond portfolio for many years. To top it off, Bob also has another $100,000 of his portfolio invested in various equity market investments. [+] Read More

Calculating the Impact of Expense Ratios on Returns: Doug's Quiz Corner

January 19, 2018
How Does An Expense Ratio Impact Returns? Consider this scenario: Your friend Martha has just invested $100,000 in a mutual fund that has an expense ratio of 1.50%. She has discovered an alternative investment that is very similar to the mutual fund she purchased but has an expense ratio of 1%. She is considering switching to the lower cost investment but isn’t sure if 50 basis points in an expense ratio will make much of a difference in her returns going forward. Assume both investments return 8% per year, each year for the next 10 years before expenses. What is the difference in ending dollar value between the mutual fund with an expense ratio of 1.5% and the alternative investment with an expense ratio of 1% at the end of 10 years? [+] Read More

Test Your Knowledge on Treasury Inflation Protected Securities (TIPS) Bonds - Doug's Quiz Corner

December 15, 2017
Protecting Principal Against Inflation via TIPS Your friend Karen is concerned about inflation increasing so she purchases $1,000 of a Treasury Inflation Protected Securities (TIPS) bond with a semi-annual coupon payment of 2%. TIPS are unique in that the principal amount ($1,000 in this case) will increase with inflation. For example, if there was 3% inflation over the first six months of the bond, the principal amount would adjust to $1,030 ($1,000 x 1.03 = $1,030). Karen isn't quite certain how the semi-annual coupon payments on TIPS work, so she asks for your help. She thinks inflation will be 2% over the first 6 months of owning the bond and 3.25% for the six months following. What is the total amount of coupon payments would she get from her TIPS bond over the first year under this scenario? $20 $20.53 $20.73 $20.80 (Answer below...) What are Treasury Inflation Protected Securities (TIPS)? According to Investopedia treasury inflation protected securities (TIPS) refer to a treasury security that is indexed to inflation to protect investors from the negative effects of inflation. TIPS are backed by the U.S. government and their par value rises with inflation - as measured by the Consumer Price Index - while the interest rate remains fixed. [+] Read More