People frequently ask me: If I have extra cash for savings or investments, how do I prioritize where it should go?

This Week In Your Wallet: 401(k)s, HSAs, IRAs, Oh My!

Recently, I spoke with aging expert Ken Dychtwald for his upcoming PBS special, and he inquired about common questions I receive. Among them are how to select a trustworthy financial advisor, how to prepare kids for independence, and how to assess if you’re on track for retirement. But the most popular question is about what I call the “next-dollar” dilemma. If you have money to set aside or invest, how do you determine its best destination?

The pandemic has certainly influenced this landscape. Given the ongoing unemployment and many businesses, like Regal Cinemas, closing again, maintaining a solid emergency fund is critical. Assuming you have that covered, what’s next? If your answer is I’ll take the free money, Alex, you're on the right track. It’s smart to grab incentive funds like 401(k) matching contributions or bonuses from your employer or health insurer when you contribute to a Health Savings Account (HSA).

This is where things get a bit complex. According to a USA Today report, 401(k) contributions have surged 20% compared to last year, suggesting that individuals are saving more from reduced commuting and dining out during the pandemic. It’s heartening to see this, but is this truly the best option for your funds?

Not necessarily. If you have an HSA linked to a high-deductible health insurance plan, you might want to consider maximizing that account. Like a 401(k), contributions to an HSA are tax-deductible, the funds can be invested tax-free, and withdrawals for qualified medical expenses are also tax-free. This strategy can save you a percentage on healthcare costs equivalent to your tax rate, which could be 25% or more. Additionally, think of it as a supplementary retirement account. You deposit money and invest for future growth while covering healthcare costs out of pocket, keeping receipts to use later tax-free. (Interested in more? Join my free panel discussion for National HSA Day on October 15 here.) Other options to consider include Roth IRAs, which offer flexibility for accessing funds and tax diversification as you approach retirement. Just a reminder to explore all your possibilities before making decisions.

And While We’re on Acronyms… Here’s Another One

QLAC. Pronounced: Q-Lack. What’s that? A Qualified Life Annuity Contract. I often feel these should be more popular than they are (a better name would help!). Here’s the scoop: Once you reach age 72, you must start withdrawing money—known as required minimum distributions (RMDs)—from your retirement accounts, regardless of whether you need it for living expenses, which can be frustrating when planning for your later years. (Roth IRAs are the exception; no mandatory withdrawals, and you can pass the funds on to heirs.) A QLAC provides an alternative. You can invest up to 25% of your retirement funds (maximum $135,000) in this deferred income annuity, creating an income stream that you can activate later (you can delay until age 85). The amount invested in the QLAC reduces the RMD amount, meaning you won’t owe income taxes on it. Yes, it can be complicated. You should ask questions like: Q: What if I pass away before receiving income? A: You can ensure funds go to your heirs by purchasing a “Return of Premium Rider.” If you feel confident about your income from Social Security and other sources, it’s worth considering. For more details, read here.

When Is a Life Insurance Policy Not Just a Life Insurance Policy?

When it’s turned into a hybrid long-term care insurance policy. In recent years, interest in long-term care insurance has surged due to increased longevity. Long-term care can be confusing and costly. Unlike car or homeowners insurance, which we willingly pay for while hoping to never use, long-term care often gets a bad reputation for being a financial drain with uncertain benefits. This has led to a rise in hybrid life insurance-long term care policies, which can provide coverage during life or be passed onto heirs if not utilized. As noted by a financial publication, hybrid policies tend to be pricier than standard cash-value life insurance and long-term care, given their dual function. However, there's an intriguing option: if you possess a permanent life insurance policy that you no longer need, you can perform a 1035 exchange to convert it to a hybrid policy, potentially offering a cost-effective solution.

Have I Mentioned That I Dislike Wires?

Lastly, during my ongoing apartment renovation, I had a realization. We stripped the place down and are slowly rebuilding, including wiring for cable, sound, and Wi-Fi. Our tech expert seemed puzzled when my husband listed the required cable boxes. “You want cable boxes?” he asked, surprised by our affirmative answer. It turns out that in some cases, with specific TVs, you can skip the box. This is excellent news for your utility bill (cable boxes are notorious energy consumers) and for those of us who prefer fewer wires.