What You Need To Know About Health Insurance Plans

There are many health insurance plans, structures, terms, and costs that are often as clear as mud. Below, I have provided you with the most important parts of each plan, relative costs, as well as other important information to help you navigate some of the complexities of the health insurance world.

Health Maintenance Organization (HMO)

HMO plans charge a monthly premium in exchange for access to a network of healthcare providers. In addition to the premium, a copayment ranging from $5-$50 is usually required in order to receive a particular service or see a doctor. 

In order for the HMO plan to cover all or the majority of the costs, the policyholder must go to hospitals and clinics that belong to the HMO network. If the policyholder seeks any care from doctors or facilities that do not belong to the network, the HMO usually will not pay for those services, leaving the insured with possibly high out-of-pocket costs. Some exceptions may be made in the case of emergencies or when the HMO network does not, or cannot, provide certain services.

In-network services are cheaper because the insurance provider has previously negotiated prices and contracted certain service providers in exchange for a flow of patients.

In order to keep medical care costs to a minimum for it’s insured, it is in the best interest of the HMO plan to encourage preventative healthcare and regular doctor visits in order to catch health problems before they become more complex and therefore more expensive.

The majority of HMOs will require policyholders to choose a primary care provider (PCP) upon enrolling in the program. The PCP will be the first contact for the policyholder and will act as the gatekeeper into the network. If the PCP can’t manage a particular health problem or concern, a referral will be made to a specialty doctor that also belongs to the same HMO.

For employers, HMOs are cheap in the long-term and represent the majority of healthcare plans offered through the workplace today. Policyholders generally know exactly how much they will have to pay out-of-pocket, and where to go to receive healthcare services. Also, in order for a doctor or a healthcare facility to belong to an HMO, strict quality standards must be met and maintained otherwise these providers risk losing the contract with the HMO.

Preferred Provider Organizations (PPO)

A PPO is a plan that combines the somewhat older tradition of Fee-For-

Service with certain aspects of an HMO.

Both PPOs and HMOs:

  • Have an established network of healthcare providers and facilities
  • Require a copayment for each visit

The major differences between the two?

  • PPOs are more flexible
  • Monthly premiums are more expensive with a PPO
  • PPOs usually don’t require a referral from PCP to see a specialist

Most PPOs cover preventive care which usually includes visits to the doctor, well-baby care, immunizations, and mammograms. The higher monthly premiums are due to the fact that unlike HMOs (whose more restricted network allows for a contract with lower costs), PPOs have a comparatively less restricted network. Costs are therefore less predictable and result in higher monthly premiums.

For employers, employer-sponsored PPO plans therefore tend to be more expensive than HMOs for the same reason.

In a PPO, the policyholder can seek specialty care services without having to see the PCP first to receive a referral. Some PPOs may have you choose a preferred PCP but it is not an absolute requirement like with an HMO and the PPO prefers that you see in-network providers (hence the name of the plan).

However, you can use out of network providers and still receive some health insurance coverage. Some people like this option because even if their doctor is not a part of the network, it means they may not have to change doctors to join a PPO.

As you can see, a PPO offers a higher degree of flexibility to the consumer and allows patients to avoid the hassle of making multiple appointments for the purpose of receiving a referral to a specialist provider. A drawback for some, may be higher associated costs.

Always perform due diligence and check to make sure if your insurance will be accepted or not at a given healthcare provider or facility so that you are fully aware of your expected costs.


Point of Service (POS)

A POS plan is yet another plan that shares some of the qualities of HMOs and PPOs. Like an HMO plan, you may be required to designate a primary care physician who will then make referrals to network specialists when needed. Seeking care from doctors that are not part of the POS network will result in higher out-of-pocket costs for the consumer. Depending upon the plan, PCP healthcare services don’t have a deductible and preventive care benefits are usually included.


Exclusive Provider Organization (EPO)

An EPO is also very similar to an HMO or PPO as well and is a health plan that offers a large, national network of doctors and hospitals for you to choose from. This net is exclusive, so seeing out-of-network providers will result in you having to cover the costs. Like a PPO, you don’t have to see your PCP prior to seeking a specialist, just make sure that the specialist belongs to the network

EPOs are often considered to be a hybrid plan between an HMO and a PPO as they offer more flexibility than an HMO (since you don’t need a referral to see a specialist) but are generally cheaper than a PPO.

Catastrophic Plan

Catastrophic health insurance has changed over the years. Today it is a plan that provides a narrow range of healthcare services but enough to meet the minimum coverage mandate stipulated by the Affordable Care Act (ACA). Like the name sounds, the idea behind the plan is to protect plan participants in moments of dire healthcare needs.

Catastrophic plans have lower monthly premiums but high deductibles as well as high out-of-pocket expenses until reaching the plan’s annual deductible, at which point the plan pays for costs.

To be eligible, an individual must be under age 30 or be any age with a “general hardship exemption” and unable to afford the more traditional health plans.

These plans may cover a limited number of primary care visits per year but all “essential health” components such as hospitalization, emergency care, and prescriptions, among others, are covered.

Policyholders may be presented with a copay requirement for care as catastrophic plans can be arranged in an HMO or PPO structure. This plan is best for young and otherwise uninsured individuals.

Cadillac plan

First of all, there is no actual plan for sale that is called a ‘Cadillac plan.’ Rather, a Cadillac plan, also known as a “gold-plated” plan, refers to any expensive healthcare plan. The term was born out of the focus that journalists and politicians have placed on the issue of healthcare costs. Any plan could be considered a Cadillac plan based on cost, regardless of its structure type. In fact, many typical employee-sponsored plans would be considered to be gold-plated.

Technically, a high-cost plan is one whose combined annual employer and employee premiums exceed $11,200 for an individual or $30,150 for a family- these indices are adjusted periodically to account for inflation and rising costs. A ‘Cadillac plan’ is one that has high monthly premiums with low deductibles which is essentially the opposite of catastrophic plans.

Even though the Cadillac makes reference to the luxury car maker, these plans are not reserved for the rich and famous. Many employees have what are technically considered Cadillac plans. Also, many small businesses that have a small number of employees may also have these gold-plated plans since the smaller number of employees means a smaller pool of money with which the company can use to bargain for lower premiums so the name is misleading.

Proposed Tax on Cadillac Plans Set For 2022

Cadillac plans were in the eye of the Obama administration as a possible factor in increasing healthcare costs as well as providing excessive tax advantages for employers. According to The Tax Policy Center (TPC), an excise tax of 40% will be applied starting 2022 (originally set to take place in 2018, but delayed by Congress) to high-cost health plans that exceed the aforementioned high-cost thresholds. The tax would kick in to effect on every dollar that exceeds the annual premium limits not on the entire cost of the plan.

The ‘Cadillac Tax’ is intended to generate more tax revenue to help finance the Affordable Care Act, reduce healthcare spending, and thereby make more expensive plans less appealing. However, the TPC projects that the costs of the tax will be passed along to workers with either a change in wages and/or a change in health plans in the form of less coverage for the same cost or simply charging more expensive premiums.


High Deductible Health Plan (HDHP)

HDHPs come with lower monthly premiums compared to cadillac plans. However, the policyholder has to pay higher out-of-pocket costs, known as the deductible, before the insurance company starts to pay its share. HDHPs can be combined with a Health Savings Account, but not all HDHPs are eligible for one.

The IRS defines an HDHP as a plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,650 for an individual or $13,300 for a family.

Health Savings Accounts (HSA)

A Health Savings Account (HSA) can help patients with HDHPs pay for medical expenses. HSA are treated similar to a bank account and you can contribute money to the account in a similar way to the way you contribute to a retirement account. Plus HSAs have some further unique benefits.

In order to be eligible to use an HSA, you must have a qualified HDHP through work or a spouse. Not all HDHP plans will qualify you for HSA use and the IRS publishes a list of ‘qualifying’ medical and dental expenses that can be recorded as deductions.

Additional eligibility requirements include:

  • You can’t be covered by any other insurance plan, including Medicare Parts A and B
  • You can’t have used VA medical benefits in the past 90 days if you plan to contribute to an HSA
  • You can’t be claimed as a dependent on another person’s tax return
  • You must be covered by the qualified HDHP on the first day of the month

Benefits of HSAs include:

  • Ownership of the account (you can keep the account even if you change jobs, etc.)
  • Money within the HSA can be invested so that the value can grow
  • Unused money in the account can be rolled over yearly and interest earned on the principle is not subject to federal taxes
    • Currently California and New Jersey do not provide state tax deductions
    • Tennessee and New Hampshire requires taxpayers to report dividend and interest earnings. Exact amounts differ depending on tax filing status
    • Residents living in states that have no income tax don’t receive additional state tax deduction benefit
  • Tax free distributions on qualified medical expenses
  • After age 65, use HSA like a retirement account. No tax penalties on non-qualified expenses
  • A Way to save for future health related expenses
  • Triple tax advantage
    • Contributions are tax deductible
    • HSA assets grow tax free
    • Funds can be used tax free for qualifying medical expense or after age 65

For 2019, the HSA contribution limit for an individual is $3,500 and $7,000 for a family. Those over 55 years of age can contribute an additional $1,000.

Some HSA plans may not allow you to invest the funds. If this is the case, you can rollover the funds in that HSA into another HSA that does allow for investment of funds once per year.

Health Plan Cost Analysis

According to ValuePenguin, a consumer spending research agency, average monthly premiums for a 21 year old are:

  • HMO: $230
  • POS: $244
  • PPO: $251
  • EPO: $254

Premiums usually only increase with age and will vary from state to state.

Plans can be further divided into tiers- catastrophic, bronze, silver, gold, and platinum. The catastrophic tier offers the least amount of coverage whereas the platinum offers the most.

Average monthly premiums by tier for a 21 year old look like:

  • Catastrophic: $167
  • Bronze: $201
  • Silver: $247
  • Gold: $291
  • Platinum: $363

The Kaiser Family Foundation produced the following graph of average costs per plan type for 2018.

Understanding Social Security

How to ace one of your biggest financial decisions

“Social security is the very foundation of retirement security for millions of Americans.” ~ Sue Kelly, Republican Politician

Social security is one of the finest achievements of the US government in the 20th century. It has served and continues to serve as a significant income source for retirees throughout the country. A recent survey indicates that roughly 57% of retired Americans consider social security as a considerable source of income. Additionally, it is estimated that approximately 90% of the current retirees and 83% of non-retirees rely on social security to provide at least some assistance during retirement.

These figures are a clear indication that America relies on social security during retirement; however, there is a huge fundamental problem with this ongoing trend.  According to the Social Security Administration, the average social security amount after the cost-of-living-adjustments was $1,461 in January 2019. Social security was never built to serve as a major source of income; instead, it was supposed to provide financial assistance to the aging population. The growing reliance on social security would leave retirees financially stressed during retirement.

For people ready to retire over the next couple of years, it is critical to understand the intricacies of social security and how they can maximize their monthly benefits. This guide intends to inform the readers about the basics of social security, strategies to boost their payouts, and different factors that affect their benefits.

Understanding the basics of social security

What is it?

Social security is a retirement benefit given to retirees who paid social security taxes during their employment. Ida May Fuller was the first recipient of monthly social security benefits in 1940. An individual should reach at least the qualified retirement age to start receiving benefits, applicable to deductions, and full-retirement age to receive full benefits.

How do you qualify for social security?

In order to qualify for social security benefits, you must earn enough credits throughout your employment history. The good news is that you only require 40 credits or approximately ten years of employment history to qualify for social security benefits.

How do you earn credits for social security?

Your earning should be more than $1,360 in 2019 to receive one social security credit or more than $5,440 to earn four credits annually. It is critical to understand that one can earn a maximum of four credits in any given year irrespective of his income level.

How does the government calculate social security benefits?

The Social Security Administration takes your earnings history into account for calculating your social security benefits. It is a three-step process:

–       The SSA adjusts your earnings in proportion to any historical changes in the US wages. It takes your 35 best or highest-paid years into account for calculation. After that, it identifies your average indexed monthly earnings (AIME).

–       After identifying your AIME, the SSA applies a social security formula to this figure to determine your monthly social security benefits. For 2019, this formula considers 90% of your first $926 out of the AIME; then it takes 32% of the amount between $926 and $5,583 as per your AIME; and lastly, it takes 15% of any remaining amount over $5,583. The SSA adds all of these figures to arrive at your full retirement benefit estimate. This is the amount you are qualified to receive after the full retirement age (FRA).

–       Under the last step, the SSA reduces your full-retirement benefit by up to 25% if you claim social security at age 62, whereas it adds approximately 8% for every year you delay your benefits after the qualified retirement age, 66 or 67 years, up to 70 years.

Note: If a worker has an employment history of fewer than 35 years, the SSA credits the worker with zero earnings for vacant or unemployed years. Additionally, social security benefits are calculated every year and adjusted for inflation as well as the cost of living adjustments.

Disappearing strategies to boost social security

File and suspend strategy

Under the file and suspend strategy, a worker could file for benefits at FRA and then immediately suspend them. This simple action would trigger social security benefits for a spouse or any other qualifying family member. At the same time, the benefits of the worker would continue to accrue until 70 years, growing up to 32%. There is a provision to collect lump sum benefits for the suspended years, although it would forfeit any of their delayed retirement credits.

Restricted claims for spousal benefits

Under the restricted claims for spousal benefits strategy, a married or eligible divorced spouse can collect half of their partner’s benefits after reaching FRA, while their retirement benefits continue to grow until 70 years.

Why these strategies are going away

The Bipartisan Budget Act of 2015 ended or at least limited the benefits of each of these strategies. As per the act, the file and suspend strategy is only applicable to workers who applied the strategy prior to April 29, 2016. Similarly, the restricted claims for spouse benefits strategy is now available for spouses who were born before or on January 1, 1954, provided they have already reached FRA. The regulations for widows/widowers or dependent children under the restricted claims for spouse benefits are different and will be discussed in the coming sections.

Social security rules for married couples, widows/widowers, and disabled beneficiaries

Married couples

Social security regulations favor married couples. A married spouse can file for both spousal benefits and survivor’s benefits. Spousal benefits allow a non-working spouse or one with low earnings history to claim half of their spouse’s social security benefits. A spouse can file these benefits starting at age 62 with some reductions, though they can wait until FRA to receive the full benefit amount. In the case of survivor’s benefits, the surviving spouse can claim benefits as early as 60 years, but there will be reductions as per the SSA guidelines. The other option is to wait until FRA to avoid reductions.

In the case of two-earner married couples, the survivor would receive the higher of either his own benefits or the benefits of the deceased. For couples born before January 1, 1954, restricted claims for spousal benefits is an option.

Tip: In the case of married couples, it makes sense to maximize the benefits of the higher earner by claiming them at age 70. It will ensure that the survivor receives higher social security benefits in case the higher-earning partner passes away.

Widows or widowers

Social security rules for widows or widowers are slightly complicated. They vary depending upon four factors, including the primary insurance amount (PIA) of the deceased at the time of FRA, whether the deceased reached FRA, the age of the survivor, whether the deceased started social security benefits.

Deceased spouse had filed for benefits

If the deceased spouse started benefits at 62 or before reaching FRA, the surviving spouse would get the higher of the benefits received by the deceased spouse or 82.5% of their net benefits. The survivor can start receiving reduced benefits starting at age 60 or wait until FRA to receive full benefits. If the deceased spouse claimed benefits after reaching FRA, the survivor would receive the same benefits as that of the deceased.

Note: If both spouses receive benefits, the survivor would get the higher of his or the deceased spouse’s benefits.

Deceased spouse hadn’t filed for benefits

In the case that the deceased spouse didn’t reach FRA, the survivor would receive 100% of the PIA of the deceased spouse, provided they reached FRA. If the survivor claims spousal benefits before FRA, the benefits will be reduced as per the social security reduction rules. If the deceased passed away after reaching FRA or older age, the survivor would receive 100% of the benefits of their former spouse, along with any additional delayed retirement credits, subject to reduction if the survivor didn’t reach FRA.

Disability benefits

Social security disability (SSDI) benefits are designed for workers who can no longer work or perform the work they did prior to their disability. It is critical to understand that the SSA has strict eligibility criteria for disability benefits. The average disability benefits as of January 1, 2019, stood at $1,234 per month.

Impact of divorce on social security

If you got a divorce but didn’t remarry until age 60, the chances are that you might qualify for spousal benefits on your ex’s record. However, don’t celebrate just now as you still need to meet the SSA’s eligibility criteria. Let’s go over the list:

  • You must have been married to your previous spouse for at least ten years.
  • You should reach age 62 to collect spousal benefits if your ex-spouse is alive. However, if you were born before January 1, 1954, you can wait until you reach FRA, and then file a restricted application for spousal benefits. In the meanwhile, you can let your own retirement benefits grow until you reach 70, thereby accruing delayed retirement credits of up to 32%.
  • In case your ex-spouse has reached retirement age but hasn’t applied for benefits, you can still apply for spousal benefits, provided you qualify other criteria. You must be divorced for at least two years to claim spousal benefits.
  • If your ex-spouse is deceased, you can apply for spousal benefits once you reach the qualified retirement age. However, if you’re taking care of a child you had with your ex-spouse who is under 16 years of age or is disabled, you can start receiving benefits earlier.
  • If your previous spouse is deceased and you remarry after age 60, you might qualify for spousal benefits.

Public employees and social security norms

If you worked in the public sector- city administration, state government or federal government- and receive retirement benefits in addition to social security benefits, your benefits, as well as spousal benefits, are subjected to the Windfall Elimination Provision and Government Pension Offset rule.

Windfall Elimination Provision

Under the Windfall Elimination Provision, WEP, the SSA will reduce your social security benefits by half of your other non-covered government pension. So, if your net social security benefits were $2,000, and you received $800 through a non-covered public pension system, your net social security benefits will be $1,600. The total reduction cannot exceed $463 in 2019.

If you are someone who has worked in a private capacity, before or after your government service, for at least 30 years (earning more than “Substantial income”) and has paid social security taxes, you might be able to avoid this provision.

Government Pension Offset

The Government Pension Offset (GPO) rule applies to the primary recipients, spousal benefits, survivor benefits, or the benefits received by ex-spouses. Under the GPO rule, the SSA reduces the social security benefits of the filer by up to two-thirds of the government income received by the individual. For instance, if you receive $1,200 through your non-covered public pension system, your social security benefits will be reduced by $800. For someone qualifying for social security benefits worth $1,000, they’ll receive only $200 after the GPO deduction.

Note: The WEP and GPO apply differently to active-duty or inactive-duty military personnel. Read more about it here.

How kids receive social security benefits

The Social Security Administration distributed $2.6 billion every month in social security benefits to more than 4.2 million children during 2017. Social security is a critical source of nourishment for the most vulnerable segment of the society, children. The SSA provides social security benefits to children in case of death, disability, or retirement of their parents/guardians. In order to receive social security benefits, a child must satisfy the following criteria.

  • The child must have a retired or disabled parent who is eligible for social security benefits. Social security benefits are provided to children whose parents/guardians passed away after working long enough in a job to receive social security benefits.
  • The child must be unmarried and below 18 years of age; 19 years if the child is a full-time high school student.
  • Social security benefits are extended to disabled children over the age of 18 years provided the disability began before attaining 22 years of age.

New do-over strategy to maximize benefits

Social security rules are confusing, and it’s quite often that people regret drawing their benefits early, especially those who claim reduced benefits before reaching FRA. The good news is that the SSA allows such individuals to opt for a do-over strategy, provided they satisfy certain conditions.

If you are planning for a do-over for your social security benefits, you must:

  • Withdraw your claim application within the first 12 months of claiming benefits.
  • Repay the benefits you or your spouse or family received during this period.

In case you claimed benefits before reaching FRA but want to stop benefits until age 70, the SSA allows you to suspend benefits without making any repayments. Your benefits will accrue the 8% annual delayed retirement credits, though your base for calculation would be lower because of early distributions. You can reinstate benefits at any time before reaching age 70 or wait for automatic reinstatement once you reach 70 years.

For instance, if you applied for benefits at age 62 but would like to stop them at FRA, between the age of 66 and 67, you can apply for a suspension and let your retirement benefits grow 8% annually. If your benefits were 75% at FRA because of an early withdrawal, your benefits could still grow up to 99% of your full-retirement benefits through this strategy.

It is critical to understand that if you suspend your benefits, any spousal benefits you receive, along with the benefits of your spouse or dependent children will stop as well, apart from the benefits of a divorced spouse. Additionally, you’ll be responsible for the Part B premiums of Medicare. Make sure that you have sufficient supplemental income to go through these suspended years.

Note: You must file Form 521 for practicing this strategy.

How to file social security benefits online

While there are multiple options for filing your social security benefits, applying online is the easiest one. Here are the steps you must follow to apply for social security benefits.

  • Create an account on the official social security website using this URL. https://secure.ssa.gov/RIL/SiView.action
  • Some key details that you must have when filing the application are employment information, self-employment activity, any foreign employment information or credits/pension details, military service details, additional income, previous SSI records/applications, Medicare or other social security benefits, and some critical information about your spouse. The application will ask for the date when you want your benefits to begin.
  • Once you have filled all the details, sign it electronically, and submit the application. In some cases, the SSA might require you to send backup documents, so it’s best to have a copy ready. In case of any questions, you can call the SSA directly at 1-800-772-1213.

The link between social security and Medicare

Social security and Medicare share a direct relation, which means higher benefits lead to higher premiums. However, the SSA has a “hold harmless” provision under which it prevents any reduction in social security benefits when cost-of-living adjustments are lower than the scheduled increase in Medicare premiums.

It is critical to understand that individuals with higher gross incomes ($85,000 if single and $170,000 if married) have to pay higher Medicare premiums. Individuals who are above this threshold receive notice from the SSA concerning their higher premiums and the reason behind it.

You can read more about different premium brackets and the SSA guidelines at the end of this article.


Understanding the new rules and strategies around social security

The modern social security rules demand new strategies, especially with the end of the file-and-suspend strategy and the phasing out restricted spousal benefits strategy in 2019. Here is a list of the most suitable social security strategies for couples, widows/widowers, divorcees, individuals, and children.

Married Couples

  • Married couples should delay the social security benefits of the spouse with higher benefits until age 70, allowing the accumulation of delayed retirement credits. It will enable the couple to maximize their retirement benefits while both are alive. Additionally, it will ensure that the survivor gets the highest possible benefits when the other spouse passes away. The spouse with lower benefits should file for benefits at FRA or earlier if none of the spouses are working.
  • If one spouse has no social security benefits, the working spouse must file for benefits to trigger spousal payments. If the spouse with social security benefits waits until FRA to claim PIA payments, it will maximize the survivor benefit for the other spouse in the event of a death.

Divorced Spouses

With the restricted claim strategy phasing out, divorced spouses should make a decision based on their current financial circumstances. The SSA will automatically choose the highest amount out of the individual’s own benefits and spousal benefits.

Individual Filers

Individual filers should wait until FRA to file for social security benefits, ensuring they receive 100% qualified benefits. In case the single filer is employed, it might make sense to delay distributions until age 70; however, the primary reason behind delaying retirement benefits is to maximize survivor benefits, so weigh your options and choose accordingly.


If the family is seeking benefits for children, it is essential to consider different options. Some strategies include:

  • If the primary social security beneficiary was born before January 1, 1954, it is possible to implement the file-and-suspend strategy to trigger spousal and independent benefits.
  • In the case of a single mother with a child younger than 18 years and low or zero individual benefits, it makes sense to file for benefits at age 62, triggering the benefits for the dependent children.

The Bottom Line

Social security filing is one of the most important financial decisions of your life, so it is crucial to analyze all of your options and choose the most suitable one. If you’re in doubt, make sure to consult a financial expert. You don’t want to regret making a financial mistake that could lower your net social security benefits by thousands of dollars.


If you have any questions regarding Social Security and how it relates to your financial future, please contact me now for assistance. You don’t have to navigate tricky financial topics alone!



Medicare Premium Chart


Beneficiaries who file individual tax returns with income:

Beneficiaries who file joint tax returns with income:

Income-related monthly adjustment amount

Total monthly premium amount

Less than or equal to $85,000

Less than or equal to $170,000



Greater than $85,000 and less than or equal to $107,000

Greater than $170,000 and less than or equal to $214,000



Greater than $107,000 and less than or equal to $133,500

Greater than $214,000 and less than or equal to $267,000



Greater than  $133,500 and less than or equal to $160,000

Greater than $267,000 and less than or equal to $320,000



Greater than $160,000 and less than $500,000

Greater than $320,000 and less than $750,000



Greater than or equal to $500,000

Greater than or equal to $750,000



Beneficiaries who are married and lived with their spouses at any time during the year, but who file separate tax returns from their spouses:

Income-related monthly adjustment amount

Total monthly premium amount

Less than or equal to $85,000



Greater than $85,000 and less than $415,000



Greater than or equal to $415,000





Maximizing Social security retirement benefits, Mary Beth Franklin, CFP










Planning For Medicare Benefits

Below is a general breakdown of Medicare benefits, programs, and costs as well as an array of issues that need to be addressed in order to successfully plan for retirement and your health care needs.

Why is this important?

Knowing what medical coverage you will have and when to sign up is extremely important so that you don’t end up with massive out-of-pocket costs for medical care. Failing to sign-up correctly for Medicare can also result in penalties. What’s more important than your health? Nothing is and your finances are an important part of your health and wellbeing so it pays to understand these subjects.

For a more comprehensive view of Medicare visit medicare.org the official government webpage that will give you personalized and specific information regarding healthcare benefits. A lot of the following summarized information comes from the official government sources on Medicare and Medicaid. However, there are too many individual factors to cover here that could greatly change the way you approach Medicare which is why it is important for you to further research this topic and allow me to help you build a plan. This is a complicated and multi-faceted subject and it’s too important to not understand so use your resources.

As your financial advisor, I am here to help you navigate all of the issues and include you in forming the best possible plan and strategy for a successful financial future. Also consult your tax specialist, former or current Human Resources department, internet web pages, and medicare.gov to help you with this complex subject.

What Exactly Is Medicare?

In short, it is the federal health insurance program for:

  • People who are 65 or older
    • Or younger with certain disabilities
  • People with End-Stage Renal Disease (ESRD)

Medicare is overseen by The Center for Medicare & Medicaid Services (CMS) and works in conjunction with Social Security.

The government suggests that you take the following steps to familiarize yourself with Medicare:

  • Learn about the different elements and ‘Parts’ of Medicare
  • Learn when you will be eligible for Medicare and whether or not you will get Medicare automatically or if you will need to actively enroll
  • Decide if you want both Part A and Part B (or Part C)
  • Learn how to establish the health coverage that best fits your needs (Similar to deciding on what Medicare Parts you want, or don’t want)
  • Learn about necessary actions to take for your first year of Medicare

Medicare Is Offered In Different ‘Parts’

  • Part A (Hospital Insurance): Generally covers inpatient hospital, skilled nursing care, hospice, and some home health services
  • Part B (Medical Insurance): Usually covers outpatient care such as doctor visits, medical supplies, and some preventative care
  • Part C (aka Medicare Advantage): Is a bundled alternative to Medicare Parts A and B plus D
  • Part D (Prescription drug coverage): Part D adds prescription coverage to :
    • Original Medicare
    • Some Medicare Cost Plans
    • Some Medicare Private-Fee-for-Service Plans
    • Medicare Medical Savings Account Plans

There are two main ways of getting and using Medicare:

  • Enrolling in Original Medicare (enrolling in Parts A & B)
  • Enrolling in Medicare Advantage Plan (Part C)

Original Medicare is health insurance provided by Medicare and allows you to choose the providers and services that accept Medicare. You will pay the Part A and B premiums (for most, Part A has no monthly cost) and you can choose to purchase supplemental insurance that may help cover those premiums. You would also have to choose a prescription drug plan as well- these are provided by private insurers.

The Medicare Advantage Plan is provided by private insurers and includes Medicare Parts A & B, and usually consists of a prescription drug plan. The private company will have its own network of providers, much like an HMO or a PPO, and you will have associated monthly premiums. The private companies usually bundle a prescription drug plan into the plan as well.

According to the official Medicare website, the Medicare Advantage Plan is estimated to have lower out-of-pocket expenses compared to Original Medicare (see below for more details).

Sometimes supplemental insurance (which would be an additional insurance policy) is cost effective for those that choose Original Medicare. Supplemental insurance can help with the costs of premiums, copayments, and coinsurance costs.

Will you get Medicare automatically?

In most cases yes, you’ll automatically get Part A and Part B starting the first day of the month that you turn 65 but it depends on your Social Security benefits and a few other qualifying factors.

Who gets Medicare Parts A & B automatically?

  • If you are going to receive Social Security or receiving Railroad Retirement Board (RRB) at least 4 months prior to turning 65
  • If younger than 65 and disabled and after having received Social Security or RRB benefits for greater than 24 months
  • Those with ALS will automatically get Parts A & B on the first month of disability benefits
  • Those with ESRD and choose to enroll in Medicare. When exactly you receive Medicare benefits will depend on what type, if any, of additional health insurance you have and the completion of certain training programs

When do you need to sign-up for Medicare?

When eligible for Medicare, you have a 7-month Initial Enrollment Period to sign up for Part A and/or Part B starting from 3 months prior to turning 65 and ending 3 months after the month in which you turn 65 (a total of 7 months).

Waiting until your birthday month or longer could cause a gap in health care coverage and a possible penalty.

You can sign up for Part A and/or Part B during the General Enrollment Period between January 1–March 31:

  • You didn’t sign up when you were first eligible
  • You aren’t eligible for a Special Enrollment Period (SEP)

You qualify for a SEP to sign up for Part A and/or B at any time if:

  • You or your spouse (or family member if you’re disabled) is working
  • You’re covered by a group health plan through the employer

You will have an 8-month SEP to sign up for Part A and/or B that starts at if one of the following occurs:

  • The month after the employment ends
  • The month after group health plan insurance based on current employment ends

Usually, as long as you qualify for a SEP, a late enrollment penalty won’t be applied.

Consequence of failing to sign up for Part B on time

Delaying signing up for Part B can lead to a late enrollment penalty, which can have long term consequences for your wallet.

The late enrollment penalty can result in a Part B monthly premium that is increased by an additional  “10% of the standard premium for each full 12-month period that you could have had Part B, but didn’t sign up for it.” You may not be eligible to enroll in Part B for several months, further delaying Part B coverage.

If 24 months go by before enrolling and receiving Part B, which equates to two 12-month periods, the monthly premium would increase by 20%

The real kicker? That 10%, 20%, or worse penalty, remains in effect for the life of Part B coverage.

A similar late enrollment penalty is applied to Part A as well, however, the penalty is not paid for over the lifetime of Part A coverage as with the Part B penalty.

Delaying Enrollment

Some people may choose to delay enrolling in Medicare Part A and B, but this requires careful planning and knowledge of the rules.

Those over 65 and continuing to work may choose to delay enrollment to continue to take advantage of an HSA while using a High Deductible Health Plan or if they have adequate insurance through their employer (or a spouse).

A major determining factor in delaying enrollment will be the size of the employer. If the employer has fewer than 20 employees, your insurance will pay secondary to Medicare. In this case, you would want primary insurance in the form of Medicare. If your employer has more than 20 employers, Medicare would be secondary insurance and pay after your primary insurance offered at work.

Some people may not need Part B

Delaying Part B Medicare coverage is mainly dependent on other available health care coverage. People seeking to avoid the cost of Part B may want to delay enrolling. Several exceptions exist and require an individualized assessment that I can help you with.

2019 Medicare Costs

Part A

Many people, if not most, will have “premium-free Part A” if:

  • You already get retirement benefits from Social Security or the Railroad Retirement Board
  • You’re eligible to get Social Security or Railroad benefits but haven’t filed for them yet
  • You or your spouse had Medicare-covered government employment
  • If under 65:
    • You got Social Security or Railroad Retirement Board disability benefits for 24 months
    • You have End-Stage Renal Disease (ESRD)

If you have to purchase Part A, the cost will depend on the length of time that you (or a spouse) paid Medicare taxes

  • If you paid these taxes for more than 30 quarters, the monthly premium can be up to $240
  • Paying for less than 30 quarters, the monthly premium would be up to $437

The deductible for in-patient hospital admission is $1,364. Depending on the length of stay, coinsurance charges are applied and are scaled up as length of stay increases.

  • 0-60 days: $0
  • 61-90 days: $341 per day
  • Over 91 days: $682 per day for each “lifetime reserve day” (up to 60 days over Part A lifetime)
  • Beyond lifetime reserve days: Full cost


The way you set up your particular insurance plan will greatly affect the actual premium amount as well as other out-of-pocket costs.


Part B

Monthly Part B premiums are income & tax-filing status dependent.

The following table is from The Centers for Medicare & Medicaid Services, updated for 2019. The premiums were raised slightly from 2018, however, there was also a protection clause included that does not raise the premium to anything “greater than the increase in…social security benefits.”

In addition to the premiums below, you may have to pay an additional amount if you are a high-income earner, which I will discuss below.

Beneficiaries who file individual tax returns with income:Beneficiaries who file joint tax returns with income:Income-related monthly adjustment amountTotal monthly premium amount
Less than or equal to $85,000Less than or equal to $170,000$0.00$135.50
Greater than $85,000 and less than or equal to $107,000Greater than $170,000 and less than or equal to $214,000$54.10$189.60
Greater than $107,000 and less than or equal to $133,500Greater than $214,000 and less than or equal to $267,000$135.40$270.90
Greater than  $133,500 and less than or equal to $160,000Greater than $267,000 and less than or equal to $320,000$216.70$352.20
Greater than $160,000 and less than $500,000Greater than $320,000 and less than $750,000$297.90$433.40
Greater than or equal to $500,000Greater than or equal to $750,000$325.00$460.50
Beneficiaries who are married and lived with their spouses at any time during the year, but who file separate tax returns from their spouses:Income-related monthly adjustment amountTotal monthly premium amount
Less than or equal to $85,000$0.00$135.50
Greater than $85,000 and less than $415,000$297.90$433.40
Greater than or equal to $415,000$325.00$460.50

Part C and D costs are less straightforward and are plan specific.

The Income-Related Monthly Adjustment Amount (IRMAA)

IRMAA refers to an additional surcharge that is applied to high-income earners. IRMAA will be applied to you if you have a modified adjusted gross income that:

  • Exceeds $85,000 if single
  • Exceeds $170,000 if married and filing jointly

This surcharge is in addition to the Part B monthly premiums boosting it from the standard of $135.50/mo to anywhere from $189.50 to $460.50. It may also increase Part D premiums as well.

You Are Probably Wondering: How Can I Save Money On Medicare?

First, if you have been paying the IRMAA surcharge and your income has dropped recently due to marriage, divorce, or death of a spouse, you can fill out form SSA-44 to petition a review and possible cancelation of the IRMAA.

Search for a new plan arrangement, but be careful to analyze the benefit of having lower premiums but higher deductibles and other out-of-pocket expenses. This would negate the cost-effectiveness in the long run. Medicare plans to roll out a “Find A Plan” feature on its page around October 2019 that should aid in searching for a new plan.

Lower your taxable income by contributing to pre-tax accounts such as a traditional 401(k) (or other similar plans such as a 401(a), 403(b), etc.), a traditional IRA, or HSA. Also, HSA funds can be used to pay for Medicare premiums and won’t be calculated in the IRMAA surcharge (Yet another reason to take advantage of the services of expert financial planners and tax preparers).

Charitable donations from a tax-advantaged account made after age 70 ½ which will count as a mandatory distribution but won’t be part of your adjusted income.

Speak with me about all of your options for reducing taxable income so that we can make an individualized plan for your success.

Health Savings Account and Medicare

If you enroll in Medicare and also have an HSA, there are some important rules that you must know.

If you enroll in Part A and/or B, you will not be able to contribute pre-tax dollars to a Health Savings Account (HSA) anymore. Recall that in order to be eligible for an HSA, you have to have a High Deductible Health Plan and no other insurance coverage. Medicare counts as qualified health coverage and therefore disallows you to contribute money to an HSA. If you are going to enroll in Medicare, stop contributing to your HSA at least 6 months prior to Medical enrollment because Medicare benefits are retroactive. If you were to contribute to your HSA up until starting with Medicare benefits, you would be rewarded with a tax penalty from the IRS.

You will be able to keep the HSA and withdraw money from the account to pay for medical expenses after enrolling in Medicare. Only contributions to an HSA are affected.

Choosing to delay Medicare enrollment would be one way that you could continue to take advantage of HSA contributions. However, depending on your situation, this may not be possible or could leave you very vulnerable to having little health coverage with huge out-of-pocket expenses. If you choose to delay Medicare enrollment, you would also have to delay receiving Social Security benefits. Receiving Social Security benefits automatically enrolls many people into Medicare and you cannot receive those benefits and at the same time delay Medicare.

Remember that we discussed some of the reasons that people may delay enrolling in Medicare Parts A and B above. Choosing to delay Medicare enrollment will be largely based on whether or not Medicare is the primary or secondary insurer (which is dependent on employer size). If it is primary, as is the case if your employer has fewer than 20 employees, it would be smarter to enroll in Medicare even if means losing the ability to contribute to an HSA.

What Medicare Doesn’t Cover

It’s great to know what Medicare pays for, but maybe more important is to know what’s not covered so that you can appropriately plan.

According to Medicare, typical expenses not paid for by Medicare include:

  • Long-term care
  • Most dental care
  • Eye exams related to prescribing glasses
  • Dentures
  • Cosmetic surgery
  • Acupuncture
  • Hearing aids and exams for fitting them
  • Routine foot care

Unfortunately, some of those services can cause extreme financial and emotional strain.

So what can you do about it?

Plan ahead because this is a common area that is missed in many people’s financial and retirement plans.

Look into purchasing Long Term Care (LTC) and Dental insurance. The longer you wait to secure LTC insurance, the more you’ll pay for premiums.

According to the official government authority on LTC, monthly costs in a LTC facility can reach almost $7,000, and that’s not even for a private room! Hiring an in-home health aide goes for about $20.00 an hour, and higher level care, such as nursing care, costs even more. Usually, LTC stays aren’t short lasting either so don’t put yourself in the position of having to find a way to cover such exorbitant expenses.

Additional ways to pay for LTC, pending eligibility:

  • Add a rider to an existing life insurance policy
  • Health Savings Account
  • Veteran benefits
  • Medicaid

Medicaid will pay for a very limited, and probably a disappointing portion of LTC. Medicaid will pay for some LTC, for a maximum of 100 days, and only after nearly all other avenues of paying for LTC have been exhausted. Furthermore, not every facility even accepts Medicaid.

Qualifying for Medicaid is not very straightforward either. Eligibility is based on several factors including income levels that are scaled to family size and medical needs. Medicaid should be viewed as a last resort for paying for LTC as it was intended to provide basic needs to the people of our society with the fewest assets and ability to pay.

This really is just an introduction into Medicare. There are many more pieces to it and successfully planning for and transitioning into Medicare requires substantial previous planning. You have worked too hard to not adequately plan for healthcare coverage in retirement.

I am always here to help you navigate these complex topics and prepare a holistic financial plan for your future. Contact me today to schedule a time to talk about all of your financial needs.








Financial Checklist For Pregnancy

There is no denying that having a baby is life-changing and expecting an infant is overwhelming and wonderful.

Learning that you are going to be a parent brings the future into sharper focus and you realize it’s time to start planning for the changes that are coming your way.

Financially, expectant parents face a range of expenses from medical care, to baby equipment, to estate planning.  Navigating these pregnancy costs requires a bit of an investment and more than likely, professional assistance.

Here’s what to plan for financially and what to review before ‘Baby’ arrives.


Medical Insurance

According to Business Insider, the average medical cost of having a baby in the US is $10,808.

The cost varies, of course, and depends on many factors. Amongst these are where you live, your insurance coverage, how you deliver (vaginally or cesarean), and the prenatal treatments/tests you may need.

For example, a cesarean section costs can range from $5,000 to over $30,000! Of course, your insurance will be paying a part of this cost.

What is the best way to estimate your costs associated with pregnancy?

Call your insurance provider! This is the best method for discovering your costs.

It’s important to contact your health insurance provider to find out the details of your coverage and ask questions that will help you estimate the charges for:

  • Prenatal care
  • Co-pays/Deductible
  • Out of pocket expenses
  • Hospital stay
  • Emergency costs
  • Post-natal care

Determining these costs in advance allows you to get the most out of your insurance and extra savings from FSA/HSA accounts.

Your health insurance provider can also provide you with a list of in-network providers, required pre-registration and/or possible restrictions specific to your coverage.

When does your baby obtain medical insurance?

Now is also a good time to confirm when the baby will be covered under the policy and what steps you will need to take to have them added. Typically, there is a 30 day period for enrolling a newborn, if it’s missed you may have to wait until your company’s annual open enrollment period. Missing open enrollment could mean that you are exposed to larger out-of-pocket costs if your child needs any care.

Estate Planning

There are 5 essential items new parents need to consider when Estate Planning, according to a recent article from Kiplinger financial planning:

  1. Health Care Proxy and Executing a Power of Attorney
    – These are considered “Living Documents” and ensure that another adult  has the power to make decisions for an adult who is incapacitated
  2. Naming a Guardian and a Custodial Trustee
    – These two individuals will work as a team; one to care for the child and the other to care for your child’s finances
  3.  Creating/Updating A Will and Possibly a Trust
    – These documents outline your wishes after you pass. Keep in mind that if you don’t create a will or update it after you have a child, you’re leaving your most important assets, in the hands of the courts (a process called probate)
    – Probate is extremely expensive and is a bureaucratic drag
  4. Evaluating Life Insurance Coverage
    – Purchasing or possibly raising coverage on life insurance policies is critical for both parents. There is a dependent on the way who needs to be cared for and a spouse who needs the security of added coverage should the unthinkable happen.
  5. Updating Account Ownership and Beneficiary Designations
    -Proper beneficiaries will ensure that assets are assigned according to the documents you have prepared.

The cost for preparation of these documents pales in comparison to the comfort of knowing that your loved ones are protected and well cared for.  These safeguards are essential for the care of your new family.

Approximate costs of estate planning range from $1500 – over $4,000. However, the cost of probate court fees and attorneys easily surpass $20,000. It’s a no-brainer to plan ahead and properly plan your estate before the need ever arises.

Maternity/Paternity Leave

Another important factor to consider is time off from work-  maternity/paternity leave.  The FMLA or Family and Medical Leave Act is a federal lw requiring employers to provide at least 12 weeks of unpaid leave for expecting mothers and fathers. This law guarantees you will have a job to return to but does not guarantee that you will have an income during your time off.

During your pregnancy, reach out to your Human Resources department for help in determining company policies regarding paid time off and FMLA leave. Some employers may not fall under the FMLA requirements yet others may even offer a form of short term disability or other forms of paid leave for expectant parents.

Like everything else, it pays to ask and perform due diligence in finding out exactly what benefits are going to be available to you.

Periods of lost or reduced income are costs that no family wishes to face unexpectedly.

So having this information early can help you prepare and start saving, if necessary.

Increased Expenses

As your family gets larger, it seems other things in your life need to grow as well.  It’s not unreasonable to include the cost of larger living spaces or perhaps a bigger vehicle, in the cost of pregnancy.

A one-bedroom apartment or a two-seater sports car, just aren’t practical for family life.  So

depending on your situation, it may be time to make some lifestyle changes before Baby arrives.

Believe it or not, that tiny little bundle needs space (a lot of space) for all of their stuff. However, don’t let the fact that you are going to have a baby destroy your financial planning. Before making larger purchases, consider how those purchases are going to affect your future finances and well-being of your family. Frequently splurging on expensive items and neglecting your financial plan (such as saving and investing) is not the best way to provide a great life for your family.


According to Baby Center.com and their baby-cost-calculator, it costs approximately $8000-$15,000+ for infant care in the first year.

This number is for a stay at home parent, with a breastfed baby, who is purchasing disposable diapers. This number also includes a pretty comprehensive list of the one-time costs of infant items such as cribs, clothing, and strollers.

The handy calculator https://www.babycenter.com/baby-cost-calculator

allows you to calculate different variables such as daycare vs. nanny, and diaper service vs. disposables, which helps to personalize the cost and causes it to vary widely.

Technically, baby care is a cost that would be incurred in the infant’s first year.  Since most of these decisions and purchases need to be in place before the baby arrives, they really should be considered a cost of pregnancy.

Recent studies demonstrate that over the course of 18 years, costs for raising one child are approximately $235,000.


We also have to consider mom’s needs and specifically, her wardrobe.  Maternity clothes are a must for keeping mom feeling and looking her best. The cost will vary depending on mom’s career, needs, and preferences, but she’s probably going to need to spend a fair amount of money on clothes and shoes.

Pregnancy yoga, pregnancy massage, pregnancy chiropractors, doulas, etc. may also be essential costs for Mom’s well being. This is in addition to all of the necessary, and sometimes unplanned, prenatal and pregnancy costs.

These costs may be considered elective and not covered under health insurance but may qualify for FSA/HSA expenditures.


Increased Expenses means it’s time to examine your budget.

Aside from one time costs for Baby, and mom’s pregnancy essentials, your monthly expenses are also going to increase.  During pregnancy, start to investigate these costs and develop a plan.

Some questions to ask:

  • Has our rent/mortgage increased?
  • What is the cost of Childcare?
  • How much college savings should we be investing?
  • How much do we expect our food budget to increase?
  • Will our insurance premiums change?
  • What items are considered “eligible expenses” for HSA and FSA accounts?

With some forethought, you and your partner can have a reasonable budget in place before Baby comes home from the hospital.

There are going to be many surprises in those first few months— finding out you have “more month than money” doesn’t need to be among them.

A note on eligible expenses for HSA/FSA accounts: the list is far too long to include here and there are probably expenses that you may find surprising. Ask your insurance company for a eligible cost lists or perform a simple internet search.


During pregnancy, It may be worth your while to schedule an appointment with your tax advisor to discuss the tax consequences of having a baby.

Here are some things to consider

  • Updating your W-4 at work
    • Adding a dependent to your deductions could result in increased take-home pay
    • However, consider how your tax burden may change come April
  • Obtaining a Social Security Number for your child
    • In order to claim your child as a dependent on your taxes, you will need to register them for a SSN#. This can be done before you leave the hospital when you are filling out your child’s birth certificate
  • Learn about tax credits and deductions
    • For 2018 and 2019, the tax credit for a new baby is up to $2000 per qualifying child
    • Up to $1,400 of the tax credit is refundable
    • You may also be eligible for earned income credits, childcare credits, adoption credits, college savings benefits
    • To be clear, a child entitles the parents to both tax deductions and tax credits. Both reduce your tax burden, but in different ways
  • Do you have a nanny?
    • You are the nanny’s employer and must report this on your tax documents
  • Does your child have income from investments?
    • You will have to report this on your tax forms
    • Known as the “kiddie tax”


Qualifying for the Child Tax Credit

The child can be your child from birth, adoption, a foster child, or even a step-child.

Your income level is capped at $200,000 if single and $400,000 if married filing jointly.

The child must be under 16 years of age prior to December 31st of the year the credit is being solicited

Childcare Credit

The government may give you up to a 35% dollar-for-dollar credit, up to $3,000 for childcare costs. The credit is scaled according to the parent’s income.

Check with your financial planner and/or tax specialist to determine how much of credit you may be eligible for. In addition to the federal credit, some states also offer a childcare credit.

Adoption Tax Credit

Yes, there is a credit for that!

For 2019, the federal adoption tax credit is $14,080, which is scaled according to income.

If your modified  adjusted gross income is:

  • Less than $211,160, you are eligible for the full credit
  • More than $211,160 but less than $251,160, you are eligible for a reduced credit
  • More than $251,160, you are not eligible for the credit

Savings & Investments

Planning for a baby is planning for the future. As mentioned above, be careful to not completely disregard your saving and investing plans. One of the best ways to protect your family is to plan for their financial future.

Pregnancy is an ideal time to re-evaluate your portfolio. Are your investments too risky?  Too conservative?  Is it time to change contribution amounts?

You will certainly need to continue saving and investing for your retirement.  But the future holds many things for your new family-  college, braces, cars…

A  financial advisor can help develop a plan that’s right for you.  They will also be able to advise you on savings strategies and products for minors.

Here are some to Explore:

  1. Open a savings account
  2. Open a Roth IRA
  3. Look into 529 college plans
  4. Opt for a Coverdell education savings account
  5. Consider prepaid tuition plans
  6. Open a Uniform Gifts to Minors Act or UTMA account
  7. Set up a Trust for education
  8. Invest in treasury bonds


A quick overview of some of the lesser-known saving options


529 College Plan

This a a tax-advantaged savings arrangement that allows parents to save for future college costs. There are two types of 529 plans, according to the U.S. Securities and Exchange Commission:

  • Pre-paid tuition plan
  • Educations savings plan

The pre-paid plan allows you to purchase college credits at current prices for your child. Considering the alarming rate at which college tuition is increasing, this may be an attractive plan.

The education savings plan allows you to open an investment account focused on growth in the child’s early years and then shifts to a more conservative portfolio as the child nears college age.

A 529 plan can receive contributions and “gifts”

States set contribution limits. Washington state allows for contributions up to $500,000


This account type offers a way for minors to own securities and eliminates the need to hire an attorney for the preparation of trust documents.

The parents act as fiduciaries, and must follow fiduciary standards and the money in the account is part of the parents’ taxable estate. Any income that is generated from this account is subject to the “kiddie tax” and therefore must be reported on your tax documents.

Coverdell Account

This account type is an after-tax savings account, similar to a Roth. Withdrawals made on this account are tax-free.

The yearly contribution limit is currently $2,000

There are several nuances to all of these saving vehicles so reach out to your financial advisor to see what will be best for you and to establish a plan that allows you to maximize savings.

With careful planning, you can start your family off on the right financial path. Schedule appointments during your pregnancy with the tax, law and financial professionals on your Team.

Then when the baby comes you can focus on the truly important thing, your family.

After all, An addition to the family may come with added costs but also added joy and being a parent will make your life richer in ways you never thought possible.

As always, don’t try to navigate all of these difficult concepts on your own. Make an appointment with your financial advisor and tax specialist early on if you are trying to have kids or know that you are pregnant.











Company Stock Compensation Plans- How Do They Work and How Can I Use This Tool For Retirement Savings?

Company stock compensation plans are a big deal and are often offered to employees at some of the most iconic employers that have ever existed. If you are eligible for employee stock compensation congratulations. But there is a lot to learn about these different plans. Regardless of the exact type of plan that you are eligible for, you will want to learn about the basic workings of the plan, the rules and regulations, how your tax burden will change, and how you can use these tools to plan for your retirement.

This article offers several over-simplified examples of different compensation plans. Therefore, the smartest thing you can do is to have an individualized meeting with a financial professional to discuss your full range of options so that you can have the best financial future possible. Educate yourself using reliable resources such as professional financial planners and tax experts. What your co-workers say at work may or may not be true as several misconceptions have arisen surrounding stock compensation plans.

Employee Stock Options

Employee Stock Options (ESO) are a form of company compensation where the employee is given the option of when to sell stocks. “Exercising” your stock option occurs if and when you buy the stocks that are offered to you. If done right, ESOs can offer opportunities for large financial gains.

Important things to know about ESOs:

  • ESOs allow employees to share in the growth and success of a company but without personal financial risk to the employee (until the stock option is exercised)
  • The stock value is hypothetical until the option is exercised
  • They serve as both a reward and as a motivator – Hard work will benefit the company and company growth will raise the value of company stock which will benefit the employee financially
  • The type of stock option determines its tax treatment

As an employee with an ESO, you will want to know the basics about the stock options available to you, when your stock options will be vested, how and when your options will be taxed, as well as some of the strategies and risks with regards to exercising your stock options.

 How ESOs work:

Your employer will offer you the chance to buy company stock at a specified time, depending on the employer’s vesting plan. But, realize that the stock option won’t be available indefinitely since there is an expiration date included in the plan.

There are 2 types of ESOs

  • Non-Qualified Stock Options (NQSO)
  • Incentive Stock Options (ISO)

How do vesting schedules work?

ESOs are subject to a vesting schedule. When you begin working with a company, you most likely will have to wait a period of time in order to have all or a percentage of your stock options become available to you (i.e. vested). A vesting schedule is another method that employers use to retain employees; the longer the employee stays with the company, the greater the financial gain. Once a compensation form is vested, the employee has a legal right to claim that compensation.

A graded vesting schedule may occur as follows (companies use varying schedules):

Time Employed Percent of ESO Vested
1 Month 2%
2 Months 4%
3 Months… 6%…
…23 Months 98%
24 Months 100%

A cliff vesting schedule is, well, like going off a cliff. It’s a sudden change in the percent vested.

Time Employed Percent Vested
1 Year 0%
2 Years 100%

Companies may also decide to blend the vesting schedule. For example, a company may use a graded scale, but with a 1-year cliff to start. If the employee were to leave the company prior to completing the first year, he or she would not have the right to any part of the stock. Vesting schedules vary so check with your employer to learn about your schedule. It is important to know when your compensation will be vested so that you can make correct decisions.

To compare, companies that offer 401(k) accounts with employer matches, for example, also typically use a vesting schedule. The employer match might become gradually vested at 20% per year, or they may use a cliff schedule of 100% vested status after three years of employment. If the employee changes jobs prior to the time at which the employer match is vested, he or she has no right to that match money. But, once vested, that matched money belongs to the employee.

Once the predetermined amount of stock is vested, you will be offered stock at the grant price. If you decide to exercise your options, you must do so prior to the expiration date.


Let’s say that your employer offers you the right to purchase 1,000 shares of company stock at $10.00 per share (the grant/strike price) once vested. Let’s imagine that your company’s stock is valued at $20 on the grant date. Alternatively, you could be granted a percentage of stock, let’s say 25%, per year over 4 years, at which point you would be fully vested.

Your option would look like this:

The fixed grant price is $10.00/share in the grant year of 2020.

Market price at grant date: $10.00/share

Expiration date: 2030

Exercise date: June 1, 2025.

Market price on exercise date: $30.00/share

If you decide to exercise your stock options, which you can perform on June 1, 2025, you will buy the 1,000 shares for a total of $10,000. If you don’t exercise your options prior to year 2030, you will lose your stock options. Imagine that the market price on the grant date was $15.00 (or $25, or 50, etc.), and the company has been seeing increasing stock prices for several years. These factors may influence you on when exactly you decide to exercise your options.

The question for many then becomes: When should I exercise my stock options?

The best answer is to speak with your fiduciary financial planner and tax expert. However, the decision to exercise should be based on a combination of:

  • Tax rates
    • Consider ordinary income tax, alternative minimum tax, and long-term capital gains tax
  • Type of stock option (ISO vs. NQSO)
  • Years until retirement
  • Stock prices
    • Are your stocks “underwater/out-of-the-money” or “in-the-money?”
    • Under-the-water represents devalued stocks whereas in-the-money represents stocks that have increased in value


What’s the benefit of ESOs?

ESO compensation allows you to purchase stock at a price that theoretically should be below the market value of a share. ESOs are therefore more valuable than buying exchange-traded funds, which are priced above the grant price of ESOs. ESOs give you more flexibility and bang for your buck. However, if you allocate too much of your portfolio to your company’s stocks, you risk being highly vulnerable if those stocks decrease in value.

Taxation of ESOs

Nonqualified Stock Options:

As the name implies, non-qualified stock options are not eligible for any form of special tax treatment.

When you exercise a NQSO, the spread (the difference between the grant price and the market price of a stock) is considered earned income and you will, therefore, be subject to:

  • Payroll taxes
    • Social Security and Medicare Tax
  • Ordinary taxes
    • At your particular tax bracket rate
  • Capital gains tax on any appreciation of stock, or take a capital loss in the case of decreased stock value

Incentive Stock Options:

The ISO is taxed differently than nonqualified stock options. With ISOs, you will not be subject to payroll taxes, and other taxes will depend on exactly how you exercise your options. If you exercise your stock option but also sell your stock in the same calendar year, you will pay your ordinary tax rate on the spread of the stock.

If you exercise your options but hold the stock for one year past the exercise date, the spread amount will be used for Alternative Minimum Tax (AMT) calculation, which you may have to pay. However, by holding the stock for one year after exercising your option, you can avoid paying ordinary tax and instead pay a long-term gains tax, which is lower than the ordinary tax, especially for high-income earners.

However, don’t let any one particular tax rule, or the fear of paying certain taxes, be the ultimate decision-maker for deciding what to do with your options. Having too large of a percentage of your portfolio allocated to just one company can also be risky. Consider what would happen to your portfolio if your company stock falls dramatically, even below the grant price.  Again, it is wise to speak to tax and financial professionals before making any decisions.

How can I use ESOs for retirement planning?

Use the profit to:

  • Diversify your existing portfolio
  • Pay down debt
  • Build up an emergency fund
  • Use the earnings to build a strategy that allows you to max out retirement accounts
    • Note that you can only fund a Roth and a Traditional IRA with cash and you can only use salary deferrals to fund employer-sponsored retirement plans, like a 401(k)
    • You can’t exchange options into retirement accounts
  • Convert a Traditional IRA to a Roth IRA using the stock profit to pay the applicable taxes. This may make sense depending on the tax bracket you think you will belong to in retirement and/or depending on your eligibility (income limits apply) to contribute to a Roth IRA

Restricted  Stock Units- RSUs

RSUs are another form of compensation that companies use to recruit and retain solid employees. RSUs may be distributed to employees based on a vesting schedule or when certain milestones or achievements are met. The following are key elements to RSUs:

  • Once vested RSUs are assigned a fair market value
  • Are tax-deferred, until vested
  • Dividends, if offered, appear on a yearly W-2 form
  • Are less risky than stock options (ESOs are subject to more volatility)
  • Don’t confer voters’ rights until vested (no rights at all if cash given in lieu of stocks)

Typically, RSUs may be distributed as follows:

The employee is offered 1,000 RSUs that are vested at 25% (250 RSUs) each year and the grant price is $10 per unit. Let’s imagine that the market value of the stock increases $5 each year.

Year 1: 250 at $10 = $2,500

Year 2: 250 at $15 = $3,750

Year 3: 250 at $20 = $5,000

Year 4: 250 at $25 = $6,250

At the end of the 4 years, the employee has a total of $17,500 in RSUs. Notice that there is no strike price (grant price) with RSUs like there is with stock options. Consider what would happen in the case that your company’s stock, which was granted to you at a grant price of $10.00/share, fell to a value of $5.00/share? In this case, you could not sell for a profit, you are under-the-water.

What if the same situation occurs with RSUs and the value of your company’s stock falls? Well, since there is no strike price, you are not buying the stock at any predetermined value, so even if market value falls, with RSUs you are still going to get some benefit, known as “downside protection.”

Of course, companies will not grant as many shares via RSUs as they would in stock options. Bill Gates recognized that stock options were akin to playing the lottery because if you win, you win big. Imagine how big you could win if a company’s stock increase by 50%? However, stock options can be very volatile and employees may not win at all. RSUs stabilize the playing field and is why they were introduced to Microsoft employees.

Taxation of RSUs

RSUs are taxed once they are vested and distributed to the employee and taxed at the market value at the time they are vested. That is different than how stock options are taxed. To be clear, RSUs are taxed once vested, unlike stock options that are taxed once exercised.

RSUs are subject to:

  • Federal income tax
  • Payroll taxes (Social Security- up to yearly maximum benefit base, & Medicare)
  • Applicable state and local taxes
  • Capital gains tax with stock appreciation
  • Section 83(b) is only for restricted stock, not RSUs

A fairly common practice among companies is to reach a “net-settlement” and essentially ‘pay’ the applicable payroll tax amount:

  • RSUs are distributed to the employee
  • The amount in taxes is calculated, and the corresponding value in RSUs is withheld and returned to the issuing company
  • Withheld value is used to cover payroll taxes

Of course, like with ESOs, employees want to know if they should hold or sell their RSUs and common misperceptions surround this issue. Many media outlets have reported on RSU recipients that decide to hold RSUs because of a perceived tax benefit of paying long-term tax rates instead of the more pricey short-term capital gains tax. Additionally, people often fall into the trap of endearment, thinking that their company will always do well and by holding onto company stocks, the shareholders will, with patience, get very rich. History is littered with companies that once were giants but eventually fell.

For most people, the correct decision would be to sell the RSUs and use the cash to reinvest in a more diversified portfolio. Remember, having too much money allocated to any one company can reduce diversification, and increase ‘concentration risk.’ In other words, by holding the RSUs you are unnecessarily increasing your risk.  Also, consider the possibility of your shares decreasing in value. If this happens, you will have paid taxes on the larger original value (at the time of vesting) plus now you have lost value on the shares, a double-whammy.

However, the year that your RSUs vest, your taxable income is going to bubble. Take advantage of the help of a tax professional and financial planner and perform a big-picture evaluation of your particular financial situation. There may be benefits in terms of capital gains and additional Medicare tax rates by holding onto the RSUs.

How can I use RSUs to plan for retirement?

  • Use RSUs to beef up an emergency fund
  • Use the cash to max out retirement accounts, as applicable and decrease the concentration of investments aiming to diversify
  • Sell most RSUs, but hold on to some. If the stock increases in value, sell some more. If the stock is devalued, you won’t take as big of a hit.

Employee Stock Purchase Plans (ESPP)

ESPPs are a compensation plan that employers use to offer eligible employees the opportunity to buy company stock at a reduced rate. Once eligible, the employee will begin to make contributions, usually as payroll deductions, toward the plan. After a predetermined period of time, the company will use the accumulated contributions to buy the employee company stock at a reduced rate.

There are two types of ESPP

  • Qualified ESPP
  • Non-qualified ESPP

The basic workings of both types of ESPPs are very similar. Major differences include favorable tax treatment for qualified ESPPs whereas non-qualified plans don’t enjoy the same tax advantages. Qualified plans are more common, and that’s what we will focus on here.

Key ESPP elements include:

  • Yearly contribution limit of $25,000 (thus, purchased stock is limited to $25,000 worth of shares)
    • This is a fixed amount that won’t change for the year, even if stock prices fluctuate
    • Actual shares purchased may be below this limit
  • Contributions are after-tax
  • No taxes on stocks until they are sold
  • 15% maximum discount on stocks
  • Employees that own more than 5% of employee stock can’t participate
  • Stock is purchased during offering periods
  • Funds used to purchase stocks are immediately vested
  • Discounted stock
    • Built-in discount
    • ‘Look-back’ provision

The  ‘look-back’ provision allows the ESPP to provide the employee with the lowest of:

  • The closing stock price on the date of the purchase
  • The closing stock price on the original offering date

The plan may offer both the ‘look-back’ benefit plus a discount on that ‘look-back’ price, offering a tremendously discounted stock price. However, factors that cause the stock price to decrease can also devalue the ESPP and effectively limit the amount of stock purchased, even to an amount below the allowed $25,000 so it can go both ways.

Taxation of ESPPs

With ESPPs, there are two ways to sell the stock, each having an effect on tax treatment:

  1. A qualified disposition (more favorable tax treatment)
  2. A non-qualified disposition

What makes a sale a qualifying disposition?

The stock must have been held for at least 2 years since the offering date, and 1 year since the purchase date.

If these qualifications are not met, the sale is categorized as non-qualifying.

Qualified Disposition Taxation

Under a qualified disposition, the discount on the stock purchase is taxed as ordinary income and the gain will be taxed with long-term gain rates.

In a non-qualified disposition, both the discount and capital gain on the stock will be taxed at the ordinary tax rate, increasing the amount of taxes paid.

If you purchased a $500 stock at a 15% discount for a total of $425, and the difference in the price from the purchase date (including the discount) and the price on the sale date is $200, then you would:

  • With a non-qualified disposition, pay an ordinary tax (at 33% of $200) of $66
  • With a qualified disposition, pay an ordinary tax on the discount of $75 (33% of $75) = $24.75 and a long-term gain tax at 15% of $200, which = $30.
    • $30 + $24.75 =$54.75

You can see that if an employee owned more stock, more like thousands of dollars of stock, the differences in taxes would also be greatly magnified. As a word of caution though, don’t let this fact influence you too much when deciding to sell or hold your stocks.

Employers usually report ESPP purchases and gains on a W2 form. If yours does not do this, you must file Form 1040.

By this point, you are probably wondering if you should hold onto or sell your ESPP stock?

Like with the other stock compensation options, it’s always going to depend. You have to evaluate your individual financial circumstances with the help of a financial planner.

It bears repeating that holding too much stock in one company, especially your company and the company that pays your wages, decreases diversification and exposes you to more risk. If something economically goes wrong at your company and the stocks plummet while the company decides to lay you off, you could really suffer. It’s impossible to know what is going to happen to the value of any one company’s stocks over time. You may have lots of confidence in your employer, or you may have none. This is also going to affect your decision.

By having received shares at a discounted price, you are already getting that 15% discount. In other words, that’s a positive return on investment. Holding onto the shares in order to satisfy qualified disposition criteria may work out, and it may not. Again, talk to professionals. Don’t let taxes be the sole reason to sell or to hold. However, in this case, selling is probably a safe move.

How Can ESPPs Help Me Plan For Retirement?

  • Sell shares and further diversify your portfolio
  • Contributions are after-tax, don’t spread yourself too thin

Wealth management is our passion! Let us help you make the best decisions today so that you have the best future possible. Contact us now to schedule a time to discuss your financial questions.


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