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Dollars Signs: Maximizing Your Company Benefits
Aired October 04, 2003 - 16:31 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LINDA STOUFFER, CNN HOST: And welcome now to DOLLAR SIGNS, where we help you make the most of your money. And today, we're talking about maximizing your company's benefits. It's advice anyone can use, especially since competition for top employees has many companies one- upping each other, offering all kinds of perks and benefits.
For instance, did you know that 79 percent of companies offer educational assistance? Sixty-four percent have employees who work flex time or flexible schedules. Twenty-seven percent offer travel planning. Twenty-six percent offer legal assistance.
And some companies, well, they go even further for their employees. Twenty-one percent offer adoption assistance. Thirteen percent offer transit subsidies. Six percent offer self-defense training, and 3 percent, well, they even offer health insurance for your pets.
Well, there are even more perks you can take advantage of if your health care plan has it. Fifty percent offer discounts or reimbursements on gym memberships. How about a workout out at home? You see more than 90 percent of health care plans provide some physical activity benefit, like discounts on gym equipment for your home.
All right, we know there are a whole lot of benefit options out there. But what's really the best way to take advantage of them? That is what we're going to talk about right now.
"SmartMoney" magazine's Roben Farzad is joining us from Boston, and Kirby Bosley with Mercer Human Resource Consulting is live in Los Angeles.
And, Kirby, I want to start with you. What are we not taking advantage of? What are we missing?
KIRBY BOSLEY, MERCER H.R. CONSULTING: Most people have the basic coverage, which is medical insurance, and they understand that that's an important coverage to select. But many times, there are, as you mentioned, discounts, services available through the medical plan that people aren't aware of, or even benefits you may be aware of that you don't take advantage of, such as a mail-order drug option in your drug coverage.
A lot of health plans have something called nurse lines, where employees can call a nurse even in the middle of the night, talk to someone and find out, well, is this an ear infection, do we go to the hospital, and so forth. A lot of options are in there if you just read the materials and find out what's available to you.
STOUFFER: So, I was going to ask you next, how you find out about your benefits, but I guess it's just, pick up the handbook and go through it, that's what you're saying.
BOSLEY: It's not always that painful. Nowadays, most health plans offer a Web site, and employees can get on the Web site and look at all of the options. Or, even if you pull out your I.D. card -- and I bet we all have one in our wallets -- and call that 800 number and ask them questions, you can find out that way, too.
STOUFFER: And, Roben, I guess that's not very smart money at all, is it, to just not use these benefits that are available to us. Why would people ignore what they have coming to them?
ROBEN FARZAD, "SMARTMONEY" MAGAZINE: A lot of people find these handbooks to be prohibitive. You just have to go through all of these motions, forms, talk to your HR person. But when you stop and appreciate that most people haven't been getting squat in terms of raises for the past three years...
STOUFFER: Yes.
FARZAD: ... it really behooves you to go and tap some of these resources. They're just sitting there uncovered, and just by, you know, talking with your co-workers, looking over the cubicle, you could get a better idea of what the company might want to offer you.
STOUFFER: What kinds of things should you be looking for in particular? Most people know about their 401(k) plans, health plans. What do you think people ought to really be listening for?
FARZAD: Well, you want to start on the retirement benefits side. You know, it's been conventional wisdom -- convention wisdom says that companies have been cutting back on 401(k) benefits. But this survey just commissioned of 500 large companies employing about three million people says that more than 85 percent of them have actually kept 401(k) benefits at the same levels or increased levels throughout the past three years.
So, if you're getting these matching benefits, that's your first priority. If not, then don't despair, because there's always a Roth IRA, and that's low-hanging fruit. If you look at the power of compounding, you could just take this matter into your own hands. You don't have to wait for your company to offer you a retirement plan.
STOUFFER: Right. Well, I know people are going to have a lot of questions about this, especially in this economy. So, we'll head to a break right now.
But coming up, we'll take your calls and e-mails next on right here on DOLLAR SIGNS. We'll be right back after this -- there we are. We'll be right back.
(COMMERCIAL BREAK)
STOUFFER: Welcome back to DOLLAR SIGNS.
Are you getting the most out of your company's benefit plan? Well, if not, our experts will help you change all of that. "Smart" magazine's Robin Farzad is here with us, and so is Kirby Bosley with Mercer Human Resource Consulting.
Welcome back to both of you. And first, we're going to hear from a viewer who is calling in for us, Vijay from Washington State. Are you there, Vijay?
UNIDENTIFIED MALE: Yes.
STOUFFER: What's your question?
UNIDENTIFIED MALE: I have a question about employee's stock purchase plans. And I would like to know what the best way of making use of it in terms of either holding onto it after the six months or selling it off immediately after every six-month cycle.
STOUFFER: OK, Roben, I think that's a stock purchase plan. What do you think about that?
FARZAD: Well, it depends on two things. What kind of discount are you getting for the stock purchase plan? And, two, what kind of stock are you buying? Is the company's underlying business successful? Do you think that the prospects for this stock are greater than just your 15 percent gain?
Otherwise, you still have the -- you mentioned the six-month holding rule. If you feel that this stock has a potential to fall more than the 15 percent discount that you got, hypothetically using that discount, then maybe it's not such a good investment. But if you think the longer term benefits, you know, outweigh that risk, then you've just gotten yourself a good stock at a 15 percent discount. So, it completely depends on where you work.
STOUFFER: Yes, good advice.
And Dean from Florida is on the phone. Hi, Dean. What's your question?
UNIDENTIFIED MALE: Yes, good afternoon, folks. I actually have a two-part question. The federal government regulates and says that some large corporations are actually small businesses classified. Does that affect benefits? And also, with the 43 million uninsured Americans, are part of that actually people just not wanting the insurance? So, in other words, it's offered, but yet they're just not willing to accept it?
STOUFFER: Kirby, do you want to start on that one? What are your thoughts?
BOSLEY: Well, let me take part two of that question having to do with the uninsured. A lot of the uninsured are unemployed and don't have a viable option -- for health insurance that is. Although a lot of the uninsured are also employed and can't afford health coverage. So, those are two big segments.
The third one is the employed with insurance available, but invincible type of a person, and that would be a young person who just feels that they're not going to need it and don't take it. So, we've got all different types out there, but the bulk of the uninsured are unemployed.
STOUFFER: And, Roben, any thoughts on that?
FARZAD: A lot of people are unemployed obviously. And I think that, though, a growing crisis here -- and Kirby is more capable of commenting on this -- is companies increasingly nickel and diming employees on health benefits. So, not necessarily that these people are uninsured, but they're suddenly underinsured. They took a certain level of benefits for granted however many years ago that just aren't there right now.
STOUFFER: It's not what it was a couple of years ago.
I want to get to an e-mail right now. Jim Franz from Greensboro, North Carolina, writes this: "What do you do if you get no benefits? I'm self-employed, and I'm paying my own insurance. My question is: Why state regulators and/or insurance companies do not allow uninsured and underinsured to form groups to help people like me?"
Roben -- or rather, Kirby, do you want to take that one first?
BOSLEY: Well, it might be worth looking at what industry this person is in, because there are such things as association plans and groups of individuals that form a larger group to really form a purchasing pool to get the better advantage of discounts and so forth. So, it might be possible this person could get association coverage.
The self employed are -- if that doesn't work -- are a little bit challenging, and states are addressing this on an individual level. In fact, California has a bill that may affect self-employed standing right now. So, there aren't good options, unless you happen to be one of the lucky ones who's young and healthy and can purchase coverage that way.
STOUFFER: Lucky is right.
And, Roben, this next e-mail is all for you: "Should I invest in my company's flexible spending account plan?" That's from Ann in Alabama.
A good idea?
FARZAD: It is a good idea, I think. I mean, these things -- is this a flexible spending account for health benefits? Is this -- I mean, Kirby, I'm curious to get your thoughts on that. I mean, the experience that I had, we had a flexible spending account for health benefits, where you put in a certain sum of money at the beginning of the year, anticipating health costs.
BOSLEY: Maybe I could jump in on this one, because flexible spending accounts, in my view, are a wonderful tax benefit. And not really a benefit, per se; this is simply a reduction of your own salary to pay for your own expenses, but you're not taxed on that portion of pay that you reduce. So, it's an excellent tax benefit, and the rules have just been liberalized so that over-the-counter drugs can now be considered reimbursable expenses under a health spending account.
Dependent care is another form of flexible spending account, too. Again, a great tax benefit, but don't lose sight of the fact that it's your own money to begin with.
STOUFFER: Right.
BOSLEY: And the other thing I would add on those is always be careful about budgeting how much money you direct to those accounts, because, if at the end of the year you haven't used that money, you lose it.
STOUFFER: Right. That's where the penalty comes in.
BOSLEY: Right.
STOUFFER: But it could pay day care costs and things like that, as you mentioned.
BOSLEY: Yes.
FARZAD: Right.
STOUFFER: We have a phone call we want to take right now, Frederick from Virginia. Frederick, how are you today? What's your question?
UNIDENTIFIED MALE: I'm doing great. My question is, as an independent consultant working as a contractor, why would it be better for me to get a Roth IRA as opposed to a regular IRA?
STOUFFER: Roben, that sounds like it's right up your alley. Why don't you go ahead.
FARZAD: The Roth IRA is really a no-brainer. The old IRA allows you to make tax-deductible contributions. If you look at this year, it's $3,000. If you're 50 and over, kind of approaching retirement, it's 3,500. But that doesn't even compare to the Roth IRA benefits, which you're contributing after-tax money.
I mean, if you have money in a checking account or left over after your paycheck and everything was taken out, you can put this in this account at $3,000 or $3,500, and it compounds tax-free until retirement. And when you take it out at retirement, the age stipulated is 59-and-a-half. You're not paying taxes then.
So, think about a snowball falling down a cliff and collecting snow as it goes down. If every 10 yards somebody was to take a scoop of snow out, it would be much smaller at the bottom of the hill. But in this case, you're going to have a much bigger nest egg at retirement.
STOUFFER: That's a great image. And, Roben, we have an e-mail that will sort of keep you on topic there. Janet from Utah writes this: "Is it best to contribute full company match to a pre-tax 401(k), or should I put a lesser amount in that 401(k) and invest outside the plan into taxable investments?" She also points out that their joint income is too high to even qualify for those Roth IRAs.
So, what's your advice there?
FARZAD: Yes, unfortunately, the Roth IRA is somewhat means- tested. If you break a joint income level of about, I think, $160,000, you and your spouse, you're not eligible. But the company 401(k) is really a no-brainer. That's money that you just found under the cushion. Your company is ready to spend that money, and it behooves you to max out to the extent that you don't need this money for, you know, a kid's education or a hip replacement, whatever it might be, and that's money you can comfortably put away.
After that, for wealthier people I think it's -- especially with this new tax law in place, that putting away money in regular taxable accounts is pretty smart with the long-term capital gains benefit. You know, dividends taxed at a lower rate. It does make sense.
But if you're not in that high income level, I would recommend options in the following order: You max out your 401(k), and once that's done and if you still have some money to squirrel away, you tap the Roth IRA. Those are two no-brainers, really.
STOUFFER: Yes, because the 401(k) can be free money if you get a match on that.
FARZAD: Right.
STOUFFER: We'll go to the phone line again. John is calling in from South Carolina. Hi, John. What are you going to ask us today?
UNIDENTIFIED MALE: Hello. How are you all doing? My wife and I have a combined income of 250,000 a year. Currently, I'm contributing to the 403(b) plan, which allows me to contribute pre-tax dollars. I was told that the maximum amount is 12,000 a year. Are there any other plans that you know that I can contribute in that are pre-tax that could help me out here?
STOUFFER: Roben, I guess you'd take that one, too.
FARZAD: No, unfortunately. I mean, you have -- you're not eligible for the Roth IRA with that combined income. You are eligible for the regular -- no, you're not eligible for the regular IRA. There's a step. There is a KEO (ph). It all depends on the nature of your family business if you can qualify for these things. And I find that a CPA is often the best source of wisdom on these matters. You know, you can meet right now with this person, anticipating your contributions through April. So, it makes a lot of sense at this point.
STOUFFER: Yes, that could be very well spent money, if you get the right kind of advice.
Kirby and Roben, thanks a lot.
Hang on with us. We're going to head to a break. We'll have a lot more of your calls and e-mails after this quick break.
(COMMERCIAL BREAK)
STOUFFER: And welcome back to DOLLARS SIGNS, everyone.
Our guests, Roben Farzad of "SmartMoney" magazine and Kirby Bosley of Mercer Human Resource Consulting are here today answering your questions about taking best advantage of company benefits.
And we have phone call right now. Benny is in North Carolina. Hi, Benny.
UNIDENTIFIED MALE: Hi. How are you?
STOUFFER: I'm great. What's your question?
UNIDENTIFIED MALE: Good. My question is for Kirby. I wanted to find out how the flexible spending plan would help a couple of empty nesters that are in relatively good health. What benefit would that flexible spending plan be to us?
STOUFFER: What do you think, Kirby?
BOSLEY: What you might do is you might set aside some money for expenses that you know you will incur that you can't get covered any other way. For example, eyeglasses or maybe sunglasses, a second set of glasses. Now over-the-counter drugs if your company will allow that to be covered. You need to confirm that with your HR people. But in that case, you'll put some money in there for antihistamines or, you know, what might come up during the year.
So, you may not want to put as much money in the spending account as others would, but it's still a good value.
STOUFFER: Because, Kirby, as we talked about earlier, if you put too much in, you're out of luck, right?
BOSLEY: Right, exactly.
STOUFFER: OK. Now to an e-mail. This one is from Utah. It says: "Returning to the workforce from private self-owned businesses, what should I look for and concentrate on in the way of benefits -- health plans, 401(k)s, something else?"
He wants to know what he should look for out there. Roben, you want to take this one? Any advice?
FARZAD: This is a good piece of advice: As soon as you get there, make sure you have a heartfelt one-on-one with your HR rep. If that seems a little bureaucratic, have lunch with some of your co- workers and kind of get this by word of mouth. Because, like I said, that employee handbook is pretty daunting. And once you get this advice from other people -- for example, on your health care benefits, there are several different tiers offered by one company often, and you don't know what the advantages are for one type of person versus -- you know, one plan versus another plan. Ditto 401(k) and Roth IRA stuff.
Ask people, and then after doing your homework for about two weeks, finding out which is the most popular plans, who is picking them, you know, go for it. Don't waste any time, especially when you're talking about accruing these benefits. With 401(k), especially if you have a company match that's generous, every month of a missed 401(k) match is lost money.
STOUFFER: But, Roben, it's really something to take into consideration if you have a couple of opportunities, isn't it? Because it can really add up if you have a lot of good benefits.
FARZAD: It really can. I mean, one person who I used to work with took an evening MBA course, which its sticker price was $20,000. And I did this over the course of two years, and the company reimbursed him because it was applicable and relevant to what he was doing during the day. Now, if somebody offered you a $20,000 raise, you'd take it right then and there.
STOUFFER: Right.
FARZAD: So, it really behooves you to read up on these things. And when put together, oftentimes you're talking several thousand dollars' worth of benefits.
STOUFFER: Do your homework. OK, John is on the phone from Connecticut. Hi, John.
UNIDENTIFIED MALE: Hello. How are you?
STOUFFER: Great. What are you thinking about right now?
UNIDENTIFIED MALE: Well, I appreciate everybody being there. This is really important to a lot of folks. At work, I have a 401(k). I haven't had it that long. I have roughly $8,000 in it. I was going to transfer $5,000 into platinum coins or gold. The company recently went up from a 5 percent match to a 7 percent, and our medical benefits disappeared.
I was also wondering, they say that you can put matching funds in there if you're 55, but my company has told me that I'm not qualified to do it. You know, if I have a few grand sitting around, I'd like to put into a 401(k). Do you know what's up with that?
STOUFFER: Roben, that's a multi-part question. Do you want to take maybe that first part first?
FARZAD: Sure.
STOUFFER: He's thinking about reducing that 401(k) and putting it elsewhere. FARZAD: Yes, keep in mind that your 401(k) contributions, when you're talking about the power of compounding, even if you're, you know, maybe five years to retirement, you want to be especially leery of taking this money out unless you absolutely need it.
As another resort, you know, if you have a Roth IRA as a backup, on some of these accounts you can take money out or use them as collateral for a loan, but it's not wise to take this stuff out, especially if the company's match is going up. And I'd also remind people that if they are 50 or over, the contribution limit for the 401(k) goes from 12,000 to 14,000. So, that helps people catch up as they approach retirement.
STOUFFER: I see. Kirby Bosley with Mercer, Roben Farzad with "SmartMoney," you've been so great today. Thank you very much for your time and all of your advice to our viewers today. Thanks a lot.
FARZAD: Thank you, Linda.
STOUFFER: I hope you both have a great weekend.
BOSLEY: Thanks.
STOUFFER: And you please stay with us this afternoon, too, right here on CNN, because "PEOPLE IN THE NEWS" is up next, profiles of Kobe Bryant and Dave Matthews.
Also, that CIA leak story is in the spotlight on "CNN LIVE SATURDAY." That's at 6:00 Eastern. And is it necessary to have an independent counsel or a special prosecutor in the case? And if not, why not?
Also, at 7:00 Eastern, don't miss the tough talk on "CAPITAL GANG."
I'll be back after a quick break with today's top stories, so please stay tuned.
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Aired October 4, 2003 - 16:31 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LINDA STOUFFER, CNN HOST: And welcome now to DOLLAR SIGNS, where we help you make the most of your money. And today, we're talking about maximizing your company's benefits. It's advice anyone can use, especially since competition for top employees has many companies one- upping each other, offering all kinds of perks and benefits.
For instance, did you know that 79 percent of companies offer educational assistance? Sixty-four percent have employees who work flex time or flexible schedules. Twenty-seven percent offer travel planning. Twenty-six percent offer legal assistance.
And some companies, well, they go even further for their employees. Twenty-one percent offer adoption assistance. Thirteen percent offer transit subsidies. Six percent offer self-defense training, and 3 percent, well, they even offer health insurance for your pets.
Well, there are even more perks you can take advantage of if your health care plan has it. Fifty percent offer discounts or reimbursements on gym memberships. How about a workout out at home? You see more than 90 percent of health care plans provide some physical activity benefit, like discounts on gym equipment for your home.
All right, we know there are a whole lot of benefit options out there. But what's really the best way to take advantage of them? That is what we're going to talk about right now.
"SmartMoney" magazine's Roben Farzad is joining us from Boston, and Kirby Bosley with Mercer Human Resource Consulting is live in Los Angeles.
And, Kirby, I want to start with you. What are we not taking advantage of? What are we missing?
KIRBY BOSLEY, MERCER H.R. CONSULTING: Most people have the basic coverage, which is medical insurance, and they understand that that's an important coverage to select. But many times, there are, as you mentioned, discounts, services available through the medical plan that people aren't aware of, or even benefits you may be aware of that you don't take advantage of, such as a mail-order drug option in your drug coverage.
A lot of health plans have something called nurse lines, where employees can call a nurse even in the middle of the night, talk to someone and find out, well, is this an ear infection, do we go to the hospital, and so forth. A lot of options are in there if you just read the materials and find out what's available to you.
STOUFFER: So, I was going to ask you next, how you find out about your benefits, but I guess it's just, pick up the handbook and go through it, that's what you're saying.
BOSLEY: It's not always that painful. Nowadays, most health plans offer a Web site, and employees can get on the Web site and look at all of the options. Or, even if you pull out your I.D. card -- and I bet we all have one in our wallets -- and call that 800 number and ask them questions, you can find out that way, too.
STOUFFER: And, Roben, I guess that's not very smart money at all, is it, to just not use these benefits that are available to us. Why would people ignore what they have coming to them?
ROBEN FARZAD, "SMARTMONEY" MAGAZINE: A lot of people find these handbooks to be prohibitive. You just have to go through all of these motions, forms, talk to your HR person. But when you stop and appreciate that most people haven't been getting squat in terms of raises for the past three years...
STOUFFER: Yes.
FARZAD: ... it really behooves you to go and tap some of these resources. They're just sitting there uncovered, and just by, you know, talking with your co-workers, looking over the cubicle, you could get a better idea of what the company might want to offer you.
STOUFFER: What kinds of things should you be looking for in particular? Most people know about their 401(k) plans, health plans. What do you think people ought to really be listening for?
FARZAD: Well, you want to start on the retirement benefits side. You know, it's been conventional wisdom -- convention wisdom says that companies have been cutting back on 401(k) benefits. But this survey just commissioned of 500 large companies employing about three million people says that more than 85 percent of them have actually kept 401(k) benefits at the same levels or increased levels throughout the past three years.
So, if you're getting these matching benefits, that's your first priority. If not, then don't despair, because there's always a Roth IRA, and that's low-hanging fruit. If you look at the power of compounding, you could just take this matter into your own hands. You don't have to wait for your company to offer you a retirement plan.
STOUFFER: Right. Well, I know people are going to have a lot of questions about this, especially in this economy. So, we'll head to a break right now.
But coming up, we'll take your calls and e-mails next on right here on DOLLAR SIGNS. We'll be right back after this -- there we are. We'll be right back.
(COMMERCIAL BREAK)
STOUFFER: Welcome back to DOLLAR SIGNS.
Are you getting the most out of your company's benefit plan? Well, if not, our experts will help you change all of that. "Smart" magazine's Robin Farzad is here with us, and so is Kirby Bosley with Mercer Human Resource Consulting.
Welcome back to both of you. And first, we're going to hear from a viewer who is calling in for us, Vijay from Washington State. Are you there, Vijay?
UNIDENTIFIED MALE: Yes.
STOUFFER: What's your question?
UNIDENTIFIED MALE: I have a question about employee's stock purchase plans. And I would like to know what the best way of making use of it in terms of either holding onto it after the six months or selling it off immediately after every six-month cycle.
STOUFFER: OK, Roben, I think that's a stock purchase plan. What do you think about that?
FARZAD: Well, it depends on two things. What kind of discount are you getting for the stock purchase plan? And, two, what kind of stock are you buying? Is the company's underlying business successful? Do you think that the prospects for this stock are greater than just your 15 percent gain?
Otherwise, you still have the -- you mentioned the six-month holding rule. If you feel that this stock has a potential to fall more than the 15 percent discount that you got, hypothetically using that discount, then maybe it's not such a good investment. But if you think the longer term benefits, you know, outweigh that risk, then you've just gotten yourself a good stock at a 15 percent discount. So, it completely depends on where you work.
STOUFFER: Yes, good advice.
And Dean from Florida is on the phone. Hi, Dean. What's your question?
UNIDENTIFIED MALE: Yes, good afternoon, folks. I actually have a two-part question. The federal government regulates and says that some large corporations are actually small businesses classified. Does that affect benefits? And also, with the 43 million uninsured Americans, are part of that actually people just not wanting the insurance? So, in other words, it's offered, but yet they're just not willing to accept it?
STOUFFER: Kirby, do you want to start on that one? What are your thoughts?
BOSLEY: Well, let me take part two of that question having to do with the uninsured. A lot of the uninsured are unemployed and don't have a viable option -- for health insurance that is. Although a lot of the uninsured are also employed and can't afford health coverage. So, those are two big segments.
The third one is the employed with insurance available, but invincible type of a person, and that would be a young person who just feels that they're not going to need it and don't take it. So, we've got all different types out there, but the bulk of the uninsured are unemployed.
STOUFFER: And, Roben, any thoughts on that?
FARZAD: A lot of people are unemployed obviously. And I think that, though, a growing crisis here -- and Kirby is more capable of commenting on this -- is companies increasingly nickel and diming employees on health benefits. So, not necessarily that these people are uninsured, but they're suddenly underinsured. They took a certain level of benefits for granted however many years ago that just aren't there right now.
STOUFFER: It's not what it was a couple of years ago.
I want to get to an e-mail right now. Jim Franz from Greensboro, North Carolina, writes this: "What do you do if you get no benefits? I'm self-employed, and I'm paying my own insurance. My question is: Why state regulators and/or insurance companies do not allow uninsured and underinsured to form groups to help people like me?"
Roben -- or rather, Kirby, do you want to take that one first?
BOSLEY: Well, it might be worth looking at what industry this person is in, because there are such things as association plans and groups of individuals that form a larger group to really form a purchasing pool to get the better advantage of discounts and so forth. So, it might be possible this person could get association coverage.
The self employed are -- if that doesn't work -- are a little bit challenging, and states are addressing this on an individual level. In fact, California has a bill that may affect self-employed standing right now. So, there aren't good options, unless you happen to be one of the lucky ones who's young and healthy and can purchase coverage that way.
STOUFFER: Lucky is right.
And, Roben, this next e-mail is all for you: "Should I invest in my company's flexible spending account plan?" That's from Ann in Alabama.
A good idea?
FARZAD: It is a good idea, I think. I mean, these things -- is this a flexible spending account for health benefits? Is this -- I mean, Kirby, I'm curious to get your thoughts on that. I mean, the experience that I had, we had a flexible spending account for health benefits, where you put in a certain sum of money at the beginning of the year, anticipating health costs.
BOSLEY: Maybe I could jump in on this one, because flexible spending accounts, in my view, are a wonderful tax benefit. And not really a benefit, per se; this is simply a reduction of your own salary to pay for your own expenses, but you're not taxed on that portion of pay that you reduce. So, it's an excellent tax benefit, and the rules have just been liberalized so that over-the-counter drugs can now be considered reimbursable expenses under a health spending account.
Dependent care is another form of flexible spending account, too. Again, a great tax benefit, but don't lose sight of the fact that it's your own money to begin with.
STOUFFER: Right.
BOSLEY: And the other thing I would add on those is always be careful about budgeting how much money you direct to those accounts, because, if at the end of the year you haven't used that money, you lose it.
STOUFFER: Right. That's where the penalty comes in.
BOSLEY: Right.
STOUFFER: But it could pay day care costs and things like that, as you mentioned.
BOSLEY: Yes.
FARZAD: Right.
STOUFFER: We have a phone call we want to take right now, Frederick from Virginia. Frederick, how are you today? What's your question?
UNIDENTIFIED MALE: I'm doing great. My question is, as an independent consultant working as a contractor, why would it be better for me to get a Roth IRA as opposed to a regular IRA?
STOUFFER: Roben, that sounds like it's right up your alley. Why don't you go ahead.
FARZAD: The Roth IRA is really a no-brainer. The old IRA allows you to make tax-deductible contributions. If you look at this year, it's $3,000. If you're 50 and over, kind of approaching retirement, it's 3,500. But that doesn't even compare to the Roth IRA benefits, which you're contributing after-tax money.
I mean, if you have money in a checking account or left over after your paycheck and everything was taken out, you can put this in this account at $3,000 or $3,500, and it compounds tax-free until retirement. And when you take it out at retirement, the age stipulated is 59-and-a-half. You're not paying taxes then.
So, think about a snowball falling down a cliff and collecting snow as it goes down. If every 10 yards somebody was to take a scoop of snow out, it would be much smaller at the bottom of the hill. But in this case, you're going to have a much bigger nest egg at retirement.
STOUFFER: That's a great image. And, Roben, we have an e-mail that will sort of keep you on topic there. Janet from Utah writes this: "Is it best to contribute full company match to a pre-tax 401(k), or should I put a lesser amount in that 401(k) and invest outside the plan into taxable investments?" She also points out that their joint income is too high to even qualify for those Roth IRAs.
So, what's your advice there?
FARZAD: Yes, unfortunately, the Roth IRA is somewhat means- tested. If you break a joint income level of about, I think, $160,000, you and your spouse, you're not eligible. But the company 401(k) is really a no-brainer. That's money that you just found under the cushion. Your company is ready to spend that money, and it behooves you to max out to the extent that you don't need this money for, you know, a kid's education or a hip replacement, whatever it might be, and that's money you can comfortably put away.
After that, for wealthier people I think it's -- especially with this new tax law in place, that putting away money in regular taxable accounts is pretty smart with the long-term capital gains benefit. You know, dividends taxed at a lower rate. It does make sense.
But if you're not in that high income level, I would recommend options in the following order: You max out your 401(k), and once that's done and if you still have some money to squirrel away, you tap the Roth IRA. Those are two no-brainers, really.
STOUFFER: Yes, because the 401(k) can be free money if you get a match on that.
FARZAD: Right.
STOUFFER: We'll go to the phone line again. John is calling in from South Carolina. Hi, John. What are you going to ask us today?
UNIDENTIFIED MALE: Hello. How are you all doing? My wife and I have a combined income of 250,000 a year. Currently, I'm contributing to the 403(b) plan, which allows me to contribute pre-tax dollars. I was told that the maximum amount is 12,000 a year. Are there any other plans that you know that I can contribute in that are pre-tax that could help me out here?
STOUFFER: Roben, I guess you'd take that one, too.
FARZAD: No, unfortunately. I mean, you have -- you're not eligible for the Roth IRA with that combined income. You are eligible for the regular -- no, you're not eligible for the regular IRA. There's a step. There is a KEO (ph). It all depends on the nature of your family business if you can qualify for these things. And I find that a CPA is often the best source of wisdom on these matters. You know, you can meet right now with this person, anticipating your contributions through April. So, it makes a lot of sense at this point.
STOUFFER: Yes, that could be very well spent money, if you get the right kind of advice.
Kirby and Roben, thanks a lot.
Hang on with us. We're going to head to a break. We'll have a lot more of your calls and e-mails after this quick break.
(COMMERCIAL BREAK)
STOUFFER: And welcome back to DOLLARS SIGNS, everyone.
Our guests, Roben Farzad of "SmartMoney" magazine and Kirby Bosley of Mercer Human Resource Consulting are here today answering your questions about taking best advantage of company benefits.
And we have phone call right now. Benny is in North Carolina. Hi, Benny.
UNIDENTIFIED MALE: Hi. How are you?
STOUFFER: I'm great. What's your question?
UNIDENTIFIED MALE: Good. My question is for Kirby. I wanted to find out how the flexible spending plan would help a couple of empty nesters that are in relatively good health. What benefit would that flexible spending plan be to us?
STOUFFER: What do you think, Kirby?
BOSLEY: What you might do is you might set aside some money for expenses that you know you will incur that you can't get covered any other way. For example, eyeglasses or maybe sunglasses, a second set of glasses. Now over-the-counter drugs if your company will allow that to be covered. You need to confirm that with your HR people. But in that case, you'll put some money in there for antihistamines or, you know, what might come up during the year.
So, you may not want to put as much money in the spending account as others would, but it's still a good value.
STOUFFER: Because, Kirby, as we talked about earlier, if you put too much in, you're out of luck, right?
BOSLEY: Right, exactly.
STOUFFER: OK. Now to an e-mail. This one is from Utah. It says: "Returning to the workforce from private self-owned businesses, what should I look for and concentrate on in the way of benefits -- health plans, 401(k)s, something else?"
He wants to know what he should look for out there. Roben, you want to take this one? Any advice?
FARZAD: This is a good piece of advice: As soon as you get there, make sure you have a heartfelt one-on-one with your HR rep. If that seems a little bureaucratic, have lunch with some of your co- workers and kind of get this by word of mouth. Because, like I said, that employee handbook is pretty daunting. And once you get this advice from other people -- for example, on your health care benefits, there are several different tiers offered by one company often, and you don't know what the advantages are for one type of person versus -- you know, one plan versus another plan. Ditto 401(k) and Roth IRA stuff.
Ask people, and then after doing your homework for about two weeks, finding out which is the most popular plans, who is picking them, you know, go for it. Don't waste any time, especially when you're talking about accruing these benefits. With 401(k), especially if you have a company match that's generous, every month of a missed 401(k) match is lost money.
STOUFFER: But, Roben, it's really something to take into consideration if you have a couple of opportunities, isn't it? Because it can really add up if you have a lot of good benefits.
FARZAD: It really can. I mean, one person who I used to work with took an evening MBA course, which its sticker price was $20,000. And I did this over the course of two years, and the company reimbursed him because it was applicable and relevant to what he was doing during the day. Now, if somebody offered you a $20,000 raise, you'd take it right then and there.
STOUFFER: Right.
FARZAD: So, it really behooves you to read up on these things. And when put together, oftentimes you're talking several thousand dollars' worth of benefits.
STOUFFER: Do your homework. OK, John is on the phone from Connecticut. Hi, John.
UNIDENTIFIED MALE: Hello. How are you?
STOUFFER: Great. What are you thinking about right now?
UNIDENTIFIED MALE: Well, I appreciate everybody being there. This is really important to a lot of folks. At work, I have a 401(k). I haven't had it that long. I have roughly $8,000 in it. I was going to transfer $5,000 into platinum coins or gold. The company recently went up from a 5 percent match to a 7 percent, and our medical benefits disappeared.
I was also wondering, they say that you can put matching funds in there if you're 55, but my company has told me that I'm not qualified to do it. You know, if I have a few grand sitting around, I'd like to put into a 401(k). Do you know what's up with that?
STOUFFER: Roben, that's a multi-part question. Do you want to take maybe that first part first?
FARZAD: Sure.
STOUFFER: He's thinking about reducing that 401(k) and putting it elsewhere. FARZAD: Yes, keep in mind that your 401(k) contributions, when you're talking about the power of compounding, even if you're, you know, maybe five years to retirement, you want to be especially leery of taking this money out unless you absolutely need it.
As another resort, you know, if you have a Roth IRA as a backup, on some of these accounts you can take money out or use them as collateral for a loan, but it's not wise to take this stuff out, especially if the company's match is going up. And I'd also remind people that if they are 50 or over, the contribution limit for the 401(k) goes from 12,000 to 14,000. So, that helps people catch up as they approach retirement.
STOUFFER: I see. Kirby Bosley with Mercer, Roben Farzad with "SmartMoney," you've been so great today. Thank you very much for your time and all of your advice to our viewers today. Thanks a lot.
FARZAD: Thank you, Linda.
STOUFFER: I hope you both have a great weekend.
BOSLEY: Thanks.
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