As summer winds down, you’re probably about to experience an uptick in fall activities. In the midst of all the busyness, make sure you don’t overlook one of the season’s prime opportunities to grow your money: your employee benefits open enrollment.
This is the ideal time to take stock of the benefits your employer offers to be sure you’re making the most of your financial future. Feeling some confusion about all the terms or how they fit into the bigger picture? Start by reviewing our cheat sheet of benefits buzzwords here.
Health Savings Account. HSAs are the wave of the future in health care. If your company offers you one, it’s a brilliant solution that will benefit both your health and your finances. Because it’s typically paired with a high-deductible health insurance policy, you enjoy lower premiums. Meanwhile, your contributions to the HSA can be saved up for hospital bills, doctor’s visits and other medical expenses tax-free. What’s more, unused HSA dollars roll over even when you don’t use them and accrue compound interest in mutual funds.
Preferred Provider Organization. Depending on your and your family’s health, a PPO might be your best bet for a health care benefit. Although you’ll pay higher premiums than you would with an HSA, you’ll also have a lower deductible with a PPO plan. This option makes especially good sense for if you have medical conditions which are likely to bring about high annual medical expenses.
Network. The network is simply the group of doctors, hospitals and other health care providers you have access to within a given health care benefit. It’s important to familiarize yourself with any plan’s network before enrolling and refer to it when scheduling doctor’s visits to be sure the visits and treatment will be covered.
Premium. This is just a fancy term for your monthly insurance payment. Many assume that paying a higher premium is worth higher coverage for medical events, but this is only true if you have a reasonable expectation of high medical bills in the near future. It’s wiser to keep premiums low and save in an HSA where the money will be ready for you as soon as you need it.
Deductible. This is the amount you’ll need to cover out of pocket each year (or sometimes per condition) before insurance coverage kicks in. As we said above, there’s a link between how high your deductible is and how low your premium is. That’s because an insurance provider is willing to charge you lower monthly payments for coverage if they know you’re going to pay a defined amount of any medical costs you incur. If your plan included a deductible, it won’t have a co-pay or coinsurance.
Co-Pay. Your co-pay is an out-of-pocket fee similar to a deductible, but tied in with specific visits.
Coinsurance. Once you’ve paid any required deductible in a year or co-pay for a visit, the coinsurance is defined as the percentage the insurance will cover of any remaining medical costs. These are often set up as 80/20 plans, where you are responsible for 20% of costs and the company covers the rest. One more plug here for an HSA: Usually the associated insurance will cover 100% of costs after you’ve met your deductible!
401(k). This is a goldmine for you and your family. It’s an opportunity to invest some of your hard-earned pay in mutual funds and allow it to grow for use in retirement. And quite often companies are giving you free money in a 401(k) through an employer match. You simply can’t afford to pass up free money, so if you are eligible for any matching dollars, invest at least that percentage.
IRA. This stands for Individual Retirement Account, but don’t be fooled by the simple name. There are two kinds of IRAs, the Roth and the traditional version. There are pros and cons with both, but the main difference is how they are treated for tax purposes. If you have a Roth, the money you contribute will be taxed upfront, but it will grow tax-free and you’ll pay no taxes to withdraw it upon retiring. If you have a traditional IRA, you will have to pay taxes on withdrawals in retirement. Because the Roth compounds tax-free and requires no new tax payments when retirement rolls around, we strongly recommend the Roth IRA over a traditional version.
Two good prerequisites to keep in mind before enrolling in either a 401(k) or IRA retirement benefit: The best practice is to eliminate all debt (except for your mortgage if you have one) and then save up three to six months of living expenses in an emergency fund.
If you begin investing in retirement savings prematurely, it’s inevitable that you’ll wind up using the account for debt payments or treating it like an emergency fund when problems crop up.
You can improve your financial outlook today. SmartDollar participants, start by taking our wellness survey here. Once you have your score, review the Baby Step lessons that can get you moving in the right direction, putting some healthy distance between yourself and the edge. If you have trouble logging in, please visit our Help Center.
If your company does not offer SmartDollar as an employee benefit yet, read more about bringing SmartDollar to your organization here.