Tag: Retirement

United Employee Benefits: How to Leverage Your RHA for Tax-Free Growth

Posted on by Nick Coleman

United Airlines Employee Benefits: Retirement Health Account

 

Working as a United Airline Employee has more benefits than just a 401(k) plan or free flights. United provides a Retirement Health Account that gives you another resource to fund medical expenses in retirement.  When doing financial plans for our clients many of which are pilots, one important issue that often comes up is how to fund health care.  The United RHA is a great tool for that.

 

What is an RHA?  

 

The United Retirement Health Account is a health expense reimbursement account like a Health Saving Account (HSA) but one you use in retirement. United Airlines ALPA Retirement Health Account (RHA) allows retired United and legacy Continental pilots to reimburse themselves tax-free for qualified health expenses for them, their spouse, and dependents in retirement. For that reason, it truly is one of the great United Employee benefits.

 

Eligible expenses include:

  • Doctor visits
  • Co-pays
  • Dental premiums
  • Insurance premiums
  • Medicare
  • Long Term Care insurance premiums

 

The RHA is a fringe benefit provided by United and is a unique savings account that most companies do not have. United basically got the blessing of the IRS through a private letter ruling to have this plan.  Because it is more of a one-off plan the rules are more opaque and restrictive.

 

How does the RHA work?

 

Unlike other United Airlines employee benefits, the RHA is funded by United only. No employee money is ever contributed to the account. Every working hour, United contributes $1.00 to your account. More importantly, when your 401(k) limit is reached, all employer contributions will continue, but spill into the RHA. United contributes 16% of your salary into your 401(k), and once the 401(k)  limit is reached at $57,000 in 2020 (not including the employee age 50 catch-up of $6,500 in 2020), further contributions will spill into the RHA. Forfeited vacation can be contributed to either the PRAP or RHA at the employees’ discretion.

 

What can I use the RHA for?

 

The RHA is meant for medical expense reimbursement in retirement or separation of service only. The account itself is held in a pooled account with other employees and pilots at United, and cannot be moved into an individual account. As such, the benefit of the RHA is to allow you and your spouse and dependents to reimburse any health expenses and premiums tax-free.

According to a study done by Fidelity, the average 65-year old couple retiring in 2019 can expect to spend $285,000 in healthcare and medical expenses. Medical expenses increase at nearly twice the rate of inflation, and will likely continue to grow in the future. The RHA allows retired employees and pilots to maximize their retirement benefits by providing a tax-free vehicle to pay for medical expenses, without having to access taxable or tax-deferred accounts like your 401(k).

 

An example

 

Take for example, Sarah. Sarah is a retired pilot and can use her 401(k) to pay for regular retirement expenses. The issue that she runs into is that distributing from her 401(k) will recognize that income. If she is currently in the 22% tax bracket and takes out $50,000 per year to pay for expenses, she will need to pay $11,000 in tax for that year. Sarah needs surgery and will need to pay $10,000 out of pocket. She will pay that money from her checking account, and reimburse herself from the RHA for $10,000. Because she used the RHA for a qualified health expense, she will not have to pay any taxes. If Sarah made the mistake of using her 401(k) for the expense, she would need to pay an extra $2,200 to the government!

The RHA can be used to pay for Medicare premiums, co-pays, insurance premiums, dental insurance premiums and expenses, and even long-term care insurance premiums. The RHA can grow rather quickly and it can be very useful for your family. For example, if you have a balance of $0 in your RHA, and United contributes $5,000 each year for 20 years, and you expect an annual return of 6%, your ending RHA value will be $183,928 of tax-free dollars at 65! If you have contributed $10,000 per year, you would have $367,856!

 

Eligible Expenses

 

All of the following in red are covered by the RHA. The blue are non-eligible medical expenses that must be paid out-of-pocket. 

United Airline Employee Retirement RHA

(Image: Further/SelectAccount Family of Products)

 

When can I excess the money in my RHA?

 

There are a few times in which you will be able to access your RHA. The most straightforward one is in retirement. Also, if you are laid off or fired you will be able to access it. Additionally,  if you are furloughed, you can use the RHA to pay for COBRA premiums until you get back to work. Just another one of the United Employee Benefits.

 

How do I maximize my RHA?

 

If you are nearing retirement, you may be seeing that you have a very large 401(k), which can also mean a very large tax problem when you go to withdraw from it in retirement, especially with Required Minimum Distributions (RMD) beginning at 72 years old with the new SECURE retirement act. To maximize RHA funding, you can contribute more to your 401(k), up to $19,500 in 2020. Moreover, if you maximize your contribution, you will have only $37,500 ($57,000-$19,500) left for the employer to contribute. Say if you make $280,000 in 2020, United will contribute $44,800. Because there is only $37,500 left for United to fund the 401(k), the rest, $7,300, will spill into the RHA. Therefore, if you wish to save more in your RHA, you can maximize your contribution early in the year to fund the 401(k) using your employee contribution.

Further, you can also elect to move all forfeited vacation days into the RHA. You can maximize or minimize what is in your RHA by either over- or under-funding your PRAP using your employee contribution or forfeited vacation. The United Retirement & Insurance committee has an RHA spill calculator available to you, to estimate your projected RHA funding.

Here is an example of two pilots, they both make $280,000. Both pilots are 47 years old. Tom (Pilot A) maxes his 401(k) contribution up to $19,500. Bill (Pilot B) contributes $10,000 to his 401(k). Remember, the total amount allowed in the 401(k) per year is $57,000. Any amount over will spill into the RHA:

Salary United’s 16% Contribution Pilot’s Personal Contribution Total Contribution (limit of $57,000) Spill into RHA (above $57,000)
Tom (A) $280,000       $44,800     $19,500     $64,300 $7,300
Bill (B) $280,000       $44,800     $10,000 $54,800 $0

How do I limit contributions to my RHA?

 

Because United funds your RHA based on your salary, there is no way to avoid contributing to the RHA if United has maximized your 401(k) contribution. Based on the 401(k) rules, the 401(k) spill will begin once a pilot has reached a total of $57,000 contributed in his 401(K) in 2020 (not including $6,500 in catch-up at 50). All employer contributions will go to the RHA  after that. By underweighting what you contribute into the 401(k), you can limit the amount of spill into the RHA. If you have a salary of $250,000 and United contributes 16%, you will have $40,000 in your 401(k). You still have $17,000 without having any spill into the RHA ($57,000 – $40,000 = $14,000 left to fund). Regardless, you are not losing money when United contributes to the plan. It is essentially a free benefit to you.

 

What happens to my RHA if I die?

 

The RHA can be used by you, your spouse, and qualified dependents. If you are 65, and your children now support themselves, they are not considered to be your dependent. When you die, your spouse will be able to use and access the RHA. Once your spouse dies, and you have no dependents, any remaining amount in the RHA will be reverted back into the pooled investment account at the record keeper. The RHA is not able to be inherited like other accounts. Therefore, it is important to take advantage of your RHA when you are able to use it so you don’t leave any money on the table. 

 

The RHA and Tricare for Life

 

Many pilots are retired military and will use Tricare to supplement part of their medical coverage. For example, a family on Tricare for Life in retirement will still be using Medicare Part A & B, and Tricare is used in conjunction to pay for coverage outside of hospital stays (A) and doctor’s visits (B).  Similarly, Tricare is used for other coverage such as prescription drugs, and the remaining premiums from Medicare Part B. Tricare and Medicare Part A & B cover most health-related expenses, but the RHA can be used tax-free to cover other parts such as dental insurance premiums, long term care insurance premiums, vision plans, therapy, and other eligible medical expenses outside of Medicare and Tricare coverage.

 

RHA to fund long term care insurance premiums

 

According to Genworth Insurance, $51,480 in 2019 was the national annual median cost of In-Home Care. Long-term care can quickly drain older Americans’ retirement and savings. According to AARP, 52% of people turning 65 in 2017 will need long-term care at some point. The estimated cost for end-of-life care in 2016 ranged from $215,820 and $341,651 according to Alzheimer’s Association. Ultimately, the last thing you want is to drain your worth in your final years and not be able to leave anything to your estate, children, heirs, and charities.

Long-term care insurance is one way to pay for long-term care and nursing care. LTC insurance can cost up to $3,000 per year for one person and can be even more if you have a family history of dementia. Luckily, you can pay for LTC insurance premiums tax-free with the RHA. Therefore, you can have LTC insurance and leverage your RHA’s tax-free characteristics. 

The Retirement Health Account might just be one of the best United employee benefits out there. It’s employer-funded, more money without more taxes, extra money for health care expenses during retirement benefit.

 

Questions?

 

We are here to help. Bonfire Financial acts as a fiduciary financial advisor for our clients. We have a staff of Certified Financial Planners™ that specialize in helping United Airline Employees and Pilots with their retirement and benefits. Schedule a free consultation with us today. We’d love to talk to you. 

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Roth 401k or Traditional 401k?

Posted on by Nick Coleman

Roth 401k or Traditional 401k? 

 

The 401k plan is the cornerstone to retirement. Gone are the days of big company and school district annual pensions and generous social security benefits. It’s now up to you to plan and save for retirement. In addition to all the expenses that go with it. Luckily, a Roth 401k or Traditional 401k is a fantastic tool. One of the best that you can use to save for your retirement and goals. However, there is a lot to understand about how they work and how to use the 401k for your best outcome.

 

A little background

 

The purpose of the 401k plan is to save for retirement. Currently (as of 2024), an employee can contribute $23,000 of their own money to their account and an additional $7,500 if they are over 50 years old per year. Some plans also allow for you to contribute to a Roth 401k. Many people wonder if this may be a better option for them. We’ll explore the key differences between a Roth 401k or a Traditional 401k so you can make a confident decision.

 

The Roth 401k

 

The Roth 401k is a relatively new concept. It was introduced in 2001 for the purpose of allowing employees to take taxes now and forever shield the gains from tax. Many people see the benefits of contributing to the Roth 401k. However, some are hesitant as to whether the traditional tax-deferred 401k will still be better for them because of its favorable tax deferral.

The money you add to the Roth is still considered income. You will be taxed on that amount. Once your savings in the account have been taxed at your regular income level, it will grow tax-free. Then, when you take money out of it, that will also be tax-free.

This is a great option if you do not want to pay extra tax in your retirement. Also, good if you are in a lower tax bracket than you expect to be in the future.

 

Example

 

As an example, if you contribute $25,000 to your Roth 401k at the 22% tax bracket, you will still pay $5,500 as a part of your tax bill. Let’s say if you contribute $25,000 annually for 10 years at a rate of 8%, you would be the owner of an account that has $362,164 completely tax-free! The benefit of having a Roth IRA is that you will never pay taxes on the gains that you make in the account. If your account is still around for your heirs, they will not have to pay any tax either!

Having this option will allow you to grow your money . Addtionally, you will not have to worry about paying extra taxes. It is important to note that your employer does NOT match your contribution on a Roth basis if you do. They will continue to match your contribution, but it will only be in traditional tax-deferred dollars.

Let’s say your company matches you 3% of your salary. If you are in the plan and make $100,000, you will be contributing $3,000 each year into your Roth 401k. Plus, your company will contribute $3,000 to the traditional 401k. They will be in the same account but will be accounted for separately by the administrator of the company 401k plan. When you are deciding, if you can afford to do the Roth 401k, you absolutely should.

 

The Traditional 401k

 

The traditional 401k allows an employee to defer their income of what they contribute. That means if you made $100,000 and decided to contribute $25,000 to your 401k, you will only have to report $75,000 to the IRS. This is because you “deferred” your income into the account. Once you retire and withdraw that money, you will have to pay the income that you “realized” at the tax rate you are at when you withdraw.

The advantage of the traditional 401k is that you get to defer your income and save it while it grows in your account. When you retire, you may move your traditional 401k to an IRA. As an example, you made $170,000 as a married couple. At $170,000, you are pushed into the 24% tax bracket (over $168,450 Married Filing Jointly). But because you understand the 401k can defer your income, you decide to defer $15,000 into the account, dropping you out of the 24% bracket and into the 22% bracket, which saves you money!

The traditional 401k is best if your cash flow is tight. It is extremely important to save for your retirement. You should always save 10% or more of your salary as a rule of thumb. When you save on taxes, you will be saving yourself money.

 

Example

 

Here is an example that will illustrate how your contributions of $20,000 affect your cash flow.

 

Roth 401(k) or Traditional 401(k)

 

Here we can see with a salary of $100,000 we cannot defer any money from taxes if we contribute $20,000 into the Roth 401k. Our total taxes at 24% will be $24,000 for the year. If we contribute $20,000 to the traditional 401k, we will defer that money from taxes, so only $80,000 will be taxed at 24%. At the end of the year, using the traditional will save us $4,400, which is $367 per month. If that money is needed for your cash flow, do the traditional. If you can take the hit now on taxes, you should do the Roth 401k.

 

Which one is best for me?

 

You are weighing now versus later. If you are just starting out in your career and are in the lower tax brackets you should contribute to the Roth 401k. At the end of the year, you will have a bigger tax bill from Uncle Sam because you recognized all of your Roth contributions. Have no fear! Your Roth retirement account will grow tax-free all the way up until you retire. Plus, all the gains that you have made throughout those years will be tax-free as well!

If you have a good handle on your cash flow, you should contribute to the Roth 401k. If cash flow is an issue you can use the traditional 401k to lower your tax bill. You get to defer that income and save it in a tax-deferred account that will grow. Once you take money out of the account, you will have to pay income tax on it. This can be quite advantageous if you are at the top of your career and at the higher tax brackets. If you believe that you will be in a lower bracket when you retire, the traditional is your best bet.

 

The Backdoor Roth IRA

 

People want to enjoy deferring their income to save on taxes but also want the ability to have a Roth account that they can draw from tax-free in retirement. Many people close to retirement are looking at all the taxes they have saved in their accounts and now see a huge dollar sign going to the government every time they take money out for their retirement expenses.

The Backdoor Roth IRA allows a person to continue to defer their income through their 401k, but also contribute $6,000 (plus $1,000 if over 50) per spouse into a Roth IRA. A married couple can contribute up to $14,000 each year to Roth IRAs. If this planning technique is done for 5 – 10 years before retiring, this would give a retiring couple a substantial tax-free account.

 

Example

 

As an example, if a married couple were to contribute the max amount of $14,000 for 10 years. Assuming a yearly return of 8%, they would have $202,811.87 of assets that would never be taxed again! The benefit of a Roth is also that there are no Required Minimum Distributions as there are with a traditional account. If a married couple paired the backdoor Roth IRA with the 401k plan, they would have an effective diversification of their tax accounts, which would be very helpful in retirement.

This is a complex planning strategy. It is important to work with a financial advisor who understands your objectives and will help you leverage your current situation to help you meet your expectations.

 

The Bottom Line

 

If you can stomach the tighter cash flow and you suspect that you may be in a higher tax bracket, the 401k Roth is best for you. If you are tight on cash flow and could use the extra money while also saving for your retirement, the traditional 401k is for you. Also, if you suspect to be in a lower tax bracket in the future when you take out money, the traditional 401k is what you should choose.

The Backdoor Roth IRA is great for people who wish to save in a traditional 401k to take advantage of the tax deduction, but also want to grow a Roth IRA that will never be taxed. Using this mechanism, a single person could add $62,000 into a traditional 401k and $7,000 into a Roth IRA.

 

What’s next?

 

Interested in learning about the differences between an IRA and a 401k? Read up on that here.  Still have questions? Please feel free to contact us!  719-394-3900- We offer free 30-minute consultations that can help answer many of your questions.

Differences Between an IRA and 401k

Posted on by Brian Colvert

IRA vs 401k: What’s the Difference:

 

There are some common misconceptions about the difference between an IRA (Individual retirement account) and a 401k plan. While these two are very similar there are some distinct differences that make each unique.

Before we tackle the difference between an IRA and a 401k it’s important to note that these are not investments.  They are simply accounts.  Just because you have an account open does not mean you have an investment that will grow and help fund your retirement.  Much the same way that just because you own a refrigerator doesn’t mean you actually have any food in it. You have to add to it.

To continue with this analogy…  in your fridge, you can have a variety of different types of food (juice, pickles, eggs, beer, and anchovies- if you’re into that sort of a thing). In an IRA and 401k you can have different investments too.  Such as stocks, bonds, mutual funds, ETFs, commodities, real estate, and more. You can also change or “throw out” the investments in your IRA or 401k if you’ve left them in the back of the fridge for too long. You know like that 3lb. jar of mayo you bought for that party that one time.

Now that you are hungry, let’s get to the dive-in.

 

Overview of an IRA vs. 401K:

 

You probably know fundamentally that saving for retirement is one of the single best things you can do financially. You don’t want to rely on social security, you don’t want to run out of money, you don’t want to be a financial burden to your children, and you want to enjoy your golden years. All great reasons to have a retirement plan! So which retirement plan is best for you?

Both IRAs and 401Ks have tax benefits and are among the most common defined contribution plans. The good news is that you don’t have to choose one over the other. To maximize your retirement savings, you can and should, if possible, contribute to both an IRA and 401k.

The key to note is that a 401k, named for the section of the tax code that discusses it, is an employer-based plan and an IRA is an individual retirement plan. Got it?

First up let’s look at how a 401K and IRA are alike.

 

The Similarities:

 

  • Both allow you to put money in on a tax-deferred basis. Meaning that taxes are not due at the time when you add money. For example, if you make $50,000 and decide to invest $2,000 of it into your IRA or 401k, the $2,000 is not going to be part of your taxable income.
  • Your money within an IRA or 401k can be invested in a variety of ways.
  • The money that is invested is allowed to grow tax-deferred. You do not have to pay taxes on the gains from your investments until you take the money out.  If you make $1,000 off of your $2,000 investment, you now have $3,000 in your account and you will not have to pay taxes on that gain until you withdrawal the money.
  • When you do withdrawal the money for whatever amount it will be considered part of your taxable income. You will own taxes on the withdrawal amount. Let’s say you withdrawal the $2,000 and your current annual income is $50,000 after the withdrawal your taxable income will be $52,000.
  • Since an IRA and 401k are designed for retirement the money that you invest is not supposed to withdraw until after the age of 59 ½. You read that correctly -the government added in a half, well, because your inner 6-year-old knows it’s that important. If you withdraw the money prior to 59 ½ you will pay a 10% penalty on the money plus the amount withdrawn is now part of your taxable income.
  • Also, the government mandates that at age 71 ½ (again the half) you have to take out a Required Minimum Distribution (RMD).  Basically, they tell you the amount that you must pay taxes on.  Quick note, if you are still employed at age 71 ½ and not the owner you can delay your RMDs.

 

The Differences:

 

While an IRA and a 401k have many similarities, they do differ is a few very key areas.  The main one being that an IRA is Individual Retirement Account, so it is yours and yours alone. Anyone can have one. A 401k is company-sponsored, so you can only participate in it if your employer offers one.   Some other key differences are:

  • Since a 401k is employer sponsored typically the employer will match a percentage of their employees’ contributions up to a certain limit or percentage. There is no option for  this in an IRA.
  • Consequentiallybecause a 401K is employer-sponsored your investment options are limited to what the employer offers. Whereas an IRA will allow you to have more variety in terms of stocks, bonds, real estate, etc.
  • Loan or hardship withdrawals are available for 401ks. However, IRAs generally do not permit loans or early
  • withdrawals.
  • An IRA has certain income limts and a 401k does not.
  • Finally, the contribution limits are different and change from year to year. Check with your financial advisor or go here to learn about the current years’ limits.

 

Difference Between an IRA and 401k- A Venn Diagram

Differences between an IRA and a 401k

Which is Right For You?

 

It depends really. If you have the option of putting your money into an employer-sponsored 401k or an IRA you should do both. Max them out if possible. We recommend prioritizing the 401k first especially if your employer offers a match and then adding to an IRA if you are within the income limits.

This hopefully gives you a good overview of the differences between an IRA and a 401k. While there are many factors to consider, the most important thing to remember is that both are great tools to use to help achieve your retirement goals.

Are you interested in learning about a Roth?  We’ve got a great article here for you.

Have other questions? Setup a call with us HERE!

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