Already it's the fourth quarter of 2012. I tend to go into review mode at the end of the year. One thing I review is my tax situation. In the past I haven't had many metaphorical tax levers to adjust, though that's been changing as my financial situation gets more and more complicated.
There are two types of tax-advantaged accounts I'm thinking of funding for tax year 2012, above and beyond my 401k which I have on auto-pilot. One is my Health Savings Account (HSA), and one is a Roth IRA. I'll start with the HSA.
Early October was benefits season at work, time for open enrollment and a question-and-answer session about most of our benefits, like health care and life and disability insurance. I've already had my HSA for a year and I'm pretty happy with it. Essentially it's a high-deductible health care plan coupled with a tax-advantaged savings account. Preventative care is free and there are no co-pays, but I pay the full amount for other doctor visits (though it's a pre-negotiated rate that's lower than the normal rate). If and when I hit the deductible of $1500/year for an individual, then all health care afterward does not cost me anything. I think there's an exception for prescription drugs but it seemed like minutia so I mostly ignored that point.
Employers like this plan, I imagine, because it costs less than traditional health care plans. I like it because my employer is paying 75% of my yearly deductible into my HSA. It's money I get to keep if I don't use it. It gives me the incentive to care about how much health care costs — for example, using an urgent care clinic instead of the emergency room for non-life-threatening emergencies. And it's money I get to keep if I leave my job, and that I can use on any qualifying medical expenses. I checked my savings account balance and found I have over $1500. That means I've got all my medical expenses covered for a whole year! It's a good feeling.
The IRS annual contribution limit for an individual's HSA is $3100 for 2012. My employer has contributed 75% of my $1500 deductible, or $1125 by the end of the year. That leaves $1975 for me to contribute (and then deduct from my taxes for 2012). I'm thinking saving up $1000 to contribute. It'll delay my loan payoff by around half a month, but the tax savings of (I expect) over $200 makes it worth it to me. Not to mention the margin of safety of having even more money in my HSA.
Now for the Roth IRA. Where an HSA is funded with pre-tax dollars, a Roth IRA is funded with post-tax dollars. But your investments get to compound tax-free, and you'll never have to pay taxes on any of that money again. I think the 2012 IRS limit for Roth IRA contributions is $5k. I'd like to be able to contribute that much for 2012. This will add months to my student loan repayment, but the way I see it, missing out on 20+ years of tax-free compound growth is something I would regret big time when I get older. Luckily I think you have until tax day in 2013 to fund your Roth IRA for 2012, so that gives me a few extra months to save up the money.
When I get the cash for a Roth IRA I'm going to open it up with Vanguard. Those guys are the best and I can't wait to have an account with them.
A final word on my student loans. What I described above is going to entail a significant slowdown from the pace I've been paying off my loans. That said, it will still be an accelerated pace. Depending on my Christmas bonus I should be student loan free before mid-2013. I have to remind myself that my goal for student loan payoff was year-end of 2013. Anything earlier than that is gravy. I don't want to sacrifice more productive uses for my money while striving for a single goal. My primary (financial) goal is financial independence ASAP and I feel that funding my HSA and Roth IRA for 2012 will be more effective than using that same money to pay down my student loans.