Jason P. Tank: Idle cash and premium subsidies

Stephanie Shomin, The Record-Eagle, Traverse City, Mich.
·3 min read

Jun. 4—Q: I've got too much cash just sitting in the bank. I like having it available to me, but I'm beginning to feel foolish earning so little on it. Besides locking it up in a CD at my bank, what other options are there?

A: Since last summer, increasingly I've been helping my clients with their cash management needs. After the Fed's rate hikes over the past year, it's absolutely time to do something with your excess cash. If you don't, you are basically leaving money on the table.

Consider opening a brokerage account that's solely dedicated to your excess cash. Once opened, establish an online link that connects your new brokerage account to your main checking account at your bank. This online link will allow you to freely move money whenever you want.

After you've successfully shifted your cash into your new brokerage account, just invest it in a money market fund. Today, a typical money market fund pays almost 5% interest. If and when you need the cash, all you have to do is sell a portion of your money market fund, push a couple of buttons and it'll land back in your bank account.

Q: We're confused about how the Affordable Care Act's premium subsidy actually works. Our tax return showed us having to pay back part of the premium subsidy we got last year. How can we avoid this?

A: It all comes down to your income guess when you signed up for your plan at the start of the year. To help, here is a simplified explanation.

The government essentially determines how much you can "afford" to dedicate to the cost of your health insurance. It depends on the level of your income and family size. It can range from as little as 2% of your income to as much as 8.5% of your income.

What you can afford to pay is then compared to the actual cost of the "benchmark plan" in your area. The difference is your premium subsidy and it is automatically — in advance — used to lower your monthly premium for the type of health plan you choose.

Now, if your income turns out to be higher than your initial guess, at tax time you'll have to pay back some of the premium subsidies you enjoyed in advance. If your income guess was too low, at tax time you'll receive a one-time, lump sum to make up for the premium subsidies you didn't get in advance.

To minimize any surprises at tax time, you can always adjust your income guess throughout the year. Of course, be aware that your monthly premium cost will change after you update your income.

Jason P. Tank, CFA, CFP is the owner of Front Street Wealth Management, a purely fee-only advisory firm, and the founder of the Money Series, a nonprofit program committed to providing open-access to financial education for all. Contact him at (231) 947-3775, Jason@FrontStreet.com and www.FrontStreet.com.