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Ask Farnoosh: You’re 26 and Have No Insurance – What Are Your Options?

@TonyDalton10 tweets: I just turned 26 and therefore I'm off my parents’ insurance. What is the best option for me?  Do I need insurance?
 
Yes, Tony, you need health insurance! Don’t fall into the mind trap that you’re young, male and therefore immortal. If you don’t get group insurance through an employer -- often the cheapest way to get insured -- it’s important to consider all your other options.
 
Here are four:
 
COBRA. You can continue to buy your parents’ plan at your own expense for up to 36 months. This can be pretty pricey, as you’ll be paying the full cost of the plan plus usually a 2% administrative fee. You should act quickly; you have up to 60 days to elect COBRA continuation coverage after falling off your parents’ plan.
 
Individual Plan. You could also shop around for a plan on the individual market at sites like InsuranceQuotes.com, eHealthInsurance.com and Insure.com. “If you’re in good health, this may end up being cheaper than going on COBRA,” says Amy Danise, editorial director at Insure.com.
 
Your State’s Health Insurance Marketplace. Beginning in October you can purchase insurance on your state’s health exchange. You can compare prices for the qualified plans available in your state. Coverage, though, doesn’t begin until January 2013, so if you need a plan to cover the gap, COBRA or an individual plan may be your best options.  More information about the exchanges can be found on the government’s site, HealthCare.gov.
 
Medicaid. If you have low income you may qualify for Medicaid. “The thresholds for income vary based on the state where you live,” says Laura Adams, senior insurance analyst for InsuranceQuotes.com. “It used to be that you had to earn 100% of the poverty level but some states, mostly in the West, have opted to expand Medicaid for people who earn more than that, up to 133% of the federal poverty level.”
 
Drew asks: To save up for kids’ college fund, what route is better: 529 or IRA?

 
Dear Drew,
 
The IRA that is most similar to a 529 plan is a Roth IRA. Contributions to both savings plans are made with after-tax dollars and the earnings accumulate tax-free.  While a 529 plan is strictly designed for college savings, a Roth IRA can help you save for retirement, college and even a home.
 
The ability to one-stop save with a Roth IRA has its advantages. If your child doesn’t end up going to college, for example, you can always use the savings for yourself.
 
Also with a Roth IRA -- unlike with a 529 -- you can pull out your contributions tax-free and penalty-free at any time for any purpose. Earnings must be left in the account until you reach 59½; otherwise, if you tap the IRA to pay for college, you’ll have to pay income tax. Other potential downsides to a Roth IRA include the annual cap (this year it’s $5,500 or $6,500 if you’re 50 or older) and income limitations. Right now you can’t contribute if you earn more than $127,000 as a single individual or $188,000 as a married person filing taxes jointly.
 
Meantime, 529 plans don’t generally have annual caps as long as the total lifetime contribution doesn’t exceed a certain amount, anywhere from $200,000 to $400,000, depending on the plan. There are no income restrictions, either, and residents of certain states who open a 529 in their state may benefit from a state tax deduction. Another key point, says Joseph Hurley, founder of SavingForCollege.com, is that an IRA withdrawal for college could diminish federal financial aid. “Any withdrawals, even tax-free withdrawals, must be reported as income on the following year's Free Application for Federal Student Aid, or FAFSA. The income can reduce financial aid eligibility by a substantial amount,” he says. “529 plans do not cause this problem.”
 
Bottom line: If you need to save aggressively and earn too much, your best option may be a 529 plan. Otherwise, go with a Roth IRA for the savings flexibility.
 
Send me your questions @Farnoosh or at FarnooshFinFit@yahoo.com.

 

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