Open enrollment rolls around every fall, and it’s usually accompanied by a stack of PDFs and deadlines. A lot of pilots handle the process as quickly as they can, re-electing the same plan and same coverage levels as last year simply because that’s what’s already there.
That’s the habit Allworth Airline Advisors set out to interrupt in their recent webinar, “The Open Enrollment Hot Seat.” Rutledge Gordon, CRPC, VP of Advisors at Allworth Financial, hosted airline-specialized financial advisors Gary Krasnov, AIF, CLTC, and James Risalvato for a conversation on the parts of open enrollment pilots tend to skim past, from health savings accounts to cash balance plans to updating beneficiary designations.
The Triple Tax Advantage Hiding in Plain Sight
Krasnov opened with what he considers one of the most underused tools available to high-earning pilots: the health savings account (HSA).
“HSA is the only vehicle where you take pretax dollars and deposit it in the account,” Krasnov said. “You can control the investment so it can grow tax-free. When you take the money out, as long as you use it for a qualified medical expense, it comes out tax-free. It’s an incredibly powerful tool.”
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An HSA account is a long-term investment vehicle in its own right for pilots with the cash flow to cover medical costs out of pocket.
Banking medical receipts over the years while letting HSA contributions ride untouched is what Risalvato calls the “shoebox method.”
“This method allows the most tax-advantaged account that we have to continue to do what it does best and save you on taxes with tax-deferred growth, tax-free distributions,” Risalvato said.
Reimbursement doesn’t have to happen the same year the expense occurred. Pilots can submit older receipts well into retirement.
“One of my clients recently used that money to go on a cruise,” Risalvato said.
That flexibility doesn’t last forever, though.
“If I die, my wife inherits my HSA as if it were hers,” Krasnov said. “If we both die, it becomes taxable [to heirs]. So the point of that is: once you retire, start using it.”
Roth or Traditional?
There’s no universal correct 401(k) contribution strategy, but there are answers that fit a given pilot’s income, tax bracket and career stage.
Traditional contributions defer taxes until retirement, while Roth contributions tax the money upfront in exchange for tax-free growth and withdrawals later.
“Between these two accounts, what we’re able to do is create a very tax-efficient investment strategy, depending on where you’re at in your earning years,” Risalvato said.
Senior, high-earning pilots in their peak years tend to be in a thirty-seven percent tax bracket.
“That’s a very expensive dollar to put in a Roth,” Krasnov said. His general recommendation for that group is to lean into traditional contributions during peak earning years, then revisit Roth conversions after retiring, when income typically drops.
Younger pilots, still climbing toward those top tax brackets are a different story.
“If you’re just starting out in your career, you absolutely should be doing Roth contributions,” Krasnov said. “Those are super powerful dollars when you’re in a lower income tax bracket.”
Despite legislative changes that affect catch-up contributions, Krasnov says to keep making those contributions.
“That money is getting taxed one way or the other,” he said. “At least you’re getting to put it in a Roth.”
Risalvato added that tax planning doesn’t stop at the day of retirement.
“As soon as you retire at age sixty-five, your effective income tax drops significantly,” he said. “We actually convert traditional money over to Roth money, taking advantage of these lower effective tax rates during retirement.”
Skip that step, he warns, and you could possibly be leaving tens, if not hundreds of thousands of dollars in federal tax savings over the course of the rest of your life on the table.
Cash Balance Plans
The market-based cash balance plan is a newer option carriers now offer for pilots who max out their 401(k) contributions well before year’s end.
“The major airlines have the three best 401(k) plans in America, bar none,” Krasnov said. The catch is what happens once a pilot’s contributions hit the IRS’s annual limit on tax-deferred savings. Historically, any company contribution beyond that cap simply showed up as taxable income in a paycheck. “It’s really not helping you save toward retirement,” Krasnov said.
The cash balance plan redirects that excess into a separate, professionally managed account instead. “It gets invested by the company,” Krasnov explained. The allocation, he says, leans conservative by design in exchange for a guarantee: “You can’t go negative. You always get your money back.”
There are some tradeoffs.
“You cannot control the investments,” Risalvato said. The plan isn’t a fit for pilots who want aggressive growth or need liquidity from those dollars soon. But framed as a tax play for high earners looking to keep deferring income, he says that this plan could potentially save you a lot of money in taxes in the future. Funds can later roll into a traditional IRA.
Coverage Gaps and the Mistakes That Repeat Every Year
Some parts of open enrollment are easy to overlook, including supplemental coverage and beneficiary designations.
Voluntary benefits like critical illness and accidental death and dismemberment coverage, according to Risalvato, can be treated as insurance against a low-probability, high-consequence event, not an expense to minimize.
“It’s planning for the unexpected,” Risalvato said.
Beneficiary reviews are a five-minute task that Krasnov says too many pilots skip year after year. “It’s amazing the mistakes we find year over year,” he said, recalling clients discovering an ex-spouse still listed on a policy. He was equally emphatic about naming contingent beneficiaries, not just primary ones, to keep accounts out of probate.
There’s another coverage gap that’s easy to miss for pilots with a stay-at-home spouse.
“Caregivers, spouses specifically, are probably the most underinsured demographic in America,” Krasnov said.
Risalvato closed with a case that stuck with him in which a pilot who shattered his ankle in a fall at home and needed long-term disability coverage he never expected to use.
“His family was completely dependent on that income coming in,” Risalvato said. “If you’re not revisiting your insurances every single year, you’re doing not just yourself, but your entire family, a huge disservice.”
Free Consultations with Allworth Airline Advisors
HSAs, Roth conversions, cash balance plans and supplemental coverage all come with the same caveat: what works depends on your income, career stage, and family situation. The cost of not reviewing these decisions, Krasnov says, is simply too high.
Allworth Airline Advisors can help you sit down with a specialized advisor before finalizing open enrollment elections, rather than after.
“It doesn’t need to be a two-hour-long discussion,” Gordon said. “We could probably knock this out in twenty or thirty minutes, just to explain some of these things and what it means if you choose option A versus option B.”
If you want to review your open enrollment options with an airline-specialized advisor, schedule a complimentary consultation with Allworth Airline Advisors at AllworthAirline.com/Consultation or by calling 800-321-9123.
