The right moves for every age.
Have you ever mapped out your financial timeline? If you’re like many Americans, it may have been more difficult than anticipated. One of the most helpful ways to achieve your financial goals is to break it down by your age. After all, depending where you are on life’s journey, certain financial moves make more sense than others. Read on to learn more.
What might you want to do in your twenties? First and foremost, you should start saving for retirement – preferably using tax-advantaged retirement accounts that let you direct money into equities. Through equity investing, your money may grow and compound profoundly with time – and you have time on your side.
Aside from equity investment, you will want to try and build your savings. A good place to start is an emergency fund equal to six months of your salary. That may seem unnecessarily large, but it is worth pursuing, especially if you have loved ones depending on you. Accidents do happen, and you could suffer an illness or injury that might prevent you from earning income. About 25% of people will contend with such an episode during their working lives, and less than 5% of disabling illnesses and accidents are job related, so workers compensation insurance will not cover them.1
What moves make sense in your thirties? By now, you may have started a family or taken on other financial responsibilities. So, your spending has probably increased from the days when you were single. As you save and invest, remember also to play a little defense.
Many people in their thirties use this time to create a will and set up financial power of attorney in case something unforeseen happens. Another smart move is securing a solid life insurance policy. Depending on the policy that’s right for you, you may even be able to use your policy as an investment vehicle. As always, speak with a financial or insurance professional to make sure you have the coverage that's right for you.
What considerations emerge between 40 and 50? Try to maintain your retirement planning efforts in the face of financial stressors. You may have teens or preteens at home, and if you have not yet considered creating a college fund that can grow and compound over time, now is the right time. You should not dip into your retirement fund to pay for their college educations, no matter how onerous college loans may seem.
You may want to look into long-term care insurance. Buying it before age 50, when you are likely in good health, is a wise move, especially if you are interested in such coverage.
Between 50 and 60, you are in the “red zone” before retirement. If you can, accelerate your retirement savings through greater contribution levels or take advantage of the catch-up contributions allowed for many retirement accounts after age 50. If possible, think about an approximate retirement date. Aim to reduce your debt as much as possible by that time or earlier. Retiring with multiple, major debts can be stressful, to say the least. Lastly, check in with a financial professional to gauge how close you are to realizing your long-term financial objectives.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - https://www.cdc.gov/media/releases/2018/p0816-disability.html [5/24/2019]
Three important factors when it comes to your financial life.
Regardless of how the markets may perform, consider making the following part of your investment philosophy:
Diversification. The saying “don’t put all your eggs in one basket” has real value when it comes to investing. In a bear or bull market, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment (say, mostly in mutual funds or mostly in CDs or money market accounts), you could be hit hard by stock market losses, or alternately, lose out on potential gains that other kinds of investments may be experiencing. There is an opportunity cost as well as risk.1 Asset allocation strategies are used in portfolio management. A financial professional can ask you about your goals, tolerance for risk, and assign percentages of your assets to different classes of investments. This diversification is designed to suit your preferred investment style and your objectives.
Patience. Impatient investors obsess on the day-to-day doings of the stock market. Have you ever heard of “stock picking” or “market timing”? How about “day trading”? These are all attempts to exploit short-term fluctuations in value. These investing methods might seem fun and exciting if you like to micromanage, but they could add stress and anxiety to your life, and they may be a poor alternative to a long-range investment strategy built around your life goals.
Consistency. Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their 401(k) and similar investments through payroll deduction or automatic withdrawal. They are investing on “autopilot” to help themselves build wealth for retirement and for long-range goals. Investing regularly (and earlier in life) helps you to take advantage of the power of compounding as well.
If you don’t have a long-range investment strategy, talk to a qualified financial professional today.
1 - forbes.com/sites/brettsteenbarger/2019/05/27/why-diversification-works-in-life-and-markets [5/27/19]
Not all gifts are taxable.
I’d like for you to meet my friend, Hugh. He’s a retired film stuntman who, after a long career, is enjoying his retirement. Some of what he’s enjoying about his retirement is sharing part of his accumulated wealth with his family, specifically his wife and two sons. Like many Americans, Hugh likes to make sure that, when he’s sharing that wealth, he isn’t giving the I.R.S. any overtime.
Hugh knows about the gift tax and knows how to make those gifts without running headlong into a taxable situation. This is Hugh’s responsibility because the I.R.S. puts the onus on the giver. If the gift is a taxable event and Hugh doesn’t pay up, then the responsibility falls to the beneficiaries after he passes in the form of estate taxes. These rules are in place so that Hugh can’t simply, say, give his entire fortune to his sons before he dies.
Exemptions for family and friends. It would be different for Hugh’s wife, Barbara. The unlimited marital deduction means that gifts that Hugh gives to Barbara (or vice versa) never incur the gift tax. There’s one exception, though. Maybe Barbara is a non-U.S. citizen. If so, there’s a limit to what Hugh can offer her, up to $155,000 per year. (This is the limit for 2019; it’s pegged to inflation.) 1,2
The gift limit for other people is $15,000 and it applies to both cash and noncash gifts. So, if Hugh buys his older son Tony a $15,000 motorcycle, it’s the same as writing a $15,000 check to his younger son, Jerry, or gifting $15,000 in stock. Spouses have their own separate gift limit, as well; Barbara could also write Jerry a $15,000 check from the account she shares with Hugh.1,2
Education and healthcare. The gift tax doesn’t apply to funds for education or healthcare. So, if Tony breaks his leg riding that motorcycle, Hugh can write a check to the hospital. If Jerry goes back to college to become a chiropodist, Hugh can write a tuition check to the college. This only works if Hugh is writing the check to the institution directly; if he’s writing the check to the beneficiaries (i.e. Tony and Jerry), he might incur the gift tax.1,2
The Lifetime Gift Tax Exemption. What if Hugh were to go over the limit? The lifetime gift tax exemption would go into effect, and the rest would be reported as part of the lifetime exemption via Form 709 come next April. Unlike the annual exemption, the lifetime exemption is cumulative for Hugh. Currently, that lifetime exemption is $11.4 million.1,2
Being a stuntman and an active extreme sportsman, Hugh is concerned about his estate strategy. Were he to borrow Tony’s motorcycle and attempt to jump the Snake River Canyon, what would happen if he didn’t make it across? If that unfortunate event occurred in 2019, and he gave $9 million over his lifetime, and his estate and all of that giving totaled more than $2.4 million, the estate may owe a federal tax and possibly a state estate tax. Barbara would have her own $11.4 million lifetime exemption, however, and since she is the spouse, estate taxes may not apply.1,2
Any wise stuntman will tell you, “leave this to the experts.” Talk to a trusted financial professional about your own plans for giving.
1 - thebalance.com/gift-tax-exclusion-annual-exclusion-vs-lifetime-exemption-3505656 [2/9/2019] 2 - cstaxtrustestatesblog.com/2018/11/articles/estate-tax/2019-estate-gift-tax-update/ [11/19/2018]
You might be surprised at its potential.
An IRA is a retirement savings account, right? Indeed. IRA stands for Individual Retirement Arrangement. Even with that definition, however, there is no prohibition on using an IRA to save for other purposes, such as funding a college education.
Why would anyone choose an IRA as a college savings vehicle? At first glance it may seem strange, since there are other types of investment accounts specifically dedicated to that objective. On closer inspection, though, IRAs (especially Roth IRAs) present some features that may be quite attractive to the parent or grandparent who wants to build education savings.
Flexibility. Parents are urged to save for their children’s college education as soon as possible, but what if their children end up spending little or no time in college? Some young adults do start careers or businesses without any higher education. Others have no interest in going to school any longer. Another, more pleasant, circumstance worth mentioning: what if a child ends up getting a significant college scholarship or even a full ride?
If any of these things happen, parents or grandparents who have opened a conventional college savings account may face a dilemma. Withdrawals from such accounts are tax free as long as they are used for qualified educational expenses, but if the money is withdrawn for other purposes, the Internal Revenue Service defines the distribution as taxable income (and the account gains are subject to a 10% penalty). The account assets can often be transferred to another family member, but not all families have that option.1,2
Assets saved and invested for college in an IRA have the potential to be repurposed as retirement savings, if necessary.
Tax-deferred growth and the possibility of tax-free withdrawals. You probably know the basic distinction between a traditional IRA and a Roth IRA: the former permits tax-deductible contributions as a tradeoff for eventual taxable withdrawals, while the latter offers no tax deduction on contributions in exchange for tax-free withdrawals later (provided an investor follows I.R.S. rules). Either IRA gives you tax-deferred growth of the invested assets.3
Can you open a Roth IRA, own it for five years or more, and withdraw its assets tax free even if you use the money for something other than retirement? If that something is a college education, the answer is (a qualified) yes.3
Withdrawals from Roth (and for that matter, traditional) IRAs taken before age 59½ face no early 10% withdrawal penalties if the money withdrawn is used for qualified educational expenses. Does this mean you can take $100K out of a Roth IRA today and use it to pay for your child’s college education? Probably not that large an amount, as some restrictions apply.1
If you own a Roth IRA and are younger than 59½ (or are older than 59½, but have owned your Roth IRA for less than five years), your Roth IRA’s earnings are ordinary, taxable income if withdrawn. Roth IRA contributions may be withdrawn tax free at any age. So, as a hypothetical example, if you have contributed $45,000 to a Roth IRA and followed I.R.S. rules, as much as $45,000 could be taken out of that IRA tax free and used for qualified educational expenses.3,4
Not considered an asset on the FAFSA. When students apply for college aid, they routinely fill out the Free Application for Federal Student Aid (FAFSA), which helps the federal government figure out the Expected Family Contribution (EFC), or the degree of college costs the family finances can handle. Conventional college savings accounts need to be reported as assets on the FAFSA, but IRAs and other retirement accounts do not need to be.1
What are the shortcomings of building college savings with an IRA? First, this idea may not work for retirees: you must have earned income to make IRA contributions, and you cannot make traditional IRA contributions past age 70½. Phase-outs for high earners may reduce or even prohibit annual Roth IRA contributions for some. Lastly, the annual contribution limit for Roth and traditional IRAs is currently set at $6,000 ($7,000, if a catch-up contribution is included), and that may be frustrating for a household needing to build college savings in a hurry. Even so, families who seek more flexibility in their college savings options may see an IRA, particularly a Roth IRA, as an intriguing potential savings vehicle.3
1 - thebalance.com/ira-college-savings-accounts-795254 [3/27/19]
2 - merrilledge.com/ask/college/can-you-transfer-or-rollover-529-plans [6/1/18]
3 - thestreet.com/retirement/ira/traditional-ira-vs-roth-ira-14920371 [4/9/19]
4 - fool.com/retirement/2018/09/09/your-first-ira-is-roth-or-traditional-the-best-way.aspx [9/9/18]