Well, whether you need PROFESSIONAL professional help is up for debate, but when it comes to your finances, don’t rely on Google.
You need someone who knows what they’re doing.
Consider this example:
I am 45 years old with 3 young children. My biggest concern is that in about 10-12 years, they will be going to college. I have a good job and currently make $75,000 per year.
I don’t have college savings plans set up for them at the moment. I’m considering opening a Roth IRA and maxing it out every year so they use it for college.
I also have an old 403b just sitting there doing nothing. I’m maxing out my 401k at my current job, which also offers an 8% match. Would you please advise what I should do for my children and for my retirement? Also, do you think I should convert my old 403b into a Roth IRA?
These are the type of questions that a Certified Financial Planner drools over.
Why? Because there’s so much going on in this person’s situation that it justifies why people need financial planners.
If I were meeting with this client in my office or over Skype, this is how I would go about the meeting.
1. Should she use her Roth IRA for college savings?
It’s a little-known fact that you can actually use a Roth IRA to pay for college-related expenses. Most people think of Roth IRAs as a retirement savings vehicle, which it is, but you can pull out any gains to pay for education without incurring any tax or penalty. Even though that’s the case, I’m typically not a big fan of co-mingling retirement savings with college savings.
I have a lot of clients who are parents that are very ambitious in saving for their kid’s college and don’t do a good job of saving for their own retirement. They do so with good intentions of trying to prevent their child from incurring an exorbitant amount of student loan debt, so what happens is that if they don’t save enough for their own retirement. Then later on in life, they’re going to be dependent on their kids because they don’t have enough savings. I’m all about trying to help your kid; pay for your kid’s college, if you’re so inclined, but not at the sacrifice of your own retirement. I discussed this is a previous video:
In this person’s case, I would suggest that she look into setting up a 529 college savings plan. I mentioned in a previous post on the four ways that you can save for college; the 529 college savings plan is what we are using for our three boys currently. It operates much like a Roth IRA in the fact that any distributions, as long as they are for college-related expenses, are completely tax-free. Which is freakin’ sweet!
The other huge benefit of the 529 plan is that the parents, or in this case, the mom, will be in control of the money even after the child turns 18. If the child decides they don’t want to go to college, they want to cash out to start their own rock band, they won’t have the ability to do so because Mom’s in control. Parental control is a beautiful thing. 🙂
Key Takeaway: Don’t commingle retirement savings with college savings. Take care of yourself first.
2. What about converting a 403(b) to a Roth IRA?
That’s the million dollar question, and it’s a very difficult one to answer. First, we need to get an idea of what we’re actually investing into, so that after the conversion, the investment has to grow; what’s our current tax rate, and how much tax will we pay on the amount that we convert; and how long is it going to sit into the account?
For a Roth IRA conversion to make sense, you don’t want to have to pay a lot of tax on a conversion, and you need ample enough time for the investments to grow to offset how much tax you had to pay to convert. It’s not a clear-cut answer, and based on the lack of information I have in this situation, it’s hard for me to make that recommendation. Typically, when people realize they have to pay the tax out of pocket for it to make sense to do the conversion, it usually doesn’t make sense for the client’s current income needs.
With the old 403(b), I would suggest that she roll it into an IRA to have better control of the investments. It doesn’t sound like that she’s reviewed the investments in a while, so it definitely would help to have a financial planner to review those investments and to make sure that they are still in line with her current goals. If you’re not sure if your risk tolerance is in line with your goals, fill out this questionnaire that will take you less than 3 minutes to find your risk number.
Key Takeaway: Converting a 403b to a Roth IRA is not a black and white answer. Meet with a financial planner or tax professional to see if it makes sense. If not, be sure to roll any old retirement accounts into an IRA.
3. Make sure she reviews her 401(k) annually.
I love the fact that she’s maxing out her 401(k) and getting that match. Free money is sweet, and saving for her retirement is even sweeter. I would want to encourage her to make sure that she reviews her 401(k) at least annually. I have a 401(k) review service, because I feel it’s extremely important that people go over their 401(k)s.
I’ve seen too many instances where people are investing blindly into these retirement accounts, and they have no clue of what they’re actually invested into. Making small tweaks in that 401(k) can yield tens, if not hundreds, of thousands of dollars more waiting for retirement. Hire a financial planner to review your 401(k) annually, as well as your other investments.
Key Takeaway: Review your 401k (and all of your investments at least once per year.
4. What about life insurance?
Although this wasn’t asked, one immediate thought that I had was having three young children, I hope that this mother has life insurance on herself. It sounds like she’s very determined to help pay for her kids’ college, so taking out a 20-year term policy, that would be enough to pay all her debts and have a good amount to pay for all three kids’ college, would be highly suggested.
Just to give you an idea, a 20-year term policy for $500,000 on a 45-year-old female would cost roughly $625 per year. That’s it. Here’s a look at the top companies with the cheapest rates:
Key Takeaway: Don’t ignore life insurance especially with young children. It’s super cheap. Not convinced? Check out How Much is a Million Dollar Life Insurance Policy?
Find The Right Answer For Your Situation
The one standard that holds true in all situations in regards to financial planning is that there isn’t one right answer. Every situation is different, and as you can see by the example above, there are many different scenarios that we can go with. My biggest situation for this individual is that they take the time to sit down with a financial planner to make sure that they’re doing things right. Make that a priority, and review their plan at minimum on an annual basis.
Do you have a question like this? Feel free to “Ask Jeff” and I’ll do my best to get back to you in 24 hours.
Great work, Jeff. What about co-mingling retirement assets with education assets in a Roth don’t you like? I think it could act as a good deterrent to parents who get overly eager to help with a child’s education at the cost of their own retirement goals. When you can see the education funds as a direct offset to your retirement goals, it may help in making a better decision.
529’s are awesome. They are even better Christmas/Holiday presents for grandchildren than toys. I finally got the grandparents converted to give $25 a month in a 529 to our daughter instead a glut of new toys. Between two grandparents that is $50 a month or $600 a year. Add that up over 14 years and interest and we’ve got a nice little head start (plus what we are adding as well). In Utah we have an awesome 529 plan, just google it and check it out. Low costs! Come on grandpa and grandma’s….stop the toys and start the 529’s for the kiddo’s.
Wow, I had no idea life insurance could be that inexpensive. As a a singleton with no dependents I haven’t really spent much time thinking about it. But good to know for the future.