We've all been there: whenever you have a question, you Google it. But when it comes to your finances, don't rely on the Internet. There's so much going on in a person's life that is unique to him or her. The advice that applies to others doesn't apply to you.
Consider this question a woman asked me:
I am 45 years old with three young children. I have a good job and currently make $75,000 per year. My biggest concern is that in about 10 to 12 years, my kids will be going to college. I don't have college savings plans set up for them at the moment. I'm considering opening a Roth individual retirement account and maxing it out every year for college savings.
I have my 401(k) maxed out at my current job, which offers an 8% match. I also have an old 403(b) just sitting there. Would you please advise what I should do for my children and for my retirement?
This is the type of question that justifies why people need financial planners. If this mother takes the time to sit down with me, this is how I would address her needs at the meeting.
Should we use a 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 gains to pay for education without incurring tax or penalty. I'm typically not a big fan of co-mingling retirement savings with college savings. A lot of parents who are very ambitious in saving for their kids don't do a good job saving for themselves. I suggest that parents set up a 529 college savings plan, a flexible and tax-advantaged way to save for education.
Should we convert an old employer-sponsored retirement plan - like a 401(k) or a 403(b) - to a Roth IRA?
When you convert to a Roth, you must pay income tax. For a conversion to make sense, you don't want a large tax bill, and you need ample time for the investments to grow to offset that tax loss. So, we need to know what we actually invest in, what our current tax rate is, how much tax we pay on the amount, and how long it sits after conversion. There's no clear cut answer.
What are we actually investing in?
It's extremely important that people go over their 401(k)s. Many have no clue of what investments comprise their retirement accounts. If you don't review the investments at least annually, have a financial planner review them and ensure that they are still in line with your current goals and risk tolerance. Making small tweaks in a 401(k) can yield tens, if not hundreds, of thousands of dollars more.
Do we have enough insurance?
Every parent with young children should have life insurance in place. Should you die and your offspring end up orphaned, what will pay for their futures? If you are very determined to help pay for the kids' college, then take out a 20-year term policy. That would be enough for all three kids. Just to give you an idea, an inexpensive 20-year term policy for $500,000 on a 45-year-old female costs roughly $625 per year. That's it.
Every situation in financial planning is different. The one standard that holds true in all situations is that there is no one universal answer. Your finances are something you need professional help with, not an online forum.
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