Tag: education

This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.
However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.
IRA Contribution Month
To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.
Procrastination Penalty
At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

8 Things Every Parent Should Know About 529 College Savings Plans

We often are asked by parents (or grandparents) of young children about college savings plans.  529 college savings plans offer tax-advantaged ways to save for the various costs of higher education.  While these plans have a lot of name recognition, many people still have questions about the details.  Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:

  1. Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses.  Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
  2. There are no income restrictions to open and contribute to a 529 account.  Even high-income earners can open and fund college savings plans.
  3. The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
  4. The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account.  (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year.  You can do it, but you should know the rules first.)
  5. The beneficiary is portable.  If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself).  You do not need to decide on a new beneficiary the moment that your child decides not to go to college.  For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
  6. Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
  7. In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000.  Thirty-three other states also offer state tax deductions for contributing to a 529.
  8. If your child gets a scholarship, you will not lose the money.  You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies.  You can keep the plan open in case your child goes on to graduate school.  You can change the beneficiary and name another college-bound relative.  A final option would be to simply cash out the plan.  Doing so would subject you to income tax and a 10{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} penalty on the earnings.  If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.

If you have questions, or are interested in finding out how to start a 529 plan, please let us know!

Lifestyle and Financial Success – Some Examples

I read an article recently about a woman with a PhD from Harvard, held a high government position in the Treasury Department and worked at the Federal Reserve. You would think that this person would be smart about finances and investments.

You would be wrong. She messed up, but was able to recover.

Academic skills and executive level jobs – in or out of government – don’t automatically translate into wise lifestyle decisions and certainly not wise investment decisions. Having a high paying job provides you with the opportunity to save for retirement. But for too many people it provides for an extravagant lifestyle.

You may never have heard of Curtis James Jackson III, but if you are familiar with the current music scene you may have heard of “50 Cent.” He is reputed to have earned about $30 million a year but he just filed for bankruptcy claiming he owes between $10 and $50 million to his creditors.

How does this sort of thing happen? Some of it could be the result of poor investment decisions. But lifestyle is the primary reason that highly paid entertainment figures, athletes and the like go broke. They spend money on expensive things – homes, cars, planes – entertainment, and on “posses” (friends and hangers-on) who they support not realizing that their money is not literally endless.

Of course “50 Cent” is not typical, but the woman who we discussed at the beginning of this essay had the same problem,  on a smaller scale. She and her husband had a huge home that absorbed a lot of their income. There was a big mismatch between their current lifestyle and the savings that were supposed to support them in retirement. In addition, they kept too much of their savings in cash or cash-equivalents because, while they were educated, they were not investment experts.

We have met too many couples who are in their 50s, are earning $150,000 to $350,000 a year, and want to retire in about a decade. But they have not really focused enough on asset gathering. Their lifestyle absorbs most of their income and their investment decisions have lacked a plan.

Does this mean that retirement for them is bleak? No. But it requires facing some facts about lifestyle, savings and investing that will require some smart decisions. This is the point at which a good financial planner and advisor can help people get their financial life in order, before it’s too late.

If this sounds like someone you know, give us a call. We may be able to help.

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Korving & Company, Investment Management, Suffolk, VA

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