Last week I spent a lot of time talking about the debt crisis and the debt that students are carrying. Students are walking out with an average of $40,000 in debt.
Over 71% of 2017 graduates are carrying debt. How do we efficiently save for our children and grandchildren?
How do you save effectively and efficiently when there are so many things to save for?
Many of us will put a ton of money in a 529 plan for education instead of saving much for retirement. What happens if your kid gets a scholarship? Great question! All the money in your 529 has a penalty if you use it for anything other than education.
That’s not efficient.
The goal is to look into the future and ask, “How can I take every dollar and use it for max capacity?”
Think Twice About a 529
As much as your baby is probably going to need money for college, there's a lot of question marks about what college will look like in 18 years. It's similar to when we look at long-term care. We know the price of long-term care cannot keep inflating at the rate it's at overtime. It's just not sustainable. You wouldn't be able to afford it. At some point we will hit a critical moment when the world says “Nope! Not going to do it anymore.” The same is true for education.
You don't want to create a plan that is only committed to one possible outcome. That's not efficient.
Your first move should not be to fund Johnny's 529 account. In my opinion, your first move is to ask yourself if there are ways to save for retirement that are flexible.
Opening A Roth IRA
A Roth IRA is God's gift to flexible savings. A Roth IRA is a special retirement account that you fund with post-tax income (you can’t deduct your contributions on your income taxes). Once you have done this, all future withdrawals that follow Roth IRA regulations are tax free.
Why Choose A Roth IRA?
A Roth IRA can be used for several different situation.
Retirement -- you already paid tax on your contributions.
Emergency: If something terrible happens and you spend all the money in your emergency fund, but you still don't have enough left to cover that emergency, the money you put into a Roth IRA can be pulled back out. You can pull back out the contributions, not the growth, with no penalties or taxes and use it.
College: It’s flexible, accessible money that you can use for education.
Before you go throwing money into a 529 plan (which is great but which is solely for the purpose of college savings) let's instead put money where you can use it for life happening.
How do you intelligently, efficiently and intentionally save in the most effective way for your child or your grandchild?
Grandparents are a great fit for 529 plans. They can be putting dollars into the 529 while the parent is putting money into a Roth. It’s a win-win.
In 2018 the gift tax exclusion is $15,000 per person. If you are married and you're a grandparent, you and your spouse can both give $15,000 to Johnny's 529 plan. Between the two of you, you can give $30,000 without having any taxable impact.
This is a great idea for a Christmas or birthday gift instead of buying something they will only use once and throw away.
If you're a parent and you’re thinking, “I don't know how to balance this. How much do I give to the 401K versus to the 529 versus a Roth IRA? Do we even qualify for those things?”
If that feels overwhelming, I’d love to sit down and help you determine how to most effectively use every dollar. I don't care if you have $20,000 extra to save every year or $500 to save.
I want to effectively propel you towards your dreams for the future.