Balancing Priorities for Parents B
By Allison Bishop, CPA
eing a parent is tough on so many levels – there never seems to be enough time, money or sleep. With kids at home come so many important priorities pulling at our-
selves and our resources. If someone gave you a thousand dol- lars right now, you could probably think of seven different places it could go – and that’s before even getting to the fun stuff, like vacations. Besides saving for retirement and college educations, you might have the dream of buying a camp on a lake, paying off car loans or student loan debt, or building up your “life happens” fund for those extra things that seem to consistently come up – like Christmas gifts, car repairs, and all the extra expenses that come along with kids – ballet tuition, sports equipment, clarinet lessons. Maybe you have to paint the house or get a new roof soon. The trickiest part of being a parent in a financial sense is balancing all of those priorities.
Saving for retirement Retirement is the most important thing to save for, whether
you are a parent or not, for so many reasons: • There are very few sources of income other than what we put away for ourselves. • Retirement can last 30 years or more and you need to have enough to live comfortably.
• You can borrow for college or a second home or a boat, but you can’t borrow for retirement.
• You don’t want to depend on your children to support you in retirement.
So, how do we plan for it? Starting early and saving steadily make a big difference. If
you’ve been living well below your means and saving 12-15% of your income starting early in your career, you will probably have enough to live comfortably in retirement. If you start later, you might have to save more aggressively. The younger you are when
16 Essential Living Maine ~ September/October 2016
you start saving, the more you can take advantage of the incredible power of compound returns – simply put, money earned on prior earnings. If you contribute small amounts to an account for thirty or forty years, the balance in that account will grow to many times the amount you contributed.
If you’re eligible for an employer-sponsored retirement fund,
such as a 401(k) or a 403(b), consider taking advantage of it, particularly if your employer offers some kind of matching con- tribution. The main advantage of such a plan, other than decades of tax-deferred earnings, is that because the money comes out of your paycheck it’s easy to set it up and then leave it to grow. You’re paying yourself first – the money never comes into your checking account, so it’s not up to you to make sure it makes it into your retirement account. If there’s no employer match, or if the plan doesn’t seem
worthwhile, maybe it has high fees or limited fund choices, consider opening a traditional IRA or a Roth IRA. You’ll get an immediate tax deduction for contributions to a traditional IRA and years of deferred taxable growth. With a Roth IRA you won’t see a tax deduction now, but you’ll have years of tax-free earnings. That’s right, you pay no taxes ever on money earned within a Roth IRA, as long as you are at least 59 ½ at the time of the withdrawal and you’ve had the account for at least five years (there are excep- tions to this rule for certain circumstances, such as first-time home purchase and college expenses).
Saving for college If you have children, you presumably would like them to get a college education. 529 plans are the best way to save for college. There’s no deduction from your federal taxes (or Maine taxes, start- ing in 2016) for contributions to the account, but withdrawals are entirely tax-free as long as you use them for qualified expenses. Qualified expenses include tuition, room and board, computers, books, and supplies.
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