Saving for Education without Neglecting Retirement

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Increasing education costs have led to young adults and their parents accumulating significant amounts of debt. According to the National Center for Education Statistics, it costs about $100,000 to attend a four-year public university, and nearly $200,000 for a private four-year school.* Even for new parents with the benefits of a longer time horizon, the savings required to cover private college tuition is projected to be more than $800 per month.* The inflation rate for education is higher than inflation as measured by the consumer price index, which eats into investment returns.*

The pressure to build retirement savings has also grown due to longer retirements and uncertainty about Social Security and Medicare. Some people may feel it boils down to saving for college vs. saving for retirement. Compounding this dilemma further, many offspring are returning to the nest post-college. With an increasing number of young adults still requiring some support until age 30, new parents can’t afford to delay saving for retirement, as it may take longer than anticipated for children to be independent. So how might a family elevate some of these pressures?

Find a happy medium. Even when finances are tight, there are several strategies you may be able to use to make the most out of your income:

* Pay yourself first – make sure you are making sufficient contributions to your employer’s retirement plan or individual retirement account. Generally, people in their 20s and early 30s should be contributing at least 10 percent of their gross income annually to qualified retirement plans, or up to the maximum $5,500 IRA contribution.

* Start a college savings plan such as a 529 plan – after-tax contributions are made and grow federal tax-free. When the funds are used for qualified education expenses, there is no tax on the deferred investment growth, either. Friends and family can also contribute to your 529 plan, which can be a great gift idea. Timing is important because the sooner you start saving for college, the smaller the drain it will be on your budget, leaving you more money to fund your retirement.

* Consider the alternatives – whenever facing conflicting financial priorities, weigh the availability of alternatives before dedicating funds to any one bucket. For example, even if you aren’t able to cover 100 percent of your children’s college expenses, plenty of alternatives exist to bridge the gap. Merit and independent scholarships, work-study programs and federal loans can all help qualifying families achieve their goals. For the 2014-15 school year, parents on average paid 32% of college tuition from income and savings, according to Sallie Mae, surpassing scholarships and grants for the first time since 2010.** The rest came from grants and scholarships (30%), student loans (16%), student income and savings (11%), parent borrowing (6%), and relatives and friends (5%).

Parents should always try to put themselves first when it comes to saving for retirement. The reason is simple: Saving is a primary way you may fund your retirement, especially if Social Security is unlikely to replace a significant portion of lost income. Remember, there are no loans for retirement.

*U.S. Department of Education, National Center for Education Statistics (2015). Digest of Education Statistics, 2013 (NCES 2015-011), Table 330.10. **Sallie Mae – https://www.salliemae.com/plan-for-college/how-america-pays-for-college/
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.

Idea for that Last Minute Tax Deduction

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One frequently overlooked tax benefit is the “spousal IRA.” Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes: wages, tips, bonuses, professional fees, commissions, alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a non-working or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as the spouse has adequate compensation. Remember IRA and Roth IRA contributions are not due until you file your taxes, so it might not be too late for a 2015 contribution.

The maximum amount that a non-working or low-earning spouse can contribute is the same as the limit for a working spouse, which is $5,500 for 2015. If the non-working spouse is age 50 or older, the spouse can also make “catch-up” contributions (limited to $1,000 for 2015), raising the overall contribution limit to $6,500. These limits apply provided the couple together has compensation equal to or greater than their combined IRA contributions.

Example: Bill is employed and his W-2 for 2015 is $100,000. His wife, Jill, age 45, has a small income from a part-time job totaling $900. Since her own compensation is less than the contribution limits for the year, she can base her contribution on their combined compensation of $100,900. Thus, Jill can contribute up to $5,500 to an IRA for 2015.

The contributions for both spouses can be made either to a Traditional or Roth IRA, or split between them, as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the Traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:

•Traditional IRAs – There is no income limit restricting contributions to a Traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the non-participant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $183,000 in 2015 (up from $181,000 in 2014). This limit is phased out in 2015 for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). *

•Roth IRAs – Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $183,000 in 2015 (up from $181,000 in 2014). The contribution is ratably phased out for AGI between $183,000 and $193,000 (up from $181,000 and $191,000 in 2014). Thus, no contribution is allowed to a Roth IRA once the AGI exceeds $193,000. *

Example: Jill, in the previous example, can designate her IRA contribution to be either a deductible Traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $183,000. Had the couple’s AGI been $188,000, Jill’s allowable contribution to a deductible Traditional or Roth IRA would have been limited to $2,750 because of the phase-out. The other $2,750 could have been contributed to a nondeductible Traditional IRA.

*Bloomberg BNA Tax Reference Guide
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.