Roth IRA for College Savings: A Great College Investment Vehicle

Roth IRA for College Savings: A Great College Investment Vehicle

If you qualify, earning less than $95,000 for a single filer or less than $150,000 if filing jointly, you likely know the Roth IRA is a great way to save money for retirement. You receive no tax deductions when you fund your Roth account, but your money earns interest tax-free until you retire. Then, if you have owned the account for at least five years and you have reached age 59-1/2, your earnings are non-taxable when you make withdrawals from your savings.

You may not realize that some key features of the Roth IRA and the particulars of college financial aid awards also make the Roth IRA an attractive way to save for your children’s higher education expenses.

You can withdraw Roth contributions at any time

Since you paid federal tax on your contributions at the time you earned them, you can leave your money in your Roth account, earning interest tax-free. Withdraw your contributions when junior enrolls at the university with no tax or penalty and let the earnings rest until you retire.

If you start when your child is still in diapers, you can accrue a tidy sum. The most a couple can invest in a Roth is $8,000 ($4,000 for each spouse). Over 18 years, that adds up to $144,000. Even saving half of that amount, which is a more likely sum for a family that meets the Roth IRA income limits, results in a hefty $72,000.

Roth earnings can be withdrawn without penalty if used for higher ed

Avoid the 10 percent penalty on early withdrawal of earnings from a Roth IRA by using the money for higher education expenses. Remember: withdrawal of contributions are always tax free, but early withdrawal of earnings are subject to federal taxes. Paying taxes on the earnings seems a fair trade off for all those years of tax-free accrual.

Roth IRA avoids the financial aid radar

The formula for determining a student’s and parents’ ability to pay for college usually doesn’t take retirement savings into account. This is where the Roth IRA out performs other college savings plans like the Coverdell Education Savings Account or state 529 options.

Financial aid concerns also reveal the flaw in using the Roth IRA for college savings–distributions from the IRA can count as unearned income and throw a monkey wrench in the following year’s financial aid assessment. The benefits and drawbacks could balance out in the end, however.

Lower income savers get IRS tax credit for Roth contributions

Joint filers with income less than $50,000 receive a tax credit for contributing to any retirement fund. The lower the income, the greater the credit. But even the smallest credit, 10 percent of your contribution that year, is a good return on your investment.

Save for college and retirement in the same account

The Roth contribution limits are likely to continue to increase in future years. Parking both retirement and college savings in a Roth IRA is a one-stop solution for these important financial goals.

Should You Lease or Buy Your Next Car?

Many people are faced with this question when the time comes to get a new car. By some estimates, leasing vehicles has increased 30% in the past 10 years. Leasing is becoming more popular and can be confusing. Both buying and leasing have their advantages and disadvantages and one should be aware of what those are before making a decision. Leasing a car is appealing to many because you get to drive a new car for lower monthly payments than if you bought (or made payments) on the same car. This is because you are only paying for the three or four years (or however long you lease for) worth of depreciation versus paying for the whole car. For this reason, many people choose to lease a more expensive car than they could afford to buy. Another lure of a lease is that in three or four years you are free to turn the car back in, lease another new car, and never get tired of the car you are driving. Leasing may also be advantageous in some instances due to the fact that the IRS allows for more generous write-offs for lease payments than for loan payments on more expensive cars. Also, you may be able to find a great deal on the interest rate for your lease if a dealer is trying to move certain vehicles. Maybe the money you save in that case each month could be used to pay off debt with a higher interest rate. However, the disadvantage of a lease is that at the end of your lease you have no ownership in the car you have been driving for several years. You can purchase the car at the end of your lease if you have the chunk of money needed to do so (not likely if you chose to lease in the first place). My husband and I leased a vehicle a few years back. When the lease was up we were struck with the fact that we had payed all that money for all those months and were just going to hand the vehicle back to the dealer. Instead, we took out a loan to purchase the vehicle, sold the vehicle for more than the amount of the loan, paid off the loan, and had some money “left over”. A lot of work. Another thing to be aware of is that there are penalties you will pay if you fail to meet the conditions of your lease. For example, many leases have mileage limitations on them and if you exceed those miles (usually somewhere around 15,000 miles/year), you will pay for the extra miles you drove. That could add up if you spend a lot of time on the road. Excessive wear and tear on your leased car can also end up costing you extra money.

Education IRAs

Education IRAs

Last month, I briefly explained the difference between the various Individual Retirement Accounts. This time, I have another IRA to tell you about. It is the Education IRA. Education IRAs, for those under age 18, are quite different from other IRAs. For one thing, $500 is the total maximum that can be contributed to an Education IRA. This is in addition to any other IRAs you may have (recall that $2000 is the total that can be contributed to any other IRA or combination of IRAs). A person can also contribute to an Education IRA even if he/she does not have earned income. However, it should be noted that the $500 maximum contribution can be made only if the contributior’s AGI (adjusted gross income) is less than $95,000 for single people or $150,000 for joint filers. Furthermore, the ability to contribute to an Education IRA is completely lost if a single person’s AGI is above $110,000, or $160,000 for joint filers. The contribution is phased out in between those ranges.

As long as the Education IRA’s beneficiary’s higher education expenses (books, supplies, equipment, fees and tuition, and part of room and board if enrolled half time or more) are equal to or more than the Education IRA distribution for the current year, the distributions are tax free. In most cases,a 10% tax is tacked on if the distributions are greater than the qualified expenses. In addition, the beneficiary has 30 days after turning age 30 to use the Education IRA funds.

Obviously, there are other requirements and details which cannot fully be explained here. If you think an Education IRA sounds like something you’d like to invest in, your own research will prove invaluable. Two good places to start are at Kiplinger (http://www.kiplinger.com) and the Motley Fool (http://www.fool.com). Good luck!

Save Some Money at the Grocery Store

Save Some Money at the Grocery Store

When my family began to budget and be more careful with our money after I stopped working, one of the areas we had to hit hard was our weekly grocery bill. It took a little planning and several efforts, but we finally got to the point where we could meet our budget and still have enough food to eat for the week. There are lots of ways to save money at the grocery store, and here are some that worked for us. Each week, I make a menu that includes what we’ll have for dinner each night the next week. This simple step becomes the basis for our grocery list and ensures that we will have exactly what we need and not a bunch of food in the cupboards that I can’t figure out how to put together into a meal (cooking isn’t my strong point). Denise Schofield, in her book Confessions of an Organized Homemaker, goes a step further. She includes “menu selection sheets” in her planning notebook (ie. a Day-Timer planner). These sheets list all of the main dishes she routinely serves for dinner as well as their ingredients. This makes creating a menu, and a grocery list to go along with it, a little easier. I try to include one or two meatless meals and some “cheapie” meals in each week’s menu to help keep us under budget.

Another thing we do before heading out to the store is to check out the food ads for several grocery stores near us. We buy the bulk of our food at a grocery outlet type store (you know, the kind where you bag your own groceries) and then hit one or two other stores for the items on our list that they are having a good sale on. If a store is having a good sale on something not on my list, I may scratch a planned menu item and substitute it with a meal made with the sale item, or I may just purchase the sale item and save it for later use.

Price lists are another good method for finding the best prices at the grocery stores you frequent. With this method, you record the best price you have paid for an item, using grocery store receipts and ads. You can have a separate sheet in your price book for each main category of food you purchase. Take your price book with you to the store and see if you are getting a good deal on an item.