Showing posts with label 529. Show all posts
Showing posts with label 529. Show all posts
Thursday, March 12, 2009
This Wealth Management Blog Has Moved
Please visit www.wechterfinancial.com and click on Financial Briefs and Featured News for more outstanding articles on Financial Planning and Investment Management.
Tuesday, December 16, 2008
Helping Your Kids Recover after a Major Money Mistake
The average college graduate is $20,000 in debt, and today’s young adults are clearly exposed to more opportunities for self-directed financial disaster than any group in history.
Despite the current credit crunch, credit cards are still a common way most young people afford their new adult lifestyle, and rising costs on everything from rent to gasoline presents deeper challenges.
So it happens. Your kid gets in trouble with those credit cards, loses a job, or can’t find a job to pay the sum total of the rising debt he or she has. What can you do?
Make sure you can afford to help: It’s tough to say no to a financial bailout for your kid, but depending on the level of trouble he or she is in and your own financial responsibilities, you may need to. Here are some ideas:
Both sides should come clean: Remember that this situation is as much about the relationship as about money. The decision to help a family member with money problems requires understanding – lecturing tends to work not so well. But it’s right to encourage your kid to take a frank look at their financial situation and if they are in debt trouble of any kind, they should get help. It’s also important that you show confidence that they will make it through this.
Consider a joint talk with a financial planner: A financial planner, such as a CERTIFIED FINANCIAL PLANNER™ professional, can look at their financial situation and your own and give you both a road map on how to work through your child’s money problems and set up better money management techniques for after the crisis.
Should help be considered a gift? Actually, this is a good first question in any scenario where you offer help to a friend or family member. What happens if you don’t get the money back? For the sake of the relationship involved, it might make sense to think through that possibility. Would the potential loss of money injure you, and worse, will it injure the relationship? This is why it might be a very good idea to present this solution as a one-time gift – and then stick to it.
But if it’s a loan: You need to structure it professionally with clear consequences if it goes unpaid. Handled correctly, such a solution can offer benefits for the borrower and lender alike. Terms should be at arm’s length to meet IRS rules but it can still be more attractive than the child could obtain in the current marketplace. But there’s the potential for incredible downside. Unclear agreements can lead to missed payments or default. If the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed. It is advisable that the loan agreement be in writing and properly executed to meet IRS rules.
Work with them on budgeting: It’s not going to be enough to solve the immediate problem. Even if you don’t use a financial planner to help you both work through the situation, it’s important to set a clear financial course for your child going forward. They obviously have to have a stake in the planning, but you’re going to have to provide guidance.
Encourage them to start an emergency fund: Even if your child only has a few cents in their pocket after settling their troubles, encourage them to start an emergency fund. Optimally, they’ll need to stash away three to six months’ worth of living expenses, and even if it’s just a small start, it’s part of the recovery effort.
December 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Despite the current credit crunch, credit cards are still a common way most young people afford their new adult lifestyle, and rising costs on everything from rent to gasoline presents deeper challenges.
So it happens. Your kid gets in trouble with those credit cards, loses a job, or can’t find a job to pay the sum total of the rising debt he or she has. What can you do?
Make sure you can afford to help: It’s tough to say no to a financial bailout for your kid, but depending on the level of trouble he or she is in and your own financial responsibilities, you may need to. Here are some ideas:
Both sides should come clean: Remember that this situation is as much about the relationship as about money. The decision to help a family member with money problems requires understanding – lecturing tends to work not so well. But it’s right to encourage your kid to take a frank look at their financial situation and if they are in debt trouble of any kind, they should get help. It’s also important that you show confidence that they will make it through this.
Consider a joint talk with a financial planner: A financial planner, such as a CERTIFIED FINANCIAL PLANNER™ professional, can look at their financial situation and your own and give you both a road map on how to work through your child’s money problems and set up better money management techniques for after the crisis.
Should help be considered a gift? Actually, this is a good first question in any scenario where you offer help to a friend or family member. What happens if you don’t get the money back? For the sake of the relationship involved, it might make sense to think through that possibility. Would the potential loss of money injure you, and worse, will it injure the relationship? This is why it might be a very good idea to present this solution as a one-time gift – and then stick to it.
But if it’s a loan: You need to structure it professionally with clear consequences if it goes unpaid. Handled correctly, such a solution can offer benefits for the borrower and lender alike. Terms should be at arm’s length to meet IRS rules but it can still be more attractive than the child could obtain in the current marketplace. But there’s the potential for incredible downside. Unclear agreements can lead to missed payments or default. If the borrower dies suddenly, the lender’s investment may be lost if the agreement isn’t structured correctly. A properly executed promissory note is still an obligation of the estate, and may continue to be paid to an heir or other person or entity based on the terms as agreed. It is advisable that the loan agreement be in writing and properly executed to meet IRS rules.
Work with them on budgeting: It’s not going to be enough to solve the immediate problem. Even if you don’t use a financial planner to help you both work through the situation, it’s important to set a clear financial course for your child going forward. They obviously have to have a stake in the planning, but you’re going to have to provide guidance.
Encourage them to start an emergency fund: Even if your child only has a few cents in their pocket after settling their troubles, encourage them to start an emergency fund. Optimally, they’ll need to stash away three to six months’ worth of living expenses, and even if it’s just a small start, it’s part of the recovery effort.
December 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Monday, October 13, 2008
Preparing Your Finances for a New Baby
Your parents might have mentioned at least a couple of times while you were growing up how wonderful and expensive you were. The bottom line? Bringing a child up is a tremendous financial responsibility, and it’s better to plan in advance than deal with a surprise down the line.
The U.S. Department of Agriculture compiles an annual survey on what it costs to raise a child from birth through age 17. In 2007, in the lowest income group, expenses ranged from a total of $7,830 to $8,830 for a two-child, husband-wife household to between $15,980 to $17,500 for families in the highest income group. Once again, those are the latest annual figures – so if you held spending unrealistically static for the next 17 years, the cost of raising a child in the lowest income group would range from $133,110 to $150,110 adjusted for inflation. In the highest income group, that range would be between $271,660 to $297,500.
Note that we haven’t begun to discuss college yet. Across the United States, the average tuition and fees at four-year private institutions in 2007-2008 was $23,712, representing a 6.3 percent increase of more than $1,400 over 2006-2007, according to College Board’s 2007-2008 Annual Survey of Colleges. At public four-year colleges, the average in-state tuition and fees averaged $6,185, a 6.6 percent increase.
All parenthood comes at a price. But with the help of a financial planner you can create a strategy to afford kids from birth through college. Here are some key points in that process:
Create or review your financial plan: A financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. For many individuals, it may be the first time they seriously examine their financial future in such black-and-white terms. But it starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your financial planner can also help you understand how much the additional costs of raising a child, including the startup costs of birth or adoption will affect all those numbers. A financial plan should be reviewed with every major change in life, and having kids is certainly one of those landmark events.
Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards first.
Make sure you have a will: If you die without a will, you won’t have a clear path of guardianship for your child, nor will your assets be properly directed to support that child. Any good adoption attorney will insist that you develop and file a will as part of the adoption process.
Check your insurance options: In today’s health insurance environment, the addition of a child to a policy can bring tremendous additional cost – sometimes without the guarantee of the best coverage. Check with your employer or your independent insurance provider to make sure you have the best coverage for what you can afford. Also look into medical savings accounts with your financial planner if you decide to take a high-deductible policy to keep premiums low.
Know your tax advantages: If you’re adopting, you can get some tax relief. In tax year 2008, parents will be entitled to a one-time tax credit of $11,650 per eligible child. There are income limits – the credit disappears for individuals with modified adjusted gross income of between $174,730 for individuals and $214,730 for couples.
Ask what your employer can do for you: If you’re working at a family friendly company, it’s often considerably easier to apply for leaves of absence or work schedules that make more sense when you’ve got a young child at home. Some companies may offer to reimburse some portion of their workers’ adoption expenses.
Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
The U.S. Department of Agriculture compiles an annual survey on what it costs to raise a child from birth through age 17. In 2007, in the lowest income group, expenses ranged from a total of $7,830 to $8,830 for a two-child, husband-wife household to between $15,980 to $17,500 for families in the highest income group. Once again, those are the latest annual figures – so if you held spending unrealistically static for the next 17 years, the cost of raising a child in the lowest income group would range from $133,110 to $150,110 adjusted for inflation. In the highest income group, that range would be between $271,660 to $297,500.
Note that we haven’t begun to discuss college yet. Across the United States, the average tuition and fees at four-year private institutions in 2007-2008 was $23,712, representing a 6.3 percent increase of more than $1,400 over 2006-2007, according to College Board’s 2007-2008 Annual Survey of Colleges. At public four-year colleges, the average in-state tuition and fees averaged $6,185, a 6.6 percent increase.
All parenthood comes at a price. But with the help of a financial planner you can create a strategy to afford kids from birth through college. Here are some key points in that process:
Create or review your financial plan: A financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. For many individuals, it may be the first time they seriously examine their financial future in such black-and-white terms. But it starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your financial planner can also help you understand how much the additional costs of raising a child, including the startup costs of birth or adoption will affect all those numbers. A financial plan should be reviewed with every major change in life, and having kids is certainly one of those landmark events.
Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards first.
Make sure you have a will: If you die without a will, you won’t have a clear path of guardianship for your child, nor will your assets be properly directed to support that child. Any good adoption attorney will insist that you develop and file a will as part of the adoption process.
Check your insurance options: In today’s health insurance environment, the addition of a child to a policy can bring tremendous additional cost – sometimes without the guarantee of the best coverage. Check with your employer or your independent insurance provider to make sure you have the best coverage for what you can afford. Also look into medical savings accounts with your financial planner if you decide to take a high-deductible policy to keep premiums low.
Know your tax advantages: If you’re adopting, you can get some tax relief. In tax year 2008, parents will be entitled to a one-time tax credit of $11,650 per eligible child. There are income limits – the credit disappears for individuals with modified adjusted gross income of between $174,730 for individuals and $214,730 for couples.
Ask what your employer can do for you: If you’re working at a family friendly company, it’s often considerably easier to apply for leaves of absence or work schedules that make more sense when you’ve got a young child at home. Some companies may offer to reimburse some portion of their workers’ adoption expenses.
Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Blended Families Should Plan Early for Their Kids’ College Financial Aid
Finances for blended families – one of the fastest-growing demographics in the United States – can be complicated. The needs of stepchildren may fall into direct conflict with one’s own, and aside from the many financial entanglements that result from previous marriages or partnerships, college planning is a particular area where couples should seek help.
Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.
That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.
Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:
Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.
Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry -- can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.
Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.
That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.
Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:
Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.
Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry -- can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.
Get advice about the FAFSA: On January 1 each year, students become eligible to file their Free Application for Federal Student Aid (FAFSA) online for the coming school year. This process can get very confusing in blended families because parent-child relationships determine the level of financial responsibility and the potential for aid. In some cases, it might be wiser for a couple not to marry while children are still receiving financial aid in college, so it is critical for divorced spouses to get advice on this issue. Colleges will determine financial aid packages on the custodial and financial profile of parents based on any of the following parental scenarios:
- The parent who had provided the majority financial support to the child during the past 12 months.
- The parent who supplied more than half of the child’s support and pledges to continue to do so.
- The parent who has legal custody of the child.
- The parent who claimed the child as a dependent on their taxes.
- The parent who provided the most financial support to the child during the most recent calendar year.
- The parent with the greater documented income.
College financial aid is tough enough for traditional families to navigate. A financial planner with specific expertise in navigating financial aid issues as well as your overall financial picture can help you make the best choices in preparing your application for college aid.
Remember that if the parent who provided financial support was single, divorced or widowed but has since remarried, the student will have to submit the stepparent’s financial information. While this information will be evaluated, it doesn’t legally obligate the stepparent to provide financial assistance.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wednesday, October 1, 2008
Always Have a Plan for Leftover 529 Plan Money
With the high cost of education, it’s hard to envision that there might be money left over, but it does happen. Kids get scholarships; they might finish early; sometimes they quit school never to return.
In the case of 529 college savings plans, it’s particularly important to have a backup plan for the possibility of leftover funds, not only to support another family member’s educational goals, but as a potential addition to your estate planning.
As a refresher, a 529 college savings plans – named for the federal law that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. You should know that a 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools [though some plans allow you to transfer out a portion of those assets to out-of-state schools]. Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.
As part of sweeping pension reform signed into law by President Bush in 2006, withdrawals from 529 plans are now permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.
It’s a good idea to have your financial adviser help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. SavingforCollege.com and finaid.org are leading sites to help educate you in how these plans work.
So, if you’ve made all these moves, how should you handle surplus 529 funds? There are a few options:
Change the beneficiary: If Student #1 doesn’t spend out the funds, you can replace the beneficiary with another blood relation – that means brother, sister, first cousin, even you or your spouse – to continue spending down those funds for educational expenses. Also, if you have a grandchild headed for college, you can arrange for your 529 plan to make the withdrawal payable to your grandchild as the beneficiary.
Take a penalty and spend the money on whatever you want: This isn’t the most sensible financial option, but you do have the option to take leftover funds as a nonqualified distribution for your own non-educational use. However, you’ll owe ordinary federal tax with an additional 10 percent on the earnings portion of the distribution. Don’t forget state tax, either.
Let your successor owner make the decisions. When you apply for the account, you are asked to name a successor owner. When you die, you can simply trust the successor owner or the beneficiary of the funds to do what they want with the money.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
In the case of 529 college savings plans, it’s particularly important to have a backup plan for the possibility of leftover funds, not only to support another family member’s educational goals, but as a potential addition to your estate planning.
As a refresher, a 529 college savings plans – named for the federal law that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. You should know that a 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools [though some plans allow you to transfer out a portion of those assets to out-of-state schools]. Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.
As part of sweeping pension reform signed into law by President Bush in 2006, withdrawals from 529 plans are now permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.
It’s a good idea to have your financial adviser help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. SavingforCollege.com and finaid.org are leading sites to help educate you in how these plans work.
So, if you’ve made all these moves, how should you handle surplus 529 funds? There are a few options:
Change the beneficiary: If Student #1 doesn’t spend out the funds, you can replace the beneficiary with another blood relation – that means brother, sister, first cousin, even you or your spouse – to continue spending down those funds for educational expenses. Also, if you have a grandchild headed for college, you can arrange for your 529 plan to make the withdrawal payable to your grandchild as the beneficiary.
Take a penalty and spend the money on whatever you want: This isn’t the most sensible financial option, but you do have the option to take leftover funds as a nonqualified distribution for your own non-educational use. However, you’ll owe ordinary federal tax with an additional 10 percent on the earnings portion of the distribution. Don’t forget state tax, either.
Let your successor owner make the decisions. When you apply for the account, you are asked to name a successor owner. When you die, you can simply trust the successor owner or the beneficiary of the funds to do what they want with the money.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Monday, August 25, 2008
Top 10 Money Moves for Today’s College Freshman
With average college tuition up 6.3 percent at private schools and up 6.6 percent at public schools this past school year, money management is a bigger issue than ever on college campuses. That’s why it’s good to send your freshman off to school with a 10-point plan on how to best manage their money:
1. Take baby steps with credit: It’s one thing for a teenager to use their parents’ credit card while they’re still living at home. It’s quite another when they get their first taste of freedom hundreds of miles away. Parents may co-sign the student’s credit card but keep it in the student’s name. That way, parents will know when financial missteps occur, which will be a strong incentive for the student to keep his credit rating clean for the next four years. Most important: Parents should do whatever it takes to make sure the child doesn’t sign up for any credit cards on campus.
2. Bank smart: Students need to get some familiarity with the banking system before they head to college. Kids generally should set up a checking account on campus, but talk to them about debit options and how banking fees (particularly for overdrafts) can eat away at their money. Also ask your child to ask the bank about direct-deposit options if you’re planning to deposit money for their tuition or agreed-to spending needs. You want your child to be independent, but if necessary, make it a joint account and check those balances online.
3. Work with them to set up their first emergency fund: A young person should get used to the idea of savings and reserves for unforeseen events such as emergency trips home or related expenses. Make it clear that late-night pizza and mochas are not an emergency.
4. Put the student in charge of maintaining her financial aid: Each year, the FAFSA (Free Application for Federal Financial Aid) is due in June. State applications are due earlier. While parents need to run the financial aid process, students need to be equally aware of how their education is paid. Everyone should file the form whether or not you think your child may be eligible, and your child should be searching for scholarships at all times. It might also make sense to take your child to your tax preparer to make sure you’re taking advantage of the child’s “tax capacity” and other income tax opportunities. It will be a good learning experience.
5. Make them budget: If they’re leaving for college with a new computer, consider giving them personal finance software to track their everyday expenses and make sure the computer has a security password. Work together to determine necessary realities about everyday expenses, tuition and financial aid. Then tell your kid that when he or she comes home at Thanksgiving, you will sit down again to review those figures and make reasonable adjustments. You obviously need to trust your kids, but you might want to do this for as long as it takes them to develop solid and consistent money habits.
6. Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to www.annualcreditreport.com for theirs.
7. Help them open their first IRA: Get some advice on this from a trusted financial planner but if your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in.
8. Discuss identity theft: Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your kid to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.
9. Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities freshman year so they’ll be in the front of the line when it’s time to apply.
10. Handle mistakes the right way: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.
August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
1. Take baby steps with credit: It’s one thing for a teenager to use their parents’ credit card while they’re still living at home. It’s quite another when they get their first taste of freedom hundreds of miles away. Parents may co-sign the student’s credit card but keep it in the student’s name. That way, parents will know when financial missteps occur, which will be a strong incentive for the student to keep his credit rating clean for the next four years. Most important: Parents should do whatever it takes to make sure the child doesn’t sign up for any credit cards on campus.
2. Bank smart: Students need to get some familiarity with the banking system before they head to college. Kids generally should set up a checking account on campus, but talk to them about debit options and how banking fees (particularly for overdrafts) can eat away at their money. Also ask your child to ask the bank about direct-deposit options if you’re planning to deposit money for their tuition or agreed-to spending needs. You want your child to be independent, but if necessary, make it a joint account and check those balances online.
3. Work with them to set up their first emergency fund: A young person should get used to the idea of savings and reserves for unforeseen events such as emergency trips home or related expenses. Make it clear that late-night pizza and mochas are not an emergency.
4. Put the student in charge of maintaining her financial aid: Each year, the FAFSA (Free Application for Federal Financial Aid) is due in June. State applications are due earlier. While parents need to run the financial aid process, students need to be equally aware of how their education is paid. Everyone should file the form whether or not you think your child may be eligible, and your child should be searching for scholarships at all times. It might also make sense to take your child to your tax preparer to make sure you’re taking advantage of the child’s “tax capacity” and other income tax opportunities. It will be a good learning experience.
5. Make them budget: If they’re leaving for college with a new computer, consider giving them personal finance software to track their everyday expenses and make sure the computer has a security password. Work together to determine necessary realities about everyday expenses, tuition and financial aid. Then tell your kid that when he or she comes home at Thanksgiving, you will sit down again to review those figures and make reasonable adjustments. You obviously need to trust your kids, but you might want to do this for as long as it takes them to develop solid and consistent money habits.
6. Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to www.annualcreditreport.com for theirs.
7. Help them open their first IRA: Get some advice on this from a trusted financial planner but if your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in.
8. Discuss identity theft: Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your kid to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.
9. Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities freshman year so they’ll be in the front of the line when it’s time to apply.
10. Handle mistakes the right way: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.
August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Tuesday, July 29, 2008
Financial Planning For Newly Single Parents
After a divorce or the sudden death of a spouse, single parents have the twin challenges of adjusting to a new life and getting their child adjusted to it as well. The third challenge – getting money issues in order – can be a threat to both.
For a newly divorced or newly widowed parent, the right tax, estate and financial planning advice are crucial. A CERTIFIED FINANCIAL PLANNER™ professional can advise any newly single man or woman on the right steps to take in setting up a new financial future that fits them. But there are some general steps the newly single should take:
Revise or make an estate plan: Single parents have to revisit the estate plans they made when they were married or set an estate plan for the first time. A will is essential, but it’s also important to make immediate plans for who will raise the children if something happens to the parent. In case of divorce, plans might have been set for the ex-spouse to take full-time custody in case of the other’s death, but if a parent has never been married, it’s particularly important to select the right custodian for the child and perhaps a separate person who can become custodian of the child’s finances to invest properly for their support and their future.
Make sure all beneficiaries are correct: If you’ve separated assets in a divorce or you’ve just had or adopted a child, it’s particularly important to go over all your holdings to make sure your beneficiary designations are correct to make sure your child or a trust or other investment structure set up in the child’s name receives those assets. Don’t forget all your insurance policies, your work and individual retirement accounts and any investments you might have recently acquired.
Make sure ex-spouses are removed from any joint accounts you’ve been awarded: You also need to notify each of the three credit bureaus of your divorce so future reports will be based only on your credit reports.
Adjust your investment focus if necessary: Becoming a single parent changes your investment picture. For retirement as well as investing you will do for your child’s future, get specific advice on what they’ll need for college and what you’ll need for retirement as a single person.
Revisit your career plan: Unless you are wealthy to begin with, you are probably going to have to either return to the workforce or possibly change jobs to increase your earnings or improve your benefits if you’re not receiving any other source of income. If additional career training is necessary to improve your prospects, you may consider going back to school – always tough with a kid at home – and you’ll need to strategize how to pay for it. You might also choose to work for an employer with great educational benefits.
Make sure you get the pension assets you’re entitled to: A Qualified Domestic Relations Order (QDRO) is a settlement statement where a spouse receives pension assets from another in case of a divorce. You need to present a QDRO approved by the court at the time a divorce is finalized to your ex-spouse’s plan administrator to make sure agreed-upon assets get transferred to the account you’ve designated. Get some advice on how to best invest those assets.
Make sure health insurance is in place: If you’re divorced, it’s likely you won’t be able to stay on your spouse’s plan, so you’ll have to locate your own insurance option. But if your ex-spouse’s plan is a good one, try and make sure that he or she can keep your child covered until a better option comes along. Again, the need for health insurance may also drive your career decision, so consider it.
Make sure your life and other insurance is in place: As a single parent, you’ll need to adjust the amount of your life insurance relative to any insurance coverage your ex-spouse has with your children as the beneficiaries. You’ll also need to make sure on a regular basis that your ex-spouse has not cancelled that coverage.
Check in with Social Security: See if your ex-spouse’s work record may entitle you to receive certain benefits.
An emergency fund becomes even more important: If you have the option of acquiring six months’ of income in a divorce settlement or if you can set aside that amount somehow, it’s particularly necessary because you won’t have another partner’s income to fall back on anymore.
July 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
For a newly divorced or newly widowed parent, the right tax, estate and financial planning advice are crucial. A CERTIFIED FINANCIAL PLANNER™ professional can advise any newly single man or woman on the right steps to take in setting up a new financial future that fits them. But there are some general steps the newly single should take:
Revise or make an estate plan: Single parents have to revisit the estate plans they made when they were married or set an estate plan for the first time. A will is essential, but it’s also important to make immediate plans for who will raise the children if something happens to the parent. In case of divorce, plans might have been set for the ex-spouse to take full-time custody in case of the other’s death, but if a parent has never been married, it’s particularly important to select the right custodian for the child and perhaps a separate person who can become custodian of the child’s finances to invest properly for their support and their future.
Make sure all beneficiaries are correct: If you’ve separated assets in a divorce or you’ve just had or adopted a child, it’s particularly important to go over all your holdings to make sure your beneficiary designations are correct to make sure your child or a trust or other investment structure set up in the child’s name receives those assets. Don’t forget all your insurance policies, your work and individual retirement accounts and any investments you might have recently acquired.
Make sure ex-spouses are removed from any joint accounts you’ve been awarded: You also need to notify each of the three credit bureaus of your divorce so future reports will be based only on your credit reports.
Adjust your investment focus if necessary: Becoming a single parent changes your investment picture. For retirement as well as investing you will do for your child’s future, get specific advice on what they’ll need for college and what you’ll need for retirement as a single person.
Revisit your career plan: Unless you are wealthy to begin with, you are probably going to have to either return to the workforce or possibly change jobs to increase your earnings or improve your benefits if you’re not receiving any other source of income. If additional career training is necessary to improve your prospects, you may consider going back to school – always tough with a kid at home – and you’ll need to strategize how to pay for it. You might also choose to work for an employer with great educational benefits.
Make sure you get the pension assets you’re entitled to: A Qualified Domestic Relations Order (QDRO) is a settlement statement where a spouse receives pension assets from another in case of a divorce. You need to present a QDRO approved by the court at the time a divorce is finalized to your ex-spouse’s plan administrator to make sure agreed-upon assets get transferred to the account you’ve designated. Get some advice on how to best invest those assets.
Make sure health insurance is in place: If you’re divorced, it’s likely you won’t be able to stay on your spouse’s plan, so you’ll have to locate your own insurance option. But if your ex-spouse’s plan is a good one, try and make sure that he or she can keep your child covered until a better option comes along. Again, the need for health insurance may also drive your career decision, so consider it.
Make sure your life and other insurance is in place: As a single parent, you’ll need to adjust the amount of your life insurance relative to any insurance coverage your ex-spouse has with your children as the beneficiaries. You’ll also need to make sure on a regular basis that your ex-spouse has not cancelled that coverage.
Check in with Social Security: See if your ex-spouse’s work record may entitle you to receive certain benefits.
An emergency fund becomes even more important: If you have the option of acquiring six months’ of income in a divorce settlement or if you can set aside that amount somehow, it’s particularly necessary because you won’t have another partner’s income to fall back on anymore.
July 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wednesday, July 23, 2008
How New College Grads Can Get a Jump on Financial Planning For a Lifetime
The average college graduate with a four-year degree now takes about five years to put on a cap and gown, and her average debt is growing too. According to 2006 figures from the Project on Student Debt, the average college I.O.U. was approaching $21,000.
With all that student loan debt, it’s genuinely tough to focus on saving and planning for retirement. But there’s really no better time for a young person to be better positioned for good money habits that will last for a lifetime. Here are some of the best moves to make coming out of school, even if you haven’t gotten a job yet:
Talk to a financial planner: Ask your parents for the graduation present of financial advice. A meeting with a financial planner can set a spending plan that will accommodate what your future income needs will be to extinguish that debt and how you’ll be able to save in the future.
Sign up for the company 401(k) the minute you’re eligible: A 401(k) plan accomplishes more than retirement savings. It teaches a new worker the value of “out of sight, out of mind” savings – when money goes to savings before you have a chance to spend it. In addition, having deductions taken to go directly into your 401(k) will mean less federal and state taxes from your paycheck. That’s why new grads should sign up for their 401(k) retirement savings the moment they become eligible. But it’s important to stress that even if it takes a year before you can join the company plan, start putting money away in a traditional or Roth IRA. You’ll be capturing funds from the start, which experts say is the absolute best way to build a financial future.
Always aim for the maximum: It’s a tremendous challenge to put away the most you can save in any retirement plan once you get out of school – you have a household to set up, school loans to pay off and you need to have a little fun, too. But even if you can’t set aside the maximum in your various retirement options at the start, make it a goal to get there as soon as your income rises and your debt falls. Have the payroll department calculate a sample of what your net pay will be with and without money deducted for your 401(k) savings. You’ll be surprised how similar your net pay could be.
Check your investment balance each year: Studies show that many people will pick a handful of mutual funds for their 401(k) s at the very start and not change them. That’s one of the great reasons to have access to a financial planner because you can examine whether your investment choices and style fit your age and goals.
Hold off on buying a new car: Mass transit is best, but if you need a car, think about buying a quality used car that you can pay off quickly. A new car with a low down payment means you’ll be doubling your debt if you owe the maximum in school loans. Do you really want to owe $40,000 or more? That’s a tremendous burden for a new professional.
Don’t forget about insurance: If you’re single, it’s not time for life insurance, but you must have auto, rental apartment and yes, disability insurance. Even if your employer does not offer you health insurance right away, you must find another insurance resource since you probably won’t be able to piggyback on your parents’ health plan for awhile. If you’re driving a used car, you may not need to keep as much collision on your car. Don’t forget to insure the contents of your apartment – one break-in can cost you thousands of dollars you don’t have. And if you think about “old folks” being the only folks who can become disabled and cut off from a paycheck until they can work again, guess again. Think of how losing a paycheck for six months would hurt your finances.
Start laying away an emergency fund: Even if all you have is the proceeds from two missed lattes a week, start putting money in a special account you will not touch unless you are out of work and need to find some way to pay the rent. Make the trigger something as serious as that, or you’ll never have a serious reserve for emergencies.
Figure out taxes: New workers tend to do one of two things when it comes to taxes – they either withhold too much or too little. It makes sense to sit down with a planner or a tax professional to make sure your annual tax set-aside is correct, because withholding too much means Uncle Sam gets to hold the money that could go to your retirement or your emergency fund.
Don’t forget about health insurance: Health insurance gets more expensive by the day, and finding a good employer that provides good options for this benefit is particularly important. Given that younger people are generally healthier, get some advice on whether you should investigate a high-deductible plan that’s paired with something called a health savings account (HSA). Such accounts allow you to stash money that can cover that big deductible – for individuals, the minimum deductible in 2008 is $1,100 – but the accounts can be invested just like IRAs. Over the course of time, you can develop a nice little nest egg that can alleviate a lot of future worries about how you’ll pay for health care.
July 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
With all that student loan debt, it’s genuinely tough to focus on saving and planning for retirement. But there’s really no better time for a young person to be better positioned for good money habits that will last for a lifetime. Here are some of the best moves to make coming out of school, even if you haven’t gotten a job yet:
Talk to a financial planner: Ask your parents for the graduation present of financial advice. A meeting with a financial planner can set a spending plan that will accommodate what your future income needs will be to extinguish that debt and how you’ll be able to save in the future.
Sign up for the company 401(k) the minute you’re eligible: A 401(k) plan accomplishes more than retirement savings. It teaches a new worker the value of “out of sight, out of mind” savings – when money goes to savings before you have a chance to spend it. In addition, having deductions taken to go directly into your 401(k) will mean less federal and state taxes from your paycheck. That’s why new grads should sign up for their 401(k) retirement savings the moment they become eligible. But it’s important to stress that even if it takes a year before you can join the company plan, start putting money away in a traditional or Roth IRA. You’ll be capturing funds from the start, which experts say is the absolute best way to build a financial future.
Always aim for the maximum: It’s a tremendous challenge to put away the most you can save in any retirement plan once you get out of school – you have a household to set up, school loans to pay off and you need to have a little fun, too. But even if you can’t set aside the maximum in your various retirement options at the start, make it a goal to get there as soon as your income rises and your debt falls. Have the payroll department calculate a sample of what your net pay will be with and without money deducted for your 401(k) savings. You’ll be surprised how similar your net pay could be.
Check your investment balance each year: Studies show that many people will pick a handful of mutual funds for their 401(k) s at the very start and not change them. That’s one of the great reasons to have access to a financial planner because you can examine whether your investment choices and style fit your age and goals.
Hold off on buying a new car: Mass transit is best, but if you need a car, think about buying a quality used car that you can pay off quickly. A new car with a low down payment means you’ll be doubling your debt if you owe the maximum in school loans. Do you really want to owe $40,000 or more? That’s a tremendous burden for a new professional.
Don’t forget about insurance: If you’re single, it’s not time for life insurance, but you must have auto, rental apartment and yes, disability insurance. Even if your employer does not offer you health insurance right away, you must find another insurance resource since you probably won’t be able to piggyback on your parents’ health plan for awhile. If you’re driving a used car, you may not need to keep as much collision on your car. Don’t forget to insure the contents of your apartment – one break-in can cost you thousands of dollars you don’t have. And if you think about “old folks” being the only folks who can become disabled and cut off from a paycheck until they can work again, guess again. Think of how losing a paycheck for six months would hurt your finances.
Start laying away an emergency fund: Even if all you have is the proceeds from two missed lattes a week, start putting money in a special account you will not touch unless you are out of work and need to find some way to pay the rent. Make the trigger something as serious as that, or you’ll never have a serious reserve for emergencies.
Figure out taxes: New workers tend to do one of two things when it comes to taxes – they either withhold too much or too little. It makes sense to sit down with a planner or a tax professional to make sure your annual tax set-aside is correct, because withholding too much means Uncle Sam gets to hold the money that could go to your retirement or your emergency fund.
Don’t forget about health insurance: Health insurance gets more expensive by the day, and finding a good employer that provides good options for this benefit is particularly important. Given that younger people are generally healthier, get some advice on whether you should investigate a high-deductible plan that’s paired with something called a health savings account (HSA). Such accounts allow you to stash money that can cover that big deductible – for individuals, the minimum deductible in 2008 is $1,100 – but the accounts can be invested just like IRAs. Over the course of time, you can develop a nice little nest egg that can alleviate a lot of future worries about how you’ll pay for health care.
July 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Tuesday, June 10, 2008
Heading Back to School? Make a Plan First
It was the physicist Rosalyn S. Yalow who said, “The excitement of learning separates youth from old age. As long as you're learning you're not old.”
A July/August 2006 story in AARP Magazine by noted workplace and career expert Rosabeth Moss Kanter pointed out that retirement-phobic mid- or late-career types might retreat to college campuses instead of the golf course to prepare for the next phase of their life. Why? They want to train for completely new careers in all-new professional fields or public service. According to the piece, “Traditional volunteering is not what leading-edge boomers have in mind. They want to be leaders and to help improve the world.” Education will be a part of that movement.
The back-to-school movement for older Americans is an interesting one, but it goes beyond purely financial considerations. It makes sense to discuss your ideas with a tax professional and a financial expert such as a Certified Financial Planner™ professional before you make a move:
Do you really need the degree? Depending on the field, many employers will look at an experienced worker and take their particular work and life accomplishments into consideration when hiring. An MBA or other advanced degree may be personally fulfilling, but you have to consider whether your future plans really require it and whether the degree will pay for itself in the end in salary, opportunity or both.
Are you planning to attend school while working or will you take time off? Going for an aggressive degree program while working full-time can be financially, mentally and physically draining. Obviously, if you plan to take a sabbatical and go to school full-time, that’s a more complex set of financial issues you need to consider well in advance, and you should get help planning for it. Beyond finance, you need to be prepared for the demands of school on your time with family, friends and your personal relaxation. Time is an opportunity cost you can’t get back.
Check your qualifications for federal and state tax credits: Both the federal Hope Credit and the Lifetime Learning Credit are among options you may consider to help cushion the tuition blow if you qualify – discuss these credits and other ways to afford college with your tax expert as well as your planner.
How prepared are you to take on debt? It would be wonderful to pay cash for a college degree, and with time and planning you might be able to do it. But if you need to take out debt to pay for your coursework, make sure your credit cards and other debt are paid off first. You’ll put yourself in the best position to afford any student debt you take on.
Will your company pay? Take advantage of every educational break you can take before you leave your company. If they require you to stay a certain amount of time after attaining your degree, work that into your plan.
Check scholarships and grants: See if there are sources of grants and scholarships not only in your community, but also within your industry. Go online and do a general search for such aid.
How’s your retirement and health plan? It might seem like a good idea to raid the retirement plan or milk the home equity to go back to school, you need to research whether that makes sense for you. Despite your current energy and determination, no one has a guarantee of perfect health through the last half or third of their lives. You can’t forego retirement or healthcare planning simply because you need the money for school.
Consider a functional degree. All sorts of colleges – even the nation’s most prestigious schools – are considering abbreviated graduate and post-graduate programs that give students exactly the amount of education to upgrade their skills and head back into the workforce. If one year of college will do, why pay for three or four?
Are your school choices friendly to older students? It’s your money. Make sure you’re attending an institution that considers its older students a valuable addition to its campus and makes you welcome.
June 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
A July/August 2006 story in AARP Magazine by noted workplace and career expert Rosabeth Moss Kanter pointed out that retirement-phobic mid- or late-career types might retreat to college campuses instead of the golf course to prepare for the next phase of their life. Why? They want to train for completely new careers in all-new professional fields or public service. According to the piece, “Traditional volunteering is not what leading-edge boomers have in mind. They want to be leaders and to help improve the world.” Education will be a part of that movement.
The back-to-school movement for older Americans is an interesting one, but it goes beyond purely financial considerations. It makes sense to discuss your ideas with a tax professional and a financial expert such as a Certified Financial Planner™ professional before you make a move:
Do you really need the degree? Depending on the field, many employers will look at an experienced worker and take their particular work and life accomplishments into consideration when hiring. An MBA or other advanced degree may be personally fulfilling, but you have to consider whether your future plans really require it and whether the degree will pay for itself in the end in salary, opportunity or both.
Are you planning to attend school while working or will you take time off? Going for an aggressive degree program while working full-time can be financially, mentally and physically draining. Obviously, if you plan to take a sabbatical and go to school full-time, that’s a more complex set of financial issues you need to consider well in advance, and you should get help planning for it. Beyond finance, you need to be prepared for the demands of school on your time with family, friends and your personal relaxation. Time is an opportunity cost you can’t get back.
Check your qualifications for federal and state tax credits: Both the federal Hope Credit and the Lifetime Learning Credit are among options you may consider to help cushion the tuition blow if you qualify – discuss these credits and other ways to afford college with your tax expert as well as your planner.
How prepared are you to take on debt? It would be wonderful to pay cash for a college degree, and with time and planning you might be able to do it. But if you need to take out debt to pay for your coursework, make sure your credit cards and other debt are paid off first. You’ll put yourself in the best position to afford any student debt you take on.
Will your company pay? Take advantage of every educational break you can take before you leave your company. If they require you to stay a certain amount of time after attaining your degree, work that into your plan.
Check scholarships and grants: See if there are sources of grants and scholarships not only in your community, but also within your industry. Go online and do a general search for such aid.
How’s your retirement and health plan? It might seem like a good idea to raid the retirement plan or milk the home equity to go back to school, you need to research whether that makes sense for you. Despite your current energy and determination, no one has a guarantee of perfect health through the last half or third of their lives. You can’t forego retirement or healthcare planning simply because you need the money for school.
Consider a functional degree. All sorts of colleges – even the nation’s most prestigious schools – are considering abbreviated graduate and post-graduate programs that give students exactly the amount of education to upgrade their skills and head back into the workforce. If one year of college will do, why pay for three or four?
Are your school choices friendly to older students? It’s your money. Make sure you’re attending an institution that considers its older students a valuable addition to its campus and makes you welcome.
June 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Tuesday, April 22, 2008
How Not To Go Broke If Your Kids Move Back After Graduation
The after-college reality is much different from a generation ago. Two thirds of college graduates owe significant money after graduation. According to the Project on Student Debt, debt levels for graduating seniors with student loans from 1997 to 2007 more than doubled from $9,250 to $19,200 – a 108 percent increase.
That’s why it’s now very common for graduating seniors to move back to the family manse for some time after graduation. For those who don’t have ready employment, it’s probably a necessity. For those with jobs, moving back in with the folks is a way to save for a down payment on a car or possibly a home.
It’s absolutely fine to welcome family back home, particularly if it means you really have an opportunity to help your kids. But it’s not a terribly good idea to welcome home what the experts are calling “boomerang kids” if you’ve put your own retirement savings on the back burner and you’re also facing both expense and strain from taking care of elders.
Like all family transitions, this one requires some planning, and it may not be a bad idea to get some advice. A Certified Financial Planner ™ professional can give you advice not only how to manage the financial aspects of your relationship with your grown child, but how to make sure the other aspects of your financial life are healthy.
Here are some steps:
- Promise not to overextend yourself. Don’t let the return of the prodigal son or daughter derail your own retirement or debt repayment plans. Parents may also have some challenging financial problems to solve, and your child should understand that you should be helping each other.
- Still your house, still your rules: Granted, your kid’s now an adult, not an 11-year-old. But if your child is moving back in, you need to set specific rules for the way you want him operating under your roof. If you want him to pay rent (it’s probably a good idea), set those terms in writing. Set terms for household expenses if you prefer. And to make sure there are no misunderstandings, make sure you both understand where you stand with non-financial issues – how much of their stuff you’ll want them to move in, overnight guests, checking in when away, etc.
- Set an endpoint: If your child needs a year to start paying off credit card bills or tuition debt or is hoping to scrape together enough for a down payment on a condo, discuss it and figure out how long that’s going to take. Deadlines enforce goals.
- Chores are necessary: You may charge rent or demand payment in kind, but a mixture of both is best. You’re not running a B&B. You might insist that your child handles laundry, makes (not buys) dinner a few times a week or helps with a major home renovation project if they have those skills.
- Supervise their financial planning: Some parents bail out their kids entirely. Instead, work with them to build better financial habits. Help them set a budget after you both figure out their net worth – a real eye-opener for many young adults. You might consider, however, matching the amount that they’re putting toward debt or a home down payment each month. If you don’t want to take full responsibility for that training, you might set up one or a series of meetings with a CFP® professional to get them started the right way. Consider it a graduation present.
- Keep records. Even if you never share these with your kid, make sure you keep track of payments, chores and other in-kind efforts made by your “tenant” during the term of his or her stay. It’s a way to look back and see what’s gone on during this phase in your relationship.
- What about the rent? If you are in a relatively good financial position and you don’t need your child’s rent to pay your own bills, you might consider investing those amounts on behalf of your child to chip in for his or her home down payment or possibly a wedding.
April 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wednesday, March 19, 2008
Get A Head Start On Tax Planning For 2008
It’s still a month until most of us will file our 2007 tax returns, but it’s a good idea to keep in mind key tax changes that will affect our 2008 returns. Here are some of the highlights:
Wider tax brackets: In one of the rare cases in life where inflation looks like a good thing, all tax-bracket thresholds will be increasing. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $65,100, up from $63,700 in 2007.
Personal exemption: The personal exemption – which you’re allowed to claim for yourself and each dependent you have -- will go up $100 to $3,500 for 2008.
Standard deduction: Single filers will see this deduction increase $100 from 2007 levels to $5,450. Married couples filing jointly will see their standard deduction rise to $10,950, $200 more, and the amount for heads of households who don’t itemize will be $8,000, up $150. For married taxpayers age 65 and older, they’ll be allowed to add $1,050 to the regular standard deduction – unchanged from 2007, and singles will get an extra $1,350 compared to $1,300 in tax year 2007.
Phase-out of itemized deductions: Taxpayers will start to see the value of their itemized deductions go down after their taxable income exceeds $159,950 in 2008. That’s $3,550 higher than in 2007.
Retirement plan contributions: The contribution amount allowed for Roth IRAs begins to phase out for joint filers with incomes exceeding $159,000 (up from $156,000 in 2007) and $101,000 (up from $99,000) for singles and heads of household. For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work begins at income of $85,000 for joint filers (up from $83,000) and $53,000 for a single person or head of household (up from $52,000). The annual contribution limit for most defined contribution plans rises to $46,000, up from $45,000 in 2007.
Hope education credit: The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.
Energy breaks: The federal government extended its credit on 30 percent of qualified solar generators for residential use.
The Kiddie Tax: The amount of investment income a child under age 19 -- or a full-time student under 24 -- can earn before excess earnings are taxed at his or her parents' rate will go up $100 to $1,800 in 2008.
Tax-free parking and transit passes: Employers will be allowed to give employees parking valued at $220 a month as a tax-free fringe benefit in 2008, up $5 from 2007.
March 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wider tax brackets: In one of the rare cases in life where inflation looks like a good thing, all tax-bracket thresholds will be increasing. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $65,100, up from $63,700 in 2007.
Personal exemption: The personal exemption – which you’re allowed to claim for yourself and each dependent you have -- will go up $100 to $3,500 for 2008.
Standard deduction: Single filers will see this deduction increase $100 from 2007 levels to $5,450. Married couples filing jointly will see their standard deduction rise to $10,950, $200 more, and the amount for heads of households who don’t itemize will be $8,000, up $150. For married taxpayers age 65 and older, they’ll be allowed to add $1,050 to the regular standard deduction – unchanged from 2007, and singles will get an extra $1,350 compared to $1,300 in tax year 2007.
Phase-out of itemized deductions: Taxpayers will start to see the value of their itemized deductions go down after their taxable income exceeds $159,950 in 2008. That’s $3,550 higher than in 2007.
Retirement plan contributions: The contribution amount allowed for Roth IRAs begins to phase out for joint filers with incomes exceeding $159,000 (up from $156,000 in 2007) and $101,000 (up from $99,000) for singles and heads of household. For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work begins at income of $85,000 for joint filers (up from $83,000) and $53,000 for a single person or head of household (up from $52,000). The annual contribution limit for most defined contribution plans rises to $46,000, up from $45,000 in 2007.
Hope education credit: The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.
Energy breaks: The federal government extended its credit on 30 percent of qualified solar generators for residential use.
The Kiddie Tax: The amount of investment income a child under age 19 -- or a full-time student under 24 -- can earn before excess earnings are taxed at his or her parents' rate will go up $100 to $1,800 in 2008.
Tax-free parking and transit passes: Employers will be allowed to give employees parking valued at $220 a month as a tax-free fringe benefit in 2008, up $5 from 2007.
March 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wednesday, November 28, 2007
Will Your Kid’s Inheritance Make Her a Monster? Not If You Plan Carefully
The airwaves are full of cautionary tales of young people with too much money too soon – wretched excess is in, and responsibility seems, well, pretty boring. And your last name doesn’t have to be “Hilton” for you to worry.
Inheritances, trust funds and other benefits from hard-earned family fortunes of any size can affect the children of wealthy individuals in incredibly positive and negative ways.
Most financial experts, such as Certified Financial Planner™ professionals, will tell you the best scenarios involve early planning, solid parenting and complete family involvement from the start. Here are some suggestions on how to raise a responsible heir:
Get advice early: If you have created a successful business or amassed a fortune working for a fast-growing employer, it makes sense to sit down with tax, legal and financial advisors to talk not only about the No. 1 goal of protecting those assets, but passing them intelligently to the next generation. Because these conversations should go beyond sensible money and tax management to how these assets will affect your family’s entire life, one of the first questions you should ask is, “How do I train my kids to inherit this money?” Also, it’s critical that you include the unthinkable in your discussion – how your surviving spouse or designated guardians will continue this stewardship if you die. You need to make sure your plan is effective particularly if you’re not there to carry it out.
Start basic money training early: In most households, kids start learning about money and what it does around age 4 or 5, even if it’s only centered on how to buy a popsicle. Obviously, your kid might have some idea already that his parents have money, so you have to strike a balance between the reality of your fortunate situation and the responsibility training all kids need no matter what their circumstances. You don’t need to lie about what you have, but when kids are this young, you’re not anywhere near discussing what they may inherit when they’re older. It’s not their money anyway. Your job should be to introduce your kids to chores and a modest allowance to cover essentials, treats and savings that you’ll agree upon. Then watch closely to see how your kid is learning these skills. This is the bedrock of how they’ll be handling money the rest of their lives.
Lead by example: If a kid grows up in a house where parents spend indiscriminately and settle disputes with the kids with money and toys, chances are the kids will repeat those patterns as teens and adults. If a kid grows up in a house where parents set money priorities for themselves, participate in charity and community service and expect children to do the same, that’s a powerful lesson about wise choices in time and money for a lifetime.
Do a family mission statement each year: This may get an eye roll from some family members. But a once-a-year meeting to discuss what’s important in family life is a great mechanism not only to find out how the entire family is doing with regard to personal values and goals, but a great way to work in a purposeful wealth message that expands over time. When children are young, they should be allowed a vote in how family money is spent for particular luxuries like vacations, and as they get older, parents can elect to expand their vote in other areas, such as general investment policies for the family holdings.
Involve the kids in investment and planning: If a child is inheriting wealth at a certain age, it is entirely fair to bring them into the process of the care and feeding of that wealth at a significantly earlier age, possibly in their early teens. Before that, it might be fun for them to buy a particular stock or mutual fund that they can own jointly with you so they can see how investments perform. Eventually, you can migrate their attention to their potential inheritance, how that money is currently invested and what efforts are taken to protect its principal are essential if they are going to take over responsible management of those funds someday. Kids need to understand that wealth needs to be tended to in order to grow – you might even consider bringing them to meetings with your money managers so they can learn about the process over time.
Raise the suggestion that wealth should stay invested. Wealthy relatives need to tread carefully here, because if a young person gets money, they’re going to understandably want to have some fun with it. But it’s important to teach the message that a significant part of the inheritance should stay responsibly invested so the child can address a personal goal (advanced education, starting a business or their own philanthropy) or have wealth to pass on to their families.
Get them some independent training: The wealth management industry – including financial planners – are directing training resources toward younger clients who may come into considerable fortunes at a later date. It’s to their benefit – they want to keep that business. But if you are already working with investment experts whom you trust, why not ask them about training your kids can receive when you’re not around? As adults, they are going to eventually handle decisions on their own – it might be wise to continue their learning in an adult environment where they can take the lead in a discussion.
November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Inheritances, trust funds and other benefits from hard-earned family fortunes of any size can affect the children of wealthy individuals in incredibly positive and negative ways.
Most financial experts, such as Certified Financial Planner™ professionals, will tell you the best scenarios involve early planning, solid parenting and complete family involvement from the start. Here are some suggestions on how to raise a responsible heir:
Get advice early: If you have created a successful business or amassed a fortune working for a fast-growing employer, it makes sense to sit down with tax, legal and financial advisors to talk not only about the No. 1 goal of protecting those assets, but passing them intelligently to the next generation. Because these conversations should go beyond sensible money and tax management to how these assets will affect your family’s entire life, one of the first questions you should ask is, “How do I train my kids to inherit this money?” Also, it’s critical that you include the unthinkable in your discussion – how your surviving spouse or designated guardians will continue this stewardship if you die. You need to make sure your plan is effective particularly if you’re not there to carry it out.
Start basic money training early: In most households, kids start learning about money and what it does around age 4 or 5, even if it’s only centered on how to buy a popsicle. Obviously, your kid might have some idea already that his parents have money, so you have to strike a balance between the reality of your fortunate situation and the responsibility training all kids need no matter what their circumstances. You don’t need to lie about what you have, but when kids are this young, you’re not anywhere near discussing what they may inherit when they’re older. It’s not their money anyway. Your job should be to introduce your kids to chores and a modest allowance to cover essentials, treats and savings that you’ll agree upon. Then watch closely to see how your kid is learning these skills. This is the bedrock of how they’ll be handling money the rest of their lives.
Lead by example: If a kid grows up in a house where parents spend indiscriminately and settle disputes with the kids with money and toys, chances are the kids will repeat those patterns as teens and adults. If a kid grows up in a house where parents set money priorities for themselves, participate in charity and community service and expect children to do the same, that’s a powerful lesson about wise choices in time and money for a lifetime.
Do a family mission statement each year: This may get an eye roll from some family members. But a once-a-year meeting to discuss what’s important in family life is a great mechanism not only to find out how the entire family is doing with regard to personal values and goals, but a great way to work in a purposeful wealth message that expands over time. When children are young, they should be allowed a vote in how family money is spent for particular luxuries like vacations, and as they get older, parents can elect to expand their vote in other areas, such as general investment policies for the family holdings.
Involve the kids in investment and planning: If a child is inheriting wealth at a certain age, it is entirely fair to bring them into the process of the care and feeding of that wealth at a significantly earlier age, possibly in their early teens. Before that, it might be fun for them to buy a particular stock or mutual fund that they can own jointly with you so they can see how investments perform. Eventually, you can migrate their attention to their potential inheritance, how that money is currently invested and what efforts are taken to protect its principal are essential if they are going to take over responsible management of those funds someday. Kids need to understand that wealth needs to be tended to in order to grow – you might even consider bringing them to meetings with your money managers so they can learn about the process over time.
Raise the suggestion that wealth should stay invested. Wealthy relatives need to tread carefully here, because if a young person gets money, they’re going to understandably want to have some fun with it. But it’s important to teach the message that a significant part of the inheritance should stay responsibly invested so the child can address a personal goal (advanced education, starting a business or their own philanthropy) or have wealth to pass on to their families.
Get them some independent training: The wealth management industry – including financial planners – are directing training resources toward younger clients who may come into considerable fortunes at a later date. It’s to their benefit – they want to keep that business. But if you are already working with investment experts whom you trust, why not ask them about training your kids can receive when you’re not around? As adults, they are going to eventually handle decisions on their own – it might be wise to continue their learning in an adult environment where they can take the lead in a discussion.
November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Wednesday, October 31, 2007
What You Can Do Before the Kiddie Tax Loophole Closes
When President Bush signed new legislation in May to limit gifts to children that take advantage of their lower tax rate, it was the second time in just over 12 months that Congress extended the reach of the so-called kiddie tax, which subjects a child’s income to his/her parents’ higher tax rate.
Maneuvering around the kiddie tax has helped parents save for college educations for years, and given the changes, it’s a good idea to consult a financial or tax adviser to discuss your options.
Congress apparently got fed up with a particular tax strategy used by wealthy families who transfer large piles of stock, mutual fund shares and other assets to their kids (who are typically in the lowest two income brackets of 10 percent and 15 percent) so they could sell those securities at a low capital gains rate. The top rate on long-term capital gains and qualified corporate dividends is 15 percent, but since 2003, those in the lowest two income brackets had a shot at a 5 percent capital gains, which is scheduled to drop to zero for those low-income taxpayers in 2008.
So here’s what’s happening this year and next. During 2007, investment income for a child 17 years old or younger (measured as of Dec. 31, 2007) above $1,700 is subject to his parents’ higher tax rate. (Before 2006’s changes in the law, the kiddie tax applied only to kids younger than 14.)
Starting in 2008, the age limit for the kiddie tax will rise to 18 and under, or 23 and under if the child is a full-time student. There are some exceptions for kids with paid jobs – the expanded provision applies only to children whose earned income does not exceed one-half of the amount of their support needs.
What you can do now
If you had put appreciated securities in your child’s name and the child is a full-time student under the age of 23 but at least 18, your child can sell those securities this year and still claim the 5 percent capital gains rate. There won’t be a zero capital gains rate available to your student next year, so you need to act before the end of the year to take advantage of the 5 percent rate before it becomes the parents’ 15 percent rate in 2008 via the kiddie tax.
You may also want to start or redouble your efforts in the 529 college savings plans you’ve set up for your kids. Qualified withdrawals for education are tax-free and therefore wouldn’t be subject to the kiddie tax. The same is true for qualified withdrawals from Coverdell education savings accounts.
Outside of 529 plans, you might consider investments that generate little or no taxable income such as municipal bonds.
Watch out for financial aid
Whatever gift and tax strategies you apply to your college savings strategy, make sure those assets don’t undermine any efforts your child is making to secure financial aid.
October 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Maneuvering around the kiddie tax has helped parents save for college educations for years, and given the changes, it’s a good idea to consult a financial or tax adviser to discuss your options.
Congress apparently got fed up with a particular tax strategy used by wealthy families who transfer large piles of stock, mutual fund shares and other assets to their kids (who are typically in the lowest two income brackets of 10 percent and 15 percent) so they could sell those securities at a low capital gains rate. The top rate on long-term capital gains and qualified corporate dividends is 15 percent, but since 2003, those in the lowest two income brackets had a shot at a 5 percent capital gains, which is scheduled to drop to zero for those low-income taxpayers in 2008.
So here’s what’s happening this year and next. During 2007, investment income for a child 17 years old or younger (measured as of Dec. 31, 2007) above $1,700 is subject to his parents’ higher tax rate. (Before 2006’s changes in the law, the kiddie tax applied only to kids younger than 14.)
Starting in 2008, the age limit for the kiddie tax will rise to 18 and under, or 23 and under if the child is a full-time student. There are some exceptions for kids with paid jobs – the expanded provision applies only to children whose earned income does not exceed one-half of the amount of their support needs.
What you can do now
If you had put appreciated securities in your child’s name and the child is a full-time student under the age of 23 but at least 18, your child can sell those securities this year and still claim the 5 percent capital gains rate. There won’t be a zero capital gains rate available to your student next year, so you need to act before the end of the year to take advantage of the 5 percent rate before it becomes the parents’ 15 percent rate in 2008 via the kiddie tax.
You may also want to start or redouble your efforts in the 529 college savings plans you’ve set up for your kids. Qualified withdrawals for education are tax-free and therefore wouldn’t be subject to the kiddie tax. The same is true for qualified withdrawals from Coverdell education savings accounts.
Outside of 529 plans, you might consider investments that generate little or no taxable income such as municipal bonds.
Watch out for financial aid
Whatever gift and tax strategies you apply to your college savings strategy, make sure those assets don’t undermine any efforts your child is making to secure financial aid.
October 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
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