Posted on August 10, 2012May 31, 2016 by Jan Roberg

Summer Job Super Gift

Photo by Eric Leslie on Flickr.com

Do you have a child or grandchild that has a summer job this year? If you want to give a “gift of a lifetime” I’ve got a suggestion for you. Make a contribution into a ROTH IRA account for the child to match the amount of income he or she earns this summer.

Saving for the future; sounds boring doesn’t it? I know, it’s not an I-Phone or a new car—but if you were to make a $5,000 contribution to a 16-year-old’s ROTH IRA—and he made no other contributions for the rest of his life—by the time he reached age 65 (assuming it earns an average of 7% interest per year) he’d retire with $138,000 (The Kiplinger Tax Letter, July 20, 2012). Now that’s a pretty sweet present!

Of course, there are rules that have to be met. For one thing, you can’t contribute more than the child actually makes for the year. Also, you can’t contribute more than $5,000 to a child’s ROTH IRA.

Obviously, this isn’t for everybody. You have to be at a certain stage of wealth to be gifting that kind of money to a kid’s IRA. And remember—that’s what it is; a gift. If you’re trying to avoid gift taxes—a contribution to a child’s IRA will count towards your $13,000 gift annual exclusion. You can’t give a child $13,000 and contribute to the ROTH IRA on top of that. You would have to reduce one or the other so that the total came to $13,000 or less or else a gift tax will be applied.

What about people who don’t have that kind of money to give away? You can make a smaller contribution. Maybe a thousand dollars instead; or maybe you make a deal with your child—you’ll match whatever they contribute to a ROTH IRA up to a certain dollar amount. (I recommend starting a ROTH IRA with at least $1000. Smaller sums are usually hit with more fees and wind up losing money instead of growing.)

Why put money into a kid’s ROTH IRA? So many reasons:
1. The money grows tax free
2. When it’s time to take the money out, it’s tax free
3. The money can be used for education, buying a home, or retirement
4. Giving your child a fighting chance for having a decent retirement nest egg

Why a ROTH and not a regular IRA? Regular IRAs are tax deductible when you make the contribution, but taxable when you take the money out. Most teenagers don’t need the tax deduction that comes with a regular IRA, so it really makes much more sense to invest in something that will be tax free at retirement. Note: the deductibility of the IRA goes to the owner of the IRA—so if you contribute to your child’s IRA—you don’t get the tax deduction, your child would.

I realize that this isn’t an option for everybody, but if you can afford putting money into a ROTH IRA for your child (or grandchild), it’s worth some serious consideration.

Posted on June 19, 2012May 31, 2016 by Jan Roberg

Saving for Unemployment

Photo by 401K 2012 at Flickr.com

I know what you’re thinking—don’t I mean saving for retirement? That’s what everybody talks about, right? Correct. Everybody talks about retirement, including myself, but this time I really mean saving for unemployment.

Why? It’s simple really. Hopefully, unless we die first, we all get to retire once. Some people go back to work, but it’s usually a “retirement job”. But for those of us in the baby boomer generation (post World War 2, 1946 to 1964), according to the US Bureau of Labor Statistics, we can expect to be unemployed an average of 5.2 times over our working lifetimes.

Us Baby Boomers are all headed towards retirement already. So if the Boomers experience an average of 5 bouts of unemployment—what about then Gen-Xers and the groups after them? The Boomer generation experienced some of the greatest economic growth our country has ever seen—it’s quite possible that the younger generations could experience even more bouts of unemployment than we have.

So when I say you need to save for your unemployment, I am very serious.

Here’s what I’m seeing in the tax office. People come to me to do their taxes after they’ve been laid off. They have no savings so they dip into their 401(k)s to pay for groceries and stuff until they find a job. They keep spending at the same level they did while they were still employed, but their 401(k) money often has no withholding and there’s a 10% penalty for taking it out too soon. Tax time rolls around and they are stuck with a huge income tax bill—which they can’t afford to pay—so they take more money out of their 401(k)! It’s a vicious cycle. Sadly, there’s not much I can do to help here, especially after the damage is already done.

The big concern all these people have in common is that they did not have anything in their savings accounts when they lost their jobs. That’s a big problem all across America—people don’t have money in their savings accounts!

Think about this: Suppose your take home pay is $2,000 a month. Let’s say your rent is $1,000 a month. You spend about $500 a month on food and other necessities, and you’ve got about $500 extra that you play with. (Yes, I’m making the numbers easy.) Your bare minimum to survive is $1500 a month. Now, if you have zero dollars in your bank account and you lose your job—well you’re in dire straits in less than 30 days, right? You can’t make your rent payment. But if you have been putting $200 a month away for the past year, you’d have $2400 in the bank. At least your rent would be paid for another month and if you qualified for any unemployment benefits you might have 2 months worth of rent and food. Having some savings set aside buys you an important commodity: time.

Ideally, you want to have enough money to support you for at least six months of joblessness. The fellow in our scenario above would want to have $9,000 put away. ($1500 of monthly minimum expenses times 6 months = $9,000.) At $200 a month, that would take him almost 4 years of saving and I know that’s a little intimidating. But baby steps are how you get there. Everybody has to start someplace. Unless you’ve already been saving, it’s going to take some time to shore up enough money to support yourself for half a year. The big point here is to get started.

Pick a goal. Don’t have one? I’ll give you one. Start with $1,000 in the bank. $1,000 is way better than nothing isn’t it? Gives you a little cushion, right? If you’ve already got $1,000 saved, then your next goal is $5,000. If the $1,000 is still too intimidating then your goal is $100. You don’t even have to have the $100 in a bank—you can hide that under your mattress if you want. But by the time you get to $1,000 you really need to have a bank account.

Don’t get me wrong, it’s still important to save for retirement. But statistically speaking, you’re five times more likely to be unemployed for awhile before you ever reach retirement age. Oh, and what if I’m wrong and you never go jobless even once during your entire working career? Well that’s okay, now you’ve got some extra money saved for your retirement!

Oh and a note from my editor: Also know that you can deduct certain job search expenses as miscellaneous itemized deductions only if these expenses exceed 2% of your income and the job is in the same line of work as your prior one. Such expenses include employment agency placement fees, resume expenses, travel and transportation expenses, and local and long distance phone calls. And another note from me: The IRS keeps telling us that all the time, but in real life I have very few clients who actually get any tax benefit from that deduction. Keep your receipts, just in case, but for most folks, that deduction is pretty worthless.

Posted on November 21, 2009June 10, 2016 by Jan Roberg

How Much Should I Put into my 401(k)?

The more you save for retirement, the more you’ll have when you retire.

Updated June 10, 2016.

One question I hear all the time is, “How much should I put into my 401(k)?” A good answer to that question is, “as much as you can.” But how do you figure that out?

For 2016, the maximum amount that you can put into your 401(k) is $18,000, unless you’re 50 years old or over, then you can put $24,000 per year in. If you can afford to put the maximum into your retirement plan, I recommend you do so. I have never yet heard anyone complain of having too much money for their retirement.

But what if you can’t afford to put $18,000 into your retirement? What if that’s all you make? How do you determine how much to save? As much as I always want to encourage people to put money into a retirement plan, if your financial situation is tight, and you might be forced to take that money out within the same year, don’t even put it in. The very first thing you want to do is have a little cushion in a savings account. If the car breaks down, or the roof needs a repair, you’ve got a little back up.

Let’s say your annual income is $30,000 a year and you have no savings whatsoever. Make a goal of saving 10% of your income. That’s 10% of $30,000, not 10% of your take home pay. To do that, you’d need to save $60 per week to save $3,000 in one year. (I gave you two weeks of vacation there.) If you can’t live with that, adjust down a little until you find an amount that you can save regularly without hurting yourself.

Once you’ve got a little savings cushion, then you can start the retirement savings. I always recommend that if your employer has a matching program, put in as much money as your employer will match. For example: let’s say your income is still $30,000 and your employer has a program where he’ll match what you put into your 401(k) up to 5% of your income. If you put in $1,500, he’ll match it with $1,500. That’s a 100% return on your investment. If you put in $3,000, he’ll still only match with the $1,500. If you can afford to save extra, that’s great, but the priority is the match.

Another consideration when deciding upon retirement contributions is reducing your income. Suppose you’ll have a graduating senior in the spring. 401(k) contributions would lower the income reported on your tax return, which could impact your scholarship potential. On the other hand, if you already have a child in college, education credits start phasing out at $80,000 ($160,000 if married filing jointly). If you’re near a tripping point for a tax credit or deduction, it might make sense to increase your 401(k) contributions so that you can qualify for the credit. Check with your tax professional to see what works best for you.