Money Matters

Focus first on your ability to retire comfortably

November 10, 2012 

Q: Our only son graduated from college this year and has fortunately started a new job that will not only support him but will allow him to save a bit for his future needs. Despite his graduation from college and financial independence, we are continuing to contribute to his 529 account. He could use this account for graduate school, or it can go to my imaginary grandchildren. We are also making contributions to his Roth IRA. We are in our late 50s, our combined income is around $90,000, and we have about $500,000 saved for retirement.

What is the best way to fund his 529 plan? We are not sure whether it makes sense to give our son money directly and instruct him to make payments to the 529 plan and his Roth, or just continue to make the contributions ourselves. Are we being foolish to continue to help him financially instead of increasing our own retirement savings? He is very appreciative of our assistance but has never asked for help and would not be upset if we decided to stop.

A. Sounds like your family is in a good place financially. Now that your son is educated and self-supporting, you should focus on your ability to retire comfortably. If you have not already done so, I suggest you either hire a financial adviser or find a good online source and generate a detailed retirement projection. The free websites are fine for a general idea of what to save for retirement, but when nearing retirement and getting ready to make irrevocable financial decisions, professional advice is usually worth the cost.

Make conservative assumptions when preparing your retirement projection, and you will be less likely to face financial disappointment in retirement. Assuming a low rate of return on investments (4 percent to 6 percent), an average inflation rate (3 percent to 3.5 percent) and a longer-than-average mortality age (85 to 95) will help provide you with a conservative illustration.

Take some time and make the effort required to get a good handle on what you will spend in today’s dollars once you stop work. If you decide you will be able to live on less after-tax income in retirement than you do now (other than expenses solely related to work), try living on the lower amount for six months while still working. Save the difference in a money market or savings account. This will allow you to see how well you like this lower-income life style before you quit your jobs. An unrealistic assumption about expenses in retirement can make the best projection meaningless.

If you determine that your current retirement funds and savings are sufficient and you want to help your son, both the 529 plan and the Roth IRA have merit. Since your son just graduated and began working, you are probably in a higher tax bracket. If you are a North Carolina resident, contributions to the N.C. 529 plan will provide you with a state tax deduction. For a married couple filing jointly, you will be eligible for a state tax deduction on contributions up to $5,000 ($2,500 for single filers). As owner of the 529 plan, you maintain control of the assets. You can change the beneficiary of the account and even decide you need that money for your own noneducational needs in retirement. You would owe taxes and a 10 percent penalty on any earnings, but you would have access to the money in the account.

Funding a Roth IRA for children is an excellent way to help them start saving for their retirements. Once the assets are gifted for this purpose, you no longer have control of them; the IRA is owned by your son.

The gifting limits are increasing from $13,000 per person to $14,000 in 2013.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624

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