Q. In the past, our parents have been very generous to my 30-year-old twin brother, our wives and me with random gifting of cash. Last year they gave each couple enough money to make a 20 percent down payment on a $250,000 home. Both he and I have a 30 year $200,000 mortgage with a 4 percent interest rate. Neither of us have any other debt; we pay off our credit cards in full every month. They have now told us that they plan to gift $14,000 to our wives and $14,000 to each of us every year for the next five years. The four of us want to make wise choices with this gifting and are worried that without a good plan the $28,000 a year will be frittered away on stuff rather than helping us get ahead financially which is what we know would make our parents glad that they made these gifts. We know they are also contributing to 529 plans for their grandchildren but don’t plan to fully fund college. So, do you have any suggestions as to what would be best to do with for this money? We would like to use some of it for fun and a replacement car may be needed but anything that would help motivate us to be wise with most of it will be appreciated!
A. Wow that is generous. Hopefully, your parents have enough money to complete this generous gifting and still be able to care for themselves if unforeseen circumstances were to arise. One never knows when an illness, accident, natural disaster or other event may occur and cause a financial hardship.
Contributing to company retirement plans to receive any matching funds, funding IRAs, paying extra on your mortgage and contributing to your children’s education fund would be worthwhile financial goals.
If your company offers and matches contributions to a retirement plan make sure you are contributing at least enough to receive the matching funds. Any decrease in cash flow can be supplemented by your parent’s gifting.
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You and your wife can contribute up to $11,000/year ($5,500 each) to an IRA as long as your combined income is at least $11,000. You may want to meet with an adviser to determine if a tax-deductible, non-deductible or Roth IRA would be suitable. If married filing jointly and your adjusted gross income is $194,000 or more in 2016 jointly you may not be able to contribute to a Roth IRA but if your income allows, the Roth IRA is probably the best option. If you contribute $11,000/year for five years and achieve an 8 percent rate of return, at age 55 your account will be worth over $346,000 and at age 65 over $768,000. If you can add a total of $5,500/year in the two IRAs after the gifting stops the value of your combined IRA accounts would be over $1.4 million dollars.
Adding $1,000/month to your mortgage payments for 60 months will result in a savings of almost $80,000 in interest and have you mortgage free in 17 years versus 30.
So, now you’ve “spent” $11,000/year on an IRA, $12,000 additional payments on your mortgage and an unknown amount to collect the company match on your retirement plan for five years. You probably still have some gift money left over for fun and you are on track to have your mortgage paid off at age 47 and IRAs worth over $768,000 at age 65. I’d add to a 529 plan for education after funding the retirement plan to get the match, funding the IRA and paying off the mortgage. If you are still working at age 47 and don’t have a mortgage you will have more income to help with college expenses and, if needed and on track for retirement you can tap into your IRAs.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624