May 20, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Chris and Anne from Finneytown: We’re trying to save for college for our two kids and also save for retirement, but it’s a challenge. Any suggestions for how to deal with these competing goals?
Answer: Yes, planning for retirement and saving for your children’s college education can be challenging to juggle. But as you go along, always keep this in mind: your retirement should come first. Your kids can take out loans for school or work part-time to help pay the tuition bills. You, on the other hand, can’t take out loans for retirement. So, if you’re facing an either-or decision, we’re giving you permission to be selfish and make your retirement your #1 saving priority.
With that said, it’s still possible to save for both of these major goals simultaneously. The key is understanding the difference between short-term and long-term goals. Short-term goals are the goals you plan to achieve in the next six months to three years. Long-term goals normally are set for more than three years into the future. Some of your short-term goals may help you achieve your long-term goals, or, some of your short-term goals may be "one and done" goals.
Let's say you want to pay off what’s left on your mortgage (for example, $50,000) within three years. And you also want to help your kids pay for college within five years. By paying down your mortgage, you’re freeing up more of your money to help your kids with school. If you pay off that $50,000 of mortgage debt, you then have two more years to put your income towards those college costs.
Often, your short-term and long-term goals will work together to get you where you want to be. To have both goals work together, you must create a plan to achieve them. Write down your goals and be as specific as possible. What are your goals? Where do you see yourself in six months? Where do you see yourself in five years?
At Simply Money Advisors, we like to stress the importance of a personalized financial plan. This plan you create with a trusted financial planner (we recommend a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®) can help map out your goals and how you’re going to reach them. It lays everything out and helps you take the first steps towards achieving your ideal vision for your financial future.
The Simply Money Point is that by determining what you truly want as you head towards retirement, your short-term and long-term goals can work together.
Trevor in Harrison: I’ve just inherited an IRA from my father who recently passed away. Do I need to pay taxes on this? And what about RMDs?
Answer: You have a few options. One option is to transfer the money to what’s called an inherited IRA. This will allow you take the money out of the account whenever you would like without penalties, however, you still will be required to pay any applicable taxes and take a Required Minimum Distribution (RMD) from the account.
A RMD is the amount of money that must be withdrawn from the IRA account after the owner turns 70 1/2. Since contributions to an IRA are made with pre-tax dollars, the IRS requires owners to begin taking withdrawals so the government gets its tax revenue. The start date for taking a RMD from an inherited IRA is generally determined by the original account holder’s age, and if the owner passed away before or after reaching 70 1/2.
Be sure you do not co-mingle any inherited IRA money with any other types of IRA assets. You also cannot contribute your own money to an inherited IRA. Additionally, for organizational and tax purposes, the titling of your inherited IRA is critical. It should read something like this: "(Current owner) Beneficiary IRA of (former owner)."
You can also decide to take a lump sum distribution. But keep in mind this could potentially push you into a higher tax bracket, meaning you may have to pay more in taxes the year of distribution.
Lastly, you can decide to let the money pass to additional beneficiaries by “disclaiming” the account. This is an option used sometimes to avoid potential estate or tax consequences.
The Simply Money Point is to take your time to look at all options before you do anything. Always be sure to speak with a trusted tax professional before proceeding because you want to make the right decision for your particular financial situation.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.