January 21, 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 email@example.com
Tony in Burlington: My employer matches my 401(k). Does this extra money count toward my yearly limit?
Answer: An employer that offers a 401(k) match can be a great benefit to you and your financial future.
Companies can structure their 401(k) programs differently: some might offer you a match contribution of 100% up to a certain limit, while others might offer you a match percentage no matter what amount you contribute to your 401(k). Understanding how your company’s program works is key to capitalizing on this “free” money from your employer.
In 2018, the contribution limit for 401(k)s for individuals is $18,500, which is up from $18,000 in 2017. However, if you’re over the age of 50, you can contribute an extra $6,000 a year to your 401(k), bringing your limit to $24,500. This is called a “catch-up contribution.”
There is also an overall annual contribution limit for your 401(k). This is $55,000 if you’re under age 50, and $61,000 if you’re over age 50. So, while your employer match does not count toward your individual contribution limit (again, depending on your age, that’s either $18,500 or $24,500 this year), it does count toward your overall limit ($55,000 or $61,000). So, let’s say you’re 47 and you contribute $18,500 to your 401(k) this year; this means your employer could contribute an additional $36,500 ($18,500 + $36,500 = $55,000).
According to Simply Money Advisors’ research, only 10 percent of Americans participating in a 401(k) program maxed out their contribution levels in 2016. The Simply Money Point is that participating in your company’s 401(k) program to at least get the match is a great start.
To learn more about the multiple facets of retirement planning - including Social Security and how to select a financial advisor - visit our free Retirement Resources library.
Shannon and Greg in Northside: We’re about to have our first child. Any suggestions for how to save for her future education costs?
Answer: Kudos to you for planning for your child’s education already! College education costs have increased by about five percent each year for the past 10 years, and the average college student now graduates with about $30,000 in student loan debt.
This debt has crippled many Millennials (those around the ages of 18-35) as they try to enter the workforce, causing them to head back home and/or delay big financial life events like buying a home or even saving for retirement. So, the earlier you start saving for your child’s education, the more financial relief you’ll hopefully be able to provide.
One of the best ways you can save for these future costs is by using a 529 college savings plan.
A 529 plan is a state-sponsored account for post-secondary costs (examples include: community colleges, universities and vocational/trade schools). More than 30 states now offer 529s, and in some states, they are tax-deductible. You can contribute to any state’s plan, no matter what state you live in; just make sure you review your states rules on tax-deductibility. And your child can attend school in any state, no matter where the plan is based. Each state sets its own contribution limit levels.
You contribute after-tax dollars to the account, and then, assuming you withdraw the money for qualified education expenses (such as tuition, books, room and board, fees) the gains are tax-free. However, if the money is used for non-qualified expenses, you must pay income taxes and a 10 percent penalty.
What if your daughter decides not to pursue a future that involves the need for this money? A nice feature of 529 plans is that you can change the beneficiary of the account without taxes or penalty, meaning, if you have another child, you can name that child the beneficiary.
Also, keep in mind that there may be gift tax consequences if your contribution amount exceeds $14,000 a year.
You can open a 529 college savings plan directly with the 529 plan manager, or through a financial advisor. The website SavingForCollege.com is a great resource for learning more about these plans.
Here’s The Simply Money Point: Contributing to a 529 plan can be a fantastic way to help with your child’s future education costs. Working with a trusted financial planner (we recommend a Certified Financial Planner™) can help you determine the best strategy for your specific 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 firstname.lastname@example.org.