MONEY retirement planning

22% of Workers Would Rather Die Early Than Run Out of Money

transparent piggy bank with one silver coin inside
Dimitri Vervitsiotis—Getty Images

Yet many of the same folks are hardly saving anything for retirement, study finds.

A large slice of middle-class Americans have all but given up on the retirement they may once have aspired to, new research shows—and their despair is both heartbreaking and frustrating. Most say saving for retirement is more difficult than they had expected and yet few are making the necessary adjustments.

Some 22% of workers say they would rather die early than run out of money, according to the Wells Fargo Middle Class Retirement survey. Yet 61% say they are not sacrificing a lot to save for their later years. Nearly three quarters acknowledge they should have started saving sooner.

The survey, released during National Retirement Savings Week, looks at the retirement planning of Americans with household incomes between $25,000 and $100,000, who held investable assets of less than $100,000. One third are contributing nothing—zero—to a 401(k) plan or an IRA, and half say they have no confidence that they will have enough to retire. Middle-class Americans have a median retirement balance of just $20,000 and say they expect to need $250,000 in retirement.

Still, Americans who have an employer-sponsored retirement plan, especially a 401(k), are doing much better than those without one. Those between the ages of 25 to 29 with access to a 401(k) have put away a median of $10,000, compared with no savings at all for those without access to a plan. Those ages 30 to 39 with a 401(k) plan have saved a median of $35,000, versus less than $1,000 for those without. And for those ages 40 to 49 with 401(k)s, the median is $50,000, while those with no plan have just $10,000.

Clearly, despite its many drawbacks, the venerable 401(k) remains our de facto national savings plan, and the best shot that the middle-class has at achieving retirement security. But only half of private-sector workers have access to a 401(k) or other employer-sponsored retirement plan, according to the Employee Benefit Research Institute. Those without access would benefit from a direct-deposit Roth or traditional IRA or some other tax-favored account, but data show that most Americans fail to make new contributions to IRAs, with most of those assets coming from 401(k) rollovers. One exception: a growing number of Millennials are making Roth IRA contributions.

Most people do understand the need to save for retirement, but they don’t view it as an urgent goal requiring spending cutbacks, the survey found. Still, many clearly have room in their budget to boost their savings rates. Asked where they would cut spending if they decided to get serious about saving, 56% said they would give up indulgences like the spa and jewelry; 55% said they’d cut restaurant meals; and 51% even said they would give up a major purchase like a car or a home renovation. But only 38% said they would forgo a vacation. We all need a little R&R, for sure. But a few weeks of fun now in exchange for years of retirement security is a good trade.

Of course, the larger problem is that a sizeable percentage of middle-class Americans are struggling financially and simply don’t enough money to stash away for long-term goals like retirement. As economic data show, many workers haven’t had a real salary increase for 15 years, while the cost of essentials, such as health care and college tuition, continues to soar.

Given these economic headwinds, it’s important to do as much as you can, when you can, to build your retirement nest egg. If you have a 401(k), be sure to contribute at least enough to get the full company match. And if you lack a company retirement plan, opt for an IRA—the maximum contribution is $5,500 a year ($6,500 if you are 50 or older). Yes, freeing up money to put away for retirement is tough, but it will be a bit easier if you can get tax break on your savings.

Related:

How much of my income should I save for retirement?

Why is a 401(k) such a good deal?

Which is better, a traditional or Roth IRA?

MONEY Ask the Expert

How to Help Your Kid Get Started Investing

Investing illustration
Robert A. Di Ieso Jr.

Q: I want to invest $5,000 for my 35-year-old daughter, as I want to get her on the path to financial security. Should the money be placed into a guaranteed interest rate annuity? Or should the money go into a Roth IRA?

A: To make the most of this financial gift, don’t just focus on the best place to invest that $5,000. Rather, look at how this money can help your daughter develop saving and investing habits above and beyond your contribution.

Your first step should be to have a conversation with your daughter to express your intent and determine where this money will have the biggest impact. Planning for retirement should be a top priority. “But you don’t want to put the cart before the horse,” says Scott Whytock, a certified financial planner with August Wealth Management in Portland, Maine.

Before you jump ahead to thinking about long-term savings vehicles for your daughter, first make sure she has her bases covered right now. Does she have an emergency fund, for example? Ideally, she should have up to six months of typical monthly expenses set aside. Without one, says Whytock, she may be forced to pull money out of retirement — a costly choice on many counts — or accrue high-interest debt.

Assuming she has an adequate rainy day fund, the next place to look is an employer-sponsored retirement plan, such as a 401(k) or 403(b). If the plan offers matching benefits, make sure your daughter is taking full advantage of that free money. If her income and expenses are such that she isn’t able to do so, your gift may give her the wiggle room she needs to bump up her contributions.

Does she have student loans or a car loan? “Maybe paying off that car loan would free up some money each month that could be redirected to her retirement contributions through work,” Whytock adds. “She would remove potentially high interest debt, increase her contributions to her 401(k), and lower her tax base all at the same time.”

If your daughter doesn’t have a plan through work or is already taking full advantage of it, then a Roth IRA makes sense. Unlike with traditional IRAs, contributions to a Roth are made after taxes, but your daughter won’t owe taxes when she withdraws the money for retirement down the road. Since she’s on the younger side – and likely to be in a higher tax bracket later – this choice may also offer a small tax advantage over other vehicles.

Why not the annuity?

As you say, the goal is to help your daughter get on the path to financial security. For that reason alone, a simple, low-cost instrument is your best bet. Annuities can play a role in retirement planning, but their complexity, high fees and, typically, high minimums make them less ideal for this situation, says Whytock.

Here’s another idea: Don’t just open the account, pick the investments and make the contribution on your daughter’s behalf. Instead, use this gift as an opportunity to get her involved, from deciding where to open the account to choosing the best investments.

Better yet, take this a step further and set up your own matching plan. You could, for example, initially fund the account with $2,000 and set aside the remainder to match what she saves, dollar for dollar. By helping your daughter jump start her own saving and investing plans, your $5,000 gift will yield returns far beyond anything it would earn if you simply socked it away on her behalf.

Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.

MONEY Taxes

5 Things to Know If You Still Haven’t Finished Last Year’s Taxes

Practicing golf in office
You can't put off finishing your taxes for much longer. Jan Stromme—Getty Images

Attention tax procrastinators: Time’s nearly up if you filed for an extension last spring.

Remember the relief you felt last April when—faced with a looming tax-filing deadline—you simply applied for an automatic six-month extension for your 2013 return? The dread is back. October 15, next Wednesday, is the filing deadline for everyone who took advantage of the government’s grace period. As of the end of September, more than a quarter of the nearly 13 million taxpayers who had filed for an extension had yet to file, according to the IRS. If you’re one of those procrastinators, here’s what you need to know.

1. This time the deadline is real. No more extensions (one exception: members of the military serving in a combat zone). If you don’t file and pay your tax bill, you’ll get a failure-to-file notice. And you’ll start the clock on a failure-to-file penalty (5% of your unpaid taxes per month, up to a max of 25%), a failure-to-pay penalty (0.5% of your tax bill per month, up to a max of 25%), and interest (currently 3%).

“You could have three things adding up month by month if you do nothing by October 15,” says Mark Luscombe, principal federal tax analyst for Wolters Kluwer, CCH. Of course, if you’re expecting a refund, there’s no penalty for not filing—and also no refund until you do.

2. Do nothing, and the IRS will eventually file for you. And you may not like the results. That’s because the IRS will base your tax bill on the information it has, such as the income reported on your W-2, notes White Plains, N.Y., CPA Paul Herman. But they won’t know other things that could lower your tax bill, like all the deductions you’re entitled to or what you paid for stocks, bonds, or mutual funds you sold last year.

3. If you can’t pay your entire bill, throw out a number. File your return for sure—that at least saves you the failure-to-file penalty. When you do, request an installment agreement (Form 9465), and propose how much you can pay a month, or the IRS will divide your balance by 72 months. If the offer is reasonable, says Herman, the IRS may accept it.

4. Free help hasn’t gone away. Through October 15, you can still use the IRS’s Free File program, which makes brand-name tax-filing software available at no cost if your income is $58,000 or less. Earn more than that, and you can still use the free fillable forms at the IRS website.

5. You have one less way to cut your taxes. You’re out of luck if you had hoped to trim your tax bill by funding an individual retirement account for 2013 (depending on your income, as much as $5,500 was deductible last year, $6,500 if you’re 50 or older). Even though you got an extension to file, the deadline for opening an IRA for 2013 was last April 15. (Make a note: You have six months to open a 2014 IRA).

However, if you switched a traditional IRA into a Roth IRA last year—which meant a tax bill on your conversion—you still have until October 15 to change your mind. That’s something you might do if the value of your Roth has since dropped. You can “recharacterize” the conversion (in effect, switch back to a regular IRA) and then convert to a Roth again later, this time realizing a smaller taxable gain and owing less in taxes.

Finally, if you find yourself doing your taxes every fall, think about changing your ways. Maybe invest in a better system for organizing your records? “If you waited this long,” says Herman, “try to begin planning earlier for next year.”

MONEY Ask the Expert

The Right Way to Tap Your IRA in Retirement

Q: When I do my IRA required minimum distribution I take some extra money out and move it to a taxable account. Good idea or bad idea? Thanks – Bill Faye, Rockville, MD

A: After years of accumulating money for retirement, figuring out what to do with “extra” money withdrawn from your IRA accounts seems like a nice problem to have. But required minimum distributions, or RMDs, can be tricky.

First, a bit of background on managing RMDs. These withdrawals are a requirement under IRS rules, since Uncle Sam wants to collect the taxes you’ve deferred on contributions to your IRAs or 401(k)s. You must take your distribution by April 1st of the year you turn 70 ½; subsequent RMDs are due by December 31st each year. If you don’t take the distribution, you’ll pay a 50% tax penalty in addition to regular income tax on the amount that should have been withdrawn.

The size of your required withdrawal depends on your age and the account balance. (You can find the details on the IRS website here.) If you’re over 59 ½, you can take out higher amounts than the minimum required, but the excess withdrawals don’t count toward your future distributions. Still, by managing your IRAs the right way, you can preserve more of your portfolio and possibly reduce taxes, says Mary Pucciarelli, a financial advisor with MetLife Premier Client Group.

For those fortunate enough to hold more than one IRA, you must calculate the withdrawal amount based on all your accounts. But you can take the money out of any combination of the IRAs you hold. This flexibility means you can make strategic withdrawals. Say you have an IRA with a big exposure to stocks and the market is down. In that scenario, you might want to pull money from another account that isn’t so stock heavy, so you’re not selling investments at a low point.

You can minimize RMDs by converting one or more of your traditional IRAs to a Roth IRA. Roths don’t have minimum distribution requirements, so you can choose when and how much money you take out. More importantly, you don’t pay taxes on the withdrawals and neither will your heirs if you leave it to them. You will owe taxes on the amount you convert. To get the full benefit of the conversion, consider this move only if you can pay that bill with money outside your IRA. Many investors choose to make the move after they’ve retired and their tax bill is lower. Pucciarelli suggests doing the conversion over time so you can avoid a big tax bill in one year.

Up until this year, you could avoid paying taxes on your RMD by making a qualified charitable contribution directly from your IRA to a charity. The tax provision expired in December. It’s possible Congress will renew the tax break, though nothing is certain in Washington. Meanwhile, if you itemize on your taxes, you can deduct your charitable contribution.

As for the extra money you’ve withdrawn, it’s fine to stash it in a taxable account. If you have sufficient cash on hand for living expenses, you can opt for longer-term investments, such as bond or stock funds. But be sure your investments suit your financial goals. “You don’t want to throw your asset allocation out of whack when you move the money,” says Pucciarelli. Consider a tax-efficient option, such as an index stock fund or muni bond fund. That way, Uncle Sam won’t take another big tax bite out of your returns.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

MONEY Kids and Money

The Best Thing You Can Do Now for Your Kid’s Financial Future

CAN'T BUY ME LOVE, from left: Patrick Dempsey, Amanda Peterson, 1987.
Your teens summer earnings can't buy love, but they can buy a bit of retirement security. Buena Vista Pictures—Courtesy Everett Collection

Open a Roth IRA for your child's summer earnings, and talk her through the decisions on how to invest that money, suggests financial planner Kevin McKinley.

In my last column, I extolled the virtues of opening—and perhaps even contributing to—a Roth IRA for a working teenager. In short, a little bit of money saved now can make a big difference over a long time, and give your child a nice cushion upon which to build a solid nest egg.

Besides underscoring the importance of saving for retirement early and regularly, opening a Roth IRA can help your child become a savvy investor (a skill many people learn the hard way).

Here’s how:

Make the Initial Contribution

Your child needs to earn money if he or you are going to contribute to an IRA on his behalf. For the 2014 tax year, the limit for a Roth IRA contribution for those under age 50 is the lesser of the worker’s earnings, or $5,500.

The deadline for making the contribution is April 15, 2015. But you can start sooner, even if your teen hasn’t yet earned the money on which you will be basing the IRA contribution. (If the kid doesn’t earn enough to justify your contributions, you can withdraw the excess with relatively little in the way of paperwork or penalties.)

For a minor child, you will have to open a “custodial” Roth IRA on her behalf, using her Social Security number. Not every brokerage or mutual fund company that will open a Roth IRA for an adult will do so for a minor, but many of the larger ones will, including Vanguard, Schwab, and TD Ameritrade.

As the custodian, you make the decisions on investment choices—as well as decisions on if, why, and when the money might be withdrawn—until she reaches “adulthood,” defined by age (usually between 18 and 21, depending on your state of residence). Once she ages out, the account will then need to be re-registered in her name.

Depending on which provider you choose, you may be able to make systematic, automated contributions to the IRA (for example, $200 per month) from a checking or savings account. To encourage your teen to participate, you might offer to match every dollar he puts in.

Have the “Risk vs. Reward” Talk

How an adult should invest an IRA depends upon the person’s goals and risk tolerance—the same is true for a teen. You can help set those parameters by pointing out to your child that, since he’s unlikely to retire until his 60s this is likely to be a decades-long investment, and enduring short-term downturns is the price for enjoying higher potential long-term gains.

You might also show him the difference between depositing $1,000 now and earning, say, 3% annually vs. 7% annually over the next 50 years—that is, a balance of $4,400 vs. a balance of $29,600. Ask your child: Which would you rather?

No doubt, your kid will choose the bigger number.

But you also want this to be a lesson in the risks involved in investing. You might talk about what a severe one-year decline of 40% or more might do to his investment and explain that bigger drops are more likely in investments that have the potential for bigger growth. Now how do you feel about that 7%?

Some teenagers will be perfectly fine accepting the risk. Others may be more skittish.

You also might explain that there are options that will not decline in value at all—such as CDs and money market accounts. But should he choose those safer options, he’ll be trading off high reward for that benefit of low risk. In fact, while his money will grow, it will likely not keep up with the rate at which prices grow (“inflation,” in adult terms). So his money will actually be worth less by the time he’s ready to retire.

Some risk, therefore, will likely be necessary in order to grow his money in a meaningful way.

Choose Investments Together

Assuming he can tolerate some fluctuation, a stock-based mutual fund is probably the most appropriate and profitable strategy—especially since a fund can theoretically offer him a ownership in hundreds of different securities even though he may only be investing a few thousand dollars. You might explain that this diversification protects against some of the risks of decline since some stocks will rise when others fall.

A particularly-suitable option might be a “target date” or “life cycle” fund. These offerings are geared toward a specific year in the future—for instance, one near the time at which your child might retire.

Target date funds are usually a portfolio comprised of several different funds. The portfolio allocation starts out fairly aggressive, with a majority of the money invested in stock-based funds, and much smaller portion in bond funds or money market accounts.

As time goes by—and your child’s prospective retirement draws nearer—the allocation of the overall fund gradually becomes more conservative.

The value of the account can still rise and fall in the years nearing retirement, but with likely less volatility than what could be experienced in the early years.

One low-cost example of this type of investment is the Vanguard Retirement 2060 Fund (VTTSX).

Of course, if you choose a brokerage account for your child’s Roth IRA, you have the option of purchasing shares in a company that might be of particular interest to your kid. Choosing a company that is familiar to your child may not only inspire her to watch the stock and learn more about it, but eventually profit from the money she is spending on “her” company’s products.

If you’re going to go this route, you should include a discussion on the increased volatility (for better or worse) of owning one or two stocks, rather than the diversification offered by the aforementioned mutual fund.

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley:

 

MONEY Ask the Expert

How To Tap Your IRA When You Really Need the Money

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Robert A. Di Ieso, Jr.

Q: I am 52 and recently lost my job. I have a fairly large IRA. I was thinking of taking a “rule 72(t)” distribution for income and shifting some of those IRA assets to my Roth IRA, paying the tax now while I’m unemployed and most likely at a lower tax rate. What do you think of this strategy? – Mark, Ft. Lauderdale, FL

A: It’s a workable strategy, but it’s one that’s very complex and may cost you a big chunk of your retirement savings, says Ed Slott, a CPA and founder of IRAhelp.com.

Because your IRA is meant to provide income in retirement, the IRS strongly encourages you to save it for that by imposing a 10% withdrawal penalty (on top of income taxes) if you tap the money before you reach age 59 ½. There are several exceptions that allow you to avoid the penalty, such as incurring steep medical bills, paying for higher education or a down payment on a first home. (Unemployment is not included.)

The exception that you’re considering is known as rule 72(t), after the IRS section code that spells it out, and anyone can use this strategy to avoid the 10% penalty if you follow the requirements precisely. You must take the money out on a specific schedule in regular increments and stick with that payment schedule for five years, or until you reach age 59 ½, whichever is longer. Deviate from this program, and you’ll have to pay the penalty on all money withdrawn from the IRA, plus interest. (The formal, less catchy name of this strategy is the Substantially Equal Periodic Payment, or SEPP, rule.)

The IRS gives you three different methods to calculate your payment amount: required minimum distribution, fixed amortization and fixed annuitization. Several sites, including 72t.net, Dinkytown and CalcXML, offer tools if you want to run scenarios. Generally, the amortization method will gives you the highest income, says Slott. But it’s a good idea to consult a tax professional to see which one is best for you.

If you do use the 72(t) method, and want to shift some of your traditional IRA assets to a Roth, consider first dividing your current account into two—that way, you can convert only a portion of the money. But you must do so before you set up the 72(t) plan. If you later decide that you no longer need the distributions, you can’t contribute 72(t) income into another IRA or put it into a Roth. Your best option would be to save it in a taxable fund. “Then the money will be there if you need it down the road,” says Slott.

Does it make sense to take 72(t) distributions? Only as a last resort. It is true that you’ll pay less in income tax while you’re unemployed. But at age 52, you’ll be taking distributions for seven and a half years, which is a long time to commit to the payout plan. If you get a job during that period, the income from the 72(t) distribution could push you into a higher tax bracket. Slott suggests checking into a home equity loan—or even taking some money out of your IRA up front and paying the 10% penalty, rather than withdrawing the bulk of the account. “Your retirement money is the result of years of saving,” says Slott. “If you take out big chunks now, you might not have enough lifetime to replace it.”

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

MONEY Kids and Money

The Surprising Place Your Kid Should Save His Summer Earnings

Pitcher of lemonade and a money jar
Your teen's summer earnings may not seem like much now, but they can serve as a cornerstone for his retirement 50-odd years in the future. Somos/Veer—Getty Images

Get your teen started off now in a Roth IRA for a big payoff down the road, says financial planner Kevin McKinley.

A few weeks ago, I wrote about how to figure out how much money you need to become financially independent, and how the process could help you teach your kids to reach the same goal.

But talking the talk only goes so far. You can walk the walk by helping them start saving for retirement in…drumroll, please…a Roth IRA.

Why a Roth IRA?

For most younger workers, the Roth IRA is preferable to a traditional IRA for two reasons.

The first is that contributions to a Roth IRA can be withdrawn at any time for any reason with no taxes or penalties whatsoever. Therefore, that portion of the account can be taken out for other expenses, such as college or a down payment on a house, without a severe cost.

The second reason the Roth IRA rules is that younger workers typically are in a low tax bracket, and therefore don’t need the deduction that a traditional IRA provides. But once they get to retirement, all the money in the Roth can generally be withdrawn with no taxes at all.

How much your kid can save

Children of any age can open a Roth IRA account—as long as they have legitimate earned income. Flipping burgers and bagging groceries certainly counts, but so does self-employment like babysitting and yard work, especially if it’s done for someone other than you.

Just make sure to keep track of what your kid makes so you know how much can be deposited in to the Roth IRA. For 2014 the contributions to a Roth IRA are limited to the lesser of the kid’s earnings, or $5,500.

Technically, for the 2104 tax year, the money doesn’t have to be deposited until April 15, 2015, the usual deadline for the federal income tax filing.

What you can do to encourage him

Congratulations to you—and your child—if you can convince her straightaway to put her hard-earned paychecks into an account that isn’t meant to be tapped for another 50 years.

But even if you can’t immediately get your teen into the savings habit, you may be able to motivate her by using some of your own money. The money for the Roth IRA doesn’t necessarily have to come from her. She can spend her earnings, and you can deposit into the Roth on her behalf.(Just remember that your deposits then become her money, and she’s free to do with it as she pleases once she reaches adulthood.)

Also, keep in mind that the source of the deposit to your child’s Roth IRA doesn’t have to be an all-or-nothing proposition. You may want to tell your kid that you will match every dollar she contributes with one of your own.

For further motivation, try showing your child how time can turn a relatively-small amount of money into a small (or large) fortune.

For instance, let’s say you and your child deposits $5,000 into a Roth IRA when he’s 15 years old, and it grows at a hypothetical annual rate of 6% per year.

By the time he’s 65 (and it will happen sooner than he thinks), the account would be worth over $92,000.

But if he has the earnings and discipline required to set aside $5,000 in to the same account every year until he turns 65, the Roth IRA will provide him with a tax-free total of $1.6 million.

And if that doesn’t get his attention, no amount of walking and talking will.

__________

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley

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MONEY Kids and Money

This is What Sting Should Have Done for His Kids

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Musician Sting performs during the 44th Annual Songwriters Hall of Fame ceremony in New York June 13, 2013. Carlo Allegri—Reuters

Financial Planner Kevin McKinley argues that there are ways to give your children money without having to worry about them becoming trust-fund brats.

Recently rock legend Sting made headlines when he declared that his six children would be receiving little to none of his estimated $300 million fortune.

He joked that he intended to spend all of his money before he died. But on a more serious note, he explained that he wanted his kids to develop a work ethic, and not let the wealth become “albatrosses around their necks.”

His motives are admirable, and he’s certainly within his rights to use his money however he pleases. But as a financial planner and a dad, I’d argue that there is a lot of room between over-indulgence and complete denial. And in fact, used the right way, your wealth can help motivate your child.

Here are three ways you can sensibly use a relatively small amount of your own money—during your lifetime—to encourage your kid’s productivity and self-reliance, without spoiling him rotten.

1. Save something for his college

You don’t need to put every dollar you have in to a college savings account, nor do you need to pay the full cost of some high-priced private school.

But setting a little aside sets an example of your commitment to your child’s education. It also can ensure that she doesn’t have to choose between taking on a six-figure debt load, and not going to college at all.

Let’s say the parents of a recent high school graduate started saving just $50 per month at her birth, and it returned a 6% hypothetical annual rate. By now they would have over $19,000—enough to pay tuition, room, and board for a year at a typical in-state four-year university, according to the College Board.

The remaining years can then be paid for by some combination of parent earnings, a relatively manageable amount of student loans, and the student’s part-time job.

2. Jumpstart retirement savings

Speaking of jobs, once your kid earns his first paycheck you have another chance to use a little money to teach a valuable lesson.

Open a Roth IRA on his behalf by April 15th of the year after he gets his first job. He’s eligible to deposit the lesser of his earnings, or $5,500.

Kudos to you if you can get him to contribute his own money. But if you can’t get a teenager to understand the importance of retirement—I mean, let’s be realistic—you can instead make the contribution out of your own pocket. Or offer to match an amount he puts in, which you can explain to him is the easiest way to double his money. (This is also a good way to set up his understanding of an employer retirement match down the road.)

One way or the other, saving a little now could mean a lot down the road. A $5,000 deposit today into a 16 year-old’s Roth IRA earning the aforementioned 6% annually would be worth almost $100,000 by the time he turns 66.

And if the initial gesture inspires him to deposit $5,000 of his own money into the Roth IRA every year for those fifty years, the account could be worth a cool $1.5 million by the time he hits 66.

3. Help with the house

Hopefully your child eventually becomes an adult in both age and responsibility. That might be the time she wants to buy her first home.

The National Association of Realtors says the median home price in the U.S. as of May of 2014 is about $214,000.

If your child’s (and/or her spouse’s) annual income totals around $60,000, she should be able to qualify for a 30-year 4% mortgage to purchase a home in that price range, leaving her with a monthly mortgage payment of about $1,300. But she may still need to overcome the biggest obstacle to the purchase of a first home: the down payment.

Even the savviest young adult might have a hard time saving up the $42,000 needed to make a 20% down payment on that average purchase price.

Helping her meet that down payment requirement will not only get her the satisfaction of home ownership, but it will help her build equity in something with her own money. And it might mean you have a place to stay if, like Sting, you end up spending all of your money before your time is up.

__________

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley

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MONEY Kids and Money

Four Reasons You Shouldn’t Be Saving for College Just Yet

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You should make these moves before you start funneling away money for tuition, says financial planner Kevin McKinley.

As graduation ceremony season nears its peak, I’m seeing a steady drumbeat of stories warning of ever-rising tuition costs and education debt loads. It’s no wonder many parents of smaller children are panicked into thinking they have to drop everything and start saving all their money for their kids’ college expenses RIGHT NOW. Hang on just a second there, moms and dads. Although I’m certainly in favor of getting parents to save, there are four things I’d suggest you should do—and one you shouldn’t—before making “saving for college” the top priority. (Already completed all of these steps? Check out the MONEY 101 section on college for help getting started on your college savings journey.) DO save for retirement Since it’s possible to borrow money to pay for college but not to fund retirement, working parents have to put their own needs first. You should start by putting money in any pre-tax retirement savings plans at work (such as a 401k or 403b), at least up to any available matching contributions from employers. If no employer-sponsored plan is available, those with earned income should fully fund an IRA. You may be able to make a deposit for a stay-at-home spouse, as well. You can save up to $5,500 in 2014, or $6,500 if you’re 55 or older. The tax savings on the contributions to a pre-tax retirement plan will likely exceed what the deposits to a college savings account are likely to earn, especially in the first year. Then if you end up with a well-funded retirement, you can tap their overstuffed accounts once you hit 59 1/2—and have passed the penalty zone—to pay for college expenses as needed or pay off student debt incurred by your children. DO open a Roth IRA For eligible depositors, Roth IRAs can serve as a hybrid college/retirement savings account. These accounts—which allow for tax-free withdrawals—are typically thought of as a retirement savings vehicle. But if parents want or need the money before retirement for college (or other) costs, they can withdraw the Roth IRA contributions at any time for any reason with no taxes or penalties whatsoever. As an added bonus, money held in parents’ retirement accounts is less likely to be counted in a school’s need-based financial aid calculation than funds in the child’s name. DO pay off credit cards Double-digit interest rates charged on outstanding balances—the average APR is now around 16%—usually greatly exceed what you’d earn on your money elsewhere. So you’re better off erasing your debt before putting a lot of attention toward college. Plus, an improved credit score will make it easier for you to obtain higher education loans for your kids should the need arises in the future. DO prepare for the worst The majority of parents of younger children haven’t established wills, guardians, and other necessary legal steps—much less purchased enough life insurance to ensure that the tragic death of a parent will only be an emotional nightmare, and not a financial disaster as well. Moms and dads should see lawyer as soon as possible, and plan on spending a few hundred to a few thousand dollars, depending on the complexity of the situation. You should then purchase enough term life insurance to cover all future expenses—including college—that the survivors might endure. DON’T pre-pay the mortgage Well-meaning parents often try to pay down their housing debt as quickly as possible, thereby saving interest expenses and freeing up money that would otherwise go toward the monthly mortgage payment. But that step should only be considered if the parents are ahead of their retirement savings schedule, have no other debt outstanding, no future major expenses on the horizon, and have at least a year’s worth of living expenses saved up. Those parents who don’t meet these criteria should stop paying anything extra on their mortgage until they have fulfilled the other aforementioned financial obligations. Otherwise, parents could end up house-rich and cash-poor—just when it’s time to pay for their kids’ college expenses and their own retirement. _____________________________________________________ Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

MONEY Ask the Expert

No 401(k)? You’ve Got Options

Q: The company I work for does not offer a 401(k), and as a young professional I want to start a retirement plan. What is the best option for me? I don’t have a large amount of money to contribute, but would obviously like to maximize my investment. — Elizabeth, Herndon, Va.

A: As one of the millions of workers who does not have access to a workplace 401(k) — or the added perk of an employer match — the responsibility for saving for retirement rests squarely on your shoulders.

The good news is that you have several options. And the earlier you start, the longer your savings has to grow. Even small sums set aside now can grow into significant savings

For example, let’s say you invest only $100 a month for the next 40 years. With an average annual return of 6%, that modest monthly contribution would grow into nearly $200,000 in four decades.

“So just getting in that habit can really set the stage for a solid financial picture.” said Sophia Bera, a Minneapolis-based certified financial planner who specializes in working with Millennial clients across the country.

Just be sure you have at least three to six months of easily accessible savings set aside for an emergency before you start investing. Once you do, here are a few options to consider that can help you get more bang for your buck:

Traditional IRA: Opening a traditional Individual Retirement Account allows you to invest your savings while realizing some sizable tax breaks.

Under federal tax rules, you can contribute up to $5,500 a year to an IRA. If you’re single and don’t have a workplace plan, you can deduct your entire IRA contribution, which could result in more than $1,000 in tax savings.

Related: 401(k) vs. Roth 401(k): Which one’s right for you?

Instead of paying the taxes now, you’ll pay them when you withdraw your money during retirement. That’s great — as long as you don’t expect to be in a higher tax bracket when you retire. If you think you will be, a traditional IRA may not be the best choice, Bera said.

IRAs also have some limitations: If you tap into the money before you turn 59 1/2, you will be hit with income taxes and a 10% early withdrawal penalty. And by age 70 1/2, you will be forced to make withdrawals, and pay the accompanying taxes.

Roth IRA: For savers who are in a lower tax bracket and can do without the immediate tax savings, a Roth IRA may be a better option, said Wendy Weaver, a Bethesda, Md.-based certified financial planner and portfolio manager at FBB Capital.

With a Roth, you contribute after-tax dollars, but don’t pay any taxes on withdrawals during retirement. The accounts are ideal for young workers since contributions can grow for decades tax-free, helping you to avoid a big tax hit come retirement.

The contribution limit is the same as a traditional IRA($5,500) as long as you don”t exceed income thresholds ($114,000 for single filers and $181,000 for married couples).

Some other pluses: unlike a traditional IRA, you can withdraw your contributions at anytime without any taxes or penalties.However, if you withdraw any investment earnings on those contributions, you will get hit with taxes and the 10% penalty.

Special provisions in federal law allow you to use the earnings from your Roth or tap a traditional IRA without penalty for education expenses or for a first-time home purchase (up to $10,000). You’ll still have to pay income taxes though.

Related: What you need to know about Obama’s ‘myRA’ retirement accounts

If you want to balance out your tax hits between now and retirement, you can split your contributions among a Roth and traditional account, said Weaver. “When it’s time to make withdrawals, you have different buckets of money that have different tax treatments,” she said.

Brokerage account: Still have extra cash to save after you max out your IRA contributions? Brokerage accounts offer a flexible place to invest after-tax dollars, Bera said. Discount brokerage firms like Charles Schwab or TD Ameritrade, for example, allow you to invest in a variety of low-cost mutual funds.

And since you’re using after tax-dollars, brokerage savings can be used for non-retirement purposes as well, such as a down payment on a home. But remember, any earnings you make on your investments will be subject to capital gains tax when you sell them.

MyRA: Should investing in stocks on your own make you a little uneasy,President Obama recently announced the creation of a new “myRA” savings account aimed at workers without workplace retirement benefits.

The accounts, which will be offered through a pilot program later this year, won’t lose money since they will invest in government bonds. But they will also get paltry returns of around 2% to 3%, which will likely barely outpace inflation.

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