MONEY College tip of the day

1 Really Bad Way to Pay for College

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Why you should keep your paws off your IRA.

You may have read that you can take cash from your IRA to pay for college tuition, without incurring the usual 10% penalty on withdrawals made before age 59 1/2. The IRS calls it the “education exception to additional tax on early IRA distributions.”

But just because you can doesn’t mean you should. In fact it’s a pretty dreadful idea.

Among the reasons:

1. You’ll have less money saved for retirement. And not just the amount you withdraw but whatever it might earn, tax-deferred, between now and the time you retire.

2. You’ll still have to pay taxes on the withdrawal. As a result, you’ll net considerably less than you withdraw. Julian Block, an attorney and tax expert in Larchmont, N.Y., gives this simplified example: Let’s say you want to take $10,000 from your IRA. Even if you’re in the relatively low 15% federal income tax bracket, you’ll owe $1,500 in taxes, netting you just $8,500. If your state has an income tax, that will reduce your net further. What’s more, the amount you withdraw will increase your adjusted gross income for the year, which could affect your eligibility for certain tax deductions and even push some of your income into a higher tax bracket.

Note that this applies to early withdrawals from Roth IRAs as well as the traditional kind, although you can withdraw your contributions to a Roth, but not their earnings, at any time without taxes or penalties. The IRS has more details on its website.

Block suggests that if you own a home, taking out a home equity loan might be a better idea. Not only will you sidestep the problems associated with IRA withdrawals, but some or all of the interest you pay should be tax deductible.

“I would look on an IRA withdrawal as an option of last resort,” Block says.

“Before you go ahead with one,” he adds, “first see what rate is available from Tony Soprano.”

For more advice on paying for college, and to create a customizable list of colleges based on criteria such as size, selectivity, and affordability, visit the new MONEY College Planner.

TIME Money

The 8 Smartest Things To Do With Your Money in Your 30s

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Buy the insurance you need

After a decade of experimenting, failing, learning from those failures, and “figuring things out,” you might find yourself in a more secure financial position once you hit your 30s.

What do you do with excess money when you’re no longer living paycheck to paycheck? And how do you prepare for big expenses you’re bound to face in your 30s?

We spoke to Michael Solari, a certified financial planner at Solari Financial Planning, about the smartest things 30-somethings can do with their money to set themselves up for a prosperous future.

Here are eight smart places to start:

1. Increase your 401(k) contributions

“In your 30s, the most important thing that you have is time, and the more money you can save now is going to pay huge dividends down the road,” says Solari.

You should already be contributing towards your employer’s 401(k) retirement account, but if you get a pay raise, increase that contribution, Solari says.

Also, get in the habit of upping your contribution at the end of each year, even if it’s just 0.5%, he advises. Check online to see if you can set up “auto-increase,” which will automatically increase your contributions every year.

2. Make a contribution to a Roth IRA

If you’re maxing out your 401(k) plan, the next step is to put money towards a Roth IRA, a retirement savings vehicle that offers tax benefits and is particularly well-suited to younger people who earn less than the income cap ($116,000 a year or less for individuals; $183,000 or less for married couples filing jointly).

Contributions to this type of fund are taxed when they’re made, so you can withdraw the contributions and earnings tax-free once you reach age 59 1/2.

Solari recommends directing your tax refund, bonuses, or any other extra money to a Roth IRA.

3. Contribute to a dependent care flexible spending account

This applies to those with younger children looking to save on child care. Typically, larger companies will offer a slew of benefits, one of them being dependent care flexible spending accounts (also known as FSAs) into which you can put pre-tax money. In some cases, you’ll receive a debit card from the company to use towards services such as daycare and summer camp. If you’re paying a nanny or babysitter, you can pay them with cash and then apply for reimbursement from the FSA.

“If you have children in daycare and your company offers a flexible spending account, contribute to it,” Solari says. “The tax deduction will give you a 15 to 30% discount on your daycare. It’s a great way to save money.”

Check with your human resources department to see if you’re offered this benefit.

4. Create a health savings account if you have a high-deductible health care plan

Another employee benefit to tap into is the health savings account (HSA) into which you can put pre-tax money and use towards medical costs whenever you want. You can also grow that money in an investment brokerage account, Solari explains.

To qualify for a HSA, the IRS requires you to be on a high-deductible health care plan (HDHP) — a plan that offers a lower health insurance premium and a high deductible. “They are encouraging people who have high deductibles to save money into these accounts,” explains Solari.

“I usually recommend my clients to have their total out-of-pocket expense saved in a savings account portion, and then the remaining in a mutual fund,” he tells us. “The savings can be withdrawn for immediate health care, and the mutual funds can be left alone and invested for a long time. ”

This option is particularly advantageous for those who are generally healthy and don’t have to go to the doctor’s office or hospital that often, such as 30-somes without children who are looking to save for future health care expenses.

5. Buy the insurance you need

Insurance in general — health, life, home, and disability — often gets put on the back burner, but it’s important to put in time to research insurance plans, or talk to a trusted adviser, and purchase the right insurance for you.

One type of insurance that gets neglected more so than others is long-term disability insurance, but not having it can be extremely risky. Disability insurance is meant to provide income should you be disabled and unable to work, which is more likely to happen that many of us may think. It’s estimated by the Social Security Administration that over 25% of today’s 20-year-olds will be disabled before retirement.

Take a look at the types of insurance you should buy at every age.

6. Set savings goals

You can’t just go through the motions. “If there are no savings goals, then there won’t be any progress,” says Solari, and your 30s are bound to be filled with bigger expenses — such as a home, car, and children — that require diligent saving.

Mint and You Need A Budget are online tools that allow you to create savings goals and see your progress.

7. Save for a home

If you plan to buy a home, it should be one of your savings goals. Ideally, you’ll want to have saved enough to make a 20% down payment — anything lower and you will have to pay for private mortgage insurance (PMI), which is a safety net for the bank in case you fail to make your payments.

If you’re thinking about purchasing a home in a major metro area, take a look at how much you need to save per day to put 20% down on a house in major US cities, and see how to make sure you’re buying a home you can afford.

8. Save for children

Kids are pricey. The average cost to raise a child is about $245,000, and that doesn’t include college expenses. If you plan to have children, it’s time to start saving. To get an idea of what you might need to cover, read about the costs new parents didn’t see coming.

The best way to prepare for these expenses is to start setting aside money as early as possible. The dependent care flexible savings account could help with daycare; as for the additional costs of college, start by looking into a 529 savings plan.

This article originally appeared on Business Insider

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This Overlooked Strategy Can Boost Your Retirement Savings

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Many high-income investors use a "backdoor" strategy to save in a Roth IRA, but there's another workaround you may not have considered.

The “backdoor Roth IRA”—a technique that allows investors barred from contributing to a Roth because their income is too high to fund one by opening and immediately converting a nondeductible IRA—has gotten considerable attention lately. Some people are concerned that a future Congress might eliminate the strategy; others worry that simultaneously funding and converting a nondeductible IRA might violate the “step transaction” doctrine. But while the backdoor route remains viable, at least for now, high-income investors may want to consider an alternative that can often get more money into a Roth.

The backdoor Roth IRA has been effective for many investors whose income prevents them from contributing to a Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible to do a Roth.) But the strategy can get complicated if, like many affluent investors, you already have pretax money in traditional IRAs. The reason is that even if the nondeductible IRA you just funded has no investment gains and thus consists entirely of after-tax money, you would still owe income taxes when you convert the account to a Roth. Why? Well, in the eyes of the IRS, you’ve got to take into account the money in your other non-Roth IRA accounts, even if you’re converting only a specific account.

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Here’s an example. Let’s say you have $100,000 in pretax dollars you transferred from a previous employer’s 401(k) into a rollover IRA and that you decide to contribute $5,500 to a nondeductible IRA (the max for anyone under 50) with the intention of immediately converting to a Roth. Even though you may think you own no income tax on the conversion since that $5,500 contribution was in after-tax dollars, the IRS looks at it differently.

From its point of view, you have $105,500 in IRA accounts (your $100,000 rollover IRA plus the $5,500 nondeductible IRA), 95% of which ($100,000 pre-tax divided by $105,500 total) consists of pretax dollars and thus is taxable, while 5% is nontaxable after-tax dollars ($5,500 after-tax divided by $105,500). So when you convert your $5,500 nondeductible IRA to a Roth IRA, the IRS assumes that 95% of that amount, or roughly $5,225, is taxable pre-tax dollars and 5%, or $275, is nontaxable after-tax dollars. If you’re in the 28% tax bracket, that means you owe about $1,463 in income tax (28% of $5,225) when you do the conversion. In short, you must come up with $6,963—$5,500 plus $1,463 in taxes—to get $5,500 into a Roth IRA.

If you participate in a 401(k) that accepts IRA money—and has investment options and fees you consider acceptable—you may be able to get around the conversion tax by rolling your $100,000 IRA into the 401(k). That would leave you with only your nondeductible IRA consisting of nontaxable after-tax dollars, which means you would owe no tax converting it to a Roth.

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But if moving your IRA money into a 401(k) isn’t an option—or if you would like to get more than $5,500 into a Roth IRA—there’s another option: Namely, take the money that you would have used to fund the nondeductible IRA and pay the tax to convert the nondeductible IRA—$6,963 in this example—and use that money instead to pay the tax to convert as much of your rollover IRA as possible to a Roth IRA. Assuming once again that you’re in the 28% tax bracket, $6,963 would be enough to cover the tax to convert nearly $25,000 ($24,868, or $6,963 divided by 28%) of your rollover IRA to a Roth IRA. Result: you end up with nearly $25,000 in a Roth instead of $5,500.

What you’ve really accomplished by doing the straight conversion instead of funding-then-converting a nondeductible IRA is tilt your mix of traditional IRA and Roth IRA money more toward the Roth side. If you had taken the backdoor Roth IRA route, you would have ended up with $100,000 in your rollover IRA and $5,500 in a Roth IRA. By doing a conversion with the nondeductible contribution and what you would paid in tax to convert the nondeductible IRA to a Roth, you end up with roughly $75,000 in a traditional IRA and about $25,000 in a Roth IRA.

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At first glance, it may seem that you’re better off with the $105,500 total balance you would have by going the back-door Roth route rather than the smaller $100,000 in IRA balances you would end up with by doing a straight conversion instead. But in terms of after-tax dollars you could still come out ahead down the road by having the slightly lower total balance but more dollars in the Roth IRA. Whether you do or not depends largely on the tax rate you face when you withdraw money from your IRA accounts. If you face a higher marginal tax rate at retirement—say, 33% instead of 28%—then you’ll end up with more money after taxes by having more of your IRA funds in the Roth IRA. If you drop to a lower marginal tax rate—say, from 28% to 15%—then you’ll have more after-tax dollars with a smaller Roth—that is, the combination of the back-door Roth IRA and traditional IRA. If you stay at the 28% marginal rate, or even drop slightly to 25%, the straight conversion comes out ahead, although the edge will likely be relatively modest.

Of course, it can be hard to predict what tax rate you’ll face in the future, which is why I think it’s reasonable to diversify your tax exposure by having some money in both traditional and Roth retirement accounts (not to mention taxable accounts with investments that generate much of their return in capital gains that will be taxed at the lower long-term capital gains rate). Roth IRAs also have other advantages that can make them a worthwhile choice, including giving you more flexibility in managing your tax bill in retirement.

Keep in mind too that any pretax dollars you convert are considered taxable income, which, combined with your other income, could push you into a higher tax bracket. If you find that’s the case, you may want to limit the amount you convert to avoid a higher tax bill and possibly undermine the benefit of a Roth.

Bottom line: If your income prohibits you from doing a Roth IRA and you have no non-Roth IRAs, the back-door strategy can be an effective way to get money into a Roth. But if you already have other IRAs and you would like to get more money into a Roth IRA than you can squeeze through the back door, the conversion strategy I’ve laid out above may be a better way to go.

Walter Updegrave is the editor of If you have a question on retirement or investing that you would like Walter to answer online, send it to him at You can tweet Walter at @RealDealRetire.

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Vanguard Founder Jack Bogle’s Surprising Retirement Advice

The one thing you absolutely, without question, unavoidably, simply must not do while saving for retirement.

Don’t you dare open that monthly statement you get about your retirement account, says Jack Bogle, founder of the mutual fund giant Vanguard, which now has about $3 trillion of assets under management. “You’re gonna get a statement every month,” says Bogle. “Don’t open it. Never open it. Don’t peek.” Wait until you actually get to your retirement, then you can open your statement (although, Bogle jokes, you may want to have a cardiologist on hand). Not knowing how much you have growing in a retirement account makes you less likely to want to raid it when your kids go to college or when you want to buy that shiny new car. It also makes you less likely to trade in and out of the market, which can be a fool’s errand.

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Here’s the Best Way to Invest a Roth IRA in Your 20s

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Robert A. Di Ieso, Jr.

Q: I just rolled over a Roth 401(k) from my previous employer into a Roth IRA. How diversified should my Roth IRA investments be? How do I select the right balance being a 28-year-old? – KC, New York, NY

A: First, good for you for reinvesting your retirement savings. Pulling money out of your 401(k) can do serious damage to your retirement prospects—and that’s a common mistake that many people make, especially young investors, when they leave their employers. According to Vanguard, 29% of 401(k) investors overall and 35% of 20-somethings cashed out their 401(k)s when switching jobs.

Cashing out triggers income taxes and a 10% penalty if you’re under 59 ½. And you lose years of growth when you drain a chunk of savings. Cash-outs can cut your retirement income by 27%, according to Aon Hewitt.

So you’re off to a good start by rolling that money into an IRA, says Brad Sullivan, a certified financial planner and senior vice president at Beverly Hills Wealth Management in California.

At your age, you have thirty or more years until retirement. With such a long-time horizon, you need to be focused on long-term growth, and the best way to achieve that goal is to invest heavily in stocks, says Sullivan. Over time, stocks outperform more conservative investments, as well as inflation. Since the 1920s, large cap stocks have posted an average annual return of about 10% vs. 5% to 6% for bonds, while inflation clocked in at 3%.

Granted, stocks can deliver sharp losses along the way, but you have plenty of time to wait for the market to recover. A good starting point for setting your stock allocation, says Sullivan, is an old rule of thumb: subtract your age from 110 and invest that percentage of your assets in stocks and the rest in bonds. For you, that would mean a 80%/20% mix of stocks and bonds.

But whether you should opt for that mix also depends on your tolerance for risk. If you get nervous during volatile times in the stock market, keeping a higher allocation in conservative investments such as bonds—perhaps 30%—may help you stay the course during bear markets. “You have to be comfortable with your asset allocation,” says Sullivan. “You don’t want to get so nervous that you pull your money out of the market when it is down.” For those who don’t sweat market downturns, 80% or 90% in stocks is fine, says Sullivan.

Diversification is also important. For the stock portion of your portfolio, Sullivan recommends about 70% in U.S. stocks and 30% in international stocks, with a mix of large, mid-sized and small cap equities. (For more portfolio help, try this asset allocation tool.)

All this might seem complicated, but it doesn’t have to be. You could put together a well-diversified portfolio with a few low-cost index options: A total stock market index fund for U.S. equities, a total international stock index fund and a total U.S. bond market fund. (Check out our Money 50 list of recommended funds and ETFs for candidates.)

Another option is to invest your IRA in a target-date fund. You simply choose a fund that’s labeled with the year you plan to retire, and it will automatically adjust the mix of stocks, bonds and cash to maximize your return and minimize your risk as you get older.

That’s a strategy that more young people are embracing as target-date funds become more available in 401(k) plans. Among people in their 20s, one-third have retirement savings invested in target-date funds, according to the Employee Benefit Research Institute.

Keeping your investments in a Roth is also smart. The money you put into a Roth is withdrawn tax-free. What’s more, you’re likely to have a higher tax rate at retirement, which makes Roth IRAs especially beneficial for younger retirement savers.

Still, you can’t beat a 401(k) for pumping up retirement savings. You can put away up to $18,000 a year in a 401(k) vs. just $5,500 in an IRA—plus, most plans offer an employer match. So don’t hesitate to enroll, if you have another opportunity, especially if the plan offers a good menu of low-cost investments.

If that’s the case, look into the possibility of a doing a “reverse rollover”: transferring your Roth IRA into your new employer’s 401(k), says Sullivan. About 70% of 401(k)s allow reverse rollovers, according to the Plan Sponsor Council of America, and a growing number offer a Roth 401(k), which could accept your Roth IRA. It will be easier to stay on top of your asset allocation if you’ve got all your retirement savings in one place.

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Use the Backdoor Roth IRA Before It Disappears

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Making a nondeductible IRA contribution, then converting that newly created IRA to a Roth can limit your tax liability.

Few investors appreciate just how revolutionary the Roth IRA was when it first became available almost two decades ago. Traditionally, retirement accounts have been a method of deferring taxable income, with contributions to traditional IRAs and 401(k)s not included in current-year income, but with eventual withdrawals in retirement subject to income tax. The Roth IRA’s truly tax-free treatment of retirement savings has appealed to millions of investors, but because of income limits on making contributions, many high-income savers don’t have direct access to Roth IRAs. Starting in 2010, the opportunity to create a backdoor Roth IRA became available even to those who were locked out by income limits. Yet with some lawmakers seeing backdoor Roth IRAs as an abuse of the retirement vehicle, you should consider using the strategy now while it’s still available. Let’s take a closer look at the backdoor Roth IRA, why it’s so valuable, and why some people want to make it disappear.

Sneaking into a Roth through the backdoor
Back when Roth IRAs first came into existence, high-income individuals found themselves locked out of the new retirement accounts. Even now, single filers with adjusted gross income above $131,000 aren’t allowed to make Roth IRA contributions, and for joint filers, a limit of $193,000 applies. Moreover, conversions from traditional IRAs to Roth IRAs weren’t allowed for those with incomes above $100,000. The combination of those factors created an insurmountable barrier to high-income savers wanting Roth access.

In 2010, though, lawmakers repealed the income limit on Roth conversions. That opened the door to Roth IRAs for high-income individuals for the first time, but it came with a hitch: Most of the time, when you convert a traditional IRA to a Roth, you have to pay income tax on the converted amount. Given how high the tax rates are for these upper-income taxpayers, paying Roth conversion tax isn’t a very attractive proposition.

The backdoor Roth IRA gets around this problem by taking advantage of another tactic: the nondeductible regular IRA. Most high-income individuals aren’t eligible to deduct their traditional IRA contributions because of similar income limits, but nondeductible traditional IRAs are available to anyone with earned income. Therefore, the two-step method for the backdoor Roth involves making a nondeductible IRA contribution and then converting that newly created IRA to a Roth.

If your nondeductible IRA is the only traditional IRA you own, then the Roth conversion doesn’t create any tax liability. That’s because the IRS recognizes the fact that you didn’t get a tax deduction for your initial nondeductible IRA contribution, and so it essentially gives you credit for that contribution when considering the tax impact of the rollover.

Setting up for a backdoor Roth IRA
For many savers, though, the nondeductible IRA isn’t their only traditional IRA. If you have made past IRA contributions and got tax deductions from them, then the IRS requires you to treat the conversion of your nondeductible IRA as if it came pro rata from all your IRA assets. That will subject part of the converted amount to tax.

However, there are a few things you might be able to do to rearrange your finances to use the backdoor Roth IRA strategy. Many employer 401(k) plans allow workers to roll their IRA assets into their 401(k) accounts, and money that’s in a 401(k) avoids the pro-rata tax problem because of its being an employer plan rather than an individual IRA. Similarly, those who are self-employed can use self-employed 401(k) arrangements and provide for the same asset movement to set up their tax-free backdoor Roth.

Get it done
The sense of urgency about backdoor Roth IRAs comes from the fact that policymakers have increasingly seen the strategy as a form of unfair tax avoidance. The Obama administration’s proposed budget for fiscal 2016 included changes that would put a halt to the backdoor Roth IRA by preventing Roth conversions involving funds from nondeductible IRAs or voluntary after-tax contributions to 401(k) plans. The budget proposal hasn’t become law and likely won’t, but in future, lawmakers might well target the backdoor Roth as something that unfairly benefits high-income taxpayers.

For now, though, the backdoor to a Roth IRA remains open, and high-income individuals should look closely at their financial situation to see if they can take advantage of it. Having tax-free retirement money available to you can be extremely valuable, and the backdoor Roth is the best — and often only — way for people subject to income limits to get the benefits of this retirement vehicle.

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7 Ways to Save on Taxes When You’re Between Jobs

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Low-income years are a unique opportunity to take advantage of the 0% capital gains rate, among other savings.

Over your career, you will probably face a year or more with limited income. Believe it or not, these situations present powerful savings opportunities, generally only for a limited time. Here’s what to know to take advantage, especially regarding your taxes.

The tax tips below are several of the most common opportunities if you find yourself off to graduate school or taking time out of the labor market (voluntarily or otherwise).

Exploit the Roth. A Roth individual retirement account is generally a powerful long-term financial opportunity in a year of unusually low income. Because of the tax-free growth, the economics of a Roth IRA contribution or conversion work best when you enjoy a long time for your investments to grow; a low tax rate at the time of the contribution or conversion; or potentially higher personal income tax rates in the future.

To qualify to make Roth contributions, you must earn income during the tax year that includes wages and salaries but not investment earnings. If you’re a student and depending on the financing costs, you might want to borrow an extra $5,500 from student loans for annual Roth contributions.

Roth conversions can be an even better opportunity if you hold existing IRAs or 401(k)s accounts from prior employment, creating taxable income you can offset using deductions and credits or that incurs tax at unusually low rates. Deductions and credits can sometimes allow you, if your income’s low enough, to convert assets to a Roth for free.

Sell your winners. Low-income years also present a unique opportunity to take advantage of the 0% capital gains rate. Taxpayers who use the filing status single and with taxable income below $37,450 and married taxpayers making less than $74,900 qualify for this rate.

If you still hold a stock that’s appreciated significantly since grandma gave you the shares years ago, consider selling it at 0% taxes. You can always buy back the stock later, simply increasing your cost basis (the price you originally pay for a stock).

Cash old Savings Bonds. If you received U.S. Treasury Savings Bonds (Series EE, E or I) as a child and still wonder what to do with them, lean years can mark a great time to cash them in.

In most cases, income on these bonds is not taxed until you redeem the bond or it matures. Realizing this income during a year when don’t make much is generally wise.

Research when the bonds were purchased, though, since it might make more sense to hold pre-1995 bonds due to rock-bottom interest rate at that time.

Retirement Savings Contributions Credit. This tax credit, rarely publicized because the qualifying income limits are relatively low, is a powerful opportunity. It essentially rewards you for contributing to your IRA or employer-sponsored retirement plan.

In some respects, the credit behaves like an employer-provided retirement plan match of some percentage of your savings – except here the Internal Revenue Service matches the funds. If you are married and have adjusted gross income (AGI) of less than $61,000 a year, you can qualify for the credit ($30,500 AGI for single filers).

Consider shifting dollars from a savings account to a Roth IRA: You qualify for the tax credit – as much as 50% of the IRA contribution – and you get funds into a Roth IRA.

This credit is unavailable to full-time students; a married couple with one spouse in school and the other working does qualify. You can also use it for your final year of graduate school if you earn income for some of the year of income and are no longer a full-time student at the end of the tax year.

The Earned Income Tax Credit (EITC). You must have limited employment income and less than $3,400 in investment income to claim the EITC, which also depends on the number of qualifying children you claim: $53,267 in 2015 for a married couple with three or more children. Taxpayers without qualifying children must be at least 25 years old; taxpayers with children face no minimum age requirement.

What can make the opportunity so valuable if you earn little: The EITC is refundable. This means that you can receive money from credit, which can be as much as a few thousand dollars, even if your income tax is zero.

Make sure you meet all qualifications before taking this credit.

Run expenses through a 529. These pre-payment plans were established to promote long-term saving for college, but state tax rules provide a loophole that encourages using these plans for short-term savings.

Of the 45 states with an income tax (including the District of Columbia), 35 offer tax deductions for 529 Plan contributions. Most of these states do not have a waiting period on withdrawals. You can funnel graduate school expenses through a 529 plan (even proceeds from a student loan), immediately distribute the funds from the plan and claim a state tax deduction up to the state limits.

If you live in such states as South Carolina and Colorado, where there is no limit on the deduction, or in states like New York with high income taxes, this strategy works well. You can’t claim any education tax credits, such as the Lifetime Learning Credit or American Opportunity Tax Credit, with the same dollars that you use for this 529 tactic, but as long as your graduate school costs exceed $10,000, you can employ the strategy.

Claim the Child Tax Credit. If your employment income falls below $75,000 and you file taxes using the single status ($110,000 if you file married filing jointly), you can claim the child tax credit to reduce income tax up to $1,000 per child. The less your income, the bigger the credit.

As with the EITC, you can receive money for the credit even if you owe no income tax.

Savings are great, of course, but always run the numbers or review the nuances of credits to understand what works best for you.

Jason Lina, CFA, CFP, is Lead Advisor at Resource Planning Group Ltd. in Atlanta.

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3 Retirement Loopholes That Are Likely to Close

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The government has a knack for catching on to the most popular loopholes.

There are plenty of tips and tricks to maximizing your retirement benefits, and more than a few are considered “loopholes” that taxpayers have been able to use to circumvent the letter of the law in order to pay less to the government.

But as often happens when too many people make use of such shortcuts, the government may move to close three retirement loopholes that have become increasingly popular as financial advisers have learned how to exploit kinks in the law.

1. Back-door Roth IRA conversions
The U.S. Congress created this particular loophole by lifting income restrictions from conversions from a traditional Individual Retirement Account (IRA) to a Roth IRA, but not listing these restrictions from the contributions to the accounts.

People whose incomes are too high to put after-tax money directly into a Roth, where the growth is tax-free, can instead fund a traditional IRA with a nondeductible contribution and shortly thereafter convert the IRA to a Roth.

Taxes are typically due in a Roth conversion, but this technique will not trigger much, if any, tax bill if the contributor does not have other money in an IRA.
President Obama’s 2016 budget proposal suggests that future Roth conversions be limited to pre-tax money only, effectively killing most back-door Roths.

Congressional gridlock, though, means action is not likely until the next administration takes over, said financial planner and enrolled agent Francis St. Onge with Total Financial Planning in Brighton, Michigan. He doubts any tax change would be retroactive, which means the window for doing back-door Roths is likely to remain open for awhile.

“It would create too much turmoil if they forced people to undo them,” says St. Onge.

2. The stretch IRA
People who inherit an IRA have the option of taking distributions over their lifetimes. Wealthy families that convert IRAs to Roths can potentially provide tax-free income to their heirs for decades, since Roth withdrawals are typically
not taxed.

That bothers lawmakers across the political spectrum who think retirement funds should be for retirement – not a bonanza for inheritors.

“Congress never imagined the IRA to be an estate-planning vehicle,” said Ed Slott, a certified public accountant and author of “Ed Slott’s 2015 Retirement Decisions Guide.”

Most recent tax-related bills have included a provision to kill the stretch IRA and replace it with a law requiring beneficiaries other than spouses to withdraw the money within five years.

Anyone contemplating a Roth conversion for the benefit of heirs should evaluate whether the strategy makes sense if those heirs have to withdraw the money within five years, Slott said.

3. “Aggressive” strategies for Social Security
Obama’s budget also proposed to eliminate “aggressive” Social Security claiming strategies, which it said allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.

Obama did not specify which strategies, but retirement experts said he is likely referring to the “file and suspend” and “claim now, claim more later” techniques.

Married people can claim a benefit based on their own work record or a spousal benefit of up to half their partner’s benefit. Dual-earner couples may profit by doing both.

People who choose a spousal benefit at full retirement age (currently 66) can later switch to their own benefit when it maxes out at age 70 – known as the “claim now, claim more later” approach that can boost a couple’s lifetime Social Security payout by tens of thousands of dollars.

The “file and suspend” technique can be used in conjunction with this strategy or on its own. Typically one member of a couple has to file for retirement benefits for the other partner to get a spousal benefit.

Someone who reaches full retirement age also has the option of applying for Social Security and then immediately suspending the application so that the benefit continues to grow, while allowing a spouse to claim a spousal benefit.

People close to retirement need not worry, said Boston University economist Laurence Kotlikoff, who wrote the bestseller “Get What’s Yours: The Secrets to Maxing Out Social Security.”

“I don’t see them ever taking anything away that they’ve already given,” Kotlikoff said. “If they do something, they’ll have to phase it in.”

MONEY retirement planning

9 False Moves That Could Derail Your Retirement

derailed toy train
Biehler Michael—Shutterstock

For many of us, retirement is a great unknown. In your 20s, it seems so far away that it’s easy to figure you’ll start saving when you have more money. Of course, if you wait until you have “extra money,” you might never start at all.

But 20-somethings aren’t the only ones who do things that sabotage their retirement. Their parents may be putting their own retirement at risk by, for example, borrowing money to pay for a wedding, just when they should be turbocharging their own savings, especially if they started late.

So what are we to do? We don’t know that we’ll live to be 85 and still healthy enough to travel, or that the stock market will crash just before we retire. And yet we hope to plan as if we do know. Some of us dream about retirement — and many of us sabotage it at the very same time. Here are some money moves you may regret down the road.

1. Raiding Your Home Equity

Home equity can seem like a a piggy bank when you’re short on cash. And a “draw period” on a home equity line of credit before repayment of principal is due can make it feel almost like free money. Worse, it feels like you are borrowing from yourself. After all, you built up that home equity, right? But if you spend it now, you won’t have it later. And should you decide you want to sell or get a reverse mortgage at some point, that decision can come back to haunt you. You will walk away with less from a sale or be eligible for lower payments from a reverse mortgage. Either way, Retired You could suffer from the decision.

2. Unplanned Roth IRA Withdrawals

Some experts recommend Roths as vehicles to save for a first home or as a place to park an emergency fund because the money grows tax-free. If you have planned to use the money for a first home, you can withdraw up to $10,000. It can also come to your rescue for unforeseen expenses (particularly tempting because, after five years, you can withdraw principal penalty-free). Its flexibility is both an advantage and a temptation, since raiding your retirement account now robs you of those funds and their compounding interest down the road.

3. Failing to Put Away Anything

For many of us, it’s easier to wait to save until we’re “more established” or until we’re making a little more money. Why aren’t we saving? Because there’s no extra money! The problem, of course, is there may well never be any extra money. Most of us don’t come to the end of the month and try to figure out what to do with all the money that’s left. Saving needs to be in the budget from the beginning. It’s often easiest to automate this.

4. Helping Adult Kids Financially

But they’re your children. And everyone makes mistakes. (Or maybe they think you did when you didn’t save thousands for a wedding.) There are exceptions, of course, but if you do help out financially, be sure you minimize your own costs or that you do not jeopardize your own retirement. It’s not usually a good idea to let them grow accustomed to a parental supplement. Relationships and money can be fraught, too. So think very carefully before you make your help monetary.

5. Co-Signing for a Child or Grandchild

They are just starting out and don’t have much of a credit history. Or they want to take out private student loans, and all that’s standing between them and next semester is your signature. The car they are financing, the lease they are signing … if your signature is on it, you are on the hook. If they pay late, your credit could be affected. And should you need a loan, this obligation will count as your debt for purposes of determining eligibility. Student loans can be particularly risky. In many cases, they can’t be erased in bankruptcy. If you have already co-signed on a loan, it’s important to check your credit regularly to see how it’s affecting your credit.

6. Failing to Have a Plan B

You probably hope or assume your good health (and that of your spouse, if you are married) will continue. You may be planning to stay with your current employer until you reach full retirement age. But people fall ill, or they get laid off before they planned to leave the workforce. Do you have a reserve parachute? Your standard of living won’t be as high, but knowing that you have a plan can make the situation a little less worrisome.

7. Poor Investment Choices

Even if you’ve managed to sign up for the 401(k) at work or to open an IRA for yourself, choosing the wrong funds or failing to diversify can set you up for failure. A target-date fund can be useful, but only if you choose the appropriate target. (If you’re in your 50s and choosing a 2050 target retirement date, you may get really lucky and see big gains — but you could also see big losses and not have much time to recoup them.) Likewise, it’s smart not to put all your nest eggs in the same investment basket. Do your own research or find a planner to find a mix you are comfortable with and that is appropriate for your age and goals.

8. Not Making Changes When Needed

Are your investments changing with your goals? And are you keeping track of all of your investments? If you’ve had several jobs (and several 401(k)s), it’s a good idea to do some consolidation. Keeping track of funds in several investment houses can make figuring out minimum withdrawals much more difficult once you are retired. Keep accounts organized.

9. Taking Social Security As Soon As You Can

In many cases, it’s better to wait. Your payment will be higher, although if you take it younger, you will get it for more years. Claiming it the minute you can may be tempting, but if you come from a family with a history of people living well into old age, consider whether you think the smaller checks will be worth it. (You can calculate a “break-even” age of how long you would have to live to collect as much as you would have had you started younger — so that checks from then on truly are additional money.) Conversely, if no one in your family has ever turned 80, you may want to opt for the earlier payout. And, of course, your financial situation when you retire will have a say. If you can’t make ends meet without Social Security, then you should take it.

Another mistake? Making all your plans — including retirement — for later. A life of sacrificing for a “later” that may or may not come is not much of a life. They key is balance. We’re not suggesting you never take a vacation, never give to a cause that is close to your heart or buy the car you’ve desperately wanted (and can now afford) so that years of self-denial will pay off someday … maybe. But it is good to know that if you live a long life, you’ll have the financial resources you need.

Read next: Can You Pass This Retirement Quiz?

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MONEY College

6 Financial Musts for New College Grads

New college grads on procession
Spencer Grant—Getty Images

Nail these moves and you're on your way to financial success.

You did it! You passed your finals, you graduated from college, and you even landed the coveted job you have been working so hard to get. So now what?

Many grads are carrying student loans that will be weighing them down for years to come. Since you’re facing plenty of new expenses—moving, rent, furniture, a suitable office wardrobe—now is a great time to make a financial plan. Here are six things every new graduate should do:

1. Make a budget

A good starting place for your monthly budget can be easily remembered as “50-30-20.” When you receive your first paycheck, sit down and figure out what your monthly take home pay will be. Out of that, put 50% toward needs such as rent, utilities, and groceries. Thirty percent goes toward “wants” such as shopping, entertainment, restaurants, and fun. The final 20% goes to your savings and debt repayment. If your student loans are substantial, you may have to flip the percentages so that 30% goes towards debt repayment and 20% toward wants. By following this plan, you can quickly put a dent in those loans.

2. Manage your debt

Student loans often have multiple tranches with varying interest rates that can be fixed or variable. Your best option is to pay off the loans with the highest interest rates first, though that practice is far less common than you might think. When the time comes to start repaying, access your student debt details online to figure out the interest rates for each tranche. Pay the minimum towards the balances with the lowest interest rates and make your largest debt payments on the balance with the highest interest rate. The biggest mistake you can make is paying the minimum into each loan and waiting until you “make more money when you’re older” to deal with them.

3. Prepare for emergencies

An emergency savings account is the best way to plan for the unexpected. What would you do if your car breaks down and you need $800 to get it fixed? If your laptop stops working and you need one for work, how will you buy a new laptop? What would you do if you lost your phone? People often go into debt to cover unexpected expenses, but it’s a problem that can be solved with a little planning. By contributing a small amount of each paycheck into a conservative investment saving account, you can be better prepared to pay for life’s inevitable emergencies.

4. Take advantage of a 401(k) match

Most employers offer 401(k) retirement plans and many offer some form of a match. A traditional 401(k) is an employer-sponsored retirement plan that allows you to save and invest a portion of your paycheck before taxes are taken out, thus decreasing your tax liability. When an employer offers a match, they are matching your contributions, often up to a certain percentage of your income. By choosing not to fully participate in these programs, you are effectively turning down free money from your employer.

Some employers also offer a Roth 401(k), where your contribution is made with after-tax dollars (meaning that you pay the taxes now) and the funds grow tax-free for retirement. The Roth 401(k) is often seen as the better option for younger investors who are typically in a lower tax bracket and who would not get as much benefit from a tax deduction today as they would in retirement.

5. Open a Roth IRA

Similar to a Roth 401(k), a Roth IRA is an individual retirement account allowing you to invest up to $5,500 for the 2015 tax year. These accounts are often considered ideal for younger investors, who may benefit from decades of tax-free compounded growth. Investing $5,500/year from age 22 to age 30 may create an account of more than $1 million when you’re using those funds in your retired years. If you invested the same amount annually but waited until your 30s to start, your account might be worth half as much. For Roth IRA contributions in the 2015 tax year, your modified adjusted gross income must be less than $116,000 if you’re single (or a combined $183,000 if married.)

6. Automate your savings

By setting up automatic transfers from your checking account to your Roth IRA and emergency savings, you’re effectively drawing money straight from your paycheck. This allows your plan to be put into action with minimal maintenance and oversight on your end.

Congratulations, graduate! With these six tips you could be on your way to a successful financial future.

Voya Retirement Coach Joe O’Boyle is a financial adviser with Voya Financial Advisors. Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O’Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.

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