Making Your Money Last
A Late-in-Life Child Poses a Challenge
Does a Roth IRA make sense for paying this family's college bills?
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, August 2008
Advertisement
Our Readers
Who: Tim Taglauer, 49, and wife Lisa, 44
Where: Luray, Va.
Question: Focus on college or retirement?
For Lisa and Tim Taglauer, the conundrum of whether to save for college or retirement is especially puzzling. Married for nearly 20 years, the Taglauers are now the proud, late-in-life parents of 1-year-old Katelyn. They've put their former plans for an early retirement on hold while they juggle their jobs, day-care costs and the prospect of sending a child to college while they are collecting Social Security. "I'll be going to parent-teacher conferences with my walker," jokes Tim.
The Taglauers, who both work for Shenandoah National Park, contribute about 17% of their joint income (including employer contributions) to the federal Thrift Savings Plan. Their savings will supplement their federal pensions and Social Security benefits, and as federal retirees they qualify for subsidized health insurance for life.
Rather than starting a college savings fund, Tim wonders whether the couple would be better off building up his Roth IRA. Once he turns 591/2, long before Katelyn will be old enough for college, he could withdraw money from the Roth tax-free for any purpose. He figures that he and Lisa could use the money to pay Katelyn's tuition or to supplement their retirement income if she doesn't go to college.
Tax trump card. Most investors should focus on retirement savings first. But the Taglauers are well on their way to covering their retirement-income needs, says Brian Jones, a financial planner and vice-president of CJM Wealth Advisers, in Fairfax, Va. Jones suggests that they continue to fund their TSP accounts and open a Virginia 529 college-savings account.
In addition to offering tax-free withdrawals for qualified college expenses, the 529 plan provides an added benefit over a Roth IRA: a Virginia state income-tax deduction of up to $2,000 per account per year. Tim and Lisa could each establish a 529 account for Katelyn, which would allow them to deduct up to $4,000 in annual contributions from their state income taxes.
To come up with the cash to fund the college account, Jones suggests that Tim and Lisa shift the $300 a month they had been paying on a now-retired car loan to the 529 plan. By adjusting their tax withholding, they can increase their monthly income (and their savings) by an extra $150.
priorities. For people who don't expect to collect a pension or won't have access to retiree health benefits, saving for retirement is the priority, says Christine Fahlund, vice-president and senior financial planner for T. Rowe Price. Fahlund recommends that by the time you retire you have enough savings to equal ten to 12 times your final salary.
A comfortable retirement cushion would make it easier to use other sources of funds, such as loans, to finance college when the time comes, says Fahlund. You and your children have other ways to pay for collegeQincluding scholarships, summer jobs and, in many cases, gifts from grandparentsQthat aren't available for funding your retirement.
ALSO SEE: Build Your Nest Egg
Reader Comments (8)
Posted by: Ed at 07/17/2008 04:32:36 PM
The financial planner's suggestion is fine so far as a VA resident is concerned, but what about the rest of us in one of the other 49 states, where there is no state income tax deduction for 529 contributions? I am 48, have a 5 and 7 year old, max out my 401k which is split 50/50 Roth/pre-tax, and max out both my wife and my Roth IRA with the intent that money in the Roth's be used for college. We have also opened Roth IRAs for both children to save their own money in. We've stopped contributing to their 529s because the Roth provides more flexibility. Any comments welcome.
Posted by: Lynn at 07/17/2008 05:26:58 PM
My father was 49 when I was born, the burden that I now carry is unbearable, I am 42 he is 91. I have children that are 17 and 20, I have to support my father financially, physically and emotionally. I love my father dearly, but my children suffer because of his decision to have kids late in life and he did not prepare for his future. I have to leave my job to care for my dad daily and he cannot support himself financially. Please, Please tell people not to have children past the age of 32. I love my parents, but now as a mom myself, ( I had my first child at 22) I still have a daughter in college and one in high school, and it is extremely hard for me to care for them, work and take care of my parents, and it is not fair to me or my children. My mother in law who is 70 has a father the same age as my father, and she who is retired and her kids have been gone for over 20 years can care for dad full time where as I cannot. People should think of the consequences of how old they will be when their child is raising teenagers and how they will not be able to care for those elderly parents who do not prepare.
Posted by: robert at 07/18/2008 02:59:47 PM
Lynn- as a child of elderly parents I find your comments offensive. my dad did not prepare for his retirement years, he retired the year I graduated from high school; he worked for the city and when the city changed its pension plan it offered the tenured employees an option to manage their own retirement money or continue with the traditional plan; he asked me for my advise- I told to leave it alone since he was retiring within the next year- because of that he was able to live a comfortable life for almost 15 years with health insurance and other benefits, he was also able to pay for 2 years of full time college until I decided to pay for it myself. I am now 43 years and am the father of a 3 year old and 1 year old- I will do the best I can to pay for their college fund but my retirement is also important. Sometimes we need to suck it up and just take care of parents- my in-laws live with us because they did not prepare for retirment neither- yet we manage.
Posted by: Dee at 07/18/2008 07:45:21 PM
Lynn-I find your opinion more ignorant than offensive but I understand your point. I had my daughter at 39 and am an "older mom". There's nothing wrong with preparing my daughter to "work her way through college" the way I did. We have some money saved to get her started, but she accepts that she is going to work at it. We have our retirement in place and she is going to have a great life-I've raised her to stand on her own two feet and she doesn't feel cheated out of anything-she's actually contributing and controlling a very important aspect of her life and she will reap the rewards in more ways than imagined by working for her future. My age doesn't have anything to do with my child's future...we can work smart together
Posted by: Deb at 07/19/2008 07:52:14 PM
Lynn - you are like many women who take care of everyone else before themselves. Make sure you have contacted services that can help your father such as your city, county, community social services. He may qualify for additional help and this will help with your financial and/or emotional needs. Take good care of yourself.
Posted by: Nancy at 12/27/2008 08:56:40 AM
I appreciate the question Ed posed regarding older parents choosing between a 529 plan and Roth to save for their children's college expenses. I have been wrestling with the exact same question myself. Janet Bodnar revisits this issue in her "Your 529-Plan Questions Answered" column saying a Roth could be a good alternative, and more flexible for older parents. I assume more flexible means that the funds don't necessarily need to be used for a child's college education, and could be used for retirement instead without being subject to the 529's 10% penalty. Does anyone know anything I'm missing? I sometimes wonder what would happen to funds in a 529 plan if I manage to cover my children's tuition by getting a position at the local university, and becoming vested in their free tuition benefit. With regard to Ed's post, I would note that it is not only VA that provides state tax savings for 529 contributions.
Posted by: Ken at 01/31/2009 02:34:28 PM
I understand where all of you are coming from. We had one (she was 2.25 lbs) when I was 37 and another at 39. I am now 56. Both are smart, well educated HS kids, but I feel that we are not responsible to insure at all costs, that our kids get through college, but that they are motivated to seek their calling in life, which may or may not include college. Whichever path they choose, we need to totally support them, including, to the degree possible, financially, while they are in school. However, with retirement not that far down the road, I do not wish to be a financial burden for my kids, because their generation is being saddled with such unconscionable debt by the politicians, so that they will not be able to help. Thus, I will fund my Roth, before making funds available to them for education(both plan to attend college).
Posted by: Jack at 10/07/2009 11:08:34 AM
One other variable to toss into the mix for older parents (I'm 63 with a 12 year old son). Thanks to an earlier Kiplinger article, I learned that our son was eligible to receive Social Security benefits when I started collecting them and that he will continue to receive these benefits until he turns 18. When I retired last year I debated whether to begin collecting reduced SS benefits at age 62 or wait until later and collect higher benefits. The fact that my son receives over $12,000 per year TAX FREE for seven years clearly tipped the scales in favor of beginning to take benefits at age 62. This move made it doubly important that I stay below the $14,160 annual income threshold until age 66 since I would begin to lose both his and my benefits if my income exceeded the threshold. This is something for Lisa and Jim to consider in their long range planning for both college expenses and retirement.