Don’t Touch That

I’ve recently had a revelation. It started with my quest to make the perfect pizza dough. Then I realized, looking back, some of my more successful efforts were the result of the same idea. Things turn out better if I leave them alone.

It took many attempts to make pizza dough from scratch. The first several batches could be considered weapons. They were so hard, their only possible use was to hurt someone. I tried the cold rise, the warm rise, the overnight in the fridge rise. Finally I just used my bread maker. Low and behold, the dough was perfect. All it took was me not touching it. Apparently I had been overworking the dough.

I make a mean Thanksgiving turkey too. The secret of my success? I leave it alone. I don’t baste it. I put it in the oven, and only open the door to take the foil cover off so it can brown. The bird is juicy and perfectly done in less time. That is because I’m not constantly letting all the heat out of the oven.

I have to say my investment strategy is and always has run along the same lines. I generally leave my investments alone. Since I started saving for retirement, right out of college, the bulk of my money was invested in a single mutual fund, the Vanguard Life Strategy Growth fund. Target date funds didn’t exist at the time, or I probably would have started with one of those.

Since we were saving for an early retirement, we needed to save outside our retirement plans, so about half of our savings was taxable. As we got older, our investment strategy needed to get more conservative. But I didn’t want to pay capital gains tax on my Life Strategy investment. So I solved the problem by gradually buying bonds and bond exchange traded funds with my savings contributions. No selling, no trading, only buying.

Now that I’m retired, it hasn’t changed much. We still have the Life Strategy Growth fund and the bonds. Each year some of the bonds mature to provide for our spending money during that year. At the beginning of each year, I rebalance between the Life Strategy Growth fund and my bond holdings. And that is the extent of my investment management strategy. Like the pizza and the turkey, the secret to my investment success is leaving my investments alone.

Could I have had better results if I had been more active. It’s not likely. In fact it’s far more likely that my results would have been worse. The average actively managed investment strategy does not produce better results than a buy-and-hold index investment strategy. Though active investment managers will tell you their strategy is the one that does.

If you are wondering how to invest your retirement savings, find a strategy that you don’t have to put much thought into. A target date retirement fund is a perfect solution. You can spend your energy saving for retirement and your investments will do much better if you leave them alone.


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Time to Retire Retirement and Bring Out Financial Freedom

These days, it’s easy to find advice that says you should never retire. There is evidence that maintaining some structure and the social network that work provides is good for your physical, mental and financial health. And there is nothing wrong with putting a positive spin on the necessity that far too many face; the need to keep working to pay the bills well beyond the normal retirement age.

Unfortunately, this line of thought is being used to justify not saving for retirement. That is a mistake. Even if you love your job, there is a good chance that you won’t be able to do it forever. The older you get, the more health issues can sabotage your plans, whether the issues are your own or a loved one’s. Older workers face higher unemployment, and it’s more difficult to get a job after the age of fifty-five.

But while you are young, and have the time to save for retirement, these eventualities seem remote and certainly not your own. So it may be a good time to start thinking about your life beyond work in different terms. While retirement conjures visions of white haired people playing endless golf and gardening, having enough money to be able live without a paycheck has a much more important benefit – financial freedom.

That is why I left work at the age of 51. My husband and I had saved enough money to support our lifestyle for the rest of our lives. He had retired the previous year. We didn’t need to work for pay anymore. While I liked my work, which was challenging, I had become tired of catering to other people’s demands. I figured if I didn’t like retirement, I could always go back to work. Because we had saved, we had choices.

I have never looked back. Since leaving work, my husband and I have done the things that are important to us. I began this blog and wrote a book to help others learn how to save and invest for their own financial security and retirement (you can find it on Amazon). I’ve personally helped dozens plan for their retirement and get their financial houses in order, all for free, because I think its important and I like doing the work.

I also serve on the boards of a few non-profits where I do volunteer bookkeeping and offer my expertise. That includes the non-profit my husband started to coordinate services to low income and homeless individuals and families. He is building a mobile shower unit to serve the homeless in our county. You can read about the project here. The proceeds from my book have gone to fund this effort.

So, as you can see, our time is filled with activities that have meaning and that we value. The money we saved for retirement gave us financial freedom to do what is important to us. It gave us the power to choose what we do with our days, and the freedom from fear of losing a job.

What would you do, if it didn’t matter whether you brought home a paycheck? Start a business? Create art? Help a family member or neighbor in need? Leave me a comment if you’re willing to share. You may not know right now what you would do with your financial freedom. But wouldn’t it be nice to have choices?

Maybe it’s time to retire the word “retirement” and replace it with financial freedom, as in, “I’m saving for my financial freedom.” That might just be motivating enough to get you to start working toward it today.

Photo by Fuu J on Unsplash


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

There is No Stock in Money Market Funds

Recently, I’ve recommended a money market mutual fund to a few friends who had money sitting idly in bank savings accounts. I knew they needed to keep the money safe, but it could still be earning some interest. So, I was surprised to hear from a couple of them last week as the stock market was gyrating.

Both were concerned that their savings could be in jeopardy, though neither had seen any changes in their account values. So, I knew I had not done a very good job of helping them understand where they had put their money.

Money market mutual funds are a safe place to put money that you need to be there under any circumstances. They are perfect for holding money you are saving for an emergency or a big ticket purchase. They are an alternative to high yield savings accounts, which have gotten a lot of press lately.

My friends’ confusion may have come from the idea that money market funds are mutual funds. Mutual funds can invest in any kind of asset. True, about half of all the money invested by mutual funds is invested in stocks, but there are funds that invest in all sorts of things other than stocks.

Money market mutual funds do not invest in stocks at all. There are strict regulations regarding what a money market fund can hold and still be classified as a money market fund. These funds only invest in high-quality short-term debt instruments. In fact, they cannot invest in anything that will pay off in more than 13 months, and the average time to pay off of all their holdings must be 60 days or less.

These debt instruments range from Treasury bills, which are the short-term debt of the U.S. Government, to short-term loans to well heeled private companies. The interest earned by these instruments are the source of income on the money market fund. The income is usually paid out monthly in the form of a dividend to the fund shareholders.

Money market funds usually offer higher returns than a savings account, and recently some funds’ yields have surpassed even high yield savings account yields. Money market funds can be easier to deal with than a high yield savings account, where you may find restrictions on the number of withdrawals you can make in a given month.

The big difference is that money market funds are not insured. A savings account at a bank, even a high yield savings account at an on-line bank, is FDIC insured up to $250,000. If your bank goes out of business, you will get your balance up to that amount back from the Government.

Money market funds rely on diversification, high credit quality and short-term exposures to maintain their steady $1 per share value. They offer no guarantee, yet they have been consistently successful at managing their risk. Since their introduction in the 1970s, only two funds have had their share values drop below $1; one in 1994 due to large holdings in unconventional investments and one in 2008 due to a large holding of Lehman Brothers debt.

While a loss is theoretically possible, money market funds have historically been and continue to be a safe alternative to bank savings accounts. They offer an opportunity to earn a bit of better return on your money without giving up flexibility. The value of your investment there will not be impacted by anything that happens in the stock market. So you can rest assured your money will be there when you need it.

Photo by Alexandra Gorn on Unsplash


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Three Simple Truths About Investing

If you are saving for retirement, or any other long-term goal, how you invest your money is an important piece of achieving that goal. Many of the folks I’ve spoken with are not investing their savings well, or even at all, meaning they may be earning interest but little else. Some even say they haven’t been saving because they don’t know how to invest their money.

I get it. The vast majority of people have no education in investing, and, while there is lots of information about it on the internet, it is really hard to know what to trust. Advice and information can be conflicting. If the bulk of your savings is in your retirement account, it can be hard to get help from an adviser, who generally will require a large minimum investment amount to take you on as a client.

But while the thought of risking your hard fought savings in any investment can give you a case of anxiety, here are three truths to keep in mind that can help calm your nerves.

  1. You don’t have to get everything, or even anything perfectly right. Good is really good enough, and frankly there isn’t any strategy that is perfect. The investment market values are the culmination of every investor’s opinion about what will happen in the future, and no one actually knows that. Successful investors hold a variety of investments knowing some will be better than others, but not knowing which is which over any short time frame.
  2. Timing is nothing. The perfect time to invest your long term savings is today. No it doesn’t matter if the market is overvalued, interest rates are too low, or if a recession is on the way. First there is no sure way to know that any of this is true. And second, it won’t be the last investment you make. You’ll be saving for a long time, and you’ll be investing in all types of markets. Third, ten, fifteen or twenty years from now there is a high probability your investments will be worth more than they are now. Time is on your side, and the market has never failed to recover from a downturn.
  3. Keep it simple. There are many low cost perfectly good ways to have your money invested for you. In your company sponsored retirement plan, you likely have the option to invest in a target date retirement fund or a managed account. If so, choose the option that fits with the time you have remaining before you retire. You can safely put all of your money in that investment. It is completely diversified and will adjust so that it continues to be an appropriate investment for your age. You can find similar options for your individual retirement account. Vanguard, Fidelity and T. Rowe Price all offer reasonably priced target date retirement funds. Betterment and Wealthfront, as well as others, offer low cost managed solutions for your IRA or taxable savings. Many state 529 plans also offer age based investment options for your college savings.

Investing your savings well is important to helping you reach your savings goals, but that doesn’t mean it has to be hard or scary. Choose an off-the-shelf investment option that will remain appropriate for your age throughout your career and don’t worry about what the market is doing on any particular day, week, month or even year.

Confessions of a Super Saver, aka So Tight I Squeak

In the last year, my husband, Jeff, and I have been attempting to be a one car family. At first it wasn’t even real, since one of our neighbors snowbirds in Palm Desert and asked us to drive his Portland car. But now it is, and I find myself wrestling with transportation decisions when I really shouldn’t. It is a great illustration of how our minds can get in our way, whether it’s with spending or saving money.

First, why are we doing this? Now that I don’t work, I barely drive. Most of my social and volunteer activities are in down town Portland, and I live less than half a mile from a light rail station. When I go down town, I much prefer to take the train, because I may, in fact, be the world’s worst parallel parker. The rec center where I work out is a block away. When we had two cars, I only used mine once a week, if that. For the first couple of years of retirement, aside from road trips, I probably only drove 1,000 miles a year, and many of those I could have walked.

So having a second car was a waste, and it really wasn’t good for the car, which needs to be driven to keep working well. We are literally saving thousands a year by owning only one car. The average cost to own a car is over $9,000 a year.

For that money, I could take a Lyft or Uber every day. I can use the train all day every day for nearly five years. Yet I hesitate. If I want to go to a place where I can’t walk or easily take public transit, I tend to assign the cost of a Lyft to my activity, and mull over whether the activity is really worth it.

This is not because money is tight. We have plenty of money to do whatever we want. It’s because I am habitually and detrimentally frugal (some would say cheap). Mulling the value I get for the money I spend is so deeply ingrained in the way I think that it gets in my way.

So that is my confession. I’ve read that every strength, taken to an extreme, becomes a weakness, and this is one that has for me. What I really should be thinking about when I call that Lyft is how much fun I’m going to have, or how much good I’m going to do if I’m volunteering. I shouldn’t be thinking about money at all, because I’ve already figured out that I’m saving a ton by not owning a second car.

This is how our brains work. We are naturally irrational. We focus on the thing that is in front of us, and it takes effort to see the big, long-term picture. Whether we’re a saver or a spender, it is this short-term focus that works to our detriment.

It helps to verbalize what you are trying to accomplish. If you need to save money, talk about what you are saving for with your partner or a friend. Write it down in a journal or wherever you keep your budget. Revisit it regularly and mark your progress. If you are holding too tight to your money, like me, turn your attention to and talk about all that you have accomplished, and take joy and comfort in knowing you are on track.


Photo by Thought Catalog on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

When to Kick the Life Insurance Habit

When my husband, Jeff, and I retired, we dropped our life insurance policies. Even though our daughter was still in high school, we had already saved all we were going to save. The income generated by our savings would be there regardless of whether we were alive, and we had no work related income to replace.  We didn’t need life insurance any more.

I have had the pleasure of telling a few friends they could cut their expenses by dropping their life insurance policies. Initially the reaction is a small gasp. It seems somehow sacrilegious to give it up if you are trying to live a financially sound lifestyle. But for these individuals, who happened to be single women with adult children, life insurance wasn’t a necessity. The kids were out of the house, and they didn’t need Mom to provide for them anymore.

Not everyone needs life insurance. Now you don’t see that statement very often. More often you see gloomy statistics, like less than 60 percent of Americans have life insurance, from a 2015 BankRate.com survey. Of the 40 plus percent of those who don’t have it, for some at least, there is a good reason.

You don’t need life insurance if you don’t have anyone depending on your income for support. The purpose of life insurance is to replace your income if you pass away. If any of these situations sound like you, you don’t need life insurance:

You are single and have no children to provide for. While many will miss you if you are gone, no one will miss your income.

You are single with adult children. The same goes here. Your children are grown and they can get along without you providing them with a life insurance benefit.

You are nearing the end of your career and you have the savings you need. As you get older, your savings grow and you have more equity in your home. These assets will help provide for those you leave behind. Therefore as you get older, assuming you are saving as you should, you need less and less life insurance, until eventually you need none.

You are a child. Children don’t need life insurance. They don’t have an income to replace. Some insurance companies sell policies pitched as a way to save for college. These policies are whole life policies that have a savings element. They develop a cash value over time which can be borrowed when your child is ready for college. But you would be better off just investing the amount of the premium in your state’s college 529 plan. All of the money will go to savings rather than providing a profit to the insurance company and life insurance coverage that you don’t need.

If none of these situations is you, you probably need some life insurance, but the amount you should have could be different depending on your situation.

You have young children. Those who have young children need the most life insurance. And they are most likely to be under insured. The life insurance provided by your employer will definitely not be enough. You will want your children to be raised with the comfortable lifestyle that you hope to provide for them, and you don’t want to make life financially difficult for your spouse or their guardians. The younger your children are, the more financial support they will need. LifeHappens.org has a good calculator that takes into account all of the relevant information to help you determine how much life insurance you will want to put in place.

For this situation, term life insurance is all that you need. Term life insurance provides coverage for a specific period, like ten or twenty years. Your premiums will be the same throughout the term. At the end of the term you can renew or allow your policy to lapse. You can also cancel your policy at any time without penalty. Term policies are the lowest cost form of life insurance. They are perfect for most people, whose need for life insurance declines over time.

Do not make your minor children beneficiaries of your life insurance policy. Insurance companies won’t pay out a benefit to anyone under the age of 18. Name your spouse, your children’s guardian or a family trust as the beneficiary instead.

You are married and your lifestyle is dependent on your income. It is worth having a discussion with your spouse about how he or she would want to live if you were gone. Would he want to stay in the house, or downsize? Are there debts to pay off? What income could he expect from working? If your spouse could not maintain his or her lifestyle without your income, even if you don’t have children, you need life insurance. If your spouse is working or reasonably could work if you were gone, you won’t need as much. If you have debt that will need to be paid off, you may need more. Term life insurance will do in this case as well.

You have outstanding private student loans.  If you have outstanding private student loans, someone may be liable for their payment after you die. If a parent, grandparent or someone else cosigned for your loan, they may still have to pay the debt after your death. If you live in a community property state and took on the loans after you married, your spouse may still have to pay. You should have enough life insurance to cover the repayment of those outstanding loans. If you are a parent cosigner, you can take out a life insurance policy for the amount of the loan on your student. Again a term policy will work just fine here.

Not everyone needs life insurance. As our kids grow up and our savings build, our need for life insurance gradually declines until it no longer exists. For the time that you do need life insurance, for most people a simple low cost term life insurance policy is all that you need. Don’t spend any more money, or spend it any longer than necessary, on life insurance.


Photo by Jason Briscoe on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

When to Go for a Clean Slate

Over the last several years I’ve spoken to a lot of people, and some of their stories are heart breaking. Several have had crippling amounts of debt, and it was difficult to see a reasonable path forward for them. In all of these cases, they felt morally bound to pay off their debts, which is a testament to their character. But there are times when it may make sense to wipe the slate clean.

In our culture, bankruptcy is still considered a terrible thing. If it weren’t, we would have all sorts of other issues, like higher interest rates and a much harder time getting credit. However, the tool is there for a reason, and if you are struggling to make your debt payments and keep food on the table, it may be worth considering.

First, what is bankruptcy? Bankruptcy is a legal process that either discharges or reorganizes your debt, depending on the form you use. Chapter 7 bankruptcy eliminates your non-exempt debt but at the cost of giving up most of the valuable things you own. Chapter 13 essentially reorganizes your debt, allowing you to pay it off over three to five years. Depending on the type of debt you hold, you may wind up paying less than the total outstanding amount.

Not all debt can be eliminated with bankruptcy. Student loans are a big category where filing bankruptcy won’t do you any good, except in rare cases. Others include tax debt and spousal or child support. There are 19 categories of debt that cannot be discharged in bankruptcy. You can find a summary at NOLO.com.

However, medical debt, credit card debt and several others can be discharged or made more manageable by filing for bankruptcy. These types of debt can mount quickly if you have a serious illness or injury and/or find yourself out of work.

If you have little in the way of valuable property, Chapter 7 bankruptcy may be a reasonable choice. You will turn over most of what you do own to the courts, and it will be sold to pay as much of your debt as possible. But there are exceptions. Your personal belongings like clothing and furniture are mostly exempt. A vehicle that is required to get you to work, and any tools required for your trade are also likely exempt. In some cases, your home equity may be excluded as long as you make the mortgage payments. Savings in tax-deferred retirement accounts, like 401(k)s and IRAs are exempt.

For those with a steady income that will allow you to make payments on your debt, Chapter 13 may be a better choice. You will not have to give up what you do own, and your debt will be restructured and consolidated into a single payment which you will be better able to afford. When the payment period is over, you can be mostly back on your feet.

Bankruptcy is not a cure-all. It has downsides, and should only be considered if you are committed to turning your finances around. It will devastate your credit score initially, though over time that will recover. You will not be able to get additional credit for a year or two, but eventually that will open up for you too.

If your debt is suffocating you, it may be time to think about getting some relief. Obviously, its much better to avoid a mess like this in the first place, but that doesn’t help once you’re there. And sometimes stuff happens that makes it hard to avoid. Bankruptcy is not the first tool that you should reach for. But it is a reasonable last resort.


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Going Green and Saving Green

They were lined up on my counter top like a small cityscape. Drops of water ran down their sides as if the city had been hit by the largest rain ever. A friend, who had just popped over, saw them and exclaimed “is there some kind of shortage of freezer bags going on!”

Yes, we reuse our freezer bags. We may in fact be the only ones who do this. If you do this too, please leave a comment so I know we’re not alone. We recently visited two sets of friends, one in Utah and one in California. As I was helping with the dishes, I naturally washed the used freezer bags. My friends both questioned why I would do such a thing.

My husband and I have always reused our freezer bags. They are plastic, and therefore will live on nearly forever in our world’s ever growing heaps of trash. If we reuse ours, there will be fewer in the landfill.

As a side benefit we also save money. We use our freezer bags anywhere from three to ten times. So that is a third to a tenth of the money we would have spent and the same reduction of plastic in the landfill.

We also only use freezer bags for some things. We try our best to mostly use storage containers. Those can last a very long time. Longer than you might think if you use duct tape when the lids crack (just kidding). You only have to buy them once every few years.

Now, of course, lowering these small expenses will not lead to an early retirement. But it can be part of a habit that can lead to more savings, less debt and smaller landfills.

If what you put in the trash looked like money, you wouldn’t throw it away. I’ll wager, you’ve never thrown a dime in the trash. A freezer bag doesn’t look like a dime, but that is what it cost. And it can be reused, just like the dime. We’re far from perfect. We have our fair share of waste, and poor purchases. But avoiding waste is always at the back of my mind.

Try this experiment. For a day, before you throw something away, think of how much it cost. Some things have to be thrown out. There is no other use for them. But some things could have gone to a better use. Spoiled food could have been eaten before it turned, saving you money. Some things could be reused or donated rather than thrown away. If you think of your trash as money, is less of it trash?

In our consumer culture, we buy more than we need. The costs are hidden. We don’t take into account how a few dimes here and a few dollars there add up. It’s easy to throw something that didn’t cost much away. But everything you put in the trash started with money coming out of your pocket. Being more mindful of the ultimate demise of what you buy could help you save both your financial future and the planet.


Photo by Paweł Czerwiński on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Doomsday Believers Still Need to Save

I recently spoke with a young woman who questioned whether saving for retirement was really a good use of your money. Her concern was that climate change would end life as we know it, and as a result, there was no point.

Impending doom has always been used as a reason to not save. The threats of nuclear war, a chemical weapons attack, or the spread of a mutant virus can make you wonder whether there actually will be a future. But climate change seems to me to be weak excuse.

With climate change, the demise of our planet is slow moving. Severe weather, new crop diseases, the loss of natural animal and plant life, and rising sea levels are all serious threats. But they won’t end the human race very quickly.

What they will do is make things much more expensive. Food will be more expensive to produce. We may face greater risks to our health and, therefore, higher medical bills. As we try to minimize the damage, taxes may increase. All this adds up to needing more money in savings when we can’t work for pay anymore. Not less.

Doomsday scenarios are not a good excuse to give up on saving money. Sure, something really bad could happen. There are no guarantees in life. But it’s far more likely that you will live to a ripe old age. The real disaster would be for you to spend those years in utter poverty because you didn’t have any savings.

The most recent life expectancy table from the Social Security Administration is revealing. The following table shows how much longer you are likely to live at different ages.

AgeRemaining Years
for Men
Age Remaining Years
for Women
Age
6517.9282.9220.4985.49
7014.4084.4016.5786.57
7511.1886.1812.9787.97
808.3488.349.7489.74

As you can see, there is a good chance you will live a long time beyond the normal retirement age. Some estimates put the number of people living to the age of 100 in the United States by 2050 at 1 million. To support yourself for such a long time, you will need to have saved $100,000 for every $333 you spend in a month.

Yes, the future is uncertain. The political tensions in the world and the growing consequences of climate change should have us all worried. But the answer does not lie in spending all your money now. The one thing that is completely within your control is how you prepare for a likely long life. No matter what happens, you will never regret saving money for your future.


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Saving for College: 529 vs IRA

Recently I saw a recommendation that you should put your college savings into a Roth IRA instead of a College 529 plan because the Roth savings would not be included in parental assets for assessing whether your child would be eligible for financial aid. This, however, is not as straight forward as it might seem. There are trade offs that mean the real answer is it depends, and in these cases, I like to do the math.

First the rules. With both a 529 plan and a Roth IRA, your investment earnings grow tax-free while in the account. With the 529 plan, withdrawals for qualified educational expenses are tax-free as well. With the Roth, you can withdraw contributions tax-free, but the earnings will be taxed at your regular income tax rate. Roth withdrawals for educational purposes do not incur the 10 percent penalty for early withdrawal.

The 529 plans in thirty seven states allow you to deduct your contributions from your state income taxes up to a limit. In Oregon, for example, you can deduct $2,435 if you are single and $4,865 if you are married. However, you are limited to the investment options available in your state’s plan. If you don’t like those, or your state does not offer a 529, you can save for college in any other state’s plan, but you won’t get the tax deduction. Earnings still grow tax-free and are not taxed on withdrawal for education.

The argument in favor of using a Roth IRA is that retirement savings are not counted in your assets on the Free Application for Federal Student Aid (FAFSA). Therefore, in theory, your child would be eligible for more financial aid if you saved in a Roth instead of a 529 plan. However, the earnings on your savings will be taxed and you won’t get the state tax deduction for your contributions (if it’s available to you), so you will have less total savings available for college given the same annual savings amount.

Now for the math. Given the tax implications of saving in a Roth, are you really better off than if you saved in a 529 plan? The answer depends on how much savings you have outside of retirement plans. Your expected family contribution (EFC) based on your savings alone (there is also an income test) will be 5.64% of your family assets per year. Your home, retirement savings and an allowance for emergency savings are excluded from the calculation. The allowance for emergency savings is based on the average cost of living for a family of your size. It usually ranges between $25,000 and $35,000.

The following table shows how the two options compare when your child is about to enter college, assuming you save $2,400 per year from the time your child is born until they are eighteen. It also assumes you have $100,000 in savings outside retirement plans at that time. I’ve assumed federal and state taxes combined are 30 percent, and that 529 contributions get a state tax deduction of 9 percent, based on Oregon’s tax rate. College savings also earn 4 percent per year in investment returns.

529 PlanRoth IRA
Taxable Savings100,000100,000
College Savings After Taxes$64,825$54,691
Family Exclusion$30,000$30,000
EFC per Year$7,604$3,948
Additional Potential Financial Aid$3,656
Additional College Savings$10,135

In this example, for the same annual savings rate, you would be better off saving for college in the 529 plan. Between the tax exempt withdrawal and the tax deduction for contributions, which I’ve added to college savings, you would have nearly $6,500 more available for college (the difference between the additional college savings and the additional financial aid) than if you saved in a Roth IRA. The 529 advantage declines with more in taxable savings. Given my assumptions, the break even level of taxable savings is $215,000.

There is one other reason you might consider using a Roth IRA as a college savings vehicle. If your child does not go to college, the Roth IRA can stay invested, and you can use it for your own retirement, with withdrawals being completely tax-free after age 59 1/2. With the 529 option, if the funds are not used for education purposes, the earnings will be taxed at your income tax rate plus a 10 percent penalty. However, you can transfer the savings to another child, or use them for your own continued education tax-free. A variety of vocational classes as well as college classes are eligible educational expenses.

If the funds are not used for education, you will have $2,200 more savings in your Roth IRA, than if you withdrew the 529 plan money and paid the taxes when your child is eighteen. The Roth would continue to grow tax-free until retirement. Alternatively, your 529 plan money could stay in taxable savings for retirement. In twenty years, the IRA option would have $6,500 more in it if your investments earned an average annual return of 7 percent and your tax rate remained at 30 percent.

As you can see, it’s not a straight forward answer of one or the other. If your child does go to college, the 529 plan offers serious tax benefits, especially if you live in a state that offers a tax deduction for 529 contributions. But if you have substantial taxable savings, or you ultimately don’t have any educational expenses, the Roth IRA could be a better option.

You certainly cannot know what the future holds for your child, so there is no wrong answer here. The important piece of the equation is that you are saving for her education in the first place. Whether you save in a 529 plan or an IRA is a secondary consideration. So save away, and don’t worry too much about whether you have the right type of account.


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