My son is a home inspector and the company he works for does not offer any savings options. He and his wife earn about $120k a year. He is
43 years old and has four kids.
Other than an IRA what other tax deferred savings is he eligible for? How much can he save? I believe for 2006 he can save $4000 in a traditional IRA. Can he do that now for his 2006 tax return?
Sorry to say he has not saved a penny for retirement despite my begging over the years. He is busy paying for college for his kids. I've told him his retirement comes first but he won't listen. Luckily at the moment he is making enough to have some extra for savings and I think I can finally talk him into saving for retirement. He's talking about I Bonds which at his age and tax bracket I don't think is the way to go.
I would turn to a Roth IRA first. If you're going to make a maximal contribution, the Roth is probably a better choice. The reason is that the Roth is 'denser' than a traditional IRA. Of the money you contribution to a traditional IRA, some of it belongs to the government. The money in a Roth is all yours. Instead of putting in pre-tax money, you put in after-tax money and then all the earnings are tax-free.
I think the Roth is a good place to start. After that, there's nothing wrong with an old-fashioned after-tax account. It's certainly not as great as a tax-advantaged account, but it's not bad. And it has the advantage that the earnings are taxed as dividends and capital gains, not regular income. You can also defer the majority of incremental taxes on capital gains and dividends by investing in tax- efficient mutual funds.
Others might suggest your son turn to a variable annuity. This is a very divisive topic in this newsgroup. I, personally, steer clear of them. If your son has a LOT of taxable income, a variable annuity could help get that down.
You have two problems. The first is finding suitable investments for your son, and the second is getting him to listen and act. The second may turn out to be a more difficult problem than the first. Usually the situation is the other way around; that is, sons and daughters with good up-to-date, internet-based knowledge have trouble getting elderly parents to accept good financial advice. People are stubborn and do not always look after themselves.
Your son is lucky; you more or less are in the process of giving him a last chance at old age security. But a possibility to consider is that he is put off by your attention to his affairs, which he might interpret as interference or "nagging." If so the trick is to somehow cajole him into taking a personal interest in financial matters himself, so that he will look upon the need for better planning as arising from him, not someone else. For example, quietly mention the fact that, if he takes care of himself his own children will not have to look after him in his old age. But above all, try to prevent him from falling into the clutches of someone pushing a "get-rich-quick" or "earn 15% interest guaranteed" type scheme!
Does his wife's company offer anything (401(k) or pension)? How does she feel about the situation? Why do you think they would be willing to address this now, if they've made no attempt to save till their 40's? You are right, that he has no obligation to pay for his kids' college at the expense of his retirement. Not to make matters worse, but the higher one's income, the lower the percentage that will be replaced by social security. At his age, he should be saving 25% of his gross family income. To answer your question, they can each put $4,000 into an IRA.
Is he an employee or a sub-contractor? People in the home inspection field are often contractors. If so, he has all kinds of great investment options in plans such as SEP, Simple, Keogh, self-directed 401K, etc. You can actually put away far more than a W-2 employee, and at that tax rate, the government does a defacto match of 1/3.
I would have thought that at his tax bracket a traditional IRA would have been a better choice. Not true?
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Actually he brought the subject up. He wanted to send us money to buy I Bonds for him. He knows himself well enough to know if he has to do anything other than hand us the money he won't bother. I know I Bonds are not the best solution for retirement savings but if it's all he'll do it's better than nothing. We can always buy them in his ssn so we won't have to worry about paying taxes on the interest.
I did tell him that he needed to worry more about retirement than college tuition because his college educated kids will be able to get jobs that will allow them to pay off loans. When he retires he won't have any income unless he's saved some money. I also told him to stay away from planners trying to sell him life insurance or annuities as investments.
Oh well, I've had my say with him. Now it's his decision.
Step 1 is to admit you're powerless over obstinateness and that your relationship with your son's finances has become unmanageable. ;-)
Not sure what's gonna turn the bulb on for him. Maybe he's stubborn and things need to be his idea for them to hatch. Buy him some hours with a flat fee financial planner that's known to be good, and that has a demeanor that you think he'd like or actually go to.
He needs a clue and he's obviously not too keen on taking it from his mom at 43. :-)
Which tax bracket he's in now is only half of the equation. The other half is which tax bracket he'll be in in the future. Of course, the latter is impossible to predict, but there's a general feeling that taxes will go up in the future. So my default advice is to favor the Roth.
Besides which, a combined salary of $120K puts them squarely in the
25% bracket. Actually, it's conceivable they might be in the 15% bracket if they have enough tax-exempt income (don't laugh-half of my income is tax-exempt and I don't even have any kids!). Either way, they're not in an exceedingly high tax bracket.
Hi Jane, Have you ever heard of "Alanon', it is for people who are too involved in other peoples issues,usually to do with "Substance abuse".I am not saying that anyone has this problem,just that we learn in "Alanon"that we,and our loved ones , are better off,when we focus on ourselves.I hope you hear this in the generous way it was written.dale
I believe I coined the notion of Roth being 'denser'(tm), and I stand by that observation. In the son's case, it seems to me that with zero savings, you are right, he should first put $8000 between his and wife's IRA. Then take the tax savings, $2000, and invest that.
There is discussion here about oversaving in pre-tax accounts. Saving your way to a high tax bracket at retirement is not something your son should worry about right now. And the bubble whereby one hits a 50% tax rate due to social security anomalies (somewhere in the $40K income range) is not an issue. Standard deduction and personal exemptions add up to $17,500 for a couple. This creates a nice zero bracket free amount they can take from the IRAs each year. Unless and until their savings are projected to hit that level at retirement, take the pre-tax route, and invest additional amounts post tax.
For those who will be in a level or higher bracket at retirement than when working, the Roth IRA (or Roth 401(k)) allow post tax money to be sacked away, so $15000 in regular IRA might give a net of 10-12K, but the 15K in the Roths remains 15K. Thus my coining 'denser'(tm).
Don't give up! He has made a start by thinking about I bonds, so work with it. But people here are right when they advise you not to let his problems wreck your own peace of mind.
You haven't mentioned anything about his wife's degree of financial expertise and attitude toward saving and investment. Could it be that the crux of the problem or at least part of it lies in that direction? Just a thought.
At his earnings level, he's not going to get to deduct the contribution to the Traditional IRA from his income anyway, so he might as well go with the Roth. And with the Roth he won't have to pay taxes on the earnings no matter what his tax bracket is in retirement.
That's a bit of a cop-out. He has control over whether he does or does not bother; anything else is just a convenient explanation for why he supposedly "should" do what he wants to.
On the OTHER hand, the fact that he brought it up shows that he is making an effort, and that's probably worthy of some encouragement.
That's true. It is not optimal, but it is better than not saving at all, and by quite a lot.
However, the I Bond thing makes me think part of the reason he hasn't saved before could be a lack of familiarity with investing. (I'm far from an expert on it myself -- just learning, in fact, which is why I'm here -- so I can relate to the feeling of confusion and unfamiliarity.) When you're not familiar with something, having to make a decision creates confusion and uncertainty (and often frustration), and you tend to gravitate towards the things you understand. With I Bonds, it's easy to understand how they work, and it's easy to see that it's very unlikely they'll go horribly wrong, which makes them appealing, even though in reality they are sub-optimal.
The point is, maybe it would help if it were demystified a little bit. If he knew a little more about the nuts and bolts of investments, he might feel more comfortable with them, and not only be more willing to do something better than I Bonds, but also might be willing to save more. Of course, you can't force that on someone; he has to take an interest on his own. But maybe having some money in an investment will whet his appetite. (It's amazing how people suddenly start caring about things when they stand to lose or gain money.)
How about a balance between the two? It's hard to argue with the idea of a balanced approach: what are you going to say? That you prefer an unbalanced approach? :-)
I think that's a good attitude. Nothing wrong with a little mothering, but people have to know they have to do things for themselves, or human nature is that they'll let others do things for them...
The income limit only applies if you are covered by "a retirement plan at work*". Otherwise no limit.
JOE
*I read this to be 401(k), not a defined benefit (tranditional pension) plan. On this I may be wrong, but the traditional pensions appear to be fading away, anyway.
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