Saving for retirement and education at the same time

It’s a familiar balancing act for many U.S. families: saving for retirement and college, two of life’s most important milestones.

Arguably the most sizeable and emotionally significant goals, retirement and college often arrive around the same time. As a result, parents might feel they have to choose between saving for retirement and paying for college. This doesn’t have to be an either/or decision. Your advisor can help you define what you want for yourself and understand the tradeoffs so that you can make informed, practical decisions.

Financial attitudes and behaviors are shifting

According to our Modern Money study, today’s parents are helping children with more financial milestones than past generations, including college. 

Perhaps because just over half (51 percent) of respondents believe it will be harder for the next generation in their family to feel comfortable financially — and 53 percent believe children should be financially independent at a later age than they themselves were — 33 percent of parents have delayed their own retirement or would do so to help their children pay for college.

Give yourself flexibility and the best chance of success

It’s key to prepare well and find the right balance for you and your family. Your advisor can provide clear, objective advice to help you:

  • Prioritize your retirement and other goals.
  • Understand the benefits and tradeoffs of funding college for your kids.
  • Maximize your savings and investment opportunities.
  • Talk openly with your family.
“You only get one shot at saving for retirement, so it’s critical to keep it front and center. Develop a plan so you don’t sacrifice your financial future to fund other priorities.”
-Marcy Keckler, Vice President, Financial Advice Strategy, Ameriprise Financial

Here are steps to get started:

  1. Establish your priorities and take action

    • Prioritize saving for retirement, if that is most important to you. You can use loans for education, but not for retirement.
    • Put time on your side. Start saving as early as possible during your working years to maximize the time horizon and opportunity for your assets and investments to grow. Automatic payroll deductions through your employer’s 401(k) plan, for example, can help you save consistently over time.
  2. Maximize savings and investment opportunities

    • Save more than you think you may need for retirement. Later in life, you could consider reducing your savings rate to allocate more money for college.
    • Maximize your retirement savings through vehicles such as your 401(k) account (consider contributing at least the amount your employer will match) and, if your employer’s 401(k) plan allows, set your contributions to increase automatically every year. If you’re able to do so, also consider funding a Roth IRA or traditional IRA annually.
    • Establish college savings accounts such as a 529 plan or tax-advantaged account that provides access to broad investment choices.
  3. Have a money talk with your family

    • Help your children think strategically about college. Discuss the majors and careers that interest them, and which schools may be the best fit. Encourage cost-effective options like completing required courses at a community or online college before transferring somewhere else for advanced coursework.
    • Be open about the cost of college, your family’s budget and your student’s potential income after college. Regularly talk with your children and check for understanding: Do they know what’s at stake, for example, with student loans, including how and when these need to be repaid and who is accountable for repaying them?

Talk with your advisor

Regardless of when you start, it may be possible to save for retirement and college simultaneously. Your Ameriprise advisor can provide you with the insights and personalized advice you need to make informed decisions that balance these two life priorities.

Disclosures

The Modern Money study was created by Ameriprise Financial, Inc. and conducted online by Artemis Strategy Group December 11-25, 2018 among 3,008 U.S. adults between the ages of 30-69 with at least $100,000 in investable assets. For further information and details about the study, including verification of data that may not be published as part of this report, please contact Ameriprise Financial or go to Ameriprise.com/modernmoney.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

Understanding retirement accounts

There are many types of accounts that can help you save for a lengthy retirement — and most people rely on more than one account to reach their retirement goals. Understanding the features and benefits of each will make it easier to choose the right ones.

Employer-sponsored plans with employee contributions

A good starting point for retirement saving is your employer-sponsored plan. Employer plans usually accept automatic contributions from your paycheck, and the money you contribute has the potential to grow tax-deferred.

In addition, if your employer offers to match your plan contributions, you should consider taking full advantage of this opportunity. An employer match will supplement your savings without any extra effort on your part. If you’re not sure if you have an employer match, you can ask your HR or benefits department for your employer summary plan description.

 
401(k) plan
403(b) plan
Governmental 457(b)
SIMPLE IRA
Which type of employer can offer the plan?
For-profit or nonprofit organizations
501(c)(3) nonprofit organizations and public schools
Any state or local government entity
For-profit, nonprofit or government organizations with fewer than 100 employees
Who is eligible to participate? (Some employers may be less restrictive)
Employees age 21 or above, with at least one year of service
Generally, all employees are eligible
Eligibility is generally at the employer’s discretion
Employees with at least $5,000 of compensation in any two previous years of service and who anticipate compensation of at least $5,000 in the current year
How much of your salary can you contribute for 2020?
$19,500, or $26,000 if you are age 50 or above
$19,500, or $26,000 if you are age 50 or above (additional catch-up contributions may also be available)
$19,500, or $26,000 if you are age 50 or above (additional catch-up contributions may also be available)
$13,500, or $16,500 if you are age 50 or above
Additional considerations
May have a loan provision
May have a loan provision
May have a loan provision
No loan provision
 
Roth 401(k) contributions may be allowed
Roth 403(b) contributions may be allowed
Roth 457 contribution may be allowed
No Roth contribution option
 
Employer match may be available
Employer match may be available
Employer match may be available
Additional employer contributions required
 
10% IRS penalty on early withdrawals (exceptions apply)
10% IRS penalty on early withdrawals (exceptions apply)
No penalty on early withdrawals
25% penalty on early withdrawals for the first two years, 10% penalty thereafter (exceptions apply)

Pre-Tax vs. Roth deferrals

Some employer plans offer you the option to make Roth 401(k) or Roth 403(b) contributions instead of the standard pre-tax contribution to your 401(k) or 403(b) account. Determining which contribution option to choose depends in part on your tax bracket now and in retirement, in addition to the amount of time you have before you retire.

  • Pre-tax contribution. When you make a pre-tax contribution to a retirement plan, you receive a tax benefit right away, but you will have to pay taxes on the money when you withdraw it. In general, a person in a higher tax bracket who anticipates being in a lower tax bracket at retirement may find a pre-tax deferral more favorable.
  • Roth contribution. You won’t receive a current tax benefit, but qualified distributions are tax-free in retirement. In general, a person in a lower tax bracket who anticipates being in a higher tax bracket in retirement may find a Roth contribution more favorable.

There are other factors to consider as well so be sure to talk with your Ameriprise financial advisor and tax professional before making a decision.

Employer-funded plans

Some employers offer plans where all eligible employees automatically benefit, without having to make contributions from their salary. Even though you do not need to personally contribute to these plans, you’ll still need to select beneficiaries, may need to choose the investments and will want to factor them into your overall plan for retirement.

 
Profit sharing
SEP
Pension/defined benefit
Which type of employer can offer this plan?
Primarily for-profit organizations, though nonprofits and government employers may also establish
For-profit, nonprofit or government organizations
For-profit, nonprofit or government organizations
Who is eligible to participate?
(Some employers may be less restrictive)
Employees with two years and at least 1,000 hours of service per year, if there is immediate vesting (with a vesting schedule, one year and 1,000 hours of service)
Employees age 21 or above who perform service in at least three of the prior five plan years, and who receive at least a required minimum amount of compensation in the current year ($600 in 2020)
Employees with one year and 1,000 hours of service
What is the maximum that can be contributed for 2020?
100% of compensation, up to $57,000 (employer’s deduction is capped at 25% of eligible payroll)
25% of compensation, up to $57,000
Contributions must not exceed the amount required to fund the maximum annual benefit (For 2020, the lesser of $230,000 or 100% of average compensation for highest three consecutive years)
Additional features
Loans may be available
No loan provisions
Loans are allowed but typically not available
 
May have a vesting schedule
Immediate vesting
May have a vesting schedule
 
Employer contributions are discretionary
Employer contributions are discretionary
Employer contributions are mandatory
 
Employee typically directs investments
Employee always directs investments
Employer directs investments

Individual retirement accounts (IRAs)

If you’re already participating in an employer-sponsored plan but are able to save more, or if you don’t have access to an employer plan, you should consider contributing to an IRA. IRAs allow you to hold a wide variety of investment and offer different tax benefits depending on your income level and the type of IRA you select.

Traditional IRAs can offer a particular tax advantage if you expect to be in a lower tax bracket when you retire. If you qualify for pre-tax contributions, your current taxes may be reduced and the taxes you pay when you withdraw the money may be less than you would pay now. However, as you consider a traditional IRA, keep in mind that at age 72 you must take required minimum distributions (RMDs)

A Roth IRA may be an advantageous way for you to invest if you are in a lower tax bracket, especially if you anticipate being in a higher tax bracket in retirement. The earnings in your Roth IRA are tax-free upon withdrawal (if certain requirements are met). This can be a powerful advantage. Assuming that you expect your tax bracket to be higher in retirement than it is now, there may be a significant benefit to giving up the current tax deduction and making do with less today in order to gain the tax-free growth and withdrawal.

 
Traditional IRA
Roth IRA
Who is eligible to make contributions?

Individuals with earned income

Non-working spouses of individuals with earned income

There is no age limit for contributions made for the 2020 tax year or later due to the SECURE Act changes

Individuals of any age with earned income (subject to modified adjusted gross income limits)

Non-working spouses of individuals with earned income (subject to modified adjusted gross income limits); no age limits

What is the maximum you can contribute for 2020? (Limits apply to combined Traditional and Roth contributions)
Lesser of $6,000 ($7,000 if you are age 50 or above) or 100% of earned income
Lesser of $6,000 ($7,000 if you are age 50 or above) or 100% of earned income
How are contributions and distributions (withdrawals) taxed?

Contributions may be tax-deductible, depending on whether or not you or your spouse have a retirement plan at work and your modified adjusted gross income.

Any growth from contributions will be tax-deferred until withdrawn.

Distributions of pre-tax contributions and earnings are taxed at your ordinary income tax rate, but are not subject to the 3.8% tax on net investment income.

Contributions are non-deductible.

Earnings are income tax- and penalty-free if:

  1. Distributed five years or more from the first day of the first year that funds were first contributed or converted to any Roth IRA for the individual, and
  2. At least one of the following applies: age 59½, death, disability, first-time home purchase (up to $10,000).
Additional considerations

Required minimum distributions beginning at age 72.

Distributions to an individual who has non-deductible contributions in any of his or her IRAs will consist of taxable and non-taxable amounts on a pro rata basis.

Distributions of taxable amounts prior to age 59½ are subject to a 10% IRS penalty (exceptions apply).

No required minimum distributions.1

Contributions are distributed first and are always non-taxable.

Early withdrawals of earnings may be subject to tax and a 10% IRS penalty if distributed prior to age 59½ (exceptions apply).

1Inherited Roth IRAs are subject to required minimum distributions

There are other factors to take into account as well so be sure to talk with your financial advisor and tax professional before making a decision about what IRA is right for you.

More ways to save

While employer-sponsored plans and IRAs offer important opportunities for retirement savings, they may not be enough to provide the retirement you want. Personal savings will likely play a critical role in funding your retirement as well. It is important to think about all of the vehicles available as you plan for a secure retirement.

Take the next step

An Ameriprise financial advisor can help identify which accounts are right for you, and allocate investments to each account. As your needs and circumstances change over time, your financial advisor will adjust your plan to help ensure you stay on track.

Disclosures

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.

5 financial mistakes to avoid

1. Putting all your (nest) eggs in one basket

A well-diversified portfolio allows the positive performance of some investments to balance out the poor performance of others. This mix of investments in different asset classes (e.g., stocks, bonds, real estate) can help keep your retirement goals on track even when one investment experiences a rocky period. Diversification is especially important as you near retirement because you have fewer years of income to rebuild savings if some investments post losses.

Your financial advisor can recommend diversification strategies based on your goals, time horizon and risk tolerance. To help you remain on course, your advisor will connect with you regularly to review your progress and your portfolio.

2. Leaving your estate plan for your heirs to figure out

You can make things much easier for your loved ones in the future by talking through estate planning today. Your advisor can work with you and your estate planning attorney to make sure that your financial wishes will be carried out when you die.

Estate planning includes:

  • Creating your will and/or trusts
  • Documenting your health care directive and power of attorney designation
  • Ensuring that your beneficiary designations are up to date for all your financial accounts, including retirement accounts, annuities and insurance
  • Keeping a list of all your online accounts and passwords in a secure place that your attorney or beneficiaries can access quickly if needed

Your advisor will provide you with personalized advice that aligns with a comprehensive estate plan, and will help bring your family members together for the sometimes-difficult discussions.

3. Waiting too long to think about health care needs

Protecting your assets means planning carefully for health care needs, including the expected and the unexpected. The first step is to make sure you have enough medical coverage, plus a long-term care strategy.

The process begins by finding out which Medicare benefits you’ll be eligible for down the road and researching options for supplemental insurance. For example, hybrid life insurance policies combine life insurance with long-term care benefits that may help you pay for the costs of a nursing home, assisted living or in-home care — expenses Medicare does not cover. In general, these hybrid policies may be more affordable than traditional long-term care policies.

4. Maintaining 401(k) accounts in multiple places

If you’ve changed jobs several times during your career, you might have multiple 401(k)s at different employers. It may make sense to consolidate some of these accounts — but before you do, discuss a few critical factors with your advisor:

  • The investment options for each account
  • Your risk tolerance and time horizon
  • The right balance between taxable and tax-deferred accounts
  • How you’ll take distributions when you need them
  • Whether to leave savings in your former employer’s qualified retirement plan if you have employer stock that has grown significantly in value

You might be able to roll your 401(k) savings into an IRA, an option that may provide you with greater control of your retirement assets and more growth potential while maintaining tax benefits. Consolidating your retirement savings can also help you and your advisor plan more strategically for retirement.

5. Paying too much in taxes

Does it make sense to pay taxes now to lessen your future tax liability? Could charitable gifts lower your taxable income? Are there tax deductions you’re not using to your advantage? Your financial advisor and tax professional can work together to help you create a tax strategy for your evolving investment choices.

Schedule a retirement check-in

Wondering whether there are other steps you could be taking — or not taking — to help ensure a confident retirement? Working together with you throughout the year, your Ameriprise financial advisor can help you navigate your options and stay on course to achieve your financial goals.

Your goals are individual. We believe financial advice should be too.

Confidence in your financial future begins with confidence in your financial advisor.

LEARN MORE

 

Disclosures

Diversification can help protect against certain investment risks, but does not assure a profit or protect against loss.
Be sure you understand the potential benefits and risks of an IRA rollover before implementing. As with any decision that has tax implications, you should consult with your tax advisor prior to implementing an IRA rollover.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial cannot guarantee future financial results.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.