When I started investing, I was concerned about picking the right stocks, mutual funds, and ETFs; matching any financial goals with the right asset allocation; and holding down investment fees. Those issues are important. But I also have learned not to overlook the impact of taxes on investment returns. That said, I can’t be so concerned about taxes that I’m paralyzed from making an investment move. But it helps to consider how investment decisions impact tax liability, both in the present and for the future.
Thinking ahead about how investing can support financial goals is the purpose of planning. Naturally, there’s lots of talk about common planning targets: retirement and college. But there’s also consideration of how to achieve multiple goals at various stages of life — whether covering basic needs or leaving a legacy — and how taxes and tax planning could impact results. Articles in the planning category allow you to clarify how today’s decisions can impact efforts to grow, manage, and maintain wealth.
I’m not a tax expert but my understanding is that, generally, you need to have earned income (or some form of taxable compensation) to contribute to an IRA. If you’re working full-time in a regular job, then you may have enough earned income to make a full contribution of $5,500 as long as you meet other requirements. But if you work part-time, then you may not make enough to contribute this amount; still, you may be able to contribute up to the amount of your earned income.
If I had young children and wanted to set aside money for their education today, I would choose a 529 Plan over a Coverdell ESA or UTMA/UGMA account. I’d also be smarter about the way I funded the account, either arranging gifts directly to an account (for grandparents, aunts, and uncles who ask what my kids want for birthday and Christmas celebrations) or placing cash gifts my kids received into an account. Here are tips on how to channel gifts to college savings.
When I started saving for my children’s education, 529 Plans weren’t yet introduced. So I saved within a UTMA/UGMA and then a Coverdell Education Savings Account. Each type of account seemed to have advantages and drawbacks. I wanted to save more for college in a designated account. But I had heard (more than once) that parents can’t borrow money for their retirement in the way that children can borrow for their education.
Eventually I came to realize that just because my retirement is a financial priority doesn’t mean I couldn’t set aside some money for my kids’ education. Even if though I didn’t save for the entire college experience — tuition, fees, room, board, books, study abroad, etc. — what I tucked away was extremely useful.