Money Talk: Time for Son to Move His IRA
Question: My son has an IRA at his credit union. He puts in small amounts when he can.
Recently the credit union lowered the interest rate and started charging a $25 yearly maintenance fee, which now is taking all the interest back. Is this legal?
Answer: Yes. It’s also a good reason to move the account elsewhere.
Your son’s retirement account was shrinking in real terms even before the fee ate up all his interest. Even though rates are now on the rise, they’re still lower than inflation, which means the money’s buying power is being eroded every day.
Your son needs to invest in stocks if he wants his savings to grow faster than inflation. A few discount brokerages, including ETrade, Fidelity and TD Ameritrade, have no account minimums or annual fees.
Your son also should consider making automatic contributions to his retirement account. This is known as “paying yourself first,” and it ensures that those contributions actually get made. Waiting until he sees what’s left over is paying himself last, and the result will be a much smaller retirement fund than he’s likely to need.
Question: I will be 66 in May 2016. My wife is 68 and retired. She began receiving Social Security when she turned 66.
I am still working, making a high six-figure income, and will continue to do so until I reach 70, when my Social Security benefit reaches its maximum. I plan to use my Social Security earnings to save for my grandchildren’s college educations (unless an emergency occurs and we need the income).
I want to maximize the amount that I can give them. What is the best strategy, taking into consideration the recent change in Social Security rules relating to “claim now, claim more later”?
Answer: You just missed the April 29 cutoff for being able to “file and suspend.” Before the rules changed, you could have filed your application at full retirement age (66) and immediately suspended it. That would allow your benefit to continue growing while giving you the option to change your mind and get a lump-sum payout dating back to your application date. Since Congress did away with file-and-suspend for people who turn 66 after April 30, that option is off the table for you.
There are other ways to maximize your household benefit, said economist Laurence Kotlikoff, author of Get What’s Yours: The Secrets to Maxing Out Your Social Security. They include:
■ Your wife suspends her benefit and lets it grow for another two years, then restarts getting checks when she turns 70.
■ At 66, you file for a spousal benefit. People who are 62 or older by the end of this year retain the ability to file a “restricted application” for spousal benefits only once they turn 66. That option is not available to younger people, who will be given the larger of their spousal benefits or their own benefits when they apply.
■ At 70, you switch to your own, maxed-out benefit. Again, the ability to switch from spousal to one’s own benefit is going away, but you still have the option to do this.
Consider saving in a 529 college savings plan, which offers tax advantages while allowing you to retain control of the money.
You can even withdraw the money for your own use if necessary, although you would pay income taxes and a 10 percent federal penalty on any earnings.
You should know, however, that college-savings plans owned by grandparents can mess with financial aid. Plans owned by grandparents aren’t factored into initial financial aid calculations, but any disbursements are counted as income that can negatively affect future awards.
One workaround is to wait until Jan. 1 of the child’s junior year, when financial aid forms will no longer be a consideration, and pay for all qualified education expenses from that point on.
Obviously, you won’t have to worry about this if your grandchildren wouldn’t qualify for financial aid anyway. If your children also make six-figure incomes, that’s likely to be the case.
Question: Your answer to the parent wanting to purchase a convertible for his son reminded me of something that happened long ago. When I graduated from high school in 1966, a friend’s wealthy parents bought him a brand-new Lamborghini Miura as a graduation present. Two days after he got the car, he missed a curve in the mountains and rolled the vehicle. By a miracle he was not badly hurt, but the car was scrap.
You gave good advice. Giving your teenage son the keys to a high-performance car is like handing him a live grenade. Kids often want things that they should not have.
Answer: These stories are legion at affluent schools where parents are so focused on indulging their children, or flaunting their wealth, that they don’t fully consider the risks involved. Sometimes the children aren’t as lucky as your friend was.
Parents can still make an ostentatious display by buying their children new four-cylinder luxury sedans, replete with air bags and other safety features, and replacing them when they’re inevitably totaled.
But everyone involved would be better off if parents avoided high-horsepower vehicles, new or used, that tempt their kids to test their driving limits.
Liz Weston is the author of The 10 Commandments of Money: Survive and Thrive in the New Economy . Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, Calif. 91604, or by email at email@example.com. Distributed by No More Red Inc.