How can a family of four shift from earning two incomes to one, while still pursuing financial independence?
How would a 55-year-old couple with $2 million saved know if they’re ready to retire?
Can parents use leftover money in their 529 plan to help their daughter with her college loans?
If you start a job with an employer who doesn’t offer high-deductible, HSA-compatible health insurance plans, could you use a plan from your old boss?
And where should a father keep his daughter’s Bat Mitzvah money?
My friend and former financial advisor Joe Saul-Sehy and I tackle these five questions in today’s episode. Here’s a close-up look at each situation.
Tyler asks:
My wife and I both work 9-to-5 jobs. She’s an elementary school teacher, and I work in sales. We’ve recently welcomed our first child into the world, and we’re expecting our second. We’d like to transition to a one-income household, at least until the children are between three to five.
We’ve maxed out my Roth IRA and 401k, funded a pension through my wife’s work, funded a small Roth IRA for her, and started a 529 for our son.
We have no credit card debt, but we have a mortgage, a car loan, and a student loan from my wife’s graduate work.
We’re thinking about gradually phasing out her income, by reducing her “income” in 25 percent increments over time, and using that money to repay our debts. We hope to have the car loan and student loan paid off by the time our second child is born.
What other recommendations would you offer as we transition into a single-income household?
Heidi asks:
We saved money in a 529 plan for our daughter’s college education. We took out some loans for her freshman and sophomore years, thinking that we’d spend the rest of the 529 money during her junior and senior year.
Then a wonderful thing happened: my daughter received $40,000 in scholarship money, covering her junior and senior years. Now my daughter has $13,000 in student loans from her first two years, and also $13,000 sitting in her 529 fund. Can we use the money in the 529 plan to repay her student loans? Or are our hands tied?
Andrew asks:
My 13-year-old daughter just had her Bat Mitzvah, and now holds $5,000 in a Schwab custodial account. Where should I put this money to preserve the capital, but also allow it to grow? She’ll probably want to use a portion of this within the next five years. It’s currently in a Schwab money market account, but I’m thinking about putting it in VFTSX, the Vanguard Social Index Fund.
Anonymous asks:
My husband just started a new job, and his employer doesn’t offer HSA-compatible plans. His new employer only offers plans with low deductibles.
I know that this isn’t idea. Could he enroll in plan from his old job, so that he can still contribute to an HSA?
Linda asks:
Am I ready to retire? I’m 55 and my husband and I have $2 million, but we recognize that the market is volatile. How do we maintain our $2 million principal when we’re no longer making contributions?
My second question is about real estate. If the returns from both index funds and rental properties comes to around 8 percent, then why would you bother with the additional hassle of real estate?
Enjoy!
Resources Mentioned:
- Salary.com
- Glassdoor.com
- Bureau of Labor Statistics
- Interview with Dr. Wade Pfau
- Here’s a Counterintuitive Idea for Your Retirement – blog post
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Brian
Child care?! Saves $9,000 per year per kid under 5 with me. That’s the biggest cost so for 3 that’s $27,000. Missing big!
Paula Pant
We don’t know if Tyler is currently paying for childcare or not. He didn’t mention any current childcare costs, and he was extremely specific about other major bills (car loans, student loans, etc). Their first child, Henry, might be getting cared for by a grandparent or other family member.
Paula Pant
P.S. That said, childcare savings could apply to other people (the broader listenership), so we definitely could have mentioned it in that context. 🙂
Jen
Where’s the info on Ginnie Mae for savings? Do you have a link to that?
Thanks for all your advice and wisdom!
Michelle McGuinness
Agree that you missed the boat on not mentioning child care costs!
Also–I had repeatedly heard that when a child gets a scholarship, there is a waiver of the penalty for 529 savings. As discussed here:
https://www.savingforcollege.com/questions-answers/article.php?article_id=137
So confused as to why this wasn’t mentioned!
Jenny Cronlund
Agreed Michelle! I wanted to jump through my car stereo and mention it to the poor woman on the podcast published yesterday! I am a longtime passive listener, but felt so strongly, that I went to that same website to double-check I had my facts straight, and yes, ” In the case of a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free, but you’ll have to pay income tax on the earnings.” Heidi can definitely take out the $40,000 penalty free and pay back her $13,000. All she’ll have to pay is income tax on the earnings. She could even talk to her tax professional, and take out only $13,000 now, and perhaps defer the rest of the withdrawal if it pushes her into a different tax bracket.
Jenny Cronlund
amendment. She has only $13,000 in her 529 to pay the $13,000 of student loans. So no deferrals of withdrawals are possible if she wants to just move all the money at once. But she sure can do this penalty free!!!
Paula Pant
Jenny — thank you! We are issuing a correction in episode 146, and we’ve contacted Heidi directly to let her know.
Paula Pant
Michelle — Let me ask Joe to look further into this; he was tracking the recent legislature around overfunded 529 plans. If we need to make a correction, we’ll do so on the next Ask Paula & Joe episode, and we’ll email the person who asked the question. Thanks for the link!
Paula Pant
Michelle – update: you are totally correct! We are issuing a correction episode 146, and we’ve contacted Heidi directly to let her know. Thank you!
B
Anyway to get the links for c rate and beam? I could not find the show notes.
Stephonee
It sounded to me like Anonymous’s question about the HSA was really asking if her husband could get a low-deductible plan from the new employer and continue to contribute to the old HSA. I can understand the nature of this question because, when you leave an employer and you had an HSA, you actually do take the HSA with you and nearly all HSA accounts have the option to make individual contributions to the account (not through the employer). For example, I had an old HSA from an employer, and after I left and went on an Obamacare health plan, I was able to continue making contributions into that exact HSA account. I did not have to open a new account, I just kept using the one I’d already had that was set up by my previous employer.
The snag here though? In order to continue contributing to the HSA on your own, you do have to have an “HSA-qualified” health plan. The low-deductible plan from Anonymous’s husband’s new employer likely does not qualify. (My new Obamacare plan did qualify because I specifically selected an “HSA-qualified” Obamacare plan at the time.)
This is a good resource for checking if you can contribute to an HSA: Do you qualify for a Health Savings Account (HSA)?
In the case that you check and your plan does qualify for an HSA but your employer doesn’t offer one? You can open one on your own… but your contributions would not be exempt from FICA taxes like they would be if they were made through your paycheck. Best to try to convince your employer that they should offer the HSA in that case, because that’s a 7.65% boost to your HSA right there!