Guest post: College students, could your parents save on taxes?

February 26 19 Comments latest by *sigh*

[From Ramit: Yesterday, Todd wrote about what to do before you file your taxes.

Today, this article is specifically for college students. I know, I know. You feel guilty because your parents are paying thousands every semester while you’re busy napping all day and trying to spit game at the girl next door. And failing.

Your parents may be able to save on taxes if they follow some of the instructions below. Take a look and send them this article.]

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Guest post by Todd Doerr

Are you in college or about to attend college? Are you in your junior or senior year? Consider sending this to your parents. This article has a lot of with ideas that may help save your parents thousands of dollars each year and may even put some extra money in your pocket.

I can sense it now. You must be feeling some pride (or bewilderment) that your college student is thinking about how to help you financially and how to make your life a little easier. Who would have thought that your student would start to get a financial clue?

I’ve coached many families who already have college students or will soon have at least one child in college. There are ways to successfully navigate the waters of paying for college. In this article, I will share a game plan with you, the parents, to make your life easier and to help your student get off to a strong start in the real world. I will also provide you with some tax-savings ideas that may speed up your progress even faster.

Let’s first look into the financial future of your college student once they graduate.

Post-Graduation Snowball

As you are probably aware, the typical college graduate has both credit card and student loan debt. Recent graduates have an average of over $19,000 of student loans and over $3000 of credit card debt. The typical graduate degree student leaves with $24,000 to over $100,000 of student loans.

So, your college graduate begins the new season in their life and the snowball builds….

Then, your graduate buys the new car (take it from someone who bought the new car one month after walking the stage - it happens a lot). Another $300 per month in payments out the door.

Then, your graduate rents the nice apartment as they are sick and tired of dorm life or the college apartment. Oh yea, that nice apartment makes the college furniture look nasty. New furniture on the MasterCard – PRICELESS.

Then, your graduate starts making payments on the student loans (sure, the interest rate might be fairly low, but the payment still stinks). Potentially hundreds more of outflow each month.

Then, all of their friends start to get married and everyone starts dropping serious cash on wedding gifts, parties, travel, dresses, and tuxes. The numbers here really add up when you multiply by the number of friends.

Maybe it’s none of these events - maybe they spend $300 per month eating out. Maybe it’s buying cool gadgets. I’ve coached many clients in their 20’s. Their stories are different, but the result is generally the same. The debt adds up quickly and the minimum monthly debt payments grow substantially.

About this time the two big “M-words” might sneak up – Marriage and Mortgages. You get the picture.

The good news is that the snowball does not have to claim your graduate. They can thrive financially if they live off a budget, get out of consumer debt, and avoid going into additional student loan debt.

The best financial coaching advice that I can share with you, the parents:
Help your child graduate with as little or no debt as possible.

Why? Because when they are free of consumer debt and student loans, they can really begin to thrive financially and to build a hopeful future for themselves.

Let’s say your graduate didn’t have that “normal” student loan payment, the “normal” MasterCard payment, those 2 payments could can easily add up to several hundred dollars per month. Instead, he or she invested $300 per month from age 25 to age 65 in a retirement account earning 8% per year. At age 65, they could have approximately $1 Million in retirement savings. Obviously the cost of living will go up, so it won’t feel as big. But it gets them off to a great start towards retirement savings.

Winning with College Expenses
Here is the overall game plan I share with my clients. It does take some work, but it is truly worth it to follow as many of the strategies as possible.

• Save-Save-Save. If you have time before one of your children heads off to school, save aggressively with an Education Savings Account (ESA) or a 529 College Account, or even just a high-yield savings account. My favorite resource for these 529 and ESA plans is www.SavingForCollege.com. If you are just a couple of years away, I would avoid investing in 529’s or ESA’s as the value could go down if invested in stock mutual funds. I would stick with a high-yield savings account in that case.
• Proactive Scholarship Hunting. Get proactive and diligent about applying for scholarships and grants, even if your student is midway through college. Don’t give up!

• It’s possible to find thousand of dollars in scholarships and grants. I recommend Ramit’s postings on these topics. He really knows how to win in this area.
• Hire a scholarship coach. I send some of my clients to a productive scholarship coach. She consistently helps her clients find $10,000 to over $40,000 of scholarship and grant money.

Cash Flow College. As a family, do everything you can to pay for college with cash and to avoid borrowing and credit cards. Here are some ideas to get you started:

Part-time jobs for your student, or even yourself. Part-time jobs are a great way for students to develop life and time management skills. They are not forever, and can provide a significant boost for college expenses.

Drive used cars. This can really boost your monthly savings. It’s not just a lower payment (or no payment at all if you a big bargain) - older vehicles also depreciate more slowly than newer vehicles.

Maximize as many tax strategies as possible for parents. I will cover this in detail later. This step alone can put money in your pocket each year.

Become a bargain hunter on everything. Buy used textbooks, used computers, used furniture, etc.

Hold off on expensive vacations. This could save $1000’s over 4 years in college.

Sell things. Have a massive yard sale. Sell the motorcycle. Sell the piano that no one plays anymore.

As a last resort, Student Loans. I’m not going to slam you for taking a student loan, but let’s work REALLY hard on all of the other steps before we start taking these on. The benefits can be substantial.

Avoid borrowing or withdrawing from your 401k or IRA’s for college expenses. Even though you can withdraw or borrow money penalty free in specific scenarios from some retirement accounts, you are putting your financial future and retirement at risk.

Avoid borrowing on your home to pay for college. Borrowing against your home puts your home at risk, especially in today’s crazy real estate market where people end up upside down on their mortgages.

Review Tax Savings Ideas
Make sure you research every possible income tax savings opportunity - this could save lots of dollars every year of college. By making tax-smart moves, you can free up more money to pay cash for college.

Here is a list to review that may help to boost your plan. Some are best handled by your personal tax accountant.

• Maximize your Hope and Lifetime Credits. These are great credits if you qualify – see IRS Publication 970 for details. The Hope Credit may only be claimed for 2 tax years per child and can only apply to the first 2 years of post-secondary education.
• Deduct Student Loan Interest. If you are already making student loan payments, you may qualify to deduct a certain amount of interest paid on student loans. See Publication 970 for limitations.
• Continue to Keep Your Student as a “Dependent”. This assumes that you continue to provide at least one-half of their support. Refer to Exemptions in the Form 1040 Instructions.
• Hire your student. If you are self-employed or own your own business, hire your child to perform bona-fide work at a reasonable salary. Keep records of time worked, duties, etc. You can deduct their wages as a business expense. This is a more complex strategy that probably would best be handled by your personal tax accountant.
• Buy-off campus housing. This is for wealthy parents only. I recommend that you do not consider this option unless your primary residence is paid for (no mortgage), you have a substantial emergency fund, you have no consumer debt, and have accumulated a large retirement account (Yes, I know this advice is very conservative). You can “hire” your child to be the property manager. You can also potentially deduct the housing property taxes on your Schedule A. This strategy requires a clear game plan – take your time and don’t rush in. Once again, this one is best handled by your personal tax accountant.
• Make sure your student has health insurance coverage. This is not a tax strategy, but important enough to mention as a “protect yourself from a financial blow-up” strategy. One serious trip to the hospital could set you back from $5,000 to $20,000 or more without health insurance on your student.

Tomorrow’s article will outline a financial game plan for the newly engaged and the newly married.

Todd Doerr is a personal finance coach. He helps his clients to rapidly get out of debt and to build serious wealth. He tells his clients, “It’s not always easy or pretty, but it always works.” You may reach him at todd_doerr@yahoo.com or at www.taxmakeover.com.

[Update]
1. See the two other articles Todd wrote:

• What to do before you file your taxes this year
• What to do, tax-wise, if you’re recently engaged or married

2. Then check out his eBook, The 2008 Tax Makeover Guide

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19 Comments latest by *sigh*

Guest post: Read this before you file your income taxes!

February 26 49 Comments latest by FD » Blog Archive » Personal Finance, Part 13 Unemployment Risk26 Feb 2008 by D…

[Update: Roth IRA amounts corrected below.]

[From Ramit: Since tax season is here, I wanted to write something about the tax issues we face. But since I’m not an expert, I’ve typically turned to guest posters to help. Last year, David Bergstein answered your tax questions.

This year, I’ve invited Todd Doerr to guest-post for the next three days. Over the next 3 days, he’ll write about taxes for three situations: people in their twenties, college students (I know you’re lazy so you can just point your parents to the article to do all the work), and recently married couples. And on Friday, after the three posts, I’ll announce something pretty cool.

I like this post below because Todd points out that if you’re already saving, why not take a small extra step to dramatically increase your returns?]

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Guest post by Todd Doerr

Stop. Turn off your ipod. Turn off your phone.

This one post will help you win with money – guaranteed – if you take ACTION. If you are in your 20’s or 30’s, this is going to rock your world.

I coach many individuals and families in my financial coaching practice – they pay me to help them quickly get out of debt and build wealth. Hopefully you are already saving some each month towards retirement. Why not spend an hour to setup a simple, automatic wealth building plan that will double your return?

I’m amazed that only 31% of Generation Y workers (born 1978 or later) are saving for retirement in their 401k, according to Hewitt Associates. You can be light years ahead of your friends if you follow the coaching advice that follows. It will only take an hour of your time – your friends will be amazed!

Let’s dive in - stay with me!

Let me go ahead and spell out the entire purpose of this post:

The Roth IRA is one of your most important wealth building tools. Maybe even the most important. If you consistently invest in your Roth IRA during your working years, you will build substantial wealth.

OK. Maybe it was a little heavy, but I want to get your focused attention for a few minutes. Let’s cover the basics first.

The Nuts and Bolts of the Roth IRA

Here are some of the common questions that I get about the Roth IRA:

Q: Why should I care about a Roth IRA?

A: The short answer: You don’t want to work the rest of your life. Using a Roth IRA consistently, in addition to your 401k, will make you very rich and will change your life. I would argue that if you save aggressively in a Roth IRA, you will open up new options and freedoms in life that you cannot fathom today.

Q: What is a Roth IRA?

A: A Roth IRA is simply a retirement savings account offering amazing “back-end” tax breaks when you take money out at retirement age (59½ years and older). The Roth is a “bucket” – you fill that bucket with good conservative mutual funds (I don’t recommend individual stocks).

Q: How hard is it to setup?

A: 1 Hour – I’m dead serious. I’ll cover the specifics later in this article.

Q: What are some specific benefits?

A: You can withdraw funds without taxes or penalties once you’ve reached age 59½ and held the funds in the Roth for five tax years after the year you make your first contribution. Here’s an example. Let’s say that you worked your buns off for 30 years and had $1 Million dollars in your Roth. When you retire at age 59½ years (or older), you can take out the $1 Million TAX-FREE. It also grows TAX-FREE each year during your career. Don’t think you can save $1 Million? Keep reading on.

Q: What are the limits on a Roth IRA?

A: You can contribute $5000 annually to a Roth ($10,000 for married couples), whether you participate in an employer plan (like 401k) or not, if your AGI (line 37 on Form 1040) is less than $116,000 (joint filers, $169,000).

Q: Anything else I should know about it?

A: You can withdraw your contributions penalty-free should you need them for an emergency. You can contribute at any age as long as you have earned income. There are some

A Sweet Retirement

OK. Onto the cool stuff. Go ahead – take a peek. Wow.

The tables below show what you could have in your Roth IRA if you invested monthly or annually during your career. These numbers assume you invested in a diversified, conservative set of mutual funds that could average 11% annually (stock market has averaged over 11% for over many decades).

You must really like that $400 car payment! Or, maybe the gym membership isn’t looking so fiscally fit anymore. And for sure, the minimum payment to Visa could be put to better use! Maybe the $200 per month for eating out is not so appetizing.

Here are some specific and exciting ways to boost your savings plan.

• $100 - $200 - $300 - $400 per month of savings: Go through your budget and find the “luxury” items – you will be amazed when you cut a little here and there. These things add up. My favorites include: driving a used car and dropping the fat car payment, drop the premium cable channels, cut back on the cell phone plan or drop your land line at home, selling the cat (just kidding!), bring your lunch to work except 1 day per week, drop the gym membership, take basic vitamins instead of $100 per month, only buy clothes that are mega-bargains, cancel subscriptions that you don’t really have time to read – the list goes on. You won’t miss these and will truly enjoy knowing you have a plan to win with your money. Get yourself motivated and start making changes now!
• $200+ per month of savings: Work a part-time job to speed up your progress. Ask your employer for overtime opportunities. Provide a tutoring service. Deliver pizzas (you can make $750/mo doing that). Mow yards or provide handyman services. Start a pet sitting business. Get creative. Get your real estate license. Write software on the side. Don’t analyze this too much – just go for it. If you don’t like your first part-time job – just find another one. This is not a FOREVER job.

Anyone in America with a decent income can win! The key is to start TODAY and not hesitate. Set your goal and don’t stop until you reach it - $100 - $200 - $300 - $400!

Annual amount – Assuming 11% return

Yearly Contribution	30 years of saving	40 years of saving
$1000	$220,913	$645,826
$2000	$441,826	$1,291,653
$3000	$662,739	$1,937,480
$4000	$883,652	$2,583,307
$5000	$1,104,565	$3,229,134

Monthly Investing Results – Assuming 11% return

Monthly Contribution	30 years of saving	40 years of saving
$100	$283,022	$867,895
$200	$566,045	$1,735,791
$300	$849,068	$2,603,687
$400	$1,132,090	$3,471,582

My

Simple Way

To Get Started in less than 1 hour

STEP ONE: Don’t file your taxes yet. The good news: You can still make a “2007” contribution if you open a Roth IRA before you file your income tax return.

STEP TWO: Open an account TODAY. The sooner you start, the sooner you start the magic of compound interest.

• Find $5000 $4000 (the new 2008 limit is $5000) for your “2007” contribution. If you don’t have $5000$4000 right now, just put in whatever you free money that you have. $500 - $1000 – it doesn’t matter. You must get started!
• Autopilot for 2008. Setup an auto-draft from your checking account each month and have the money invested automatically. It’s too easy to get distracted during the year to write a check each month – set it up once and let it run. Your target amount should be $416 per month ($5000 divided by 12 months). If you have to start small, that’s OK. As you can see, even $100/mo is HUGE at retirement. And don’t forget the next time you get a raise, bump up your monthly investment by even more.
• Open an account at a low-expense, customer friendly mutual fund company. Simply tell them “I would like to open up a new Roth IRA and make a contribution for 2007. I would also like to setup an automatic investment plan each month for 2008 and beyond.” I highly recommend T. Rowe Price and Vanguard as a great place to open a Roth IRA.
  • T Rowe Price. You can start with as little as $50 per month on most mutual funds. Contact them at www.troweprice.com or 1-800-638-5660.
  • Vanguard – They have higher minimums amounts to start, but offers lower annual expenses than most companies. Contact them at www.vanguard.com or 1-877-662-7447.
• Choose a conservative “growth and income” mutual fund or balanced fund to get started. These should be funds you plan to hold for a lifetime. You can diversify later into different flavors and styles of mutual funds. For right now, these will work fine.
• Leave it alone! If you look at the long history of the stock market, 97% of any 5 year timeframe had a positive return. Don’t try to get fancy, time the market, buy individual stocks – stick with the basics. You want your foundation to be strong – don’t tinker with it. Invest and leave it alone.

Retirement Savings Goals

In case you are wondering how much you should save each year for retirement, your overall savings goal should be about 15% of your gross income (most of my clients are in the 10% – 20%), in the following order:

• Fund your employer 401k plan up to your maximum employer’s match.
• Max out your Roth next up to $5000 (or start with a Roth if no company match).
• Finish out the 15% by investing more in your 401k.

Friends, Laziness, and Boosting Returns

OK. You now have a vision for building significant wealth.

But what about your friends? Many of your friends probably don’t get it. Why? Because they haven’t seen that significant wealth is possible for the “average” person with an “average salary”. Share this article with them. I’ve found that it helps to have like-minded friends shooting for a hopeful future.

If you are feeling lazy – you better wake up! I have made it abundantly clear that 1 hour of your time will rock your world. You don’t have to do heavy analysis each month – set up this plan on autopilot and let it run. If you are so lazy that you can’t spend 1 hour on this, then, whew, life is not going to be easy in your later years.

If you are already saving some, you can turbo charge your results by using low-cost mutual funds that I recommend in this article. Using mutual funds that cost 1% less per year than the average mutual fund could boost your total nest egg by nearly 25% over a 30 year time span. Instead of $1,000,000, you could end up with another $250,000 for a total of $1,250,000.

Final Thoughts – Keep it Simple and Automatic

It’s amazing, but you can actually thrive and build wealth with a simple, “boring” diversified portfolio in your retirement accounts. The Roth IRA should be a serious part of most wealth building plans. Open your account today.

Be sure to join us tomorrow. I will be sharing some specific ways to find $1000 Dollars for college expenses.

Blessings,

Todd

Todd Doerr is personal finance coach. He helps his clients to rapidly get out of debt and to build serious wealth. He tells his clients, “It’s not always easy or pretty, but it always works.” You may reach him at todd_doerr@yahoo.com or at www.taxmakeover.com.

[Update]
1. See the two other articles Todd wrote:

• How college students can save their parents tax money
• What to do, tax-wise, if you’re recently engaged or married

2. Then check out his eBook, The 2008 Tax Makeover Guide

(No Ratings Yet)

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49 Comments latest by FD » Blog Archive » Personal Finance, Part 13 Unemployment Risk26 Feb 2008 by D…

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