For many parents of college seniors, Independence Day will come early this year. Those who have been picking up a tab for college costs will finally be free of the expenses when their children graduate from college this spring.
And while you may be looking forward to having a few extra bucks to spend, now is a great time to redirect the money you’ve been spending on college toward another major financial goal: your retirement.
Since you’ve probably been investing for college a long time, you aren’t likely to miss the money when you shift the payments to a new goal. What you may notice, though, is how much faster you begin to build your retirement fund.
Here are a few ideas on how you can put your freed-up dollars toward your retirement nest egg.
• Maximize contributions to your 401(k) plan. If you’re not already doing so, consider contributing the maximum to your 401(k) or other employer retirement plan.
Your contributions will be deductible from your taxable income, and your investment will grow tax-deferred until you need it.
What’s more, many employers will match a portion of your contributions, providing an immediate return on your investment.
• Increase your investments in an IRA. Thanks to the Taxpayer Relief Act of 1997, you have a lot more choices in IRAs. If you favor a traditional IRA, you may now be able to make more deductible contributions.
Previously, people who had an employer-sponsored retirement plan such as a 401(k) could deduct a $2,000 IRA contribution only if their income was less than $25,000 for single filers and $40,000 for joint filers.
Starting in 1998, income limits began to rise and they’ll reach $50,000 for singles by 2005 and $80,000 for couples by 2007.
The law also expanded traditional IRA eligibility for spouses who don’t participate in an employer-sponsored plan. If you fall into this category, you now can fully deduct a $2,000 IRA contribution even if your spouse participates in a retirement plan at work — as long as your joint income doesn’t exceed $150,000.
Funneling your extra income into a new Roth IRA may be an even better way to build your retirement stash. Your contributions to a Roth aren’t deductible, but earnings will be tax-exempt if you keep your money in the account for at least five years and wait until you’re 59 1/2 to start withdrawals. The eligibility income limit for the Roth is $150,000 for joint filers and $95,000 for singles.
• Take advantage of dollar-cost averaging. Regularly investing the amount you were dedicating to college costs may help build your retirement fund. By dollar-cost averaging — investing equal amounts at regular intervals — you will automatically buy fewer shares of an investment when prices are high and more when they are low.
The strategy will not only lower your average cost per share, it also will help you avoid worrying about when to invest. Dollar-cost averaging doesn’t assure profits nor protect against loss in declining markets.
Since this strategy provides for continuous investment, regardless of fluctuating prices, investors must consider their financial ability to continue to invest during low price levels.
• Invest in stocks for the long haul. College funding became a closer and closer target as your child grew up — and that eventually required you to hold less volatile, more liquid investments.
As you refocus on retirement investing, you’ll likely extend your time frame.
That means you can harness the growing power of stocks and stock funds without having to worry about short-term volatility.
While stocks are more volatile over shorter periods, they historically have outperformed bonds and cash investments over long periods.
Helping your child afford college no doubt will enhance your son’s or daughter’s life in many ways.
With that goal accomplished, redirecting your efforts on retirement funding will help ensure a future of opportunities for you as well.
Gary N. Garner is a personal financial advisor with American Express Financial Advisors in Jackson.
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