Graduating college is an exciting time, both for parents and adult children. Finally your kids are ready to fly freely from the nest, and make their own way in the world. After they graduate college, securing the right job will be a top priority, along with starting their own homes and families. But experts say that recent college graduates should begin planning for retirement right away, so share these tips with your kids as they begin the next phase of their lives.
A traditional retirement account can reduce your income tax liability. When you contribute to a traditional 401(k) or IRA, those contributions are deductible for tax purposes. This lowers your overall taxable income, and therefore the amount that you owe the IRS.
A Roth IRA may lower your taxes in retirement. Roth IRAs basically work in reverse of traditional retirement accounts. Contributions are made on an after-tax basis, so they won’t lower your tax liability for the year in which you make the contribution. However, your withdrawals in retirement won’t be counted as taxable income. For many people in their 20s, a Roth account might be the better deal. A young person just starting out in their career might not need the tax deduction of a traditional account, especially as they start their family and earn deductions for dependents. Even small contributions to a Roth account will grow nicely by retirement time, and provide tax-free income at that point.
Consider a Health Savings Account. Young people are likely to be healthier, and therefore choose low-premium, high-deductible health insurance plans. If your child enrolls in this type of plan, they might be eligible to contribute to a Health Savings Account (HSA). This type of account allows them to set aside pre-tax dollars to be used toward out-of-pocket medical expenses such as meeting their deductible. If the funds aren’t used in a particular year, they can be rolled over and over all the way into retirement. Then they can be used for qualified medical expenses, which are likely to be quite high when their generation reaches retirement age, due to the rising cost of healthcare.
Consider insurance options. Even if they’re young and healthy, everyone should have at least a basic life insurance plan. Young people can secure a term life insurance policy with a relatively low premium, and might be able to convert into a permanent life insurance policy later when they’re earning a higher salary (and have greater insurance needs for their family). Disability insurance is another important consideration for young people. In the event of an accident or illness, the payments can keep their households afloat, financially.
Consult with a financial advisor. Remind your kids that although their choices seem simple at the moment, the cost of missed opportunity can be great. They should consult with a financial advisor, just as you do, to ensure they understand all of their options and receive professional guidance to choose the ones that best suit their needs.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.