As every new parent knows, raising kids can be expensive. Experts estimate that the average cost of raising a child from birth to age 18 is nearly a quarter of a million dollars.1 With this kind of financial commitment, many parents have just one question—how can you keep saving? Below are a few tips and tricks to help maintain a solid investment strategy even after kids enter the picture.
Even a Little Can Make a Big Difference
With kid-associated costs like daycare, an increased grocery bill, and (often) a larger vehicle, it may seem like there's just not enough money left over each month to set anything aside. But it's important to remain committed to saving for your future (including retirement) while your kids are young. Even if you can only commit to putting aside 5 or 10 percent of your income per paycheck, saving something can help you avoid racking up credit card debt when an unforeseen expense rears its head.
Remember—You Can Borrow for College, but Not for Retirement
Saving money in a 529 account can provide your kids with a great head start when it comes to funding their post-high-school ventures. These accounts can be used to pay tuition, room and board, and other costs associated with higher education, helping them avoid starting their adult lives with student loan debt.
But if you can only afford to contribute to your own retirement or your kids' college—not both—you'll usually want to prioritize your retirement funds. Your child will be able to take out student loans for college if needed, but you won't be able to take out "retirement loans" when you leave the workforce. Saving for your own retirement can provide you with far more flexibility to handle whatever circumstances the future may bring.
Give Your Kids an Early Start
Once your kids are old enough to begin working for an income, you can also help them open their first retirement account. Anyone with earned income can contribute to an individual retirement account (IRA) or Roth IRA, so long as their income falls within the IRS limits.2 Depending on your own financial situation at the time, you can give your child a head start on their future retirement savings by offering to match each dollar contributed. Because your child is unlikely to have much of a federal income tax obligation as a teenager, contributing to a Roth IRA can allow them to benefit from a low tax rate now while letting this money grow for the next 40 to 50 years.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be
appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
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.
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