If you're a retiree with more than enough money at the end of each month, don't let excess cash stack up in your checking account. Instead, take a deliberate approach to putting the money to work. Two options are:
- Reinvest it and continue to build your nest egg.
- Use it to help others with education expenses.
Reinvesting for your future
While it may seem that you have more than enough income to finance your future, rising costs and unforeseen expenses could place greater demands on you than you've planned for. You should invest your excess money in a way that complements the rest of your portfolio, seizing tax-advantaged opportunities where possible. While IRAs are appealing, their availability is limited. Traditional and Roth IRAs require you to have earned income in the year of your contribution, and you can't contribute to a Traditional IRA after you've reached age 70½.
Another tax-friendly option is a guaranteed growth annuity. Features include:
- Deferred taxes on earnings until withdrawal.
- No age or contribution limits.
- Guaranteed principal and minimum interest rates.
The fixed annuity guarantee against principal loss depends on the claims paying ability of the insurance company. Later in life, you can consider transforming your annuity savings into an additional stream of guaranteed lifetime income.
No matter what investment solutions you choose, consider setting up an automatic monthly transfer of funds from your checking account to your investment portfolio. It's convenient, and you'll have the potential to earn interest.
Helping future generations through college
If you want to help grandchildren or others with their education, consider investing in a 529 College Savings Plan, which provides federal income tax-free withdrawals for qualified education expenses. Withdrawals for purposes other than qualified educational expenses are subject to income tax and can incur an additional tax of 10 percent on the earnings in the account. Contribution limits are very high and unlike IRAs, they aren't affected by an investor's income level.
Other 529 plan benefits:
- Lump-sum contributions of up to $65,000 ($130,000 for married couples) can be made without triggering gift taxes in a single year through the accelerated gift option unique to 529 Plans. However, with this option you can’t give additional gifts to a grandchild during the five-year period without incurring the gift tax.
- Money you contribute is removed from your estate, which means that amount will not incur estate taxes, even though you maintain control over it.
- Provided you don't establish the 529 in a custodial account, you'll have the ability to change who gets the benefits.
- There is minimal effect on financial aid since it is not considered the child’s asset.
How do you choose a 529 plan?
There are many plans, each sponsored by an individual state. First, find out if your state provides tax breaks for contributing to its plan. If it does, it may be best to use it. If not, find a plan with competitive investment options, reasonable expenses and reward services.
The USAA 529 College Savings Plan™ features:
- A high contribution amount of $370,000.
- Management of investment accounts by experienced portfolio and fund managers.
- The ability to get cash back directly into the account when you shop, dine out and buy groceries or gas with the Upromise Rewards service.
- Your choice of six asset allocation portfolios and a convenient age-based option that gradually becomes more conservative as college draws closer.
- A Preservation of Captial portfolio is available to help protect your investment from market volatility.
The direct route. If your loved ones are already in college, you can pay some or all of their tuition directly. It won't count against the annual limit on tax-free gifts if your check is made out to the school and not to the student you're helping.
Consider the investment objectives, risks, charges and expenses of the USAA mutual funds and/or USAA College Savings Plan carefully before investing. Contact us at 800-531-8910 to request a prospectus and/or Plan Description and Participation Agreement containing this and other information about the funds and/or the Plan from USAA Investment Management Company, Underwriter and Distributor. Read it carefully before investing. For the USAA College Savings Plan, if you or the beneficiary are not residents of the State of Nevada, consider before investing whether your or the beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and other benefits not available through this Plan. Please consult your tax adviser.
An investment in the Preservation of Capital Portfolio is not insured or guaranteed by the FDIC or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the portfolio.
Automatic investment plans don't assure a profit or protect against loss in declining markets.
Contribution amount is prorated over five years. Contributions are subject to an 'add back' rule in the event of the account owner's death within five years. The information provided is not intended to constitute, nor does it constitute, legal or tax advice. This content was developed to support the marketing of the USAA College Savings Plan and cannot be relied upon for purposes of avoiding the payment of federal tax penalties. You should consult your legal or tax advisor about the impact of these rules on your individual situation.
Interests in the USAA College Savings Plan are municipal fund securities issued by the Nevada College Savings Trust Fund. The value of an investment in the Plan will vary with market conditions. The Plan is administered by the Board of Trustees of the College Savings Plans of Nevada, which is chaired by Nevada State Treasurer. USAA Investment Management Company provides investment management services to the Portfolios, together with its affiliate, USAA Financial Advisors, Inc., and markets and provides related services with respect to the Plan. Upromise Investments, Inc., serves as the Program Manager as well as affects participant transactions in the Plan. Interests in the Plan are not guaranteed by the Trust, the Plan, the State of Nevada, the Board or any other governmental entities, or any USAA or Upromise entities and you could lose money.
The law concerning tax and retirement plans is complex, penalties are severe, and the laws of your state may differ. Consult your tax and legal advisers regarding your specific situation.
Financial advice provided by USAA Financial Planning Services Insurance Agency, Inc., known as USAA Financial Insurance Agency in California, and USAA Financial Advisors, Inc., a registered broker dealer.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.