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Wednesday, May 04, 2005

Your child's financial future

Planning for your child’s financial future includes many variables. Your goals, your values, and your income all play a part. Assuming college education is a goal, should you start a 529 plan? Why do so many financial advisors say to save for your own retirement and let your children finance college themselves? What about estate planning? How much should I tell my kids about our family finances?

How much did you know about your parent’s financial picture as you grew up? Did you know anything? Was money ‘tight’, or did you get anything you asked for? Did your parents ‘protect’ you from the truth?
BankRate calculator: “What is the cost of raising a child?”
Yahoo.com: Preparing for a Growing Family in a Recession,


INSURANCE
We all know about basic home insurance. Whether you live in an apartment, condo or house you need homeowners insurance. How comprehensive your insurance is depends on your future needs should you actually need to draw on your insurance. For most people, a cheaper plan with a higher deductible is best, although you need to carefully evaluate the plan to make sure it covers your home for any likely event. Flood insurance and other types of coverage is probably not automatically included but is sometimes necessary.
If you have dependents other types of insurance may be costly but are necessary. If you are lucky enough to have a job where medical and dental are offered take advantage of them. The same goes for life and long term disability insurance. What you need to do is determine what the needs of your dependents would be should something such as death or disability happen to you. Often life insurance and LTD is available through employer plans for just a few dollars a month. If you have no dependents, you probably don’t need life insurance, but you do need LTD. What if you are permanently disabled? Who is going to take care of you? If it is family, they may need to bear a heavy financial burden if you haven’t planned well. This in turn, brings us to the necessity of a living will.

LIVING WILL
Who hasn’t heard of the Terry Schiavo case? Needless to say, we all need a living will. We also need to periodically review and update this document if necessary. Consider not just your pain if something puts you in this medical predicament, but the pain of your loved ones you have to determine what they think you may have wanted. No one wants to leave a spouse, parents, or even their own children in this untenable situation.

529 PLANS AND COLLEGE
Savingforcollege.com is one of the best sites I’ve seen to explain the various 529 plan options and other ways to save money for college. One caveat that someone people don’t realize, is that any money saved in a 529 or Coverdell plan, for instance, is taken into consideration when the prospective students FAFSA is reviewed. However, money in a IRA, which may be withdrawn without penalty for education, is not considered as student funds by FAFSA as it is in a retirement account. If you can start early enough to save (the best option) to have enough money to fund four years of college, then there is no problem. But if you start rather late, you may want to consider putting the money into a custodial IRA instead. Tax reliefs for college are also available.

Taxwise, look into the Hope credit, the Lifelong learning credit and don't forget the student loan interest deduction. Information can be found at the IRS web site .

One often overlooked feature of some state programs is tuition free college plans. That's right tuition free. In Georgia, for instance, students with a decent high school GPA (I think its 3.0) go to college tuition free. I believe California has a similar plan and don't knock state schools, some of these are really good.

Saving for College.com: 529 plans and “kiddie” IRAs
Student financial aid

CUSTODIAL IRA
As long as the child in question has employment income, they can have an IRA. Contributions can’t exceed their annual income. Whether or not the individual needs to use this fund for college, it’s a really great way to teach a teenager about saving for the future.
Citizensfunds.com: Custodial IRAs

INVESTING AND SAVING FOR KIDS
I think it’s never too young for a child to start saving and investing. Start them with a piggy bank when very young, and get them a passbook savings account when old enough to earn an allowance. When the piggy bank is full, roll the coins and take your child to the bank to deposit them in a savings account. Establish some savings goals. I think its really easy for a child to lose accountability for the purpose of ‘saving’ money if they have no goals. The goals may be multifold and short or long term: college, a bike, a book, etc.
Investing for kids can be fun and eye opening and sometimes a great motivator. They can even buy real stocks- help them do a little research and buy a DRIP that they may know something about- such as a games company, a food company, or a local company. If they really get motivated and have a steady savings or income something like Sharebuilder might be interesting for your child to look in to.
Kiplinger.com: “Investing Resources for Teens,”
Dollarstretcher.com: “Arm your kids to fight for their financial future”,
http://www.sharebuilder.com/


INHERITANCE, GIFTING AND TAXES
Gifting is a great way to distribute some of your accumulated wealth during your lifetime. Anyone can give up to $11,000 per year to anyone else completely tax free. This is in addition to the lifetime exclusion so take advantage of it if you believe your assets are enough that you don’t want them lost to estate taxes.

You need a will. You really, really need a will. Every state has different rules on probate and executorships and if you want to determine what happens to your estate when you die, whatever its worth, then you need a will. The limits on inheritance and gifting have been rising so be sure to check the latest updates at www.irs.gov.

Suze Orman: “Baby-proof your Finances”
BankRate.com: “A single parent’s guide to financial security,”


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