Planting the Seeds for Your Tomorrow
By Pattie Christensen, ChFC, RICP
Ah, spring! If you are a gardener, you may be gathering seed packets to plant in your vegetable garden. But whether gardening is a part of your spring ritual or not, now is a great time to plant seeds for financial growth.
What is the best way to cultivate your finances? First, determine the outcome you want (your goal) and the time frame for meeting that outcome. Is your goal to purchase a car in the next 12 months? Save for your child or grandchild’s college? Save more for retirement, for 10, 20, or 30 years from now?
Next, determine your time frame for reaching your goal, and what may be the most appropriate investment vehicle for reaching it.
For a short-term goal such as a down payment on a car, consider setting up a monthly automatic withdrawal from your checking account to a savings account. That way you are saving on a regular basis. Savings accounts may not provide a high return on your investment, but the money is easily accessible.
For long-term goals like saving for a family member’s college tuition, you may want to explore different investment vehicles such as a 529 Savings Plan. As state-sponsored plans, they offer tax breaks and tax-free earnings. Most of these plans allow you to invest a lump sum or make periodic deposits, giving you the flexibility to save at your own pace.
One of the most important long-term goals is saving for retirement. A common way to save for retirement is through a defined contribution plan such as a 403(b) plan, the non-profit equivalent of a 401(k) plan. What makes them popular, and effective, is that they give you the advantage of being able to make contributions directly from your salary before taxes are taken out (pre-tax) — up to $18,000 or 100% of compensation, whichever is less in 2017. If you are age 50+, you can make additional catch-up contributions of $6,000. If you would like information on CPG’s retirement savings plans, please visit www.cpg.org.
Another retirement saving option is an IRA, although IRAs do not allow you to contribute as much each year as a 403(b) plan. The annual IRA contribution limit is $5,500, with a $1,000 catch-up provision if you are over age 50. If you meet IRS adjusted gross income requirements, your contributions are tax-deductible. Also, non-working spouses may have the option to make contributions to an IRA as well.
Another IRA option is the Roth IRA, which features non-deductible, tax-deferred, and tax-free withdrawals. Because Roth IRAs allow you to save money you have already paid taxes on, it could be a good choice if you prefer to not have to pay taxes on your withdrawals in retirement, or if you anticipate that your tax bracket in retirement will be higher than your tax bracket now. You can take your contributions out of your Roth IRA at any time. However, if you want access to the earnings along with the contributions, you must be at least 59½ years old and at least five years must have passed since you first began contributing, otherwise there could be a 10% penalty. With the Roth IRA, if you meet this five-year rule, you can
- withdraw funds for the purchase of a first home ($10,000 lifetime limit) without tax or penalty, and
- avoid withdrawal penalties when using the funds specifically for qualified educational expenses, such as tuition, fees, books, and room and board.
Whatever your financial goals, planting financial seeds is such an important step to a great harvest down the road. Make this a season of planning and start your financial garden today!
Pattie Christensen serves as Vice President for the Education & Wellness Department of the Church Pension Group. She has oversight responsibility for the development and management of financial and health education programs and resources. Pattie has received both the ChFC® (Chartered Financial Consultant) and the RICP® (Retirement Income Certified Professional) designations through the American College of Financial Services.