Jill On Money: Lightning Round Q&A

To help get through my ever-bulging inbox, I plan to devote a few summer columns to lightning round questions and answers. If you need more in-depth information, send an email to: askjill@jillonmoney.com. Here goes!

Jill Schlesinger

Q: We have two grandchildren who will be starting college next year and we would like to get them on the right track with investing. Can we open Roth IRAs if they don’t have earned income?

A: Without earned income, you can’t fund a Roth IRA. Instead, how about opening a custodial account and teaching them how the investment world works? It may be gratifying for them to learn the basics from their grandparents.

Q: I am a 70-year-old widow, and ready to retire. I have no debt, $100,000 in savings, $600,000 in retirement accounts (401(k) and Roth IRA), and a pension. The pension offers either a lump sum or an annuity payment for the rest of my life. Is it OK to forego control of the lump sum and dip into the retirement savings that I have amassed to pay for big expenses, like a car or a trip?

A: Presuming that the monthly annuity payment, plus your future Social Security retirement benefit will cover your basic needs, yes. Remember that the money you will withdraw from the 401 (k) will be subject to taxes, so be careful to factor that into your planning. That said, it is likely that the retirement savings should provide ample liquidity, should future needs arise.

Q: I’m looking for a place to put some of my “safe” money, while still earning some interest. Should I pull money from savings and put it into a higher yielding bond mutual fund?

A: This is the saver’s lament. Although reaching for more interest may seem enticing, if it is true safety that you seek, I would look for a higher yielding savings or money market account. Go to depositaccounts.com and check out what they’ve got.

Q: I’m 26 years old, have a six-month emergency fund, and I’m also maxing out my Roth IRA, and contributing to my work Roth 401(k). Should I also be contributing some pretax money to my 401(k)?

A: Given your age it’s probably better to pay taxes now, while your income — and tax rates are low. I would use all Roth, all the time. Decades in the future, when you reach retirement, I think you’ll be very happy with your decision.

Q: Are there income limits for a backdoor Roth IRA? I make $260,000 and was hoping to use this technique to put $6,000 per year into a Roth.

A: A backdoor Roth allows high earners to move money into the Roth world without any income limits. You start by making a $6,000 contribution into a nondeductible traditional IRA and then convert it to a Roth. Just remember that for this to work, make sure there are no other IRA accounts floating around, which could make things messy and screw up the whole plan.

Q: Early in the pandemic, my wife and I realized that we only had $15,000 in emergency savings. We got up to $30,000 by stopping all retirement contributions above our company matches and pulling back on contributions into our kids’ 529 accounts. At what point should we shift back over to retirement and college savings?

A: Presuming that $30,000 represents six months to one year of your household expenses, then now is the time to ramp up the retirement contributions with a goal of maxing out at $19,500 per year. If you are still short on the savings, address that first, then retirement, and then start adding to the 529 plans.

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