It’s Financial Literacy Month, making money matters top of mind.
I had a chance to interview Rosemary Lombardy, a financial advisor with over 35 years of experience.
What issues affect women when it comes to saving for the future?
Women tend to live longer than men, so it is extremely important for them to start saving early for their retirement. As soon as they become eligible to participate in a corporate sponsored retirement plan, such as a 401k, they should fund at least enough to receive a matching contribution if one is offered. If they don’t have a 401K, funding a ROTH IRA (Individual Retirement Account) is a great option. If they start early, the power of compound interest will start working in their favor. The tax deduction for the contribution helps to reduce their tax bill, and the money grows faster as it accumulates tax-deferred. They need to educate themselves about finances and investments, learn to prepare a budget, and keep their retirement goal a priority, as there will be other goals, which may include funding children’s education, buying a home, or replacing a worn out car.
How do new tax laws affect women that may be getting a divorce?
Child support is neither deductible nor taxable. For separation or divorce agreements signed after December 31, 2018, alimony is neither deductible to the payor nor taxable to the recipient. The tax law change will affect divorce negotiations, as the payor is in a higher tax-bracket than the recipient, and received a tax benefit for paying higher amounts in the past. Now that the deduction has been eliminated, alimony payments will probably be considerably lower to reflect the change. This will have a very negative effect on recipients, usually women, as they paid a lower percentage of tax on the alimony payment and were able to keep more after taxes in the past than they will now.
Get advice from your own professionals for your specific situation, including liquidity needs, risk tolerance, and long term goals. In most cases, you will receive about half of the assets. Gifts and inherited assets are not included in most states, but there are exceptions. If you signed a prenup agreement, ask your attorney what you can expect to receive as a settlement.
What are your thoughts on Roth IRAs?
ROTH IRAs are a great way to save for retirement and have valuable tax benefits. The maximum annual funding amount is $6,000 if under age 50, and $7,000 if age 50 and older. There is no tax deduction in exchange for tax free growth as long as certain requirements are met. Your contributions to these accounts may always be withdrawn tax-free. Distributions of earnings are tax-free if the ROTH IRA has been opened at least 5 years ago and the individual account owner is:
—age 591/2 or older
—making a first-time home purchase (with a lifetime limit of $10,000)
—becomes disabled or dies
Non-qualified withdrawals from a ROTH IRA are subject to income tax as well as a 10% penalty. Annual required minimum withdrawals (RMDs) from retirement plans such as a 401K or IRA, which begin at age 70 1/2 or older and are based on life expectancy, are not required from ROTH IRAs. This is a very valuable benefit, as those ROTH IRA assets may continue to grow tax-free for many years. Unless the contributions to the 401K plan were to a ROTH 401K, the contributions were tax-deductible and the growth is tax-deferred, not tax-free. Distributions will be subject to income tax. ROTH IRA distributions are tax-free, a major difference. It is well worth it to give up the tax deduction in return for tax-free growth.
What about 529 plans?
One of the best ways to save for college for your child is a college savings 529 plan. These state sponsored higher education savings accounts grow tax-free if the rules are followed. Each state determines the maximum contribution amounts, eligible investments, and tax advantages. Although you will not receive a tax deduction, distributions are tax-free if used for qualified education expenses of the beneficiary of the account. You are not required to contribute to your own state's 529 plan. Distributions may be used for schools out of state. Ask your financial advisor to help you consider state tax advantages, annual gifting amounts, costs, fees, and risks when making a decision.
Non-qualified withdrawals of income from a 529 are subject to ordinary income tax as well as a 10% penalty to the person who receives the money, which can be either the owner or the beneficiary of the account. The principal portion of the withdrawal will not be subject to tax. If a child does not go to college or receives a scholarship, the owner may change the beneficiary to another child or member of the beneficiary's family. This flexibility makes a 529 plan very attractive. If a withdrawal is made from a 529 plan because the beneficiary dies, becomes disabled, or has earned scholarships and doesn't need the money, the 10 percent penalty can be waived. Income taxes still apply to the income portion of the amount withdrawn. Make sure that the withdrawals are used only for qualified expenses to avoid taxes and penalty. A smart approach is to ask relatives to make a contribution to a 529 plan in lieu of gifts that will eventually be discarded by your child.
Rosemary Lombardy is a financial advisor with over 35 years of experience and domestic abuse survivor. She is the founder of Breaking Bonds, a free resource for abused women, and author of Breaking Bonds: How to Divorce and Abuser & Heal - A Survival Guide.
Connect with Rosemary Lombardy on Facebook, Twitter and LinkedIn, and visit www.breakingbonds.com.
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