Ask Liz Weston

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Investing

Q&A: Budgeting for new college grads

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Dear Liz: My son will be graduating from college this June. He is fortunate to have already landed a good job, starting in August, and will be managing his own finances for the first time. His company provides a full benefits package, retirement fund, profit-sharing, a hiring bonus and all that good stuff.

I’d like to give him some guidance on how to organize and allocate his income between living expenses, liquid savings, student loan payments, charities, etc. What do you suggest? With graduations coming up, this might be a good time to help us parents get our kids off on the right foot.

Answer:One of the best things new college graduates can do is to continue living like college students for a little while longer.

In other words, they shouldn’t rush out to buy a new car or sign up for an expensive apartment when they get their first paychecks.

Pretending they’re still broke can help them avoid overcommitting themselves before they see how much of that paycheck is actually left after taxes and other nondiscretionary expenses.

A few other rules of thumb can help them get a good financial start. One is to immediately sign up for the 401(k) or other workplace retirement plan.

Ideally, they would contribute at least 10% of their salaries to these plans, but they should put in at least enough to get the full company match. If they aren’t eligible for the plan right away, they can set up automatic monthly transfers from their checking accounts to an IRA or Roth IRA.

Graduates don’t need to be in a rush to pay off their federal student loans, since this debt has fixed rates, numerous repayment options and various other consumer protections. Private student loans have none of these advantages, and so should be paid off first.

If your son has both types, he should consider consolidating the federal loans and opting for the longest possible repayment period to lower his payments. That would free up more money to tackle the private loans. Once those are paid off, he can start making larger payments toward the federal loans to get those retired faster.

One budgeting plan to consider is the 50/30/20 plan popularized by bankruptcy expert and U.S. Sen. Elizabeth Warren.

In her book “All Your Worth,” she suggested people devote no more than half their after-tax incomes to “must have” expenses such as shelter (rent or mortgage), utilities, food, transportation, insurance, minimum loan payments and child care. Thirty percent can be allocated to “wants,” including clothing, vacations and eating out, while 20% is reserved for paying down debt and saving.

Q&A: Investing vs Saving for college tuition

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Dear Liz: We recently inherited some money. We’ve never had much. We want to invest our inheritance for our kids’ college education.

We asked around to find investment firms that people have had a good experience with. But how do we know they are honest and make sound investment decisions? How do we know if the rates they are charging are fair and reasonable? (For example, one charges a percentage of the value of the account. How do I know if their rate is a fair amount?)

Answer: If you want to invest the money for college education, you don’t need to consult an advisor at all. You simply can use a 529 college savings plan. These plans allow you to invest money that grows tax-deferred and can be used tax free for qualified college expenses nationwide.

These plans are sponsored by the states and run by investment firms. You might want to stick with your own state’s plan if you get a tax break for doing so (check http://www.savingforcollege.com for the details of each plan).

If not, consider choosing one of the plans singled out by research firm Morningstar as the best in 2014: the Maryland College Investment Plan, Alaska’s T. Rowe Price College Savings Plan, the Vanguard 529 College Savings Plan in Nevada and the Utah Educational Savings Plan.

College savings plans typically offer several investment choices, but you can make it easy by choosing the “age weighted” option, which invests your contributions according to your child’s age, getting more conservative as college draws nearer.

If you still want to talk to an advisor — which isn’t a bad idea when dealing with a windfall — you’ll want to choose carefully.

Relying on friends and family isn’t necessarily the best approach. Many of the people who invested with Bernie Madoff were introduced to him by people they knew.

Most advisors aren’t crooks, but they also don’t have to put your interests ahead of their own. That means they can steer you into expensive investment products that pay them larger commissions.

If you want an advisor who puts you first, you’ll want to find one who agrees to be a fiduciary for you, and who is willing to put that in writing.

Here are three sources for fiduciary advice:

•The Financial Planning Assn. at http://www.plannersearch.org

•The Garrett Planning Network at http://www.garrettplanningnetwork.com

•The National Assn. of Personal Financial Advisors at http://www.napfa.org.

Garrett planners charge by the hour with no minimums. Expect to pay around $150 an hour.

NAPFA planners often charge a percentage of assets — typically about 1%.

FPA members charge for advice in a variety of ways, including fees, commissions and a combination of the two.

Any planner should provide you with clear information about how he or she gets paid.

You’ll want to check the advisor’s credentials as well. The gold standard for financial planners is the CFP, which stands for Certified Financial Planner.

An equivalent designation for CPAs is the PFS, which stands for Personal Financial Specialist. People with these designations have received a broad education in comprehensive financial planning, have met minimum experience requirements and agree to uphold certain ethical standards.

Each of the organizations listed above has more tips for choosing a plan on its website.

Q&A: 401(k) employer limits

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Dear Liz: My company doesn’t allow us to contribute more than 50% of our paycheck to our 401(k). This limits my contribution to far less than the IRS’ $18,000 annual limit because I’m low paid.

How can I tackle this situation, as I would want to contribute more but am being constrained by the 50% contribution cap?

Answer: Your zeal to save for retirement is admirable. Your company may not have anticipated that anyone in your situation would be able to save so much, so consider simply asking if the limit can be raised.

You can explore other avenues as well, such as contributing to an IRA or a Roth IRA. Many people incorrectly believe they can’t contribute to these individual retirement accounts if they have a workplace plan, but that’s not true.

You can contribute up to $5,500 to a Roth (plus a $1,000 catch-up contribution if you’re 50 or older) if your income is below certain limits. The ability to contribute is reduced between modified adjusted gross incomes of $116,000 and $131,000 for single filers and $183,000 and $193,000 for marrieds filing jointly. Alternatively, you can contribute $5,500 (plus the $1,000 catch-up contribution) to an IRA regardless of your income, although your ability to deduct your contribution if you have a workplace plan is phased out for incomes between $61,000 and $71,000 if single and $98,000 to $118,000 for marrieds.

Q&A: Max contributions to 401(k)s

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Dear Liz: I understand that anybody with a 401(k) can contribute up to $18,000. Does the amount you can contribute depend on your salary? Say you make $45,000. Therefore I would assume you could put in the full $18,000, or 40% of your salary. Am I wrong?

Answer: The maximum the IRS allows someone under 50 to contribute to a 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is $18,000 in 2015. The additional “catch up” contribution limit for people 50 and older is $6,000.

The plans themselves, though, may impose lower limits. Even if the plan doesn’t cap contributions, your contributions may be limited if you’re considered a “highly compensated employee.” Last year, highly compensated employees were those who earned more than $115,000 or owned more than 5% of the business. If lower-earning employees don’t contribute enough to the plan, higher earners may not be able to put in as much as they’d like.

Q&A: Shifting Roth IRA Broker Fees

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Dear Liz: What can I do to stop my broker from deducting trading fees from my Roth IRA contributions, which I make monthly? Let’s say I invest $420 each month, but the broker takes $7, or $84 a year. Shouldn’t this be payable from a separate source so that I can invest the full contribution each year, thus reaping the eventual benefits of compounding the extra $84 sum over a long period of time?

Answer: As you understand, $7 per month isn’t such a small sum when you factor in how much more you’d get over time by investing that money instead of paying it to a broker. If that money remained in your account, you’d have roughly $8,500 more at the end of 30 years, assuming 7% average annual returns.

All investments have costs, of course, but minimizing those costs typically means you’ll create more wealth.

You can ask your broker if there is a way to pay the monthly fee from another account, but any commission you pay would be included in the annual amount you’re allowed to contribute. If your broker isn’t providing helpful investment advice to justify the commission, you can look into ways to invest for less, such as using a discount brokerage.

Q&A: Rolling traditional IRA to a 403(b)

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Dear Liz: My husband and I both have employer-sponsored 403(b) retirement plans. We each also have a Roth IRA, and I have a traditional IRA that I started in the 1980s before I started work with my current employer. I do not actively contribute to this traditional IRA as I am contributing the maximum amount allowed into both my Roth IRA and my 403(b) plan. My husband is also maxing out on his Roth and 403(b). We are both in our 50s. Should I contribute anything into my traditional IRA? Should I see if I can roll it into my 403(b)? Or roll it into my Roth? Our adjusted gross income is high enough where I would not be able to take the deduction if I did start contributing. Your thoughts would be greatly appreciated.

Answer: If you can’t get a tax deduction for your contributions, then putting the money in a Roth IRA is usually the better option — assuming, of course, that your income is under the Roth limits (which it sounds like it is). Nondeductible contributions reduce the income taxes owed on any withdrawals from a traditional IRA, but withdrawals from a Roth can be entirely tax-free.

If you have a good, low-cost 403(b), rolling your traditional IRA into it could be a good choice. It would be one less account for you to have to monitor and coordinate with your other savings.

You won’t be able to roll your traditional IRA into a Roth without triggering a (possibly hefty) tax bill. The older you are, the harder it is to make a good argumen