Divorce is like an emotional hurricane. It’s hard to think straight in the middle of the emotional storm, and it’s normal for your financial frame of mind to blur when going through a divorce. But no matter your stress level or your fuzzy frame of mind, it’s extremely important to prepare yourself for the financial side of divorce.
Your divorce is going to result in decisions that will have a huge impact on your finances both now and in the future. Don’t wait until you’re mid or post-divorce to figure out the costs. This can lead to unwanted surprises. But being prepared ensures you won’t be financially devastated as you move forward.
8 Tips To Help Handle the Financial Side of Divorce
- Get Educated about the Financial Side of Divorce
Your finances is an important element that you naturally think about in the break-up of your marriage. Divorce is stressful and traumatic, and with emotions running rampant, you’re likely not going to be thinking clearly during your divorce. But you need to be educated about the costs that come along with your divorce, and get yourself ready to deal with them.
From lawyers and experts, to real estate agents, financial planning, and therapy, costs can range between $10,000 to $20,000. If managed properly, the cost can be considerably lower. Whatever the case may be, make sure you’re prepared for the cost of your divorce by educating yourself.
- Know Your Financial Obligations
If you have children, you’re likely the one who’s going to pay child support. If child support is part of your divorce agreement, you are legally obligated to pay it. Some guys who are supposed to pay child support don’t pay it or don’t pay it in full, which is a legal no-no. The well-being of your children should come first, and the amount of child support that’s decided by the court or mandated by the state is what you’re obligated to pay.
Always pay your child support in full. If there’s a significant change in your financial situation or in your custody agreement it can be adjusted. But, until then, you should pay what is required. Child support pays for everything from the basic necessities of life like food, clothing and housing, and may include child care, education fees, medical expenses and extra curricular activities. If you’re concerned about the money not going to your children, try to find alternate solutions where you can pay service providers directly.
- Be Open to Alimony
Whether you chose to be a stay-at-home dad, or your ex chose to be a stay at home mom, be open to the possibility of alimony. Lots of guys are closed-off to the idea of alimony, not wanting to give the Ex a free ride. But, paying alimony for some short duration of time should also reduce your child support obligation.
Keep in mind, when you’re the one writing the alimony check, the alimony payments are tax deductible, whereas child support is not. Try offsetting child support, dollar for dollar, with alimony so a to take advantage of the tax savings.
- Do Not Hide Your Assets
Divorce can be scary, but the last thing you want to do is panic and move money out of your bank account and into hiding. If the money is found (which it likely will be), you’ll lose your credibility in court and won’t be trusted in any asset discussions. Worse, you may be penalized by the court for your deceit.
Revealing your assets is a legal requirement of all divorcing couples, so disclose everything that belongs to you and don’t hide anything. On top of not being trusted in court, you could be ordered to pay your ex’s attorney fees or the court may even award her all of your undisclosed assets.
- Track the Money
You should locate all of your marital financial resources to help ensure your future. This includes everything from your bank accounts and assets to incomes, properties, retirement plan, vehicles, furniture, brokerage accounts, and insurance policies – everything that’s owned jointly and/or separately by the two of you. Then organize everything into 401(k) and IRA statements, employment retirement accounts, employment bonuses and stock options/awards, real estate holdings, insurance policies (those that have cash values), mortgages, house and vacation home appraisals, brokerage accounts, money market accounts and tax returns. Tracking your monetary assets now can help stabilize your financial situation in the future.
- Protect Yourself
There are many ways to protect yourself, your finances and your assets during the divorce process. Separate your non-marital assets – property belonging to you, such as gifts you were given, that are not subject to equitable distribution. Also, make sure to cancel any joint bank accounts and open individual accounts, but, be careful not to disproportionately take more than what is rightfully yours in the process. Check your credit reports from all three credit agencies (Equifax, Transunion, Experian) and double check that all credit cards in your report are accounted for an/or cancelled. Get new credit cards in your name and close all unused credit accounts. You don’t want your Ex racking additional debt during the divorce process for which you may be held responsible
And don’t be afraid to talk to your spouse to get the information you need. It’s important you’re both aware of your complete financial situation and understand the debts you share as a couple and individually. To avoid unforeseen surprises, with the help of your attorney, ask for a full disclosure of all financial records and accounts and be prepared to share yours. Don’t forget to change your will (and beneficiaries), medical proxy, living will, and your brokerage account beneficiaries too.
- Create a Post-Divorce Budget
Your post-divorce life is going to look much different than your life did when you were married, and it’s important you prepare a budget to account for everything that may come your way. Every day expenses are going to change when you’re single, and if you have kids, you’re going to want to make sure you have everything they need to feel at home and comfortable in your new place.
It’s easy to just focus on divorce-related expenses like child support and alimony, but it’s key to recognize your new reality. Talk to a financial planner if you need to, and create a realistic and meaningful budget for your new single lifestyle.
- Resist the Urge to Impulse Buy
It’d likely you did not initiate the divorce, but divorce always results in a sense of loss. You’re losing a big part of your life and it’s likely very devastating. People deal with loss in different ways, and sometimes we think, albeit illogically, that making a big purchase, like an expensive new car or a big new house will make us feel better.
Divorce is expensive. Your post-divorce life is going to come with new costs you won’t be accustomed to or prepared for. Resist the urge to purchase expensive items on impulse, especially within the first twelve to twenty four months of your divorce.
If you’re about to go through a split, don’t neglect the financial side of divorce. It may be the last thing you want to think about, but it’s crucial for your financial well-being.
What are your biggest questions or concerns when it comes to divorce financials? Write us and let us know in your comments below.
If you are newly divorced or about to be, and faced with moving you of the marital home, you’re probably weighing deciding to buy or rent after divorce. It’s a major consideration with the potential for significant emotional and financial implications either way. Check out the list of questions to ask, factors to consider, and a nifty tool to weigh the costs before making your decision to buy or rent.
In 2011, I found myself in the buy or rent dilemma. Because I could not afford our 3,000 square foot marital home on my income, I was the one to move. At the time my ego won out over everything else, and I ultimately purchased a home in another town.
While I didn’t immediately regret my decision, I soon realized the shortsightedness of it. In these past seven years, I’ve moved two additional times and learned much more about real estate, personal finance, and myself. I hope to help you learn from my experience.
Deciding To Buy or Rent After Divorce – Each Hold Pros and Cons
Buying a home has typically been a plus factor in evaluations of financial success while leasing has often been perceived as “throwing your money away.” However, with the housing crisis not yet a forgotten memory, and younger generations on the move, opinions are changing. Now, thoughts of a dream home are not so dreamy, and the benefits of renting are proving popular.
The typical pros for buying sound like this:
- A home is yours, and you can paint, remodel, and decorate any way you want
- Once your mortgage is paid off, you own it completely, with only maintenance, property taxes, and insurance costs remaining
- Homes generally appreciate in value
- Improvements to the home may allow you to ‘earn’ money when you sell
- Tax credits may help to reduce some of the ownership costs
On the flip side, here are common renting pros (or buying cons):
- Renting is not throwing your money away, it’s simply securing a temporary place to live
- With renting you aren’t on the hook for emergency repairs or maintenance costs for the property
- Costs for insurance, and often utilities too, are lower
- There’s no personal financial concern if the property increases or decreases in value
- Purchasing a home ties up a large sum of money while also tying you down more permanently
- Owning property comes with the additional monthly costs of taxes and mortgage interest
All these factors do not weight equally, however. To effectively compare renting to buying after divorce you need to know the whole story.
Start With These 6 Questions When Deciding To Buy or Rent After Divorce
- What do you need? First list out what you need in a home before you start on your list of wants. Consider who will be spending overnights in the house and what space is required. Sure you may want room for a home office, gym, play area, and your car restoration project, but is it a bona fide need? It is entirely possible to meet all your needs with a rental property, and maybe even a few of your wants. Attempting to purchase them all, however, may cause you to overextend yourself financially.
- How long are you planning to stay in your next home? Buying and selling a home involves costs, far beyond the purchase price. Realtor and attorney fees, inspection fees, appraisal fees, mortgage origination fees, and title insurance costs are among those to consider.These additional costs may make owning a home far less practical unless you remain in the property more than a couple of years. Selling within the first few years, might not give the home time to appreciate enough to balance out the additional costs.
- What’s the likelihood of house prices rising? In recent years the housing market showed us it falls and stagnates as well as it grows. How would your overall financial life look if your house’s value increases slower than the market, does not increase at all, or decreased suddenly? Your home may not be an investment at all, only an expense.
- Will you be eligible to save on taxes by buying? While it’s true some buyers can balance additional costs of homeownership with tax savings via the mortgage interest deduction, not all do.You must be able to itemize tax deductions to receive the benefit. With your new marital status, your tax-filing situation will be different, and your deductions may change. Speak with a tax expert to understand your potential tax savings if any.
- Are you financially stable right now? Divorce usually impacts your financial life dramatically. If you currently hold any debt, face alimony or child support payments, and are behind on your retirement savings, now may not be the best time to make a significant purchase.
- Are you emotionally stable right now? This may indeed be the hardest question to answer while also being the most important. Divorce is stressful. In fact, it is number two on this list of the 10 most stressful events of life. While you may know that logically, you may not fully understand yet how it’s affecting you.
Rushing into a decision to purchase a home may only lead to more stress down the road. Speak with a close friend, family member, or a professional if you need help sorting through your emotions.
To Buy or Rent, the Financial Comparison
Accurately comparing the financial difference of renting or buying requires you to factor in the entire cost of home ownership —not merely the monthly mortgage payment versus rent payment Additionally, you want to look at the overall money picture.
For example, consider if finances not tied up in a home could earn you more through investing in a diversified index portfolio, thereby improving your overall net worth and financial security.
“Rather than simply focusing on monthly or annual costs of the buy versus rent decision, consider which option would have a greater positive impact on your overall wealth at the end of your stay. For example, let’s say your total costs of ownership were $2,000 a month and you could rent a similar property for $1,800 a month. You might consider how that additional $200 a month could grow if you were to invest it in a diversified portfolio and compare it with all the home equity you will build up during the same time through your mortgage payments.” – Fidelity Investments
You can run a simple rent vs. buy comparison by looking at the price-to-rent ratio. Taking the home value and dividing it by the annual rent amount calculates this. In general, when the price-to-rent ratio is higher than 20, renting looks to be the better option. If the ration is less than 20, buying may be the better way to go. Any comparison, however, is only beneficial when you are comparing similar properties.
A sophisticated, yet easy to use online tool that requires a few additional inputs does the calculations for you – found here.
It’s Not Just About the Money
When weighing the differences between the homes you’re considering, take into account the non-monetary benefits of each as well. Does one offer the outdoor space or ideal location you desire? Will one keep you closer to your children or ease your daily commute?
I failed to do any of the above when deciding to buy or rent after divorce and jumped into buying a home quickly. Fortunately, it ended up being a positive financial move even though I sold it two years later, but it was the wrong move on an emotional level. Just a few months in I realized I should have listened to my brother and best friend and leased a property first.
When you are coming out of a divorce, you’ve no idea what your life will be like even one year later. Give yourself some time to get accustomed to your new life. And your kids will do just fine in an apartment or rented home.
The Bottom Line
Renting or buying can each work in your favor. Yes, owning a home may be beneficial over an extended period but renting may be the best option today.Ask and answer the hard questions and crunch the numbers. Then make the best financial and emotional decision you can for you and your family, with all the information in hand.
If you’re a Dad who wants his kid to do well in life, then one of the best things you can do is to start teaching your kids about money. The sooner, the better. Children who learn smart earning, saving, and spending habits early on positively impact their financial futures.
Skills to earn income, save, invest, and spend money can be taught at a very young age. Understanding the difference between needs and wants, grasping the concept of how savings grow, and grasping how debt can negatively impact one’s life are all entirely possible for children to learn.
These concepts are not often taught in most schools, and while I think they should be, I think it is more important that dads take the lead in teaching your kids about handling finances. Because frankly, who cares more about your child’s money than you and them anyway?
Ways to Teach Financial Basics
I did not give my children an allowance, but in hindsight, I wish I did. Having them ‘earn’ an income is a great way to teach the ins and outs of earning, saving, spending, and even donating. As children are faced with situations such as wanting a toy or piece of clothing that isn’t in the family budget, they can be taught the difference between needs and wants. You can be teaching your child patience as well by showing them how to save for a desired purchase that is not in the family budget.
Grocery or back-to-school shopping trips can be great teaching opportunities. Start by preparing a list of needs before hitting the store. Show your child how to compare prices, take advantage of things that are on sale, or buy in bulk to save additional money.
Explain how the brands they may see advertised on television are not always the best value option. If they ask for items that are not on the list explain that those things are not necessary and be willing to say no. Alternatively, you can use those times for teaching your child they can pay for their wants out of their savings.
Open a savings account with your child and if they are of working age assist them in opening a checking account. Owning and maintaining savings accounts can children learn about interest, how to deposit and withdraw money, and depending on their age, properly use debit cards.
Does your kid show an entrepreneurial spirit? Help them start a small business. A lemonade stand, lawn mowing, snow shoveling, or babysitting services are all reasonably easy options for teaching your kids about money. This is an excellent way for them to learn financial skills. Also, they can learn how to set and achieve goals, what profit and loss are, how pricing effects profits, and more importantly how hard and honest work can be rewarded. A small business can also instill confidence and necessary people skills.
Hacks for Teaching Your Kids About Money
- Use clear jars to accumulate money for saving, spending, and donating so that your child can visual see the money. As they earn money or are gifted money, teach them to split the money between the different jars, based on agreed upon designations. Such as 25% for long-term savings they can’t touch, 25% for short-term savings, 10% for donations, and 40% for spending on their wants.
- Have them count their money and record in a notebook or on the computer, each time they add money to their jars or take money out. Putting down notes as to where the money came from or how it was spent or donated is a good habit for them to create. You’ll be teaching your kids about money, and about record keeping.
- Assist your child in setting goals for their money. If they want a toy that will take four weeks of allowance to pay for or their first car, which may take them four years, help them create a savings chart to track it. This can be done with a simple piece of paper and crayons for young children or an Excel spreadsheet for an older child.
- Physically show them how money works. Instead of using your credit card online or at the store teach them how to use cash. Go through the motions with their own money when they want a toy by having them grab a few dollars out of spending jar and taking it to the store to physically purchase an item.
- Explain the concept of opportunity cost. If you buy this book with your money, you won’t be able to buy that toy too.
- Find opportunities for teaching your child the importance of giving and lead by example. Even with just a little bit of money, they can learn about giving. Have your child pick a charity, a cause, your church, or even someone they know who could use a little help. Eventually, they’ll understand giving doesn’t just positively affect the charitable causes they give to, but also the giver as well.
- Describe how compounding interest works – Interest is earned on the original amount of money saved, as well as on any interest already earned. Here’s a fun calculator for them to try.
- Educate them about credit and the danger of credit cards. Stress the importance of using credit responsibly and paying off credit cards in full each month. Credit card debt is costly and can quickly ruin one’s life. Don’t let them learn this the hard way.
Financial Technology and Money Apps for Teaching Your Kids
As your child ages, you’ll likely want to introduce them to more technology-based financial education. This may aid you in teaching them necessary to understand concepts mentioned above. Here are a few highly rated fin-tech products you may want to check out when you and your child are ready.
FamZoo, encompasses many areas of teaching kids about money, including spending, saving and giving. Their technology allows you to utilize prepaid cards or a simple IOU system instead, to provide allowances to your kids. It’s entirely customizable, goal-based, simple to use and in addition to allowance tracking, FamZoo also allows you to:
- Assign payments for chores
- Set up savings buckets to pay your kids a specified interest rate (compounding interest!)
- Establish separate logins for your child to give them responsibility for tracking their money.
FamZoo offers lots of features for a variety of ages making it an awesome program that grows with your kids.
Started in 2011, Bankaroo is the idea of an 11-year old daughter and her father who helped her bring it to life. It is a virtual bank designed for kids, ages 5 to 14. It teaches the value of money in a fun and straightforward way. Create checking, savings, and charity accounts for your kids to track their allowance, gift, or chore money. Kids can also create savings goals and earn cool badges.
Bankaroo has mobile apps in both English and Spanish and offers financial curriculum programs for schools too.
Aimed at kids, ages 6 to 8, PiggyBot offers an easy way to track allowance spending and saving. Instead of cash, your kids have a virtual balance, like an IOU with you. Each child has a separate Spend-It, Share-It, and Save-It account and you decide how to allocate the allowance.
Kids can set goals, take pictures of things they want and share money. There’s also an option to show off the items they purchased. The system is designed to reinforce principles of saving for wants, needs, and nice-to-haves.
One of the most important things you can do as a parent is to communicate with your child early and often on how to earn, save, and spend. There are many ways, tools, and technology available for teaching your kids about money. Offer several examples to them of how money is earned and provide your child the opportunity to help decide how it is budgeted for saving, spending, and sharing. Also, please educate your children about the dangers of spending above their means, overusing credit cards, being in debt, and paying high-interest loan rates.
Money Confident Kids
Are you outraged about the money you pay your ex for child support? Do you spend a lot of time wondering what she does with your money that doesn’t involve support of your children? Do your thoughts about your money and your ex consume a great deal of your time and energy?
Fighting over money can wreck relationships and is one of the most significant sources of post-divorce conflict too. If you find yourself caught in this trap, you can benefit from understanding painful triggers and how to decide when to fight over the money you pay your ex.
I have four tips for managing money issues successfully with your ex post-divorce. If you can set aside all of the preconceptions you bring to the table about your ex-wife and your money, and how it impacts the children, you can do this.
That’s asking a lot, but your children’s happiness is worth it. You may need to re-frame the way you have been thinking of the ex since the divorce, but you can make the shift with some hard work and determination.
The first thing you can do is to recognize that money you pay your ex through child support is intended to equalize, to a limited degree, the homes in which the child lives. This means their mother may benefit from the child support too. This concept probably wasn’t introduced to you during your divorce negotiations, but makes it clear that it’s okay for an ex-wife to have some benefit from the child support payments. The idea is that when children have less disparity between the two households where they reside, it is good for them.
Also, your views about money should be considered. Have you always been a “cup half full” person? Do you worry that there isn’t enough to go around? Or do you always expect to have enough money but sometimes come up short?
Whatever the case, take notice of what you bring to the table regarding money, perhaps based on your childhood, and acknowledge it. Although you may want to think otherwise, your ex isn’t responsible for all of your money issues. You play a role in how you manage money, and how you think about money, and it’s up to you to take responsibility for this. If you can do that, and use the four tools below, you are well on the way to creating a system for keeping money in its place in your life and with the ex!
1. Recognize It’s Good for Your Children If Your Ex Isn’t Struggling Financially.
Simply put, child support is intended to equalize income, to some limited extent, between homes. Whatever your “beef” with your ex, don’t make this one of them. You cannot control how she spends the money so let that go. Assume she, like you, is doing the best she can to take care of your children too. If you’ve spent a long time believing otherwise, this isn’t an easy task. But, it’s an important one.
When you begin to let go of the need to “punish” your ex for perceived misdeeds of the marriage, or your divorce, it will help you to allow the space for her to move forward successfully too. The expression, “A rising tide lifts all boats,” applies here as your children are surely well served by having two financially secure parents.
2. Stop Talking About Money All the Time
Start by paying what you owe on time and not commenting negatively, for one month, on any money issues. If there is a real problem, you will deal with that, as needed. But, not right now. You should create a budget for yourself, including the money paid to your ex, and make a plan to live within it. If you consider the money paid to your ex simply part of your monthly operating expenses, rather than an unnecessary burden, it may be simpler to stop thinking about it all of the time. Take the steps necessary to limit focusing on it. That will help you and your children.
Also, free yourself from the repetitive mantra of, “She’s a witch and is spending all of my money.” Instead, if it’s impossible to see her as a partner in co-parenting right now, acknowledge, if nothing else, she has the kids when you don’t. It’s good for them to be happy and secure when they are not with you. Your money helps them. Period.
3. Don’t Talk to Your Kids About The Money You Pay Your Ex
There are no exceptions to this rule. Just don’t. They won’t think better of you if you tell them the money is all yours or that you are the only one who provides for them. They love their mom too, and they should, and this only makes them uncomfortable and insecure. You must choose to prioritize your children’s emotional health over your own need to feel as though you have somehow been victorious over your ex. There are no winners when children are put between their divorced parents. Their esteem is tied to what you say about their mother too.
4. Keep Your Disagreements Civil and Simple
You are well served to have a system in place to address disagreements that arise outside of court. Perhaps you can develop a quarterly reconciliation of expenses outside of support, preferably by email, that works for you. Limit your comments to the expense itself and do not infer intent in your communication with your ex. It doesn’t solve the problem and is likely to only heighten the conflict.
Think carefully before escalating the dispute to the legal arena. It is much preferred, for the benefit of your children, to consider mediating expense conflicts outside of court. As a last resort, take your disagreement to court. Of course, if your income changes and modification of an order is necessary, you may need to use the legal process. Just remember to keep it matter-of-fact and don’t make it personal to your ex. She has her own money pressures and adding your negative energy will only hurt your children.
You are Your Kid’s Example
You can decide when to fight over money you pay your ex. Knowing when to let it go is likely the most important thing you can do for your own well-being and to take care of your kids. Recognize when you are triggered by money and your ex and always take a pause. Use the four tools above to limit your unnecessary interaction with your kids and their mother over money and make a plan to address when there is a dispute. You have a choice and can only control how you behave. Make sure you do to benefit you and your children, now and into their adulthood. Teaching them how to manage money, even when it’s difficult will help them now and long into their future. It’s really up to you!
(c) Can Stock Photo / AndreyPopov
If you’re a divorced dad who hasn’t started saving for college, you’re not alone. Most parents want their child to go to college, but less than 40% have a plan to pay for it. With less than 25% of funds currently spent on college coming from savings, it’s no wonder student loan debt is so high.
Annual college tuition and fees are now averaging nearly $35,000 at a private, four-year institution. They are almost $10,000 at a public four-year college and $3,500 at public two-year schools. As costs continue to increase the struggle to pay for them will too.
Results from the 10th annual study, How America Pays for College 2017, show parents are paying 31% of these costs through savings or loans, with students picking up 30%, family and friends covering 4%, and scholarships funding for the remaining 35% of advanced educations.
As a divorced dad, saving for college on top of child support payments, everyday living expenses, and your future retirement, may seem impossible. Yet, with a bit of planning and perhaps some creativity too, you can start saving today. Thus, making advanced education an affordable option for your children in the future.
It’s Not Too Late to Start Saving for College
Choosing to attend in-state versus out-of-state schools is one way students themselves can reduce the overall cost of college. Earning college credits in high school, or attending community colleges for one or two years before moving on to four-year institutions are others. Living at home instead of at college, or living with one or more roommates, help as well.
Applying for scholarships and working while in high school are additional ways your child can help. This will minimize the impact later on your wallet and theirs too.
Even if your son or daughter is now a sophomore in high school, it’s not too late to start saving for college. Any savings is beneficial but the sooner you start, the better of course. According to Finaid.org, stashing away just $50 per month from your child’s birth to the time they turn 17 would provide $20,000, assuming a 7% return on investment.
Before starting college savings, however, experts suggest:
- Paying off any credit card debt or other high-interest loans.
- Establishing an emergency savings account with 3-6 months of expenses accumulated
- Regularly contributing to your tax-advantaged retirement savings accounts – 401ks, Traditional IRAs, etc.
Additional College Saving Tips
Cut non-essential expenses to provide more money for savings. Track your spending to see if there are any expenses you can eliminate to increase your savings for college. Think cable TV, gym memberships, subscriptions you don’t use or eating out less. $5, $10, or $25 savings add up over time.
Increase your income. Ask for a raise at work or apply for a promotion. Seek a position at a competing company offering a larger salary and benefits. Turn an interest or a hobby into a side hustle and create an additional income stream or pick-up a part-time job.
Keep substantial savings in your name with your child as beneficiary, to avoid any loss of student aid. For every dollar above $3,000 saved in your child’s name, 20 cents is subtracted.
Make savings automatic. Make it easy on yourself by automatically depositing a portion of your paycheck into your savings.
Where to Stash Your Money
529 College Plans
More than 30 states offer a 529 college savings plan with full or partial tax savings benefits. Also known as Qualified Tuition Programs (QTP), 529’s are funded with after-tax money you’re allowed to withdraw later tax-free, including any gains, for use on qualified education costs, such as tuition, fees, and books. These state plans offer various investment options and expenses, and contribution limits vary.
A 529 account owner is allowed to withdraw funds at any time for any reason – but the earnings portion of non-qualified withdrawals will incur income tax plus a 10% penalty tax. Should your child not end up going to college, you can typically transfer the account to another beneficiary.
Most plans allow you to change your 529 plan investment options twice per calendar year and allow for a rollover of funds into another 529 plan once per 12-month period. 529 programs have no income, age, or annual contribution limits, but may have lifetime contribution limits – $235,000 to $500,000 depending on the plan.
Roth IRAs, popular as tax-advantaged retirement savings vehicles, can also be used for college savings. As with a 529 plan, you contribute after-tax money to a Roth IRA, and any investment gains can later be withdrawn tax-free, typically for retirement after age 59-1/2. But a Roth IRA also allows you to remove funds tax- and penalty-free, after five years, when used to pay for qualifying educational expenses. Should your child not attend college, you can use the funds for your retirement.
There are income and contribution limits with the Roth IRA. Single taxpayers earning more than $129,000 per year are not eligible, and contributions are limited to $5,500 per year ($6,500 for those over age 50).
Coverdell Education Savings Account
Coverdell ESA’s may be used to cover not just college costs but also any educational expenses, including private school tuition at K-12 institutions. Like a 529 college savings plan, the Coverdell ESA is typically tax-advantaged when utilizing the savings for education expenses.
You may contribute $2,000 per child per year, although contributions phase out for anyone earning more than $95,000 per year.
Similar to the 529 and Roth IRA, money in a Coverdell ESA is considered your asset, not your child’s for financial aid purposes. Please note, however, funds not utilized before your child turns 30 may be subject to taxes and penalties.
Prepaid College Tuition Plans
Prepaid plans allow you to pay for a portion of your child’s college tuition today, locking in current costs and in turn protecting you from future tuition hikes. Like 529 college plans, monetary gains in these programs are typically exempt from federal taxes. A dozen plus states offer prepaid tuition plans but this not the most recommended method of saving for college, as it severely limits educational choices to the state they are purchased.
UGMA / UTMA Custodial Accounts
The Uniform Gift to Minor’s Act (UGMA) and Uniform Transfer to Minor’s Act (UTMA) accounts are custodial accounts to hold and protect assets for minors until they reach adulthood. Because the assets are considered the property of the child, they provide some tax benefits, but less than a 529 plan would. Additionally, unlike other saving plans, they can be considered your child’s asset affecting federal aid amounts your child qualifies for.
A custodian can initiate withdrawals for the child’s benefit provided the expenses are for a legitimate need. Unlike other college savings accounts, payments are not limited to education costs. Once your child becomes a legal adult, they may use the money for any purpose without custodian consent.
Other Ways to Save for College
- Sign up for Upromise – Register for a free at Upromise.com and earn cash back for college with your shopping, dining, and travel. You earn money by using your registered credit, debit, and loyalty cards at participating businesses. Accumulate savings in a savings account, a 529 plan, or have a check sent to you.
- Credit Card Rewards – Find a credit card specifically designed to earn college savings or use any cash back rewards card to amass savings for college. By using your credit card to pay for items such as your utilities, your cell phone bill, groceries, and insurance and paying off the balance in full each month, you’ll accrue some additional savings for college. Of course, utilize any credit card responsibly and don’t go into credit card debt trying to save.
- LEAF College Savings Gift Cards – Leaf provides family and friends a way to gift a monetary amount for your child’s education. A gift card is purchased via LeafSavings.com and sent to you via email, Facebook, or postal service. You then redeem the gift card on Leaf’s site and transfer it to your 529 college savings plan.
No matter how or where you decide to save for college, get started as soon as possible to take advantage of time and compounding interest. You and your child will be thankful you did. Remember, every little bit helps.
Sources and Recommended Resources:
What is a 529 plan?
Choosing the Best 529 College Savings Plan
(c) Can Stock Photo / karenr
It’s the punchline of a thousand bad movie jokes…but what does it actually mean? What does it entail?
What It Means
The word “alimony” is derived from the Latin alere, meaning “to nourish”, and the concept is simple: it is the legal obligation of one spouse in a marriage to provide financially for the other after separation or divorce. If it helps, think of your marriage as kind of like a cell phone contract; you can break that contract, but you’re gonna pay for doing it.
In the past, the paying spouse was invariably the male spouse…but as social norms have changed, and with the advent of same-sex marriage in many states, that’s no longer always the case.
So what does that mean for you? Will you have to pay support? Can you ask for spousal support? The answer is: it depends. Financial support is not an automatic right, but either party can ask for it during divorce proceedings. In many cases, the terms of financial support can be handled privately between both parties. But if you and your spouse can’t come to an agreement, the courts can step in, and that’s where it gets complicated.
State Laws Vary on Alimony
How support is assigned, and how much and how long, varies wildly depending upon where you live. Each state is different and your divorce lawyer will be intimately familiar with the laws in your jurisdiction. In many states, spousal support is only awarded if the marriage lasted over ten years or if you have children. (In that case, spousal support is still handled separately from child support, which is a whole other massive deal.) Some states factor marital fault into support proceedings: if you cheated on your wife, you might end up literally paying for it.
Some states have limits on how long spousal support must be paid; in Kansas, for example, payments cannot last more than ten years and one month, while in Utah, it can’t last longer than your marriage did. On the other hand, if you live in Mississippi, Massachusetts or Tennessee, you might be expected to pay until the day you die or your former spouse dies or gets remarried.
Some states have alimony pendente lite, which is basically “separation spousal support” that is paid from one spouse to another during the separation period, until the divorce is finalized. If you’re a house husband or stay-at-home dad and your wife kicks you to the curb, you can ask for “rehabilitative support” from her, which will only cover you until you can get a job and a place and get on your feet.
Where and How Much
But let’s assume you’re the one who gets saddled with making payments. How does the court determine how much you’re going to be shelling out each month? Again, it depends on where you live, but it’s also going to depend on how much you make; the standard of living you provided for your spouse during the marriage; whether your spouse supported you at any point during your marriage…the list goes on and on.
And it’s usually not going to be cheap. Generally, you won’t be asked to pay more than you can afford and still cover your own bills, but it’s important to remember that most courts consider spousal support more important than voluntary debts (like credit card bills or car payments) and won’t take those into account, which might leave you in a tricky position. The one upside is that the federal tax system allows you to deduct spousal support when filing your taxes. (If you’re receiving support, though, it’s considered taxable income.) Negotiating court-ordered support is what your lawyer’s for, but you can also use this handy-dandy calculator to get a ballpark figure.
Try To Reach an Amicable Agreement
For childless couples, negotiating spousal support can be the nastiest part of divorce proceedings. In the long run, it’s going to be a lot cheaper and less painful if you and your spouse can negotiate the terms of alimony between the two of you, and come to an amicable agreement without bringing your lawyers (and their billing departments) and a judge into it. If you can find a way to make sure that everybody gets what they think they’re entitled to, for as long as they need it, it will make the transition out of the marriage that much easier.