Adapted from Broadridge Communication Services

You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you’ll need to fund your retirement. That’s not as easy as it sounds, because retirement planning is not an exact science. Every situation is different, and your specific needs depend on your goals and many other factors.

Adapted from Broadridge Investor Communication Services 

Everyone wants to retire comfortably when the time comes. We may also want to help our children go to college. So how do you juggle the two? The truth is, saving for your retirement and your child’s education at the same time can be a challenge. If you make smart choices now, you may be able to accomplish both goals.

Know what your financial needs are.

The first step is to determine your financial needs for each goal. Answering the following questions can help you get started.

For retirement:

• How many years until you retire?
• Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
• How much do you expect to receive in Social Security benefits? (One way to get an estimate of your future Social Security benefits is to use the benefit calculators available on the Social Security Administration’s website, www.ssa.gov. You can also sign up for a mySocialSecurity account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor’s, and disability benefits.)
• What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
• Do you or your spouse expect to work part-time in retirement?

For college:

• How many years until your child starts college?
• Will your child attend a public or private college? What’s the expected cost?
• Do you have more than one child whom you’ll be saving for?
• Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
• Do you expect your child to qualify for financial aid?

Many online calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Figure out what you can afford to put aside each month.

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

Retirement takes priority.

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of potential tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!

If possible, save for your retirement and your child’s college at the same time.

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8% annually, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment. Investment returns will fluctuate and cannot be guaranteed.)

If you’re unsure about how to allocate your funds between retirement and college, a professional financial planner may be able to help. This person can also help you select appropriate investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be suitable. It may be appropriate to treat each goal independently.

Help! I can’t meet both goals.

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll probably have to make some sacrifices. Here are some suggestions:

• Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
• Work part-time during retirement.
• Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
• Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
• Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively (but remember that aggressive investments mean a greater risk of loss). Note that no investment strategy can guarantee success.
• Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
• Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty – a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
• Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Can retirement accounts be used to save for college?

Yes. Should they be? That depends on your family’s circumstances. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years.

However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With Traditional IRAs, you can withdraw money penalty free for college expenses, even if you’re under age 59½ (though there may be income tax consequences for the money you withdraw). In a Roth IRA, you can withdraw the principal tax free if the account has been open for at least 5 years. But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10% penalty on any withdrawals made before you reach age 59½, even if the money is used for college expenses. There may be income tax consequences, as well. (Check with your plan administrator to see what withdrawal options are available to you in your employer-sponsored retirement plan.)

If this is all overwhelming or you need help putting the pieces together, a financial planner can help you with the process. The longer you wait, the less time you will have to save for any goal.

Roth in Retirement Accounts

“What’s the difference between pre-tax and Roth?”

This is one of the most common questions I receive when working with employees enrolling in a 401(k) plan. The decision to make either type of contribution to your retirement account (whether it is an IRA, 401(k), 403(b), etc.) is a complex decision that can have important tax implications now and in the future.

This article will cover some benefits of Roth contributions and how they compare to pre-tax contributions. It is not intended as a recommendation to contribute to Roth account. A qualified tax professional can help you make a decision that is right for your situation.

Often the question of whether to contribute to pre-tax or Roth is simplified by asking if you prefer to pay taxes now (when you earn your income) or later (when you take the money from your account). This question alludes to a big difference between pre-tax and Roth contributions, but it only scratches the surface of the complexity of the decision.

The best-known difference between Roth and pre-tax is the treatment of contributions and withdrawals for tax purposes. Pre-tax contributions reduce earned income in the year of the contribution, so the IRS does not impose a tax on money that goes into the retirement plan. Roth contributions do not reduce earned income in the year of the contribution, so your tax liability doesn’t change.

When you start taking withdrawals from your retirement account, any withdrawals that come from pre-tax contributions will be taxed as income in that year. This includes investment earnings related to the contributions. Roth contributions have already been taxed so withdrawals that come from Roth contributions are not taxed. Also, if the Roth withdrawal is a “qualified distribution,” any investment gains/earnings are tax free as well. A Roth withdrawal is considered a qualified distribution if your first Roth contribution was at least 5 years prior to the distribution and you’re at least age 59½.

All things being equal, the actuarial difference between Roth and pre-tax contributions is zero. But we know that all things do not remain equal over time.

It’s impossible to know whether your effective tax rate will be higher when you retire compared to today – and yet that is a big determining factor in which contribution type is best for you. You may be able to estimate the tax bracket you will be in during retirement, but Congress may change the tax code between now and then.

Another benefit of Roth contributions is that you may have more flexibility during distribution. Currently, Roth IRAs are not subject to Required Minimum Distribution (RMD) rules, but Roth 401(k) accounts are. Starting on January 1, 2024, Roth 401(k) accounts will no longer be subject to RMD rules. The absence of RMDs on your Roth contributions is important because depending on your financial situation in retirement, you may not need to take a distribution every year.

With pre-tax contributions, you’ll be required to take out RMDs every year after you reach a certain age regardless of your financial need. The exclusion of RMDs for Roth contributions will give you the potential to better preserve your retirement balance by only taking money out when you have a financial need to do so.

The chart below illustrates some basic comparisons of pre-tax and Roth contributions. As mentioned earlier, I recommend consulting a qualified tax professional.

	PRE-TAX Contribution	ROTH Contribution
When do I pay taxes on my contribution:	At Retirement Withdrawals taken from your account are taxed **	Today Taxes calculated through current payroll
When do I pay taxes on the earnings:	At Retirement Withdrawals taken from your account are taxed **	Never If specific requirements are met *
Will distributions affect my taxable income during my retirement years:	Yes Withdrawals increase taxable income	No Qualified withdrawals do not increase taxable income

Pre-tax contributions may be right for you, if:

• You are looking for a tax break today.
• You expect your income taxes to be lower when you retire.
• You want to save with a smaller reduction to your current take-home pay.

Roth contributions may be right for you, if:

• You prefer to receive a tax break during retirement rather than today.
• You expect your income taxes to be higher when you retire.
• You have many years to save before retirement.
• You like the thought of never having to pay taxes on investment earnings.*

Since it is hard to predict tax laws in the future, you may be able to make both pre-tax and Roth contributions and not have all of your eggs in the same basket. For an IRA, you would need a traditional IRA for pre-tax and a Roth IRA for Roth contributions. For employer-sponsored retirement plans, you can do this within the same account. It is important to note that employer contributions to employer sponsored retirement plans goes in as pre-tax. As always, consult your accountant or tax professional to see how each option affects your personal tax situation.

*Qualified Roth distributions are tax free if your first Roth contribution was made five years prior and you are at least 59 ½ years of age

**Early withdrawals may incur additional taxes unless exceptions apply. (See Special Tax Notice for specific details)

The end of 2022 brought several noteworthy changes to retirement savings plans. The changes are intended to have positive impacts on the ability to save for retirement and will have lasting impacts on the retirement savings industry in America.

In October of 2022, the Internal Revenue Service (IRS) set the 2023 salary contribution limits for 401(k) and similar employer sponsored retirement plans. The IRS looks at these limits every year.

The salary contribution limit in 2023 for employer sponsored plans is $22,500, an increase of $2,000 from last year. The IRS also increased the 2023 catch-up contribution limit for employer sponsored plans, available for those who are 50 years of age or older. The catch-up limit in 2023 is $7,500, which is an increase of $1,000 from last year. As you can see in the table posted below, the increases to elective deferrals and catch-up contributions are the largest the IRS has made in the last five years.

The biggest news for the retirement savings industry happened days before the end of 2022 when the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 was signed into law. SECURE Act 2.0 made significant rule changes for individual retirement accounts and employer sponsored retirement plans. The act has generated a lot of excitement because its intention is to expand access to retirement plans, increase the amount being saved for retirement, and help preserve retirement income.

SECURE 2.0 has also gained attention due to its extensive scope. The act has over 90 provisions, making it triple the size of the first SECURE Act passed in 2019. Implementing SECURE 2.0 will be an industry-wide effort, requiring changes in tax laws, labor laws, payroll processes, and recordkeeping systems.

An important feature of SECURE 2.0 is that not all the provisions go into effect in 2023. The act has several provisions effective this year, but many other provisions don’t take effect until 2024 or beyond. It will take time to examine, understand, and implement all the provisions of SECURE 2.0, so this phased-in approach will allow some time for all parties to take the steps necessary to implement the act.

Here is an overview of select provisions of this act that will affect employer sponsored retirement plans:

• Starting in 2023, an individual must start taking Required Minimum Distributions (RMD) from their retirement account at the age of 73, one year later than the current RMD starting age. In 2033, ten years from now, the act moves the RMD starting age to 75.
• Starting in 2024, Roth contributions made into a 401(k) plan will be exempt from RMD requirements. Currently, an individual’s Roth IRA is exempt from RMD requirements, but Roth money in 401(k) plans is not exempt. This provision will create a uniform treatment of RMD requirements on Roth savings.
• Also starting in 2024, there is a new rule for individuals making catch-up contributions. Catch-up contributions must be made as Roth contributions for individuals that earned over $145,000. This will mean that a 401(k) plan that allows individuals to make catch-up contributions must also allow Roth contributions into the plan.
• Starting in 2025, there will be an increased catch-up contribution limit in place for individuals aged 60-63. The catch-up contribution limit for these individuals will be the greater of $10,000 or 150% of the catch-up limit for the year.

If you have any questions regarding SECURE Act 2.0 or any other retirement plan questions, give us a call or send us an email at [email protected]. We’re always here to help.

The economic and investment landscape for 2022 was memorable – and not in the way most of us want to remember.

Despite the increased optimism from investors as we rolled into 2022, the S&P 500 finished the year down 18.13%. The U.S. bond market, normally a safe haven when equity markets fall, posted returns of -13%. Inflation soared to 40 year highs. Interest rates rose to their highest levels since 2008. Egg prices went from roughly $1 per dozen to over $4 per dozen.

Through all of that, it didn’t seem like the sky was falling. We managed to avoid a recession, at least by the traditional economic definition. Unemployment remained low. The S&P 500 loss for 2022 put the value back to where it was 22 months ago in May 2021, a comparatively minor loss to other major market pullbacks. For context, The Great Recession of 2008 erased almost 12 years of gains.

The international markets did not fare quite as well through much of 2022. Most of Europe experienced higher inflation than the U.S.. They avoided a recession because declining oil prices and government subsidies softened the blow when the supply of Russian natural gas was shut off. China also fared better than expected when their “COVID-zero” policy was relaxed and an unexpected rate cut was announced.

Back in the U.S., there is still work to do in 2023. The overall market has shown strong signs of reemergence during the first part of the year. The Fed continues to raise interest rates, albeit at a much slower pace, in its efforts to curb inflation. So far it seems to be working. Return prospects for bonds should be more favorable as the Fed rate hike cycle comes to a close. Even egg prices have started to come down.

Here at Heartland Trust, we continue to do our due diligence with respect to the investments we choose . Our investment process is detailed, tested, and focused on the long-term. We work to capture as much of the upside gain as possible when the market is thriving, while limiting the downside loss during periods of market turbulence.

When it comes to your personal financial well-being, a financial plan is an invaluable tool to have. A good plan will give you a detailed view of your assets and debts, cash flow, and the protections on the life and property within the plan. While it might seem like an overwhelming process at first, the benefits are worth it.

If you already have a financial plan, great job! Make sure it is updated at least annually. Account values change, loans get paid off, new debts get added, personal property is bought and sold, and your financial goals can change. 

If you do not have a financial plan, the best time to get one is now. Look online to find a financial advisor or wealth management company with advisors on staff. It is possible to do financial planning on your own, but important factors could get missed. You should at least have a financial planning professional who is a fiduciary review it. 

Having a financial plan is a key factor in improving your financial wellness. Other benefits include:

• Knowing where your money is going. This will likely be the most noticeable effect once you have a plan. Knowing at a glance how much was saved, how much was earned, and how much was spent in a given time period is invaluable.
• Peace of mind. Understanding where your finances are overall, what areas need improvement, and where you are doing well can take a lot off your mind. It can also help you keep track of accounts you might have forgotten about.
• Improved saving. When you know how much is needed for a goal, your chances of reaching it are much higher. Those with a financial plan are more than twice as likely to save enough for retirement.
• Goal achievement. Having enough for retirement isn’t the only goal a financial plan can include. Education funding, paying off debt, funding vacations, doing charitable giving, and anything else you can attach a dollar amount to can be accounted for and tracked in a plan.
• Knowing your alternatives. Maybe there is a goal that isn’t going to be reached. Knowing that beforehand allows you to seek suitable alternatives.
• Estate planning insight. Want to leave a legacy with your wealth? If you know leaving money to people or organizations that are important to you is part of your estate plan, a financial plan will help.
• Tax planning. A financial plan can help you foresee future tax obligations or opportunities and prepare for them. Many individuals have periods of lower income between retirement and the start of required minimum distributions. This is an excellent time to take advantage of Roth conversions at a lower tax rate. 
• Investment allocation coordination. Most of us don’t have only one account set aside for saving. You may have a 401(k), IRA, Roth IRA, or more just on your own. If you have a spouse, they might also have multiple accounts. With a financial plan you can get a combined look at these accounts to how they are invested and align them to your risk tolerance.

What should be included? A thorough plan should include just about everything you can think of related to your finances.

Assets

• Retirement accounts (401(k), IRA, Pensions)
• Investment accounts
• Bank accounts (checking, savings, CDs)
• Personal property (real estate, land, automobiles, anything else of substantial value)
• Business interests

Liabilities

• Mortgages
• Personal loans
• Student loans
• Any other debts

Protection

• Life Insurance policies
• Long-term care policies
• Property/Casualty insurance policies

Once your plan is complete, the next step is to put it in action. You don’t need to make immediate alterations to your lifestyle. Start incrementally increasing your 401(k) contributions. Create a dedicated account for certain goals and save directly to it.

Want to start a financial plan? Give us a call at Heartland Trust Company. The most important step is to start the process. There is no benefit in putting it off. 

Heartland Trust Company has served our clients for over 32 years. WOW! And we are just getting
started! It has been an exciting few months at Heartland. Our staff is growing and we are thrilled about
upcoming advancements to our business. We will have more to share in our next newsletter.

Even with all of your savvy college shopping and research about financial aid, college costs may
still be prohibitive. At these prices, you expect you’ll need to make substantial financial
sacrifices to send your child to college. Or maybe your child won’t be able to attend the college
of his or her choice at all. Before you throw in the towel, you and your child should consider
steps that can actually lower college costs. Although some of these ideas deviate from the
typical four-year college experience, they just might be your child’s ticket to college — and your
ticket to financial sanity.

Ask about tuition discounts and flexible repayment programs.
Ask whether the college you apply to offers any tuition discounts or flexible repayment
programs. For example, the school may offer a discount if you pay the entire semester’s bill up
front, or if you allow the money to be directly debited from your bank account. The college may
also allow you to spread your payments over 12 months or extend them for a period after your
child graduates. And if it’s your alma mater, don’t forget to inquire about any discounts for the
children of alumni. Finally, ask if some charges are optional (e.g., full meal plan versus limited
meal plan).

Graduate in three years instead of four.
Some colleges offer accelerated programs that allow your child to graduate in three years
instead of four. This can save you a whole year’s worth of tuition and related expenses. Some
colleges offer a similar program that combines an undergraduate/graduate degree in five years.
The main drawback is that your child will have to take a heavier course load each semester and
may have to forgo summer breaks to meet his or her academic obligations. Also, some
educators believe that students need four years of college to develop to their fullest potential
— intellectually, emotionally, and occupationally.

Earn college credit in high school.
By taking advanced placement courses or special academic exams, your child may be able to
earn college credits while still in high school. This means that your child may be able to take
fewer classes in college, saving you money.

Think about cooperative education.
Cooperative (co-op) education is a type of education where semesters of course work alternate
with semesters of paid work at internships that your child helps select. Although a co-op degree
usually takes five years to obtain, your child will be earning money during these years that can
be used for tuition costs. In addition, your child gains valuable job experience.
Enroll in a community college, then transfer to a four-year college.
One way to cut college costs is to have your child enroll in a local community college for a
couple of years, where costs are often substantially less than four-year institutions. Then, after
two years, your child can transfer to a four-year institution. Your child’s diploma will be from
the four-year institution, but your expenses won’t. Before choosing this route, make sure that
any credits your child earns at the community college will be transferable to another institution.

Defer enrollment for a year.
Your child might be aching to get to college, but taking a year off, commonly referred to as a
“gap year,” can give you both some financial breathing room and allow your child to work and
save money for a full year before starting college. Your child will apply under the college’s
normal application deadline with the rest of his or her classmates and, once accepted, can ask
for a one-year deferment. But make sure the college offers deferred enrollment before your
child goes through the time and expense of applying.

Live at home.
It’s not every child’s dream, but attending a nearby college and living at home, even for a year
or two, can substantially reduce costs by eliminating room-and-board expenses (though your
child will incur commuting costs). This arrangement may work out best at a college that has a
student commuter population, because the college is likely to try to meet these students’
needs. If your child does live at home, you’ll both need to sit down beforehand and discuss
mutual expectations. For example, now that your child’s in college, it’s not realistic to expect
him or her to adhere to a rigid weekend curfew.

Research online learning options.
Taking courses online is a trend that’s here to stay, and many colleges are in the process of
creating or expanding their opportunities for online learning. Your child might be able to take a
year’s worth of classes from home and then attend the same school in person for the remaining
years.

Work part-time throughout the college years.
Part-time work during college can help your child defray some costs, though working during
school can be both a physical and emotional strain. To make sure that your child’s academic
work doesn’t suffer, one option might be for your child to focus on school the first year and
then obtain a part-time job in the remaining years. In addition, encouraging your child to
become an RA (resident assistant) at college could earn them free room and board.

Join the military.
There are several options here. Under the Reserve Officers’ Training Corps (ROTC) scholarship
program, your child can receive a free college education in exchange for a required period of
active duty following graduation. Your child can apply for an ROTC scholarship at a military
recruiting office during his or her junior or senior year of high school. Or, your child can serve in
the military and then attend college under the GI Bill. Your child can also attend a service
academy, like the U.S. Military Academy at West Point, for free. Be aware, though, that these
schools are among the most competitive in the country, and your child must serve a minimum
number of years of active duty upon graduation. For more information, visit your local military
recruiting office, or speak to your child’s high school guidance counselor.

Go to school abroad.
Foreign schools generally offer an excellent education at a price comparable to that of an
average four-year public college in the United States. And in the global economy, many
employers tend to look favorably on studying abroad. Your child will even be eligible for need-
based federal student loans (but not grants), as well as the two federal education tax credits —
the American Opportunity credit and the Lifetime Learning credit.

Look for employer educational assistance.
Does your employer offer any educational benefits for the children of its employees, like partial
tuition reimbursement or company scholarships? Check with your human resources manager.

Have grandparents pay tuition directly to the college.
Payments that grandparents (or others) make directly to a college aren’t considered gifts for
purposes of the federal gift tax rules. So, grandparents can be as generous as they want without
having to worry about the tax implications for themselves. Keep in mind, though, that any
payments must go directly to the college. They can’t be delivered to your child with instructions
to apply them to the college bills.

Full disclaimer: this article is not all encompassing. You could write a long book on foundation and endowment investment management. This is a collection of thoughts and opinions about what I think foundation and endowment boards should consider. If you’ve ever met me, you know I’m both opinionated and long-winded. So, if you serve on a board or work for a nonprofit foundation/endowment, don’t hesitate to send me an email and take me to task for why I’m wrong.