HRSmom, after insurances and such, I am making $750 more every two weeks which is what I’m contributing to the 401K.
I disagree with not taking the vision and dental, especially if you think you are going to need work. I went with the higher dental, but there were 3 of us on the policy and one needed braces, so we got our money’s worth. The vision was nothing, like $2/paycheck for single, $5/family. Covered exams and glasses. I did opt for a high deductible health plan with a savings account and that’s worked out well too, saving a lot on premiums. The one thing that was probably unnecessary was the additional term life, but my kids were 13 and 14 at the time I started that job, so I felt it was worth it. If your employer offers some term life as part of your benefits, you might not need to buy more.
I was in almost your exact position, going from $60k in one year to more than double that. Much of the paycheck was eaten up with life insurance, health insurance, taxes, 401k (I maxed it out, and the over 55 contribution, so that was a big deduction); I brought home about 55% of my gross pay, but that was still more than I’d been bringing home before - a good thing. Being HOH doesn’t help that much with taxes above $60k in salary. You will also lose some credits like the AOTC if you were taking that and the child credit (but that was gone when he turned 17).
I think you’ll be surprised that, even with the insurance deductions and taxes, making more means you’ll bring home more.
Continue putting at least $250 into 401K that are matched and start adding money to Roth IRA. You can withdraw these money to pay for the last year of school after you filed your last FAFSA.
Paying more taxes makes your EFC smaller (if it makes any difference in your situation).
While you’re going through the company benefits book, make sure you check to see if there is a small scholarship fund for employees children. My kid got a few thousand bucks out of that.
If I understand your posts, This year your increased salary should give you more disposable income which hopefully can be saved. It makes sense to invest in your 401K plan at least to the point where you will get the full match available. Next year, it sounds like your son’s aid will be reduced by an amount that is close to or greater than your increased take home pay. You have been doing this for over ten years. I have got to believe you have cut your expense to the bone a long time ago.
It seems that your choices boil down to 1) accepting that all of you increased income will go to the school (A bitter pill but it is only two more years) or 2) investing heavy in the 401K or IRA/Roth IRA saving on taxes both increasing your debt load. The second option requires a analysis of tax savings against the interest cost.The last option is seriously asking yourself if this school is still affordable and if there are any other options such as a transferring after Sophomore year. Not ideal but you need to balance both your needs and your son’s.
Some other thoughts:
You might be able to borrow from your 401K. The plus is the interest goes back to you not a bank. The negatives (at least in my plan) are 1) There are limits. Some plans limit you to 50% of the balance with an overall limit., 2) You might not be able to contribute new money. This means you lose any company match until the loan is repaid. and 3) If you lose you job, I believe that the loan is due IMMEDIATELY! Can you take that risk?
The Roth IRA can be lot more flexible compare to a standard IRA but you lose the immediate tax advantage of a regular IRA but you do get some long term tax advantages. There are some advantages to this type of IRA that might be worth considering. It can be easier to take money out of a Roth IRA without tax penalties. There are plenty of rules to follow but it is worth considering. A tax specialist or financial planner could help you determine the best mix of IRA/Roth/401K.
For loans, the home equity loan will most likely give you the best rates. Direct loans in you son’s name gives the best flexibility and IMO the best first option. Others can speak to the Direct Parent Loans.
coolweather: For FAFSA, I thought any contributions make to a retirement plan were added back into the FAFSA calculations. I known there are exception but that doesn’t seem the case here.
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noname, I never assume that someone’s “cut to the bone” is accurate at a higher salary.
When I made less money, I carried a lower deductible on my car insurance. Even a moderate fender bender, given how expensive car repairs are these days, would have wiped out my emergency cash fund. Now I have the highest deductible possible- I can afford out of pocket any conceivable repairs so my monthly payments for car insurance are much lower, paradoxically, because I make more money.
When I made less money, I relied on my tax refund to fund home repairs or to replenish my emergency fund. Now I pay the least amount of taxes I can during the year (without incurring a penalty) and write the feds a check in April when I file. I can afford NOT to lend the government money at zero interest.
Etc. I just suggested to the mom that she do a financial review to make sure she’s using every dollar in the best way possible. At a higher salary she doesn’t need homeowners to cover a camera or TV. At a higher salary she (may) not need dental insurance. At a higher salary, unless she’s got a chronic and expensive disease to manage, she may be able to drop her prescription coverage. In the last two years my prescription costs have been under $20 total (Walmart pharmacy, thank you bronchitis which only needed generic antibiotic).
Twoinanddone, thanks. I am sure of my income numbers though. I set my contribution a hair under $20k/ year. My company matches just under $6k/ year. After contributing to insurances and paying additional taxes, this is absolutely not more take home.
Noname, as long as he keeps his scholarship, I don’t want him to transfer for financial reasons. As it is, he will have received a private education at quite a cost savings ($100K in merit and $50k in grants).
I will look into a Roth, at least for the amount over the match. I’m still wondering if a home equity would be better than a retirement loan since the interest on the home equity would be tax deductible but not on the retirement loan, right?
Yes if you need $35 k for year 3 and 4 it would make the most sense for S to take all available loans starting this year and then for you to spend down college savings account first and either divert some of retirement savings from 401k to Roth IRA and save that up for year 4 or take out a home equity loan, whichever is possible and makes most sense, or even a combination of both. I do agree to maybe ask someone knowledgeable in retirement savings for advice.
Someone was suggesting to take out 401k loan I think because there are usually penalties for taking money out of 401k prematurely. But for the Roth I don’t think you take out a loan, rather take out the contributions, without earnings I believe. The purpose of saving the money in a retirement account is that isn’t a financial asset in the same sense as a savings acct or college savings account for FA purposes.
But please make sure you know all the possible tax implications of these options. I don’t itemize on taxes so not sure if home equity interest would make much impact, the rates are pretty low right now.
Your goal is to pay for the last two years of son’s college with the least amount of interest and impact on your retirement savings.
And your son can also contribute by taking out some of his own loans and by working.
Blossom, I guess we handle our financies very differently. I don’t own a camera. I have the highest possible deductible on my insurances and home maintenance has been referred for so long that I can’t put it off much longer. There is no election at work for health insurance or prescription coverage. I live in an expensive area; most people would tell you it couldn’t be done on what I earned and, frankly, l couldn’t have done it without state health insurance for the kids.
Thank you mommdc. I will look into that.
Thanks to all of you! Really! I realize it may sound like I’m may discounting some ideas but it doesn’t mean they won’t be helpful to someone else in a similar situation or that it won’t result in a bit of savings. I really appreciate the help.
I see. Yes, if you 401k the max, that and your other deductions and tax will suck it all for sure…
I’m not clear on whether FA sees a 401k as an asset, as opposed to cash, which is. I see your conundrum.
Yes and kudos to you for even having a college savings account!
At many companies you can borrow from your 401k, pay yourself back the interest. If you take a hardship withdrawal, you are penalized, the money becomes taxable income and you cannot contribute to the 401k for a year
The EFC is impacted by income and non retirement assets. Like investments, 529 accts, saving accts
401k and IRA are retirement assets.
The contributions for 401k are pre-tax, and result in less federal tax paid, but for EFC calculation they get added back in to income. Roth IRA contributions are made from after tax income.
I’d take a HELOC loan before a 401k loan.
One consideration is, I believe if you leave the company, the 401k loan must immediately be repaid.
Yes, I agree. What kind of FA forms does your son’s school require? Do they figure in home equity?
Talk to your human recourse department. Like I mentioned before, if you borrow against your 401K then (at least at my old job), you can no longer make contributions to your 401K. If this is the case you will lose all the company’s match (since you are no longer investing new money but paying off the loan) until the loan is paid off. In this case, the home equity loan might work better for you. Also clarify what happens in YOUR plan if you lose you job. I have been laid off too many times to risk have a loan being call at the same time I lost my job. If you don’t paid it back at that point, I believe it then becomes a hardship withdraw with penalties and taxes due.
For some the 401K loan is perfect but you need to see if it works for you.
The nice thing about the Roth IRA is that once your investment has been in the IRA for 5 years you can withdraw the principal without penalties. After five years, it can serve as a backup emergency fund. There are also other rules that allow distributions. However you lose the tax break which in your case might make the Roth IRA less desirable. Just food for thought.
Noname, thank you! Will look into that.
I believe to take out Roth penalty free for certain purpose (like education expenses), the account needs to be established for at least 5 years.
The kid has $25,000 in need based aid as well as a $25,000 scholarship. The mom is worried about losing the need based $25,000 in aid when her salary increases.