Get With The Plan: July 29, 2012

New parents Mickey and Daisy have college at the top of their savings list. With a brand-new baby, they’re wondering if they should save in a college-specific account or use Daisy’s employer-sponsored Roth retirement savings plan as the target for their savings.

“What is the right savings vehicle for college?” Daisy asked.

The couple is in the process of refinancing their mortgage to a 3 percent rate. They plan to save an additional $300 to principal, and they’ll still end up with a $170-per-month cheaper mortgage payment.

The couple, whose names have been changed, have set aside $248,100 in 401(k) plans, $85,700 in IRAs, $4,500 in a brokerage account, $97,400 in money markets and $7,800 in checking.

Daisy also expects a pension worth 1.1 percent of the average of her highest three years’ salary.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with U.S. Financial Advisors in Montville, to help the couple get their college savings and retirement plans in line.

“Like most couples, college is only one of several items they need to plan and save for,” Duerr says. “They are also concerned about saving for their retirement, which would include additional travel expenses and a remodel of their basement.”

He says while their retirements and college are between 15 to 20 years away, proper planning is crucial in order for them to have the best chances of attaining these goals.

The couple realizes it’s critical to start saving early for college for their 10-month-old child to amass what they will need.

Daisy was thinking her employer-sponsored Roth plan could be a good place to save for college.

“While this could be done, I still would suggest using a 529 plan for college funding,” Duerr says. “All the contributions and growth from the plan are tax-free if used for qualified education expenses.”

Duerr says by using the 529 plan, they could also make additional contributions should their son receive any gifts from relatives. This would not be possible in the Roth plan.

Mickey and Daisy are in the process of refinancing their current mortgage to a new 15-year loan, and the low 3 percent rate will allow them to significantly reduce their current payments. While they plan to pay an additional $300 per month to pre-pay the mortgage, they’d still be saving $170 per month on payments. Duerr suggests they instead use the savings to fund their child’s 529 Plan.

The couple say they are not concerned about paying for 100 percent of education costs, but they’d like to pay a significant portion — 60 percent of a state university and 30 percent of a private college.

“Their new mortgage will be paid off in a little less than 11 years, given the additional principal payments,” Duerr says. “At that point, once the mortgage is paid, they will still have seven years before their child begins college. They can then allocate the money that was being used for the mortgage to be used for his college savings.”

On retirement savings, both spouses save 10 percent of their salaries for retirement, but Duerr says a review of their budget and annual earnings show they should have additional funds.

Some of these extra monies are being saved regularly to a savings account. Duerr says given their cushy cash account, they should increase their retirement savings instead.

“By placing the funds in a pre-tax retirement account, they will defer paying taxes on the money,” he says. “They also will be able to potentially earn more in the retirement investments than the interest they are currently receiving in the savings account.”

But he does realize that making the maximum retirement contribution may not be practical now, given that college savings is a high goal and the family wants to start a basement remodel.

Duerr says after they do the work to the basement, they should readdress their retirement accounts to see if they could make the maximum retirement contributions. Of course, Daisy’s pension will help significantly when they retire, but given the state of flux with pensions these days, any additional funds they can save will only help them later when they retire.

The couple has life insurance, but it’s not enough. Mickey has $230,000 in coverage and Daisy has $295,000.

“This is an area they should focus on immediately, Duerr says. “Should something happen to either one of them there would be a significant burden on the other to care for their young child.”

Duerr says he can’t stress enough the need for them to get some additional coverage to ensure their family is protected. They can see if it is possible to get additional coverage through their employers, or they should speak with an insurance agent and get some term coverage, he says. Mickey quit smoking about two years ago, so he may be able to get less expensive coverage.

Overall, though, the couple is on the right track, Duerr says.

“They are good savers and the savings from their mortgage will help them set aside funds for their child’s education and their remodeling plans,” he says. “By ensuring that these funds go toward saving for college and their other wishes, they will greatly improve their chances for achieving these goals.”