Money Talk: Reconsider contributing to workplace 401(k)Q: I am a 20-year-old college student with a stable, part-time job. I haven’t contributed to a 401(k) with this company because I don’t plan to be working for it for two years, which is how long I’d have to wait for my contributions and earnings to be 100 percent mine.
By: Liz Weston, INFORUM
Q: I am a 20-year-old college student with a stable, part-time job. I haven’t contributed to a 401(k) with this company because I don’t plan to be working for it for two years, which is how long I’d have to wait for my contributions and earnings to be 100 percent mine. I’d like to open a Roth IRA, but I’m not sure I’m eligible. I’m listed as a dependent, and our household adjusted gross income is between $145,000 and $155,000. Can I open a Roth?
A: The short answer is yes, although you may want to reconsider contributing to your workplace 401(k) as well.
As long as you have earned income that’s less than the Roth limits, you can contribute to a Roth account, said Mark Luscombe, principal analyst for tax research firm CCH Inc. Your status as a dependent and your parents’ household income aren’t factors.
This fact allows many wealthier parents who make too much for their own Roth IRAs – the limits are $179,000 for a married couple filing jointly and $122,000 for singles – to give money to their lower-earning children to fund the kids’ Roth accounts.
“The dependent would need to have earned income for the year at least equal to or greater than the amount of the Roth IRA contribution,” Luscombe said. But “the Roth IRA contribution would not have to come from that earned income.” The money could come from the parents’ gift.
All that said, you should reconsider your aversion to your company’s 401(k), especially since you may be misunderstanding how it works. You typically would be able to leave with your own contributions, and the earnings on those contributions, at any time. What you may not be able to take with you is your employer’s full match, since it may take several years for you to be fully vested. Still, you may be able to leave with part of the match, which would make it free money that you shouldn’t turn down.
Q: I’m a mother of two children and I work part time. On top of that, I go to school full time. Even though I receive financial aid, I still have trouble saving money on a tight budget. How can I do it?
A: Saving money in your situation is tough, but it’s not impossible. The most important thing is to make it a priority. In other words, don’t wait until you’ve paid your bills and otherwise spent your paycheck to figure how much is left over that you can save. Instead, pay yourself first by setting up an automatic transfer that moves some amount of money – however small –from your checking account to your savings account. The transfer should occur the day your paycheck is deposited, if possible. Even small contributions build up over time, and you’re unlikely to miss the money if you make the process automatic.
If you’ve found yourself raiding your savings for non-emergencies in the past, then decide now under what circumstances you’ll tap your funds. A car repair may be a good reason. Dinner out, even if you’re bushed from all that working, mothering and studying, probably is not. If you really can’t keep your hands off your savings, you may need to move the money somewhere that’s harder to access. You could set up an account at an online bank or at a bank or credit union that’s different from the one that holds your checking account.
Another issue that prevents many people from saving is that they spend too much on their so-called fixed, or basic, expenses. If too much of your income goes to rent, food, utilities and transportation, for example, you may have continual trouble making ends meet. Trimming those expenses can have a profound effect on your ability to save.
Following frugality-oriented websites can give you ideas for reducing your expenses as well as encouragement that your sacrifices will be worthwhile. As one blogger put it, saving money isn’t about deprivation, it’s about gaining control. When you make the decision to save, and follow through with action, you’re putting yourself back in control of your spending and your own life.
It won’t be easy, but remember you won’t always have to work this hard. Your education should result in bigger paychecks that will enable you to save more easily – as long as you continue to pay yourself first.
Liz Weston is the author of “Your Credit Score” and “The 10 Commandments of Money.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via the “Contact” form at http://asklizweston.com.