Ask Jill: Stretching Your Money
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
As the markets have gyrated recently, the questions have shifted from "How do I keep growing my account?" to "How can I make the money in my account last longer?" Funny how our priorities shift, but that's the name of this emotional game called investing. You have to work hard to balance those competing fear and greed impulses.
We start with Joyce, who writes:
My son is a sophomore in college and while we thought we saved enough for four years, his 529 account only has enough for one more year. Should we use it up next year and close it out? We can pay the rest of the bill by: taking an early withdrawal from my husband's retirement plan, depleting savings or selling stock that my mother left when she died a few years ago. It's the only stock I own and my mother got it because she was an employee of the company, but I feel weird selling it.
Thanks for your help!
Joyce was wise enough to use a 529 plan-hopefully she bought it directly from her state and not through a broker, but that's another topic. I think the best course of action is to leave the 529 money in the account and use it for senior year-that way, Joyce can enjoy one more year of tax deferral on the money.
Given the alternatives for paying the upcoming tuition bill, the one I like the best is using the inherited stock. The other choices are not nearly as good-I hate to tap retirement funds unless it is absolutely necessary-same deal with the emergency reserve fund.
I know that people often feel like they should keep these legacy holdings to honor their parents, but at the end of the day, most of the people I know who leave assets just want their kids and grandchildren to use them wisely. What grandparent wouldn't want inherited money to be used for education? That said, the sale of the stock could trigger a capital gains tax, depending on the value as the date of death. Make sure you locate your records so you are prepared to file appropriately next year.
Next up-a beneficiary of a trust asks:
I have a trust fund that is about to run out and would like to know if there is any thing I can do to make it last longer? It is with Wells Fargo and I draw a certain amount each quarter. There is only about 3 quarters left. Thank you.
Trusts come in a variety of flavors, but upon the death of the trustor (the person or people who funded the trust) they usually become irrevocable, which means that the terms of the trust can't be altered. But many trusts allow for investments inside the trust to change. That means that the beneficiary of the trust can talk to the investment advisor who manages the trust and pose this very question-how can I make it last longer? The advisor may say that the only way to extend the payments is to take more risk and hope that the bets pay off-I don't like that at all.
More likely, the advisor will say that the only alternative is to withdraw fewer dollars each month, which will stretch out the life of the trust. Probably not the answer you wanted to hear, but I think the most prudent.
Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
