Finance 101 for College Students (and Parents)

Before your children head off to college, help them become financially savvy by sharing strategies for spending, saving and investing. Every family has different needs and priorities. The key is to discuss them with your children so they can make wise decisions. Consider the following topics:

Decide whether or how much you’ll contribute. Nail down your portion of expenses, such as tuition, books, food, housing and entertainment. Whatever amount you decide you’ll cover, be consistent in your budgeting rather than impulsively writing checks.

Offer incentives. If your child has a job, you might suggest opening a Roth IRA to take advantage of decades of tax-free growth potential. You might also consider providing incentives for saving: For instance, give your child a financial goal to meet by the end of the year and offer to match that amount, if you can afford it.

Weigh the pros and cons. Some parents are opposed to letting their children have credit cards because they’re worried about fostering unhealthy spending habits. Others consider credit cards useful for building a good credit score, or for unpredictable situations, such as a car breakdown. If you go the credit card route, choose one that has a pre-set spending limit and emphasize the importance of paying the full balance due—on time.

Set expectations. Some parents want their children to work in order to learn to be independent—particularly when it involves recreational expenses like meals out or social activities. Set your expectations regarding your child’s financial responsibilities.

Adapted from Charles Schwab On Investing magazine, Spring 2011.

Q&A Roll Over Your 401(k)

Q. I have a new job. What should I do with my old 401(k)?
A. You have several choices: You may be able to roll over your assets into your new employer’s plan or into an individual retirement account (IRA), or you can leave them in your old plan, if allowed. You also could withdraw your assets, but that’s typically unwise.
Q. Why is it a bad idea to cash out my old 401(k)?
A. Withdrawing the assets before age 59½ means you’ll pay income taxes along with a 10% early-withdrawal penalty. Even worse, that money will lose the potential for years of tax-deferred growth.
Q. Which option is right for me?
A. It depends on your situation. You may want to consolidate your retirement accounts to make it easier to manage your investments. In that case, a rollover into your new employer’s plan may be the right choice, if allowed. If you want more investment options, compare choices in each plan, or consider an IRA. Also take fees into account: Going with the provider with the lowest fees allows you to keep more of your savings.
Q. What is a “direct” transfer?
A. With a “direct” transfer, your previous plan’s administrator sends a check to your new plan sponsor or IRA custodian. If you opt for an “indirect” transfer, in which a check is sent directly to you, the IRS may view it as a taxable distribution and require a 20% withholding, plus—if you’re under age 59½—a 10% early-withdrawal penalty. For more insight on rollover options, visit schwab.com/rolloveroptions.

Source: irs.gov.