Tax-Friendly Uses for Extra Retirement Cash


If you're a retiree with more than enough money at the end of each month, don't let excess cash stack up in your checking account.

Instead, take a deliberate approach to putting the money to work.

Two options are:

  • Reinvest it and continue to build your nest egg.
  • Use it to help others with education expenses.

Reinvesting for Your Future

While it may seem that you have more than enough income to finance your future, rising costs and unforeseen expenses could place greater demands on you than you've planned for. You should invest your excess money in a way that complements the rest of your portfolio, seizing tax-advantaged opportunities where possible. While IRAs are appealing, their availability is limited. Traditional and Roth IRAs require you to have earned income in the year of your contribution, and you can't contribute to a Traditional IRA after you've reached age 70½.

Another tax-friendly option is a guaranteed growth annuity. Features include:

  • Deferred taxes on earnings until withdrawal.
  • No age or contribution limits.
  • Guaranteed principal and minimum interest rates.

The fixed annuity guarantee against principal loss depends on the claims paying ability of the insurance company. Later in life, you can consider transforming your annuity savings into an additional stream of guaranteed lifetime income.

No matter what investment solutions you choose, consider setting up an automatic monthly transfer of funds from your checking account to your investment portfolio.1 It's convenient, and you'll have the potential to earn interest.

Helping Future Generations through College

If you want to help grandchildren or others with their education, consider investing in a 529 College Savings Plan, which provides federal income tax-free withdrawals for qualified education expenses. Withdrawals for purposes other than qualified educational expenses are subject to income tax and can incur an additional tax of 10% on the earnings in the account. Contribution limits are very high and unlike IRAs, they aren't affected by an investor's income level.

Other 529 plan benefits:

  • Lump-sum contributions of up to $65,000 ($130,000 for married couples) can be made without triggering gift taxes in a single year through the accelerated gift option unique to 529 Plans. However, with this option you can’t give additional gifts to a grandchild during the five-year period without incurring the gift tax.2 Money you contribute is removed from your estate, which means that amount will not incur estate taxes, even though you maintain control over it.
  • Money you contribute is removed from your estate, which means that amount will not incur estate taxes, even though you maintain control over it.
  • Provided you don't establish the 529 in a custodial account, you'll have the ability to change who gets the benefits.
  • There is minimal effect on financial aid since it is not considered the child’s asset.

How do you choose a 529 plan?

There are many plans, each sponsored by an individual state. First, find out if your state provides tax breaks for contributing to its plan. If it does, it may be best to use it. If not, find a plan with competitive investment options, reasonable expenses and reward services.

The USAA 529 College Savings Plan™ features:

  • A high contribution amount of $370,000.
  • Management of investment accounts by experienced portfolio and fund managers.
  • With the Upromise Rewards service, you have the ability to get cash back directly into the account when you shop, dine out and buy groceries or gas.
  • Your choice of six asset allocation portfolios and a convenient age-based option that gradually becomes more conservative as college draws closer.
  • A Preservation of Captial portfolio is available to help protect your investment from market volatility.

The direct route. If your loved ones are already in college, you can pay some or all of their tuition directly. It won't count against the annual limit on tax-free gifts — if your check is made out to the school and not to the student you're helping.

Making Informed Decisions

USAA's financial advisors can help you understand your options and make decisions. They can help you use your excess income to add to your portfolio, educate your family or accomplish other goals.

Consider the investment objectives, risks, charges and expenses of the USAA mutual funds and/or USAA College Savings Plan (Plan) carefully before investing. Contact us at 800-531-8910 to request a prospectus and/or Plan Description and Participation Agreement containing this and other information about the funds and/or the Plan from USAA Investment Management Company, Underwriter and Distributor. Read it carefully before investing. For the USAA College Savings Plan, if you or the beneficiary are not residents of the State of Nevada, consider before investing whether your or the beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and other benefits not available through this Plan. Please consult your tax adviser.

An investment in the Preservation of Capital Portfolio is not insured or guaranteed by the FDIC or any other government agency. Although the Portfolio seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the portfolio.

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