Kjell Croce, a guitar builder and repairman, contributes more than enough of his $45,000 annual salary to his 401(k) plan to capture his employer's match. Still, as a relatively new employee, the meager $22,000 balance in his account falls flat. Kjell (pronounced shell), 43, and his wife, Michelle, 42, are also concerned with future college costs for their two young daughters, 8-year-old Josephine and 4-year-old Gabriella.
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Traditional retirement savings are just one part of a long-term financial plan for Kjell and Michelle, who is a self-employed therapist. The Croces, who live in Marshall, Mich., also own a number of rental properties that generate income, a stock portfolio worth about $60,000 that Kjell inherited, and several IRAs scattered among different financial institutions. But with so many pieces, the Croces are missing the big picture.
To provide focus, Kiplinger's put Kjell and Michelle in touch with Drew Tignanelli, head of Financial Consulate, a fee-only financial advisory firm in Hunt Valley, Md. Tignanelli, who works with clients all over the country, recommended that the Croces start by doing some financial housekeeping.
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For example, he advised them to consolidate the IRAs with a single custodian to make it easier to monitor their investments. He also suggested that they sell enough of their stock portfolio to fund annual Roth IRA contributions of $5,000 each for Kjell and Michelle, plus contributions to state-sponsored 529 college-savings accounts for both of their daughters.
In the process, the Croces may qualify for multiple tax breaks. For instance, Tignanelli noted that they could tap the stock portfolio virtually tax-free by using long-term investment losses to offset any gains, then transfer the money to their retirement and college funds. By contributing to Michigan's 529 plan, they will also qualify for a state tax deduction of up to $10,000 a year.
And the Roth IRA "is the most powerful accumulation vehicle you can possibly have because it grows 100% tax-free," says Tignanelli. (To contribute to a Roth IRA for 2008, your income can't exceed $116,000 if you are single, or $169,000 if you're married filing jointly.) When it comes time for the Croces to withdraw their money in retirement, that will be tax-free, too.
Tignanelli also recommended that Kjell and Michelle increase their life-insurance coverage; boost the deductibles on their home and car insurance to reduce the premiums; apply for a home-equity line of credit to keep in reserve; and make sure all of their beneficiary designations are in order. In addition, he showed them how to make better use of Michelle's business to improve their family's finances -- for instance, by hiring the children.
Tignanelli's recommendations "really opened our eyes," says Kjell. "There were quite a few things we didn't know or hadn't even thought about."
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