Second career earnings fund education, charities

In fact, according to the U.S. Bureau of Labor Statistics, workers older than 55 are projected to make up 19 percent of the labor force by 2012. After working for years to provide for their families, many retirees are choosing to chase their dream jobs or are working for charitable causes.

If you find yourself in the growing group of retirees who are choosing to return to work, here are some ideas for what to do with the money you earn.

• Help fund an education. You know the true value of an education, and just as you make plans to pass your wealth to your family, you also can help your grandchildren experience the joys and opportunities gained from a college education.

You might want to consider shifting some of your extra income from your new job into an education savings plan for your grandchildren. There are several ways in which this can be done, and your choice could provide you with some potential tax benefits.

One popular vehicle for helping grandchildren to save for college is a 529 plan. This type of plan allows funds to accumulate tax-deferred. Withdrawals that are free of federal taxes are subject to the sunset provision, which expires in 2010, unless it is extended by Congress.

In conjunction with stepped-up gifting, no additional gifts can be made for five years, and a portion of the gift might be subject to recapture if the donor dies within those five years.

When your grandchildren are ready, they can use the money in the fund for qualified higher education expenses, such as tuition and books. Money that is withdrawn from a 529 plan for these types of expenses is exempt from federal – and in some cases, state – income taxes. State tax-free withdrawals are limited only to residents of states that allow this benefit. Noncollege-related withdrawals are subject to income taxes and an additional 10 percent Internal Revenue Service penalty on earnings. An investment in a 529 plan will fluctuate in such a way that an investor’s shares, when redeemed, might be worth more or less than the original investment. There is no guarantee that the account will grow large enough to cover higher education expenses. All 529 plans have various fees and expenses, and before you invest in a 529 plan, be sure to read the plan’s offering document carefully for more information on fees, charges and expenses.

There are several attractive features to a 529 plan, especially if you have multiple grandchildren. You can open separate accounts for each of your grandchildren, and you can transfer funds from one child to another in the same family. Some 529 plans also allow you to deduct your contributions – up to a limit – on your state income tax return.

Coverdell Education Savings Accounts are another option that can help your grandchild not only to save for college but also for elementary or secondary education costs. Qualified withdrawals from a Coverdell account cover a wide variety of education-related expenses, including uniforms, computers and extended day care costs.

There is an annual contribution limit of $2,000 per beneficiary, and you can only contribute to Coverdell accounts for children age 18 and younger. In addition, your adjusted gross income must be less than a certain level for you to be able to contribute to a Coverdell Education Savings Account. Funds in a Coverdell account must be used by the time the beneficiary reaches 30 years of age.

As with 529 plans, funds in Coverdell accounts accumulate with federal income tax deferred, and they are distributed free of federal income taxes if they are used for qualified expenses.

• Contribute to a charitable cause. A common motivation for many who embark on a second career is that they want to support their favorite charitable causes. However, you don’t have to work directly for your favorite charities in order to help them. You can give to charities by participating in a donor-advised fund, which allows you to contribute to one or several charitable causes.

A donor-advised fund allows you to contribute to a charitable fund established in your own name. Through this vehicle, you can control the timing and distribution of the grants from the fund, and you receive a charitable income tax deduction at the time you contribute to the fund. Also, assets contributed to the fund are removed from your taxable estate, reducing your potential estate tax liability. You can establish a donor-advised fund for as little as $10,000.

There are many ways to save your additional income if you choose to work during retirement, but don’t forget to spend a little on yourself.

Your financial consultant can help you best allocate the money you will earn from your second career to maintain a well-balanced financial picture.

Timothy M. Reese is senior vice-president, investments, with A.G. Edwards & Sons Inc., Member SIPC.