#529plans

By:  Paul Horn, CFP®, CPWA® Senior Financial Planner

Most of our clients as they get older want to begin to think of ways that they can take care of their grandchildren. Most commonly the discussion revolves around opening 529 plans and saving for college. Below are five alternatives that are worth considering if you are trying to take care of grandkids:

1. Pay for their first car. Another large expense for kids is getting them their first car. The costs of gas and insurance alone are a burden for parents. This can be a great way to bond with grandkids and help them get their first taste of freedom.
2. Pay for vacations with the grandkids. Raising kids is expensive and there may not be a lot of money left in the parent’s budget for nice vacations. Instead of material goods, create memories that will last their lifetime. Paying for vacations with the grandkids will help them have new experiences, learn new things, and create lasting memories. I will never forget the camping and fishing trips I had with my grandparents. I learned how to bait a hook, drive a boat, and appreciate the mountains because my grandparents did this for me.
3. Buy them their first stock. You can transfer shares to your grandkids, and this can save you on taxes since you don’t have to sell the shares. Investing on behalf of your grandkids is an excellent way to help them start on the right foot financially. This also creates a great teaching opportunity to help your grandkids to develop the right financial habits. Here are the best accounts to open for your grandkid’s future.
4. Help them with giving to charity. Most of our clients would prefer to pass on values than assets to their kids and grandkids. Something we do is work with grandparents and have them make charitable donations each year on behalf of their grandkids. You can have the grandkids choose the charity and even give a little pitch as to why the charity deserves the money. The kids tend to love this and expect some money to go to the local animal shelter!
5. Spend time with them. If you live close to them, kidnap the grandkids for the day. Spoil them and get them hopped up on sugar and send them home! This can provide a needed break for the parents and helps create a strong bond and lasting memories for the grandkids. At the end of the day, kids want time more than anything else (even though they won’t say it).

There are many ways to help provide for and take care of grandchildren. Many of these ideas can be done without having to break the bank or spend too much money. If you have questions or would like to discuss these ideas, please contact us at financialplanning@bfsg.com.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

As parents we always want to see our kids succeed and do better than we did. This means many times we want to invest in their future for various things. Most of the time parents want to save for education, but there could be other reasons to save.  For example, helping them buy their first home, seed money to start their business venture, or to pay for a wedding. Below are the most common account types and when it may be the best choice based on your goals for the money. Some may notice that the Coverdell (Educational IRA) is not listed and that is because it is no longer relevant given recent changes to the 529 Plan.

529 Plan: Best account for saving for education

• Best used if you 100% know that the beneficiary is going to use the funds for college, post-secondary education, or private school.
• For 2022, the max that can be contributed in one year is $16,000 per person per beneficiary (or $32,000 with gift splitting).  There is also an option to superfund a 529 where 5 years of contributions are made in one year.
• Contributions grow tax-free and distributions can be tax-free as long as they are used for qualified education expenses.  Qualified education expenses include (but are not limited to) items like room and board, tuition, and books.
• Contributions can be deductible at the state level depending on your state.
• If the distribution is not for qualified education expenses, the earnings on the distribution are subjected to ordinary income taxes and a 10% withdrawal penalty.
• You can switch the beneficiary at any time. Let’s assume you have money left over after the oldest child graduates; you can transfer this money to the next kid in college.

UTMA/UGMA (custodial account): Best account if you want your kid to have the money at 18 or 21 without any limitations

• In 2022, this is an account where the custodian can contribute $16,000 per year to an investment account for a minor child.  At the age or majority (usually age 18 but can be increased to age 21 or 25 in some circumstances), the minor child then becomes the owner of the account.
• While the minor child is still listed on the UTMA (Uniform Transfer to Minors Act) account or UGMA (Uniform Gift to Minors Act) account, the earnings are subject to capital gains at the following schedule:
  • The first $1,100 of unearned income is free from tax,
  • The next $1,100 is taxed at the minor’s tax rate,
  • Earnings above $2,200 are taxed at the parent’s tax rate.

• When the account transfers to the minor child due to the minor child reaching the age of majority, earnings and distributions are taxed at capital gains tax rates.

2. Put money into a taxable account in your name – Best option for anything not education specific

• There are no limits on how much you put into the account or how the money is used.
• You maintain full control of the assets and determine when and how much they receive.
• This is a taxable account, so it would be subject to regular taxes (i.e., interest income, capital gains, dividends, etc.)
• If your kid(s) were to inherit the taxable account, the securities in the taxable account get a step up in basis to virtually eliminate any tax implications for them.
• A taxable account has less impact on financial aid for your kid(s) than a UTMA/UGMA.
• Money can be invested however you choose.
• When you give the money to them it is considered a gift and limited to $16,000 per person or $32,000 for a married couple per year (2022). Any amount over this is reported on a gift tax return (no taxes are paid but it reduces your estate tax exemption).
• If the money is used to pay tuition for a school directly or directly to medical bills, then the $16,000 limit does not apply.

Roth IRA: Best if saving for their retirement

• Contributions to a Roth IRA can be made for a minor child as long as the minor child has earned income from working.
• For 2022, contributions are limited to $6,000 or the amount of earned income (whichever is lower). Assume they make $3,000 from a summer job, then you are limited to contributing $3,000.
• A parent can put money into the Roth IRA for the kids to allow the kids to keep their income they earned.
• Contributions grow tax-free and distributions can be tax-free if the owner (the minor child) is at least age 59.5 and the contributions have been in the account for at least 5 years.  If not, earnings on the distributions are subject to ordinary income tax and subject to a 10% early withdrawal penalty.  There are some instances where the 10% early withdrawal penalty can be waived that include (but are not limited to): buying your first home (up to $10k), college tuition, or permanent disability.

As you can see, there are many options available to you and the best account depends on what your goals are. You can reach us at financialplanning@bfsg.com if you would like to have a complimentary call to discuss your specific situation.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

(This is part 4 of a four-part estate planning series)

In the previous posting, we discussed how Mark Zuckerberg of Meta Platforms, Inc. had the same strategies available, that you have available in order to reduce or possibly eliminate your estate tax bill.  In this final part of the estate planning series, we would like to review how gifting assets from your estate can be beneficial to your estate tax bill. If you have concerns regarding how these strategies could affect certain estate and gift planning transactions in which you intend to engage or have previously engaged, please contact your tax advisor and estate planning attorney to further discuss your estate and gift planning inquiries. Our firm is happy to work with you and your estate planning attorney on your unique situation and we can work together to help you achieve your estate planning goals.

During my CFP® studies, one of my professors quipped, “Some people are charitable by choice, but some people get to a certain level of net worth and are charitable by necessity.”  This means that even though some people aren’t charitably inclined, it may be best for their bottom line to be charitable for their own sake and/or their heir’s sake.

The Charitable Remainder Trust (CRT) and the Charitable Lead Trust (CLAT)

I’ve lumped these two strategies together because they generally both gift assets to charity and get assets out of the estate, but one pays the charity in a lump sum and the other pays an annual income stream to the charity over a stated number of years.  When a Charitable Remainder Trust (CRT) is funded, income gets paid to the beneficiary(ies) at least annually for a set number of years and the charity gets the remainder. The Charitable Lead Annuity Trust (CLAT) (sometimes referred to as just a Charitable Lead Trust) is structured where income gets paid to the charity over a stated number of years and afterward, the beneficiary(ies) gets the remainder. Both trusts are irrevocable and serve the purpose of lowering your taxable estate. The CRT allows for an immediate charitable deduction when you fund the trust, while the CLAT allows the estate to take a charitable deduction for the value of the interest paid to charity.

Here are some graphical examples of how a Charitable Remainder Trust and Charitable Lead Annuity Trust work:

Charitable Remainder Trust (CRT):

Charitable Lead Annuity Trust (CLAT)

Superfunding 529 Plans

The 529 plan is an investment account typically used for college planning that allows for tax-free growth and possible tax-free distributions if those distributions are made to pay for qualified educational expenses. One strategy that is available to you is using the annual gift tax exemption of $16,000 per person per beneficiary since (as we discussed in part 1 of this series) this is typically the maximum that you can gift without triggering the gift tax and having your gift tax exclusion reduced. However, we can do one better. You can “superfund” a 529 plan by making five years’ worth of gifts in one year.  Therefore, we can gift $80,000 per person per beneficiary (or if you are a married couple, you can use gift splitting and instead gift $160,000 per beneficiary) all without triggering gift tax and while getting that $160,000 out of the estate. Notice that the definition states: “per beneficiary”. The catch is that you need to live at least 5 years after the gift is made for it to have successfully left your estate. After the first five years are completed, you can do it again if you wish. If one of the 529 plan beneficiaries decides not to go to college, you can always change the beneficiary at any time, or even make a once per year rollover of 529 plan assets to another 529 plan beneficiary’s account.

529 Plan Superfunding Example:  Say you have six grandchildren, and you are benevolent Grandma and Grandpa. You want to superfund their 529 plans, so you then make a gift of $160,000 to each of the six grandchildren to their 529 plan accounts (for a total of $960,000). You wait 5 years and do it again, but unfortunately, passed away 2 years later. The first $960,000 that you gifted will be out of your estate. But the second time you tried to superfund their 529 plans for the second $960,000, it will be counted in your gross estate. In this example, there was still $1,920,000 contributed to the six grandchildren’s 529 plans and $960,000 left in your gross estate – all without triggering any gift tax.

In summary, there are many different estate planning strategies that can help reduce your overall income tax burden. If you would like to revisit any of our prior posts in this estate planning series here are the articles for easy reference:

• What is the Estate and Gift Tax
• Getting Assets out of the Estate
• Getting Future Growth out of the Estate

Furthermore, earlier this year we posted a white paper, “2022 Estate and Gift Tax Planning”, that discussed making gifts to children and grandchildren during 2022 while incurring little or no gift tax.

The bottom line is we are happy and willing to work with you and your estate planning attorney on your unique estate planning goals.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

The current rule states that you must take your first Required Minimum Distribution (RMD) by April 1^st of the year after you reach 72 and annually thereafter by December 31^st of each year. When the SECURE Act became law on December 20, 2019, the RMD age was pushed back from age 70.5 to age 72. 

Plans affected by RMD rules are: 401(k) plans, 403(b) Plans, 457 Plans, Traditional IRAs, SEP IRAs, SIMPLE IRAs, Inherited IRAs and Inherited Roth IRAs. Defined Benefit and Cash Balance plans satisfy their RMDs by starting monthly benefit payments (or a lump sum distribution) at the participant’s required beginning date.

If you’re still employed by the plan sponsor of a 401(k) and are not considered to be a more than 5% owner, your plan may allow you to delay RMDs until you retire. The delay in starting RMDs does not extend to owners of traditional IRAs, Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs) and SARSEP IRA plans.

The RMD value is calculated based on the qualified investment account’s value on December 31^st of the prior year and is based on standardized IRS guidelines (i.e., the RMD for 2022 is based on the value of the account on 12/31/2021). The prior year’s year-end balance is divided by a life expectancy factor issued by the IRS.

 If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA. If you have more than one defined contribution plan, you must calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan (Exception: If you have more than one 403(b) tax-sheltered annuity account, you can total the RMDs and then take them from any one (or more) of the tax-sheltered annuities).

For inherited IRAs and inherited Roth IRAs, if the account was inherited before the SECURE Act was passed, you can take RMDs over your life expectancy. If you inherited the account after the SECURE Act was passed, there are no required annual distributions, but the account must be depleted within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child until they reach the age of majority. 

Now let’s take a look at the options available to you for your IRA, 401(k), or another qualified investment account subject to RMD rules.

Option 1 – Take your RMD.

This is the most straightforward option. You can take your RMD (or a greater amount if needed), withhold the appropriate federal and state taxes from the distribution, and use the net distribution as needed. If this is your first year taking your RMD, you can take two RMDs in the first required year. This is because the rules say by April 1^st following the year you turn 72. Therefore, you could take your 2022 RMD on February 15, 2023, and your 2023 RMD on June 30, 2023. Doing this would allow you to delay the first year’s RMD for tax purposes for only the first year and means that the 2022 RMD wouldn’t affect your 2022 tax return. However, Uncle Sam will eventually get his recompense and your 2023 tax return would reflect your 2022 RMD and 2023 RMD with this strategy. Note that RMDs are taxed at ordinary income rates.

Option 2 – Don’t take your RMD.

Please don’t go with this option. The IRS has a very steep penalty for those who don’t take their RMD.  The IRS penalty is 50% of the amount not taken on time.  In general, even if you don’t need the money.  You really should take it.  As you will see later, there are many options available to you even if you don’t need the money.

Option 3 – Take your RMD and invest those proceeds into a non-qualified investment account.

With this option, you would take the RMD as normal and withhold federal and state taxes and invest the net distribution into a non-qualified (taxable) investment account. The non-qualified account could be used for general savings to be used during your lifetime, an inheritance to gift to your beneficiaries after your death, or to help save for a future unexpected expense like a long-term care need.

Option 4 – Qualified Longevity Annuity Contract (QLAC).

A QLAC is a strategy where you put in the lesser of 25% of the total value of all your qualified investment accounts or $145,000. A QLAC allows you to fund an annuity contract as early as age 65 and delay income received from the annuity until age 85. The QLAC itself does not count towards the RMD calculation, but the income received from QLAC is treated as ordinary income. This sounds like the slam dunk option, right? Wrong. The answer is it depends on your unique situation (like most answers in financial planning). Yes, a QLAC would help lower the tax bill during the years you defer taking income from the QLAC, at the cost of less net money in your pocket during the early years of your retirement and annuity payments that do not generally have a cost-of-living adjustment tied to them that would increase your tax bill because you still have RMDs on top of the QLAC payments. A QLAC is generally also an irrevocable decision. We would be happy to discuss the pros and cons of purchasing a QLAC if you have further questions.

Option 5 – Qualified Charitable Distribution (QCD).

For the altruist (who also likes not paying taxes), a QCD is an option. If there is a charity (a 501(c)(3) organization) that you feel passionate about, you can donate up to $100,000 per year (as of tax year 2022) directly from your qualified investment account to that charity tax-free. This helps you avoid the distribution being included in your taxable income and is especially valuable for those who don’t typically itemize on their tax returns. The key word is “directly”, as if you physically take the RMD check and then turn around and write a check to that charity, that does not count. For those over age 70.5, QCDs can be used before you are required to take your RMD at age 72. We can work with you to make sure that your QCD is done correctly.

Option 6 – College Planning.

Maybe you have a sizable estate and are concerned about making sure your grandchildren can attend college. With this option, you can put the net RMD funds into a 529 Plan that would grow tax-free and withdrawals can be tax-free if the funds withdrawn from a 529 Plan are used for qualified educational expenses (i.e., tuition, books, room and board, etc.). Contributions to this investment account may even be tax-deductible in your state. Also, since this is considered a gift, you are lowering the size of your taxable estate, which could help your heirs at the time of your passing. Normally you are only allowed to gift $16,000 per year (or $32,000 per year if you elect gift splitting with your spouse) per beneficiary. But with a 529 plan, you can gift 5 years’ worth of gifts in only one year (“superfunding”).  This means that you could potentially gift $80,000 per beneficiary for a single tax filer or $160,000 per beneficiary for a married couple into the 529 plan and lower your taxable estate by that amount. There are a few moving parts in this example, including possibly filing a gift tax return, so we would need to work with you and possibly your accountant and estate planning attorney to make sure this would all go according to plan.

Now that we have an idea of the different options available to you, we would like to illustrate examples of how some of these options can be used in a real-world setting.

*If you have a QLAC, the calculations could differ, but the general idea of the flowchart would still be the same. 

The goal of this article was to illustrate that there are many different options available to you (including ones not illustrated in this article). Also, check out this 2-minute BFSG Short which gives a high-level overview of the most important things to know about RMDs. Our team is available to discuss these concepts with you in further depth if you have any other questions and to evaluate what option would be best for your unique situation.  

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

With potential tax changes on the horizon, funding a 529 college plan deserves careful consideration. 529 college plans allow an individual to donate up to $15,000 per year for each beneficiary ($30,000 per year for married couples). With the potential increase in income taxes and capital gains taxes, 529 plans could be favored since invested funds are free of both income and capital gains taxes as long as those funds are used for qualified education expenses for the beneficiary. With the passage of the Tax Cuts & Jobs Act of 2017 (TCJA), you can now withdraw up to $10,000 per year to pay for private primary or secondary school tuition (*withdrawals limited to tuition only).

High net worth individuals or those who are experiencing a particularly lucrative year may consider superfunding their 529 plan(s) by making contributions using five-year gift averaging. To read more about this strategy read our prior blog post here.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s web site or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.