How to Use a 529 Plan to Fund a Roth IRA

Contributed by: Josh Bitel, CFP®

Before the passing of SECURE ACT 2.0 in late 2022, folks with unused funds sitting in a 529 account had a few options for using leftover 529 funds. Generally speaking, the most common options were: 

1. Save the funds for future educational use (either for the current or future beneficiary) or

2. Withdraw the money and pay federal income taxes and a 10% penalty on any gains within the account.

While these options may be feasible for some folks, others are left scratching their heads when they see leftover funds in a 529 plan when their child finishes college. This can also be a concern if a student wins a scholarship, attends a military academy, or receives unexpected gifts to help pay for school. 

Fortunately, among the legislative changes brought forth by SECURE ACT 2.0 is a solution to help ease some of these concerns. Starting in 2024, 529 account holders are permitted to roll excess college savings plan funds into a beneficiary’s Roth IRA without incurring taxes or penalties. Sounds great, right? Well, as with most new laws, there is some important fine print to understand before going forward with such a transfer:

• The 529 plan must have been open for at least 15 years before you can execute a rollover to a Roth IRA.

• Rollovers are subject to the annual Roth IRA contribution limit. For 2024, this limit is $7,000. Additionally, if the beneficiary makes any IRA contributions in a given year, the eligible 529 to Roth IRA rollover amount is reduced by the size of that contribution. For instance, if the beneficiary contributes $3,000 to an IRA in 2024, the eligible rollover amount decreases to $4,000, based on the 2024 total IRA contribution limit set by the IRS.

• 529-to-Roth rollovers are subject to a lifetime limit of $35,000 per beneficiary. So, if you wanted to roll over the entire $35,000, you would have to do it over five years under the current 2024 contribution limits. (Although IRA contributions limits tend to rise in most years with inflation).

• 529 plan contributions made in the last five years cannot be transferred to a Roth IRA (including any earnings accrued on those contributions).

• The beneficiary of the 529 plan must match the owner of the Roth IRA. For example, if you have a 529 for your grandson Teddy, you can only roll over any excess funds to a Roth IRA in Teddy’s name. 

• Just as when making a normal contribution to a Roth IRA, the owner must have earned income at least equal to the amount of the rollover. For example, if Teddy has a part-time job earning $4,000 in 2024, you may only roll over $4,000 in 529 funds to the Roth for that year.

• There are no income limits restricting a 529-to-Roth rollover for either the beneficiary or 529 owner. For someone contributing directly to a Roth IRA (not using 529 funds) they are not permitted to do so if they earned $161,000 or more in taxable income as a single person in 2024. This rule does not apply to 529-to-Roth rollovers, so it is an excellent way for high earners to get money into a Roth.

As you can see, there is a lot to know before performing one of these rollovers, but for the right person, this can be a great retirement savings option. A more concise flowchart can be found here to help determine if you or your beneficiary is eligible for this transfer.

Overall, this new provision is a great way for savers to utilize excess 529 funds penalty and tax-free. However, there are still many questions that remain unanswered as it pertains to SECURE ACT 2.0. We are continuing to monitor and research as more details emerge. We will provide additional information as it is available, but if you have any questions about how this could affect you, please contact your Financial Planner. We are always happy to help!

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Any opinions are those of Josh Bitel and Center for Financial Planning, Inc., and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation do not ensure a profit or protect against a loss This material is general in nature and provided for informational purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor's or the designated beneficiary's home state offers any tax or other benefits that are only available for investment in such state's 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state.

Time to File the FAFSA!

Contributed by: Kali Hassinger, CFP®, CSRIC™

Just as parents and students are getting back into the groove of another school year, it's already time to start thinking ahead! The Free Application for Federal Student Aid, better known as the FAFSA, opened for the 2023-2024 school year on October 1. The form helps determine financial aid eligibility for both current and prospective students. Although this is a federal application, it may also be used to apply for many state loans, grants, and scholarship programs.

A New Format

This is the first year a new, shortened version of the FAFSA is being released. The number of questions has been reduced from 108 to 36! Applicants will also be asked to select their role when completing the application. The options are parent, student, or preparer. The Asset Protection Allowance (APA) amount has been effectively reduced to zero, meaning that parental or student assets will be considered more heavily when completing the FAFSA. However, this isn't a shock as the APA has steadily been reduced over time, drifting from $21,400 in 2009 for a single-parent home to $2,500 in 2021 and now officially hitting zero. 

The sooner, the better!

A large portion of available funds is distributed on a first-come, first-served basis, so the earlier you file the FAFSA, the more money is available for loans and grants. While you have until June 30, 2023, to file the FAFSA for the 2023-2024 school year, most state and school deadlines differ. It doesn't matter whether a school has accepted a student at the time of filing. You'll need to elect at least one college to receive the application information, but you can add multiple schools in which you may be interested.

What information do I use?

For the 2023-2024 school year, the FAFSA will use 2021 tax return information. For dependent students, you will need financial information for at least one parent. If your parents are married and/or living together, income and assets for both will be considered. If the parents are divorced and living separately, the custodial parent's information will be reported (whomever the child lives with the majority of the time).

Regardless of the parent's marital status or the student's dependent or independent status, be prepared with W-2s, financial account information, and a 2021 tax return. Even if you don't think you'll qualify for aid, it's important to file the application. Some schools will only consider students for scholarships if they have filed the FAFSA.

Bigger Changes on the Horizon

This October's FAFSA changes were supposed to be more far-reaching than simply a shortened format. In June of 2022, however, it was announced that the rollout of several other changes would be delayed until the 2024-2025 school year (release date of October 2023) to allow more time for technology updates. These changes should provide increased access to Pell Grants (provided to those with exceptional financial need) and reduce the portion of parental or student income expected to pay for school costs.

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Student Loan Forgiveness Announced

Contributed by: Kali Hassinger, CFP®, CSRIC™

On Wednesday, August 24th, President Biden announced a highly anticipated plan to forgive a portion of student loan debt for approximately 43 million borrowers. He also extended the pandemic-driven student loan repayment freeze through the end of the year.

For single taxpayers making less than $125,000/year and Joint or head of household taxpayers making less than $250,000/year, $10,000 of their current student loan balance will be forgiven. For those with Pell Grant debt who meet these income requirements, $20,000 will be forgiven. Pell Grants were given to students with "exceptional financial need." The annual amount of this type of grant awarded is capped at $6,895 for the 2022-2023 school year, and the limit has historically been lower with slight increases each year.

Regardless of the loan type, the amount forgiven will be tax-free. However, whether eligibility will be phased out based on income or a cliff (meaning income $1 over the limits would eliminate eligibility) is unclear.

Loans taken out after June 30th, 2022, will not qualify for this relief. However, current college students who are still considered dependents will be eligible for forgiveness based on their parent's income.

Details on how to apply for forgiveness are still pending, with the understanding that an application will be available before the December 31st repayment freeze ending date. The need to submit an application and certify income will likely be required. Those repaying their student loans through an income-driven repayment plan must certify income yearly. There's also the possibility that some portion of loans will automatically be forgiven if the Department of Education has current and relevant income data. We expect that additional and more detailed guidance will be released in the coming weeks.

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The Secure Act 2.0 and Possible Changes Coming to Your Retirement Plan!

Contributed by: Kali Hassinger, CFP®, CSRIC™

The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, passed in late 2019. This legislation was designed to encourage retirement savings and make significant changes to how inherited retirement assets are distributed. We have written about the Secure Act a bit over the last two years or so (you can read some of our posts here, here, or here), and now, it seems Congress is considering some additional ways to encourage Americans to save for retirement. 

It is, of course, important to note that this is still being debated and reviewed by Congress. The House passed a version of The Secure Act 2.0 on March 29th, but the version that the Senate could pass is expected to differ and be revised before ultimately hitting President Biden’s desk. Some of the key changes that the House and Senate versions of the Bill include are highlighted below:

Automatic Retirement Plan Enrollment

• The new Secure Act would require employers with more than ten employees who establish retirement plans to automatically enroll new employees in the plan with a pre-tax contribution level of 3% of the employee’s compensation. A 1% increase in contributions would be required each year until reaching at least 10% (but not more than 15%) of the employee’s pay. Employees can still override this automatic system and elect their own contribution rate.

Boosting Roth Contributions

Roth Catch-up Contributions

• Catch-up contributions are available at age 50 and, as of now, can be either pre-tax or Roth, depending on what the employee elects. The Secure Act 2.0 could require that all catch-up contributions to retirement plans would be subject to Roth tax treatment. 

• In addition to the current $6,500 catch-up contribution amount at age 50, they could also allow an extra $10,000 catch-up contribution for participants aged 62 to 64.  

Roth Matching Contributions

•  There could be an option to elect that a portion (or all) of an employer’s matching contribution would be treated as a Roth contribution. These additional matches could be included as income to the employee.

Student Loan Matching

• An additional area of employer matching flexibility is associated with employees paying off student loans. While employer matches have traditionally only been provided in conjunction with the employees’ plan contributions, this would allow employers to match retirement plan contributions based on employees’ student loan payments. This would give some relief to those missing retirement plan contributions because of the burden of student loan repayment schedules.

Further Delaying Required Minimum Distributions

•  The original Secure Act pushed the Required Minimum Distribution age from 70 ½ to 72. The Secure Act 2.0 could continue to push that timeline back as far as age 75. The House’s version of the Secure Act would slowly increase the age in a graded schedule. In 2022, the new Required Minimum Distribution age could be 73, with the age increasing to 74 in 2029, and finally up to age 75 by 2032.

Another item on our watch list is related to the original Secure Act from 2019. The Secure Act limited those who could stretch an inherited IRA over their lifetime, and many became subject to a 10-year distribution ruling. The IRS is working to provide more specific guidance on the rules surrounding inherited IRA distribution schedules. Based on the proposed regulation, non-spouse beneficiaries who inherit a retirement account on or after the period when the original account owner was subject to Required Minimum Distributions would be subject to both annual Required Minimum Distributions and required to adhere to the 10-year distribution timeline.

If or when the Secure Act 2.0 is passed into law, we will be sure to provide additional information and guidance to clients, so be on the lookout for possible upcoming blogs and webinars related to this topic. We continuously monitor, discuss, and review these changes with clients and as a firm. If you have any questions about how the Secure Act 2.0 could affect you, your family, or your business, we are always here to help! 

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion

Big Changes Coming to the FAFSA Process

Contributed by: Josh Bitel, CFP®

2021 has brought some significant changes to the Free Application for Federal Student Aid (FAFSA) process. Thanks to the Consolidated Appropriations Act of 2021, one of these major changes, which will be in effect for the 2023‐2024 academic year, will allow grandparents to help pay for college expenses without falling into a financial‐aid trap.

Before this Act, if grandparents owned 529 Account to help out with college costs, these funds would be considered income to the student in regards to the FAFSA process. The more income a student shows, the less aid this federal program is willing to offer that student. For this reason, grandparent‐owned accounts have been deemed “financial‐aid traps” by many industry professionals.

However, the new FAFSA questionnaire, which will come into play for the 2023‐2024 academic year, no longer asks students to disclose cash support on the form. The IRS now uses a data retrieval tool for this purpose, therefore all student income will be taken from tax return data. This opens up a significant opportunity for grandparents to help cover some educational expenses for their grandchildren without impacting their financial aid status.

529 accounts remain the most popular and tax‐efficient way to help pay for education expenses. Any contributions to these accounts are removed from the contributor’s taxable estate, the funds within the account are invested and grow tax‐free, and (if used for educational expenses) withdrawals are taken out free of tax too! Grandparents have always been able to establish and contribute to these plans, however up until now, there were major pitfalls to be aware of. With the Consolidated Appropriations Act now in full swing, grandparents should strongly consider 529 accounts as a tool to help with education costs.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

Disclosure: As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover education costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. favorable state tax treatment for investing in Section 529 college savings plans may be limited to investments made in plans offered by your home state. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.

Helping You Set Your Financial Goals For The New Year!

Contributed by: Kali Hassinger, CFP®, CDFA®

New beginnings provide the opportunity to reflect.  What choices or experiences got you to where you are today, and where do you want to go from here?  Whether you’re motivated by the New Year or adjusting your course due to circumstances outside of your control, goals provide the opportunity to set your intentions and determine an action plan.

Budgeting, saving, retirement, paying off debt, and investing are all common, and often reoccurring, resolutions and goals. Why reoccurring?  Because, as is human nature, it is too easy to set a goal but lose focus along the way.  That is why it’s so important to set sustainable goals and find a way to remain accountable.

Working with an outside party, like a financial planner, can help you define these attainable goals and, most importantly, keep you accountable.  When we make commitments to ourselves and share them with others, we are more likely to follow through.

When goals are written down and incorporated in a holistic financial plan, it becomes easier to track progress and remain committed throughout the year.  The financial planning process, when executed correctly, integrates and coordinates your resources (assets and income) with your goals and objectives. As you go through this process, you will feel more organized, focused, and motivated. Your financial plan should incorporate the following (when applicable):

• Goal identification and clarification (you’re here now!)

• Developing your Net Worth Statement

• Preparing cash flow estimates

• Comprehensive investment management and ongoing monitoring of investments

• Financial independence and retirement income analysis

• Analysis of income tax returns and strategies designed to help decrease tax liability

• Review of risk management areas such as life insurance, disability, long term care, and property & casualty insurance

• College funding goals for children or grandchildren

• Estate and charitable giving strategies

As you reach one goal, new ones can emerge, and working with a financial planner can help you navigate life’s many financial stages. When you’re setting and working toward your objectives, don’t hesitate to reach out and share them with your trusted financial planner!  If you aren’t working with anyone yet, it’s never too late to start!  

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Consolidated Appropriations Act Of 2021: More Stimulus On The Way

Contributed by: Kali Hassinger, CFP®, CDFA®

After months of deliberation, Congress passed a bill providing a second round of Coronavirus relief, and it was signed by the president on December 27th.  This will provide direct payments to citizens, extend unemployment benefits, and reopen the Paycheck Protection Program to provide loans to small businesses.  This Act, totaling $2.3 trillion dollars, earmarks $900 Billion for stimulus relief with the remaining $1.4 trillion for the 2021 federal fiscal year.   

The direct stimulus rules are largely similar to the CARES Act from March 2020, with a few changes, most notably, of course, the amounts provided.

Direct Payments

Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government.

• Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:

  • Married Filing Jointly: $150,000

  • Head of Household: $112,500

  • All other Filers (Single): $75,000

If income is above the AGI limits shown above, the credit received will reduced by $5 for each $100 of additional income.

• How much can I expect to receive?

  • Married Filing Jointly: $1,200

  • All other Filers: $600

  • Additional credit of up to $600 for each child under the age of 17

The rebates are dispersed based on your 2019 tax return, but, like the CARES Act, is a 2020 tax credit.  This means that if your income in 2019 phased you out of eligibility, but your 2020 income is lower and puts you below the phase out, you won’t receive the rebate payment until filing your 2020 taxes.  The good news is that those who do receive a rebate payment based 2019 income, and, when filing 2020 taxes, find that their income actually exceeds the AGI thresholds, taxpayers won’t be required to repay the benefit.

• When will I receive my benefit? As soon as possible, though delays similar to the CARES Act payments should be expected. 

• Where will my money be sent?  Payment to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have a payment sent to the last known address on file.

Charitable Giving Tax Benefits

• The charitable deduction limit on cash gifted to charities will remain at 100% of Adjusted Gross Income for 2021.  This was increased from 60% to 100% for 2020 with the CARES Act.  If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years.  This does not apply to Donor Advised Fund contributions.

• This Act also extends the above-the-line tax deduction for charitable donations up to $300 that was authorized by the CARES Act, but it increases this deduction to $600 for married couples ($300 per person)

Support For Small Businesses

The Paycheck Protection Program (PPP) will allow businesses affected to COVID-19 to apply for loans. Those who did not receive a loan through the CARES Act once again have the chance, and those who successfully applied for a loan previously, may have the opportunity to obtain another loan. If applying for a second loan, however, the previous loan funds must already have been received and spent.

Some of the Paycheck Protection Program provisions are more stringent and other provide more clarity:

• The business must have experienced a 25% or larger drop in revenue for any quarter in 2020

• The loan is limited to a 2.5 times the average monthly payroll costs or 3.5 times for businesses categorized as “Accommodation and Food Services.”  The total amount received is capped at $2 million.

• Expenses paid of forgiven Paycheck Protection Program funds are deductible

  • The IRS tried to withdrawal the deductibility of items funded with PPP, but this Act states that expenses paid with both forgiven and new PPP loans shall remain deductible.

• Loans are limited to businesses that have no more than 300 employees with the exception, again, for businesses categorized as “Accommodation and Food Services.”

Expanded Unemployment Benefits

Unemployment benefits were set to expire for many Americans, but the Consolidated Appropriations Act extends the benefit for an additional eleven weeks.  Additional relief will also be provided at $300 per week until Mid-march when the extension expires.

Individual Healthcare & Tax Planning

• Individuals are able to deduct medical expenses if they exceed 7.5% of their Adjusted Gross Income.  This hurdle was previously 10% of AGI.

• FSA funds that haven’t been used in 2020 can be rolled into 2021 if the employer permits this extension. 

Higher Education Deduction With Increased Phase-out

The Lifetime Learning credit provides a credit of 20% of the first $10,000 spent on higher education expenses (so $2,000 if you spend $10,000). The income phase-out limit has been increased to match the American Opportunity tax credit at $80,000 to $90,000 for single filers and $160,000 to $180,000 for joint filers. Although the American Opportunity tax credit is more lucrative for the amount spent (100% credit up to $2,000 in education expenses with an additional 25% credit on the next $2,000 of expenses.  So a total credit of $2,500 on $4,000 spent), you can only claim this credit for 4 years.  As the name Lifetime Learning credit implies, you can claim this credit throughout your lifetime!

Earned Income Tax Credit Changes

The Earned income Tax Credit and additional Child tax credit are determined by an individual’s earned employment income.  Because so many Americans have faced periods of unemployment in 2020, this Act will allow individuals to use their 2019 earned income to calculate the amount they will receive for 2020.

Student Loan Repayments

The ability for an employer to pay up to $5,250 of an employee’s qualified student loan debt is extended through 2025. The employee receives this benefit tax free.  

The period of time between the passing of the CARES Act and the passing of a 2nd round of relief throughout the Consolidated Appropriations Act of 2021 was much longer than many anticipated.  Thankfully the majority of the legislation did not provide short term deadlines for the end of 2020!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should discuss any tax or legal matters with the appropriate professional.

Gifting Considerations During The Holiday Season

Contributed by: Nick Defenthaler, CFP®, RICP®

Giving is top of mind for many now that we are officially in the thick of the holiday season. Whether you’re shopping online or fighting crowds at the mall, there are other forms of gifting to consider – ones that would arguably have a much larger impact on your loved one's life.

Gift Tax Exclusion Refresher

The annual gift tax exclusion for 2020 is $15,000. This means you can give anyone a gift for up to $15,000 and avoid the hassle of filing a gift tax return. The gift, if made to a person and not a charitable organization, is not tax-deductible to the donor nor is it considered taxable income to the recipient of the gift. If you are single and wish to gift funds to your daughter and son-in-law, you can give up to $30,000, assuming the check issued is made out to both of them. Remember, the $15,000 limit is per person, not per household. For higher net worth clients looking to reduce their estate during their lifetime given estate tax rules, annual gifting to charity, friends, and family members can be a fantastic strategy. So what are some ways can this $15,000/person gift function? Does it have to be a gift of cash to a loved one’s checking or savings account? Absolutely not! Let’s look at the many options you have and should consider: 

1. Roth IRA funding 

If a loved one has enough earned income for the year, he or she could be eligible to fund a Roth IRA. What better gift to give someone than the gift of tax-free growth?! We help dozens of clients each year with gifting funds from their investment accounts to a child or grandchild’s Roth IRA up to the maximum contribution level of $6,000 ($7,000 if over the age of 50). Learn more about the power of a Roth IRA and why it could be such a beneficial retirement tool for younger folks. 

2. 529 Plan funding 

529 plans, also known as “education IRAs” are typically used to fund higher education costs. These accounts grow tax-deferred and if funds are used for qualified expenses, distributions are completely tax-free. Many states (including Michigan) offer a state tax deduction for funds contributed to the plan, however, there is no federal tax deduction on 529 contributions. Learn more about education planning and 529 accounts.

3. Gifting securities (individual stock, mutual funds, exchange-traded funds, etc.)

Gifting shares of a stock to a loved one is another popular gifting strategy. In some cases, a client may gift a position to a child who is in a lower tax bracket than them. If the child turns around and sells the stock, he or she could avoid paying capital gains tax altogether. As always, be sure to discuss creative strategies like this with your tax professional to ensure this is a good move for both you and the recipient of the gift.  

4. Direct payment for tuition or health care expenses

Direct payments for certain medical and educational expenses are exempt from the $15,000 gift tax exclusion amount. For example, if a grandmother wishes to pay for her granddaughter’s college tuition bill of $10,000 but also wants to gift her $15,000 as a graduation gift to be used for the down payment of a home, she can pay the $10,000 tuition bill directly to the school and still preserve the $15,000 gift exclusion amount. This same rule applies to many medical costs. 

For those who are charitably inclined, gifting highly appreciated stock or securities directly to a 501(c)(3) or Donor Advised Fund is a great strategy to fulfill philanthropy goals in a very tax-efficient manner. For those over 70 ½, gifting funds through a Qualified Charitable Distribution (QCD) could also be a great fit. Gifting funds directly from one’s IRA can reduce taxable income flowing through to your return which will not only reduce your current year’s tax bill but could also lower help lower your Medicare Part B & D premiums, which are determined by your income each year.  

As you can see, there are numerous ways to gift funds to individuals and charitable organizations. There is no “one size fits all” strategy when it comes to giving – the proposed solution will have everything to do with your goals and the need of the person or organization receiving the gift. On behalf of the entire Center family, we wish you a very happy holiday season, please reach out to us if we can be of help in crafting your gifting plan for 2020!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of earnings are permitted. Earnings withdrawn prior to 59 1/2 would be subject to income taxes and penalties. Contribution amounts are always distributed tax free and penalty free. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover educational costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. To learn more about the potential risks and benefits of Donor Advised Funds, please contact us.

7 Ways The Planning Doesn't Stop When You Retire

Contributed by: Sandra Adams, CFP®

Most materials related to retirement planning are focused on “preparing for retirement” to help clients set goals and retire successfully. Does that mean when goals are met, the planning is done? In my work, there is often a feeling that once clients cross the retirement “finish line” it should be smooth sailing from a planning standpoint. Unfortunately, nothing could be further from the truth. For many clients, post-retirement is likely when they’ll need the assistance of a planner the most!

Here are 7 planning post-retirement issues that might require the ongoing assistance of a financial advisor:

1. Retirement Income Planning 

An advisor can help you put together a year-by-year plan including income, resources, pensions, deferred compensation, Social Security, and investments.  The goal is to structure a tax-efficient strategy that is most beneficial to you.

2. Investments 

Once you are retired, a couple of things happen to make it even more important to keep an active eye on your investments: (1) You will probably begin withdrawing from investments and will likely need to manage the ongoing liquidity of at least a portion of your investment accounts and (2) You have an ongoing shorter time horizon and less tolerance for risk.

3. Social Security

It is likely that in pre-retirement planning you may have talked in generalities about what you might do with your Social Security and which strategy you might implement when you reached Social Security benefit age. However, once you reach retirement, the rubber hits the road and you need to navigate all of the available options and determine the best strategy for your situation – not necessarily something you want to do on your own without guidance.  

4. Health Insurance and Medicare

It’s a challenge for clients retiring before age 65 who have employers that don’t offer retiree healthcare. There’s often a significant expense surrounding retirement healthcare pre-Medicare.

For those under their employer healthcare, switching to Medicare is no small task – there are complications involved in “getting it right” by ensuring that clients are fully covered from an insurance standpoint once they get to retirement.  

5. Life Insurance and Long-Term Care Insurance

Life and long-term care insurances are items we hope to have in place pre-retirement. Especially since the cost and the ability to become insured becomes incredibly difficult the older one gets. However, maintaining these policies, understanding them, and having assistance once it comes time to draw on the benefits is quite another story.  

6. Estate and Multigenerational Planning

It makes sense for clients to manage their estate planning even after retirement and until the end of their lives. It’s the best way to ensure that their wealth is passed on to the next generation in the most efficient way possible. This is partly why we manage retirement income so close (account titling, beneficiaries, and estate documents). We also encourage families to document assets and have family conversations about their values and intentions for how they wish their wealth to be passed on. Many planners can help to structure and facilitate these kinds of conversations.

7. Planning for Aging

For many clients just entering retirement, one of their greatest challenges is how to help their now elderly parents manage the aging process. Like how to navigate the health care system? How to get the best care? How to determine the best place to live as they age? How best to pay for their care, especially if parents haven’t saved well enough for their retirement? How to avoid digging into your own retirement pockets to pay for your parents’ care? How to find the best resources in the community? And what questions to ask (since this is likely foreign territory for most)? 

Since humans are living longer lives, there will likely be an increased need and/or desire to plan. In an emergency, it could be difficult to make a decision uninformed. A planner can help you create a contingency plan for potential future health changes.

While it seems like the majority of materials, time, and energy of the financial planning world focuses on planning to reach retirement, there is so much still to do post-retirement. Perhaps as much OR MORE as there is pre-retirement. Having the help of a planner in post-retirement is likely something you might not realize you needed, but something you’ll certainly be glad you had.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

Time to Fill Out the 2020-2021 FAFSA Application

Contributed by: Kali Hassinger, CFP®

Just as parents and students are getting back into the groove of another school year, it’s already time to start thinking ahead! The Free Application for Federal Student Aid, better known as the FAFSA, opened for the 2020-2021 school year on October 1. The form helps determine financial aid eligibility for both current and prospective students. Although this is a federal application, it may also be used to apply for many state loan, grant, and scholarship programs.

The sooner the better!

A large portion of available funds are distributed on a first-come, first-served basis, so the earlier you file the FAFSA, the more money is available for loans and grants. While you have until June 30, 2021 to file the FAFSA for the 2020-2021 school year, most state and school deadlines differ. It doesn’t matter whether a student has been accepted by a school at the time of filing. You’ll need to elect at least one college to receive the application information, but you can add multiple schools in which you may be interested.

What information do I use?

For the 2020-2021 school year, the FAFSA will use 2018 tax return information. Regardless of your household income level, however, it’s important to file the application. Some schools will only consider students for scholarships if they have filed the FAFSA.

Visit https://studentaid.ed.gov/sa/fafsa to start the process.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.