Glen & Amber are sandwiched between their elder parents and three children, ages 15-24. Glen has been managing their investments on his own and would like to retire from his corporate job. With family pressures complicating this decision, friends referred them to us for financial advice.
In our Discovery Meeting, we learned that Glen’s parents are in their late seventies and becoming less independent. His sister lives closest to them but increasingly frequent trips are straining her family. Amber’s parents are divorced; her dad and his wife are stable, but her mom is struggling with health and financial issues.
Seeking comfort for Glen’s career decision, we started with the family needs. Through our Generational Conversations program, we provided comprehensive information on care management options. Hiring occasional home caregivers who report to Glen’s sister proved to be a good solution. Amber’s mother moved into independent senior living at a reasonable monthly cost. She is now happier in a social setting and Amber is greatly relieved. The proceeds from selling her mom’s home combined with Social Security will keep mom financially stable for many years.
The couple’s elder daughter, Olivia graduated college with some 529 funds remaining, which we transferred to their middle child. Olivia is now largely independent with a first job, and gets occasional support from her parents.
In addition to increasing 529 contributions for the younger kids, we opened custodial (or UTMA) accounts. These are irrevocable gifts that a parent controls until the children reach their state’s age of majority. Unlike 529’s, they can receive annual gifts of stock and mutual funds and get a preferential tax rate on sales. Glen gifted some appreciated company stock which was promptly sold. The proceeds can immediately cover some extracurricular expenses and later fund college costs ineligible for 529’s like cars, Greek life and entertainment.
With family issues addressed, we narrowed in on the retirement conversation. We explored Social Security strategies. Glen also expects some consulting opportunities. We all agreed to start managing Glen and Amber’s investments right away. Our paradigm of aligning investments to match expected income needs brings comfort around retirement spending, while capturing growth with longer-term dollars.
Generational Conversations also supports adult children and their elder parents to plan for housing, legal strategies and security needs.
Many families list paying for a child’s college education as an important financial goal, yet are unsure how much to save. College tuition costs have increased much faster in recent decades than any other household expense. J.P. Morgan recently projected that a four-year college education for a child born today will cost between $250k and $580k (ranging from public in-state tuition to private tuition). At the same time, financial aid awards have declined.
If you’re the parent of a newborn, the need for college planning may seem far in the future. But starting early can make a huge difference, even if making small monthly contributions.
A tax-advantaged savings vehicle has the potential to grow faster, as taxes aren’t taking a bite out of your investment returns.
In honor of National 529 Day on May 29th, here we highlight some facts about 529 accounts as a tax-advantaged vehicle for saving and investing for college.
You may get an income-tax break on contributions made to a 529 offered by the state you live in.
Money saved in a 529 has the potential to grow tax-free. Earnings on the money contributed are not taxed while in the 529 account, and money can be withdrawn free from federal income tax if used for qualified educational expenses, including an amount for room and board, and even an annual amount for K-12 education.
Most states also don’t impose state income tax on qualified withdrawals.
Taking money out of a 529 for non-educational expenses triggers tax and penalty only on the gains.
The beneficiary of a 529 account can be changed at any time to another family member or even to yourself. And there is no limit on how long a 529 account can exist – theoretically allowing an account to be passed down generations.
Family and friends can make contributions to your child’s 529, and if a non-parent is the account owner, the money in the 529 plan does not impact federal financial aid.
Subject to certain limitations, up to $35,000 of unused money in a 529 account can be rolled over to a Roth IRA in the beneficiary’s name, without any taxes or penalties related to taking money out for non-educational expenses.
1 J.P. Morgan Asset Management. This hypothetical example illustrates the future values at age 18 of different regular monthly investments for different time periods. Chart also assumes an annual investment return of 6%, compounded monthly. Investment losses could affect the relative tax-deferred investing advantage.
Changes to the FAFSA form and the formula for determining a family’s need for aid are changing, effective for the 2024-2025 school year. While all the changes are beyond the scope of this post, here we highlight two from a financial planning perspective.
Parent Income:
Contributions (pre-tax salary deferrals) to employer retirement accounts are no longer added back to parent income. This could be an additional incentive for parents with employer plans to max out contributions in years that the FAFSA looks at income. The FAFSA looks at the year two years prior to the beginning of the school year. For example, the 2024-2025 school year looks at 2022 income. Note that this change only applies to contributions that come straight from a salary reduction. Contributions to IRAs that are deductible on the tax return are still added back to parent income.
Grandparent Contributions: Up until now, while grandparent (or other non-parent) owned 529 accounts did not count towards a parent or student’s assets, withdrawals from said account counted as income to the student which had to be reported on the FAFSA. This could reduce the student’s aid eligibility. With the changes, withdrawals from a third-party owned 529 account will no longer count as student income. Grandparents can now maintain a 529 account for their grandchildren and distribute funds without impacting aid eligibility.
Because of these changes, the 2024-2025 form will not be available until December this year. You can stay up to date on announcements at https://studentaid.gov/, or through college financial aid office websites.
Call us to review your investment approach (404) 941-2800.
Long-time employees face this non-revocable and permanent choice upon retirement. While the security of lifetime income can be comforting, several trade-offs exist.
Do I want to rely on the company’s future financial strength? How long will I live? What will inflation do to my pension income over time? What happens if I die? Should I take a lower amount to protect my spouse? What happens if they die? Do I have a choice to take a lump sum and control how and when I spend the money?
Pension distributions are limited to lifetime income options without future inflation adjustments. Additionally, If the income beneficiaries die early, there is often no remainder. Many companies offer a “lump-sum distribution” to effectively buy the retiree out of their pension obligation. This amount can be transferred to a traditional IRA tax-free.
There are several advantages to taking the cash.
Freedom to invest the money, timing and adjusting your income, and protecting your heirs. Lump-sum buyouts are calculated using a specified interest rate, so the lump-sum payout value increases in low-rate environments; it increases the lump-sum payout value.
Once you start a pension, you’re locked in. From an IRA, you might take an increased amount until you start Social Security, allowing you to defer and increase your Social Security payment for both you and your spouse. If you have a life event, you can adjust IRA distributions. You cannot adjust a pension. You may downsize your home, get an inheritance, or need to spend a chunk of cash on a new car or family need. A lump sum allows flexibility a pension cannot. Plus, when you die, there is likely an inheritance, which a pension does not offer.
Integras Partners separates lump sum funds into different IRAs, keeping money for short-term needs conservative while allowing assets needed later to grow. Having more time for the remainder to stay invested reduces market risks. Having control of the funds also protects your heirs. Employing good strategies should increase both lifetime income and protect your family.
Most importantly, a “lump-sum rollover” gives you the peace of mind to enjoy what you’ve worked so long to earn truly.
If you’re interested in learning more, give us a call at (404) 941-2800, or reach out to us about your situation.
Several years ago, a client couple referred their neighbors. Let’s call them Jim and Kate. They had been married almost 20 years and had established careers and two younger children. After recently purchasing their dream home, they came to us to help consolidate multiple investments and build a financial plan for their retirement. We started by solidifying their college savings, reviewed existing life policies, and started managing their accumulated retirement accounts.
Jim was an early employee of his firm and was working with leadership to design his exit strategy. He wanted to spend more time with family, and was starting his own business. A few years later Jim got sick, and we sat with them at the attorney’s office to draft wills and healthcare directives. Fortunately, his life insurance was already in place, as insurance companies won’t issue a policy once a serious healthcare issue arises.
Jim recently lost his battle with a debilitating illness. Through the waves of emotions that followed, we were able to provide Kate with peace of mind around her financial future, so that she could focus on her family and their grieving. When she was ready, we helped her reregister accounts, file insurance claims, update her will, and refine college planning. Thankfully, the life insurance benefits more than covered expenses while she took a leave of absence from work and prepared their oldest child for college.
Kate has told us many times how grateful she is to be able to lean on us. A year after losing her husband, we helped her dismantle her inherited business and work through the pros and cons of strategies to help restart her life, including selling their family home and securing financial freedom.
Partnering with a trusted Financial Advisor now could be one of the most important moves you make. Life is unpredictable. When you find yourself faced with stressful life changes, having built strong advisor relationship will prove to be invaluable.
