Inheriting IRA or 401(k) proceeds from a friend or relative can be a potentially huge windfall, but it can also be a sizable tax headache. For both the giver and the recipient, it’s worth getting some advice.
Bank accounts, stocks, real estate and life insurance proceeds generally pass to heirs free of income tax. However, inherited retirement benefits can be a different story. Beneficiaries have to pay ordinary income tax on distributions from 401(k) plans and traditional IRAs after they are inherited. (You don’t see the same problem with Roth IRAs – their benefits can be free of income tax to your heirs if all tax requirements are met.)
A financial planning professional or an experienced tax advisor can work with you based on your personal tax and estate circumstances to determine an inheritance strategy that is best for you. Some general guidelines:
Spouses are the first stop: Federal law dictates that your surviving spouse must be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a waiver to redirect those funds. Even with a traditional IRA, naming the spouse as the primary beneficiary may be an appropriate option. Should the surviving spouse have his or her own IRA, this approach would allow them to simply roll over the assets from the decedent’s IRA into their own. Furthermore, if the surviving spouse is significantly younger than the deceased, the surviving spouse would receive the added benefit of stretching out distributions from the IRA until he or she turns 70 1/2. The stretch-out allows the assets to continue to grow on a tax- deferred basis, thereby maximizing asset value and delaying any income tax due.
When might you want to rethink a spousal beneficiary? When the surviving spouse’s estate is expected to be large enough to exceed the applicable exclusion amount for federal and state estate taxes. The applicable exclusion amount after allowable expenses is $2 million in 2008 and above $3.5 million in 2009. It should also be noted that in addition to federal estate tax, many states impose a state tax on estates with considerably lower asset levels (often anything over $1,000,000). Proper estate planning may alleviate this issue.
What about non-spousal beneficiaries? Today, non-spouse beneficiaries may be able to roll over all or a part of inherited 401(k) benefits to an inherited IRA. A recent change in IRS regulations still requires non-spousal heirs to withdraw a minimum amount from Inherited IRA assets every year, but it’s based on the age of the recipient rather than the age of the decedent.
Establishing a Stretch IRA: Due to recent changes in the minimum distribution law, taxpayers may now establish IRAs designed to stretch out the time period over which a non-spouse beneficiary (i.e. child) is required to take minimum distributions from an inherited IRA. Proper use of this vehicle may potentially allow for continued growth of tax-deferred earnings over multiple generations and can have a substantial impact on the future value of the family portfolio.
Naming trusts or charities as beneficiaries. Placing IRA assets in trust can have substantial advantages but can be complex. It should only be considered after receiving tax advice from a competent professional. It is particularly important to get tax advice related to this issue. Trusts can be complex instruments with which to bequeath assets, and even though naming a charity as one’s primary beneficiary will not affect distributions in your lifetime, it could affect the tax consequences for non-charitable beneficiaries who are sharing the same asset upon your death.
October 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Thursday, October 23, 2008
Monday, October 13, 2008
Open Enrollment on the Way:Should You Take Advantage of Your Company’s Health Savings Account Option?
Fall is approaching, which means for many workers that open enrollment is coming. Open enrollment is a specified time period during which companies let their employees sign up for various health and retirement savings benefits as well as smaller benefit options that may be unique to a company.
One of those options might be a health savings account, also known as an HSA. Health savings accounts were created as part of the Medicare Modernization Act of 2003. Anyone under age 65 who buys a qualified high-deductible health plan (HDHP) can open an HSA. However, you can still own an HSA and be covered under other types of insurance policies that cover liability, dental, vision and long-term care needs.
Why are companies offering these plans? Because a high-deductible health plan option allows the company to save money while giving their employees a shot at lower or stable monthly individual and family premiums. And it’s important to know that in 2007, the contribution rules on these plans changed. Previously, the maximum contribution was calculated as the lesser of the deductible of the high-deductible health plan or a specific indexed amount. Now, the limit is the maximum annual contribution alone.
What’s the big advantage to choosing one? Contributions are made to HSAs on a pretax basis where they are allowed to grow tax-deferred and spent out on a tax-free basis for medical expenses. HSA contributions could be made through a company’s cafeteria plan if allowed by the company’s cafeteria plan document, and can potentially save FICA/Medicare taxes on the contribution along with federal and state taxes.
Yet there are some critical things to know before you make the switch:
Get some individual financial advice first: The enticement of potentially lower or more stable health insurance premium increases may lead you to jump immediately, but it makes sense to speak to your tax professional as well as a financial adviser about how an HSA should fit into your overall financial strategy.
Understand your 2008 HSA limits: The following cover the maximum contributions you can place in an HSA and the minimum and maximum out-of-pocket amounts for an HDHP insurance plan:
One of those options might be a health savings account, also known as an HSA. Health savings accounts were created as part of the Medicare Modernization Act of 2003. Anyone under age 65 who buys a qualified high-deductible health plan (HDHP) can open an HSA. However, you can still own an HSA and be covered under other types of insurance policies that cover liability, dental, vision and long-term care needs.
Why are companies offering these plans? Because a high-deductible health plan option allows the company to save money while giving their employees a shot at lower or stable monthly individual and family premiums. And it’s important to know that in 2007, the contribution rules on these plans changed. Previously, the maximum contribution was calculated as the lesser of the deductible of the high-deductible health plan or a specific indexed amount. Now, the limit is the maximum annual contribution alone.
What’s the big advantage to choosing one? Contributions are made to HSAs on a pretax basis where they are allowed to grow tax-deferred and spent out on a tax-free basis for medical expenses. HSA contributions could be made through a company’s cafeteria plan if allowed by the company’s cafeteria plan document, and can potentially save FICA/Medicare taxes on the contribution along with federal and state taxes.
Yet there are some critical things to know before you make the switch:
Get some individual financial advice first: The enticement of potentially lower or more stable health insurance premium increases may lead you to jump immediately, but it makes sense to speak to your tax professional as well as a financial adviser about how an HSA should fit into your overall financial strategy.
Understand your 2008 HSA limits: The following cover the maximum contributions you can place in an HSA and the minimum and maximum out-of-pocket amounts for an HDHP insurance plan:
- Maximum HSA contribution: $2900 for individual, $5800 for families
- Minimum HDHP deductible: $1100 self-only coverage, $2200 family coverage*
- Annual out-of-pocket maximum: $5600 self-only coverage, $11200 family coverage
- If you are 55 or older and your HDHP is in effect, you are eligible to deposit catch-up contributions, and in 2008, the additional amount is $900.
Know the difference between an HSA and a medical flexible spending account (FSA): One important difference is that HSAs allow balances to be rolled over from year-to-year, growing on a tax-free basis as long as they’re used for medical expenses. On the other hand, Medical FSAs require that the money you contribute each year to be spent by year-end (or a brief grace period if provided by the plan) or you’ll lose it. But in certain cases, such as when you incur medical expenses early in a year, you can be reimbursed by your FSA without having to fully fund it – so FSAs might be a bit more flexible in this regard. Get help from your tax or human resources professional.
Know whether you can have both: In some situations, you may be able to have both an HSA and an FSA. If your FSA provides for limited reimbursement for items not covered by your health insurance plan (such as dental, vision or wellness care), you can use an HSA for items covered by your plan and your FSA for medical expenses that are not. Obviously, double-check this with an expert.
Know penalties for non-medical withdrawals: You’ll get hit with a 10 percent penalty, plus any withdrawals will be taxed at ordinary income tax rates. After age 65, you’re free to use the funds for any purpose without penalty, but non-medical withdrawals are still taxable.
You may actually use an IRA to fund an HSA on a one-time basis: The rules let individuals roll over money from an IRA once so people can use the money tax-free for medical expenses, but the amount of the rollover is limited to the HSA maximum contribution for the year minus any contributions already made.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Preparing Your Finances for a New Baby
Your parents might have mentioned at least a couple of times while you were growing up how wonderful and expensive you were. The bottom line? Bringing a child up is a tremendous financial responsibility, and it’s better to plan in advance than deal with a surprise down the line.
The U.S. Department of Agriculture compiles an annual survey on what it costs to raise a child from birth through age 17. In 2007, in the lowest income group, expenses ranged from a total of $7,830 to $8,830 for a two-child, husband-wife household to between $15,980 to $17,500 for families in the highest income group. Once again, those are the latest annual figures – so if you held spending unrealistically static for the next 17 years, the cost of raising a child in the lowest income group would range from $133,110 to $150,110 adjusted for inflation. In the highest income group, that range would be between $271,660 to $297,500.
Note that we haven’t begun to discuss college yet. Across the United States, the average tuition and fees at four-year private institutions in 2007-2008 was $23,712, representing a 6.3 percent increase of more than $1,400 over 2006-2007, according to College Board’s 2007-2008 Annual Survey of Colleges. At public four-year colleges, the average in-state tuition and fees averaged $6,185, a 6.6 percent increase.
All parenthood comes at a price. But with the help of a financial planner you can create a strategy to afford kids from birth through college. Here are some key points in that process:
Create or review your financial plan: A financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. For many individuals, it may be the first time they seriously examine their financial future in such black-and-white terms. But it starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your financial planner can also help you understand how much the additional costs of raising a child, including the startup costs of birth or adoption will affect all those numbers. A financial plan should be reviewed with every major change in life, and having kids is certainly one of those landmark events.
Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards first.
Make sure you have a will: If you die without a will, you won’t have a clear path of guardianship for your child, nor will your assets be properly directed to support that child. Any good adoption attorney will insist that you develop and file a will as part of the adoption process.
Check your insurance options: In today’s health insurance environment, the addition of a child to a policy can bring tremendous additional cost – sometimes without the guarantee of the best coverage. Check with your employer or your independent insurance provider to make sure you have the best coverage for what you can afford. Also look into medical savings accounts with your financial planner if you decide to take a high-deductible policy to keep premiums low.
Know your tax advantages: If you’re adopting, you can get some tax relief. In tax year 2008, parents will be entitled to a one-time tax credit of $11,650 per eligible child. There are income limits – the credit disappears for individuals with modified adjusted gross income of between $174,730 for individuals and $214,730 for couples.
Ask what your employer can do for you: If you’re working at a family friendly company, it’s often considerably easier to apply for leaves of absence or work schedules that make more sense when you’ve got a young child at home. Some companies may offer to reimburse some portion of their workers’ adoption expenses.
Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
The U.S. Department of Agriculture compiles an annual survey on what it costs to raise a child from birth through age 17. In 2007, in the lowest income group, expenses ranged from a total of $7,830 to $8,830 for a two-child, husband-wife household to between $15,980 to $17,500 for families in the highest income group. Once again, those are the latest annual figures – so if you held spending unrealistically static for the next 17 years, the cost of raising a child in the lowest income group would range from $133,110 to $150,110 adjusted for inflation. In the highest income group, that range would be between $271,660 to $297,500.
Note that we haven’t begun to discuss college yet. Across the United States, the average tuition and fees at four-year private institutions in 2007-2008 was $23,712, representing a 6.3 percent increase of more than $1,400 over 2006-2007, according to College Board’s 2007-2008 Annual Survey of Colleges. At public four-year colleges, the average in-state tuition and fees averaged $6,185, a 6.6 percent increase.
All parenthood comes at a price. But with the help of a financial planner you can create a strategy to afford kids from birth through college. Here are some key points in that process:
Create or review your financial plan: A financial plan is a written set of goals, strategies and a timeline for accomplishing those goals. For many individuals, it may be the first time they seriously examine their financial future in such black-and-white terms. But it starts with the basics – determining how much you really have in savings, debt, insurance and investments. Your financial planner can also help you understand how much the additional costs of raising a child, including the startup costs of birth or adoption will affect all those numbers. A financial plan should be reviewed with every major change in life, and having kids is certainly one of those landmark events.
Get rid of your high-interest debt: A major decision like having a child is a good reason to take a “clean slate” approach to debt. Before you can build a reserve fund, it’s wisest to pay off your credit cards first.
Make sure you have a will: If you die without a will, you won’t have a clear path of guardianship for your child, nor will your assets be properly directed to support that child. Any good adoption attorney will insist that you develop and file a will as part of the adoption process.
Check your insurance options: In today’s health insurance environment, the addition of a child to a policy can bring tremendous additional cost – sometimes without the guarantee of the best coverage. Check with your employer or your independent insurance provider to make sure you have the best coverage for what you can afford. Also look into medical savings accounts with your financial planner if you decide to take a high-deductible policy to keep premiums low.
Know your tax advantages: If you’re adopting, you can get some tax relief. In tax year 2008, parents will be entitled to a one-time tax credit of $11,650 per eligible child. There are income limits – the credit disappears for individuals with modified adjusted gross income of between $174,730 for individuals and $214,730 for couples.
Ask what your employer can do for you: If you’re working at a family friendly company, it’s often considerably easier to apply for leaves of absence or work schedules that make more sense when you’ve got a young child at home. Some companies may offer to reimburse some portion of their workers’ adoption expenses.
Build your reserve fund: When a baby, toddler or older child comes into the house, money flies out the door at a velocity most childless people have never seen. Children always cost money and sometimes unpredictably so, but it pays to build your savings before they arrive so you won’t overuse your credit cards. Also, it’s possible that a birth mother’s health may take a turn during the pregnancy, so that’s an expense that needs to be anticipated.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Blended Families Should Plan Early for Their Kids’ College Financial Aid
Finances for blended families – one of the fastest-growing demographics in the United States – can be complicated. The needs of stepchildren may fall into direct conflict with one’s own, and aside from the many financial entanglements that result from previous marriages or partnerships, college planning is a particular area where couples should seek help.
Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.
That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.
Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:
Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.
Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry -- can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.
Why? Because more than 60 percent of all college students now apply for some form of financial aid, and those numbers will go higher as college costs rise. Add that to the sometimes conflicted financial goals within families with children from previous marriages and relationships, and a couple’s financial picture may become a source of considerable strain based on negotiations with former spouses over the welfare of children from previous relationships.
That’s why both tax experts and financial planners should be consulted before couples remarry – to address the host of financial issues blended families face. In particular, individuals with children from a previous marriage should think through how college will be funded for their own children as well as any children born after the remarriage.
Here are several key issues that soon-to-be remarried individuals should consider with regard to planning for college:
Divorce agreements should spell out college support: By the time individuals are planning to remarry, a divorce may be long past. But in cases where a divorce may be pending before remarriage, couples may have the opportunity to secure adequate college support if state laws allow that as part of a settlement. Even if the children are very young, support agreements should always look ahead to the years when the child heads to college, not only to make sure that the education is properly funded, but to spell out those financial responsibilities for each divorcing spouse.
Prenuptial agreements should too: Even if a remarrying couple has very small children, it makes particular sense to look to the future when the children of this blended family are heading for school. In many situations, it’s common for remarrying spouses to shoulder the full burden of the blended family’s college expense. But a prenuptial agreement – a financial agreement made by two individuals planning to marry -- can do two things. It can look into the past and document existing agreements with ex-spouses to pay for college expenses and other financial support and it can look into the future to do contingency planning for the kids in case this marriage ends up in divorce as well.
Get advice about the FAFSA: On January 1 each year, students become eligible to file their Free Application for Federal Student Aid (FAFSA) online for the coming school year. This process can get very confusing in blended families because parent-child relationships determine the level of financial responsibility and the potential for aid. In some cases, it might be wiser for a couple not to marry while children are still receiving financial aid in college, so it is critical for divorced spouses to get advice on this issue. Colleges will determine financial aid packages on the custodial and financial profile of parents based on any of the following parental scenarios:
- The parent who had provided the majority financial support to the child during the past 12 months.
- The parent who supplied more than half of the child’s support and pledges to continue to do so.
- The parent who has legal custody of the child.
- The parent who claimed the child as a dependent on their taxes.
- The parent who provided the most financial support to the child during the most recent calendar year.
- The parent with the greater documented income.
College financial aid is tough enough for traditional families to navigate. A financial planner with specific expertise in navigating financial aid issues as well as your overall financial picture can help you make the best choices in preparing your application for college aid.
Remember that if the parent who provided financial support was single, divorced or widowed but has since remarried, the student will have to submit the stepparent’s financial information. While this information will be evaluated, it doesn’t legally obligate the stepparent to provide financial assistance.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
Monday, October 6, 2008
Financial Crisis Update: Monday, October 6, 2008
by Advisor Products Inc. 10/6/2008 6:00:00 PM
Global equity markets retreated again today as investors indulged fears that not even the world’s top government bankers will be able to shore up the credit markets and stave off recession. The blue-chip Dow industrials fell 369 points, cracking the 10,000-point barrier for the first time since 2004, and other major indices fell 3% to 4%. The market did show some resolve, however, gaining over 400 points from the session's low in the final hour and 15 minutes of trading. Once again, bond markets served their traditional role as a relatively safe haven from stock market volatility. Treasury yields sank even further as demand for government debt pushed prices upward yet again. For more, please read:http://money.cnn.com/2008/10/06/markets/markets_newyork/index.htm
World Holds Breath For Bank Bailout Now that Congress has ratified the $700 billion emergency bank rescue package and President Bush has signed it into law, Treasury officials are already hard at work to put the controversial plan into practice before global credit markets freeze over. Few of the central figures involved in the bailout expect that the next few weeks will be completely free from setbacks, but in the meantime investors around the world can at least hope that the plan works.
Investing In The Post-Bailout Future Noted finance professor Jeremy Siegel says few people are happy that the Treasury has had to resort to such extreme lengths to stimulate lending, but he also notes that the $700 billion rescue plan “can be a plus” for taxpayers and investors if executed properly. But what exactly is the government buying with that $700 billion and how will the plan work? In clear language, Prof. Siegel lays out the parameters and what’s at stake.
Digging Into The Job Numbers After the initial shockwaves from Friday’s labor report, economists are putting together a more balanced picture of what the numbers imply. American businesses may be trimming their payrolls, but wages are still edging higher, which indicates that skilled workers are still in demand. And due to the impact of Hurricane Ike and other events, the final revision to the numbers may end up telling a very different story – the revised July numbers were less gloomy than economists had expected, for example.
Global equity markets retreated again today as investors indulged fears that not even the world’s top government bankers will be able to shore up the credit markets and stave off recession. The blue-chip Dow industrials fell 369 points, cracking the 10,000-point barrier for the first time since 2004, and other major indices fell 3% to 4%. The market did show some resolve, however, gaining over 400 points from the session's low in the final hour and 15 minutes of trading. Once again, bond markets served their traditional role as a relatively safe haven from stock market volatility. Treasury yields sank even further as demand for government debt pushed prices upward yet again. For more, please read:http://money.cnn.com/2008/10/06/markets/markets_newyork/index.htm
World Holds Breath For Bank Bailout Now that Congress has ratified the $700 billion emergency bank rescue package and President Bush has signed it into law, Treasury officials are already hard at work to put the controversial plan into practice before global credit markets freeze over. Few of the central figures involved in the bailout expect that the next few weeks will be completely free from setbacks, but in the meantime investors around the world can at least hope that the plan works.
Investing In The Post-Bailout Future Noted finance professor Jeremy Siegel says few people are happy that the Treasury has had to resort to such extreme lengths to stimulate lending, but he also notes that the $700 billion rescue plan “can be a plus” for taxpayers and investors if executed properly. But what exactly is the government buying with that $700 billion and how will the plan work? In clear language, Prof. Siegel lays out the parameters and what’s at stake.
Digging Into The Job Numbers After the initial shockwaves from Friday’s labor report, economists are putting together a more balanced picture of what the numbers imply. American businesses may be trimming their payrolls, but wages are still edging higher, which indicates that skilled workers are still in demand. And due to the impact of Hurricane Ike and other events, the final revision to the numbers may end up telling a very different story – the revised July numbers were less gloomy than economists had expected, for example.
Financial Crisis Update: Friday, October 3, 2008
by Advisor Products Inc. 10/3/2008 11:35:00 AM
Wall Street closed its worst week since 2001 with fresh losses as fear of a full-fledged credit crisis and ongoing economic concerns conspired to drive share prices sharply lower. Major U.S. indices fell another 1.3% to 1.5% despite the eagerly awaited passage of a $700 billion package of aid for the banking system. Bond yields continued to sink as Treasury debt beckoned investors as a relatively safe haven from the stock market carnage. For more, please read:http://www.msnbc.msn.com/id/3683270/
$700 Billion Bailout PassesAfter two weeks of sometimes heated debate, the Treasury’s far-reaching and historic plan to bail out the nation's financial system—now with added tax breaks and other incentives to tempt recalcitrant members of Congress—was signed into law by President Bush on Friday afternoon. Whether it will provide what it takes to keep the credit markets moving and keep the economy out of the grip of recession remains to be seen.
Job Market Takes Another HitOutside the credit markets, investors pondered news that U.S. payrolls plunged in September, leaving some speculating that bailout or no bailout, a recession could be waiting in the wings. Although the unemployment rate remained unchanged at 6.1%, a net 159,000 jobs still disappeared in September.
Candidates Tighten Focus On EconomyNow that the debate between Sarah Palin and Joe Biden is over (and the bailout has been passed), presidential candidates Barack Obama and John McCain have increased the intensity of their economic rhetoric in an attempt to calm the fears of investors and consumers alike. Social Security and taxes are now headline issues, as is the welfare of the middle class.
Wednesday, October 1, 2008
Always Have a Plan for Leftover 529 Plan Money
With the high cost of education, it’s hard to envision that there might be money left over, but it does happen. Kids get scholarships; they might finish early; sometimes they quit school never to return.
In the case of 529 college savings plans, it’s particularly important to have a backup plan for the possibility of leftover funds, not only to support another family member’s educational goals, but as a potential addition to your estate planning.
As a refresher, a 529 college savings plans – named for the federal law that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. You should know that a 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools [though some plans allow you to transfer out a portion of those assets to out-of-state schools]. Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.
As part of sweeping pension reform signed into law by President Bush in 2006, withdrawals from 529 plans are now permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.
It’s a good idea to have your financial adviser help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. SavingforCollege.com and finaid.org are leading sites to help educate you in how these plans work.
So, if you’ve made all these moves, how should you handle surplus 529 funds? There are a few options:
Change the beneficiary: If Student #1 doesn’t spend out the funds, you can replace the beneficiary with another blood relation – that means brother, sister, first cousin, even you or your spouse – to continue spending down those funds for educational expenses. Also, if you have a grandchild headed for college, you can arrange for your 529 plan to make the withdrawal payable to your grandchild as the beneficiary.
Take a penalty and spend the money on whatever you want: This isn’t the most sensible financial option, but you do have the option to take leftover funds as a nonqualified distribution for your own non-educational use. However, you’ll owe ordinary federal tax with an additional 10 percent on the earnings portion of the distribution. Don’t forget state tax, either.
Let your successor owner make the decisions. When you apply for the account, you are asked to name a successor owner. When you die, you can simply trust the successor owner or the beneficiary of the funds to do what they want with the money.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
In the case of 529 college savings plans, it’s particularly important to have a backup plan for the possibility of leftover funds, not only to support another family member’s educational goals, but as a potential addition to your estate planning.
As a refresher, a 529 college savings plans – named for the federal law that created them in 1996 – allow a parent to open a tax-deferred college savings plan with as little as $25 to start in some states. You should know that a 529 college savings plan is NOT the same thing as a 529 prepaid college tuition plan. Prepaid tuition plans are just that – tax-deferred savings plans that allow you to save for tuition for in-state schools [though some plans allow you to transfer out a portion of those assets to out-of-state schools]. Also, it’s important to note that prepaid tuition plans are not an automatic guarantee a student will get into that college.
As part of sweeping pension reform signed into law by President Bush in 2006, withdrawals from 529 plans are now permanently tax-free. In some states, contributions may also be deductible on state tax returns. All 50 states now have 529 plans college savings plans, and a majority of them provides additional incentives, such as a state-tax deduction to in-state residents who invest in their respective plan.
It’s a good idea to have your financial adviser help you sort through the details of various state plans. There are various services – including Morningstar Inc. – that now rank the offerings of each state’s plan. SavingforCollege.com and finaid.org are leading sites to help educate you in how these plans work.
So, if you’ve made all these moves, how should you handle surplus 529 funds? There are a few options:
Change the beneficiary: If Student #1 doesn’t spend out the funds, you can replace the beneficiary with another blood relation – that means brother, sister, first cousin, even you or your spouse – to continue spending down those funds for educational expenses. Also, if you have a grandchild headed for college, you can arrange for your 529 plan to make the withdrawal payable to your grandchild as the beneficiary.
Take a penalty and spend the money on whatever you want: This isn’t the most sensible financial option, but you do have the option to take leftover funds as a nonqualified distribution for your own non-educational use. However, you’ll owe ordinary federal tax with an additional 10 percent on the earnings portion of the distribution. Don’t forget state tax, either.
Let your successor owner make the decisions. When you apply for the account, you are asked to name a successor owner. When you die, you can simply trust the successor owner or the beneficiary of the funds to do what they want with the money.
September 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.
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