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Why Wouldn’t You Use a 529 Plan to Save for College?

By College Planning

529 plans are a powerful tool for building college savings, yet many worry that 529’s are too restrictive – that the money they put in could be “lost” somehow if the child gets a sports or academic scholarship, or chooses not to go to college at all.

Fear not! You have options.

First, you can always withdraw the money that you contributed penalty- and tax-free. Second, if Junior earns a sports or academic scholarship, you can take money out of the 529 plan up to the dollar amount of the scholarship penalty-free.

There is a small catch. When you take a distribution from a 529, the IRS will consider a portion of that to come from “contributions” and another from growth or “earnings.” The latter part will be taxed as ordinary income. So how does the IRS figure out what portion comes from earnings v. contributions?

It’s just a simple ratio. Let’s say you’ve contributed $500 per month to Junior’s 529 from the time he was born and used one of those “age-based” investment options the plan offers. Initially, the account was invested 100% in stocks but over time it’s shifted to mostly bonds and CDs. By the time he’s 18, the account has grown to $177,207. Of that, $108,000 (or 61%) represents money contributed while $69,207 (or 39%) represents earnings in the account.

So, say Junior gets a scholarship worth $25k his Freshman year. If you take $25,000 from his 529, 39% of that – or $9,750 – will be considered earnings and be taxed as ordinary income. Had you invested in a traditional brokerage account, instead of Junior’s 529, would you have come out ahead? Multiple factors come into play. Were your gains in the traditional brokerage account short-term in nature and taxed as ordinary income? Given changes to the tax code over time and your own career trajectory, how have your personal tax rates changed? Using some pretty middle-of-the-road assumptions, my quick calculations show it to be a wash.

Another option is to leave the funds in the 529 plan and let them grow until your kids’ kids are old enough for college. You can always change the beneficiaries of a 529 account and there is no deadline by which you have to use the funds. This makes 529s a great vehicle for creating what amount to educational trust funds for future generations.

Given all of that, it doesn’t make sense not to use a 529 to save for college.

529 Plans Are Powerful Tools For Building College Savings

By College Planning

There are no income restrictions limiting who can open a 529 plan. You can contribute up to $15,000 annually to a given child’s 529 without triggering gift tax. Those who are fortunate enough to have $75k to invest can make five years’ worth of contributions in one go, gift tax free.

Plans offer low-cost, “age-based” investment portfolios. Initially, they’ll be invested 100% in stocks. Over time, bonds get added to the mix, until the accounts hold just bonds and CDs when the child reaches 18. Funds grow tax-free, and, so long as distributions are used for qualified expenses, they will also be free of tax. “Qualified expenses” include:

  • Tuition and mandatory fees.
  • Room and board during the academic year, up to the maximum given in the university’s financial aid calculator or the amount actually charged if the student is living in university-operated housing.
  • Books, supplies and equipment.
  • Expenses to address special educational needs.
  • Computers, software and internet service.

There are some expenses students face that are not considered “qualified expenses,” namely:

  • Health insurance payments.
  • Expenses and fees related to sports teams and health clubs/gyms.
  • Electronics and smart phones.
  • Travel to/from campus and local transportation expenses.

When opening a 529 account, you are not required to invest in your own state’s plan. That said, more than thirty states give their residents tax incentives to stay in state. Find out who and how much in this chart.

A handful of states are so generous as to give their residents tax breaks for investing in any state’s 529 plan. Find out who and how much here.

So, given all of the above, why are some parents – and, in my experience, especially grandparents – reluctant to use 529’s? I’ll get to that in my next post.

States That Give Their Residents Tax Incentives to Invest in Any State’s 529 Plan

By College Planning
State Tax Incentive Link to State’s 529 Plan
Arizona Contributions to any state’s 529 up to $2k (single), $4k (MFJ) are deductible
Missouri Contributions to any state’s 529 are deductible up to $8k (single), $16k (MFJ)
Montana Contributions to any state’s 529 are deductible up to $3k (single), $6k (MFJ)
Pennsylvania Contributions to any state’s 529 plan of up to $15k per done/beneficiary can be deducted from taxable income

States That Give Their Residents Tax Incentives to Use Their Own State’s 529 Plan

By College Planning
State Tax Incentive Link to State’s 529 Plan
Alabama Contributions to Alabama’s 529 are deductible up to $5k (single), $10k (MFJ)
Arkansas Contributions to Arkansas’ 529 are deductible up to $5k (single), $10k (MFJ)
Colorado Any dollars invested in Colorado’s 529 are deductible to the extent of taxable income
Connecticut Contributions to Connecticut’s 529 are deductible up to $5k (single), $10k (MFJ)
Dist. of Columbia Contributions to DC’s 529 are deductible up to $4k (single), $8k (MFJ)
Georgia Contributions of up to $4k per beneficiary (single filers) and up to $8k per beneficiary (MFJ) to Georgia’s 529 are deductible
Idaho Contributions to Idaho’s 529 are deductible up to $6k (single), $12k (MFJ)
Illinois Contributions to llinois’ 529 are deductible up to $10k (single), $20k (MFJ)
Indiana Indiana residents can receive a 20% state income tax credit on up to $5k contributed to the Indiana 529 plan
Kansas Contributions of up to $3k per beneficiary (single filers) and up to $6k per beneficiary (MFJ) to Kansas’ 529 are deductible
Louisiana Contributions of up to $2,400 per beneficiary (single filers) and up to $4,800 per beneficiary (MFJ) to Louisiana’s 529 are deductible
Maryland Contributions of up to $2,500 per beneficiary Maryland’s 529 are deductible
Massachusetts Contributions of up to $1k (single filers) and up to $2k (MFJ) to Massachusett’s 529 are deductible (at least thru 2021 tax yr)
Michigan Contributions to Michigan’s 529 are deductible up to $5k (single), $10k (MFJ)
Minnesota Residents can choose whether to invest in another state’s 529 and take a tax deduction of $1,500 (single) or $3,000 (MFJ) orreceive a tax credit of up to $500 for contributions made to Minnesota’s plan subject to an AGI phaseout of $75k
Mississippi Contributions to Mississippi’s 529 are deductible up to $10k (single), $20k (MFJ)
Nebraska Contributions to Nebraska’s 529 are deductible up to $5k (single), $10k (MFJ)
New Mexico Contributions to NM’s 529 are fully tax deductible
New York Contributions to New York’s 529 are deductible up to $5k (single), $10k (MFJ)
North Dakota Contributions to North Dakota’s 529 are deductible up to $5k (single), $10k (MFJ)
Ohio Contributions of up to $4k per child to the Ohio 529 are deductible
Oklahoma Contributions to Oklahoma’s 529 are deductible up to $10k (single), $20k (MFJ)
Oregon Contributions of $150 (single) or $300 (MFJ) to Oregon’s 529 receive a tax credit
Rhode Island Contributions to RI’s 529 are deductible up to $500 (single), $1k (MFJ)
South Carolina All contributions to the SC 529 are tax deductible
Utah Contributions to the Utah 529 of $2,040 (single) and $4,080 (MFJ) are eligible for a 5% state income tax credit
Vermont Contributions to Vermont’s 529 of up to $2,500 (single), $5,000 (MFJ) are eligible for a 10% Vermont income tax credit
Virginia Contributions to Virginia’s 529 of up to $4k per beneficiary per year are tax deductible
West Virginia Contributions to West Virginia’s 529 are fully tax deductible
Wisconsin Contributions to Wisconsin’s 529 of up to $1,670 (single) and up to $3,340 (MFJ) per beneficiary are fully tax-deductible

RMDs Not Required in 2020 = Good News for Seniors

By Uncategorized

The Coronavirus Aid, Relief & Stimulus (CAREs) Act waives required minimum distributions (“RMDs”) from IRAs in 2020. It’s a one-time waiver that could substantially lower taxable income for those seniors fortunate enough to not need any/all of their RMD to support their annual income needs.

Let me explain.

The money you contributed to your Traditional IRA or Rollover IRA – created when you rolled funds from a 401(k) or other retirement plan from an old employer into an IRA – had not yet been taxed. In the years since, it’s grown tax-free. The IRS is going to require that you take a certain percentage out, every year after you turn 72[1], and pay income tax on that distribution. Simply put, after all of these years of tax-free growth, the IRS wants to collect its pound of flesh (aka tax). In the year you turn 72 this distribution must total 3.91% of the value of your IRA on December 31st of the year prior. From 73 on, the percent that you are required to take rises – to 4.37% at 75, 5.35% at 80, 6.76% at 85 and so on. These distributions are called RMDs. And if you fail to take them on time the penalty is severe – the IRS demands you pay them 50% of the RMD amount you should have taken. Ouch.

Some seniors are fortunate enough to be able to live off of their Social Security and other sources of income in retirement – for example, pensions, private annuities, and taxable savings. Some others need only take a distribution from their IRAs that are  smaller than their RMD. For these fortunate seniors, a one-year holiday from RMDs means that their taxable income in 2020 could be substantially lower.

This opens up lots of opportunities, tax-wise and portfolio-diversification-wise. For those who have taxable brokerage accounts with substantial long-term capital gains but in dire need of change – like dumping legacy stock, mutual fund or bond holdings in favor of a shift to a lower-cost, better-diversified mix of Exchange Traded Funds (ETFs) – the waiver of RMDs coupled with the fall of stock market values represent a unique opportunity in 2020 to reconfigure smarter portfolios for the future.

And if you’ve already taken your 2020 RMD you can still benefit. You have 60 days to redeposit the funds to your IRA.

Now is a good time to reach out to a Certified Financial Planner. Take advantage of the fact that s/he is a fiduciary who must put your interests first. You may discover that your current Financial Advisor isn’t actually earning the fees you’ve been paying.

[1] The SECURE Act, signed in December 2019, raised the starting age for RMDs from 701/2 to 72 for those who had not yet turned 701/2 by December 31, 2019.

How to Survive, Financially, During the Pandemic

By Cash Flow Planning, Financial Planning

Last week Congress passed, and the President signed, a $2 trillion bill to provide relief to American taxpayers and businesses suffering from the economic effects of the Coronavirus pandemic. They named it the “Cares Act.”

Media reports have focused on the $1,200 checks that individual taxpayers will receive. For most who live in major metro areas with high costs of living, this $1,200 will not provide much real relief – especially as our time spent in quarantine extends from several weeks into several months.

There are, however, other elements in the bill that allow you to draw substantial amounts of cash from your retirement savings to pay bills and stay afloat in 2020. First, you can now borrow two times as much from your 401(k). Second, the 10% penalty normally applied to early withdrawls from IRAs and retirement plans will be waived.

Borrowing from your 401(k)

Borrowing from your current employer’s 401(k) plan when your finances have taken a turn for the worst has always been an option. It’s quicker and easier than securing a loan from a bank, has no impact on your taxes or credit score, and is less expensive than maxing out on your credit cards. Yes, you’re paying some amount of interest on the loan, but you’re paying it to yourself. And you have five years to repay the loan.

Previously, you were only allowed to borrow the lesser of $50,000 or 50% of your vested balance. Now, you can borrow the lesser of $100,000 or 100% of your vested balance and you have an additional year (six total) to pay back the loan.

Taking early withdrawls from your IRA

Taking money from your IRA “early” – meaning before you turn 59.5 years old – has always been an option. Unless you met certain hardship tests, a 10% penalty was levied on your withdrawl and the full amount of that withdrawl was included in your taxable income. And you could not simply replace the funds you withdrew. You were limited by the annual contribution limits to IRAs ($6,000 + $1,000 if 50+).

Now, the 10% penalty will be waived on withdrawls up to $100,000 taken anytime through December 31, 2020. The withdrawl will be included in your taxable income, but you will be able to stretch that over three years and you can redeposit 100% of the funds withdrawn over three years. What’s more, if you redeposit the funds, you can file an amended tax return and get back the income tax you paid on the withdrawal.

That $100k withdrawl limit can be extended in certain circumstances. If you have been laid off and are paying health insurance premiums yourself while unemployed, any dollars withdrawn to cover those premiums are considered a “hardship withdrawl” and were already exempt from the 10% penalty.

So You Inherited an IRA. Now what?

By Financial Planning, Retirement, Widows and Money

Wealth Management: Putting Your Interests First

Or a 401(k), or a SIMPLE IRA or a SEP IRA….

It depends first on your relationship to the account’s original owner – were they your husband or wife? The IRS has one set of rules for spouses who inherit retirement accounts and another set for everyone else.

Next, it matters how contributions were made into the account. Were pre-tax dollars used, as with a traditional IRA, 401(k), SEP or SIMPLE IRA? Or were after-tax funds used, as with a Roth IRA or Roth 401(k)?

Lastly, to the extent you have options, ask yourself whether you need the funds you’ve inherited, and, if so, when.



If so, you can take a lump sum distribution and there will be no penalties if you are under 59.5 years old. In the case of a Traditional IRA, the entire distribution will be considered taxable income to you. For a Roth IRA, because taxes were paid on the dollars originally contributed, only the portion of the distribution that represents earnings (or growth, inside the account) will be taxable income. Depending on the size of the inherited account and your other income, taking a lump sum distribution could result in a large tax bill that year, so be cautious and consult your tax professional before doing anything.

An alternative for those needing to access the inherited funds in the near term is to make withdrawls over five years. To do this, you set up an Inherited IRA in your name and transfer the funds from your late spouse’s IRA into the new Inherited IRA and tell the IRS that you have elected to take distributions using the five-year method. You can choose how much to withdraw each year, but must exhaust the account by December 31st of the fifth year after the year of your spouse’s passing. This can be done with both Traditional and Roth IRAs and there will be no penalties on distributions if you are under 59.5 years old. One caveat is that you will not be able to make any contributions to that Inherited IRA over those five years.


 You have two choices – transfer the funds into an account you own (a “spousal transfer“) or into an Inherited IRA in your name. The rules regarding future contributions and required minimum distributions differ significantly, so let’s compare and contrast the two options.


First, know that spousal transfers are an option for surviving spouses only when they are the sole beneficiary of their late spouse’s account.

Now, after inheriting a Traditional IRA you can treat the funds as if they were your own and roll them into your own IRA account in a spousal transfer. You can make contributions to the account in future years if you have earned income. The funds are available for distribution anytime, but will be subject to a 10% penalty if you are under 59.5 years old and do not meet any of the IRS’s hardship exemptions. If your late spouse was already taking their required minimum distributions (RMDs), you must take the RMD for the year of their death. Going forward, no further RMDs will be required until you yourself reach 72 years old and those RMDs will be based on your age, not your late spouse’s.

After inheriting a Roth IRA you can also do a spousal transfer into your own Roth IRA. You can withdraw dollars that represent contributions anytime, penalty and tax free. You can withdraw dollars that represent earnings – or growth inside the account – penalty and tax free if you are at least 59.5 years old and five years have passed since your spouse’s Roth account was opened. Because the dollars used to fund a Roth IRA have already been taxed, there are no requirements for RMDs in Roth IRAs, even when they’ve been inherited.


If you are not the sole beneficiary of your late spouse’s IRA, you may open an Inherited IRA in your name and roll the funds from your late spouse’s account into your Inherited IRA. Going forward, you can take distributions but cannot make contributions (ever).

If the IRA you inherited is a Traditional IRA, you can take distributions anytime and penalty-free if you’re younger than 59.5 years old. If your late spouse was taking required minimum distributions (RMDs), you must take his/her RMD in the year of their death. Thereafter, RMDs will kick in when you are 72 years old and be based on your age, not your late spouse’s.

If you’ve inherited a Roth IRA, you can withdraw dollars that represent contributions anytime penalty and tax-free. You can withdraw earnings – or growth inside the account – penalty-free regardless of your age. Withdrawls of earnings will also be tax-free so long as the account has been open for at least five years. The IRS does require minimum distributions or RMDs starting the later of (1) December 31st of the year following the year of your spouse’s death; or, (2) the date your late spouse would have turned 72.


It used to be a little complicated, but thanks to passage of the SECURE Act into law in December 2019, it’s now quite simple. Now, when you inherit an IRA or other retirement account – whether Traditional or Roth – you must take distributions of all funds in that account by December 31st of the tenth year following the death of the original account owner.[1]Distributions from Traditional IRAs will be taxable income to you and thus can create a sizable tax bill, depending on your other sources of income. Thankfully, the IRS gives you the freedom to decide how much to withdraw in each of those ten years, so you can work with your tax professional to come up with a strategy to minimize the taxes you’ll have to pay.

[1]There are some exceptions, namely, if the non-spouse beneficiary is a minor child, disabled or chronically ill or is less than ten years younger than the original account owner.

Financial Aid Strategy for Small Business Owners

By College Planning, Financial Planning

If you own a small business with fewer than 100 employees, here is something to consider to improve your eligibility for financial aid. Public universities use the FAFSA to collect information about your income and personal, non-retirement assets. They place a zero value on family businesses that employ fewer than 100 people. Don’t be offended – this is actually a good thing!

The FAFSA will ask for your income for the prior two calendar years, as reported on your 1040. They will ask you for the value of your various personal, non-retirement assets – checking, savings accounts and brokerage accounts – on the date the FAFSA is filed (generally, the autumn of your student’s senior year of high school). Small business owners can take advantage of these facts to loan their small businesses money from their personal accounts prior to completing the FAFSA to remove those dollars from the FAFSA, lower their family’s Expected Family Contribution and raise their eligibility for financial aid.

Following Divorce, Who is the “Parent” for Financial Aid Purposes?

By College Planning

The financial aid process is a little more complicated when a student’s parents are divorced. Who is considered the “parent” for financial aid purposes?  The answer differs based on whether you’re applying to a public university that uses the FAFSA or a private institution that uses the CSS.

Let’s start with schools that use the CSS because it’s simple and straightforward. Colleges consider both Mom and Dad – or both Moms or both Dads – to be “parents” for financial aid purposes. They also consider stepparents to be “parents.” They will look at the income and assets of all of them. They’ll examine retirement assets, annuities, home equity and small business assets – basically everything. (The one exception remaining is any cash value you may have in a whole life insurance policy.) Many private institutions have healthy endowments, so they still may award aid to students – but they want to paint a complete picture of all of the resources at a student’s disposal before reaching a decision on aid.

For schools using the FAFSA, who is a “parent” for financial aid purposes is more complicated.

First, parents whose divorce is not yet finalized as of the date the FAFSA is filed are still considered married for financial aid purposes, and the income and assets of both parents will be examined. Second, if a student’s parents live together – regardless of their marital status – the FA office will consider the income and assets of each.

Now, if a student’s parents are divorced, the one who is considered the “parent” for the FAFSA is the parent with whom the student lived the most in the last twelve months. If custodial time is split evenly, the parent who provided more financial support in the last twelve months is the “parent” for the FAFSA – even if that means only $1 more. (Note, it doesn’t matter which parent gets to claim the student as a dependent on their tax return.) The school using the FAFSA will then examine the income and assets of the one “parent” when determining financial aid. And, as for married parents, they will exclude from assets any retirement accounts, equity in your primary residence, annuities and the cash value in whole life insurance policies.

If, however, this “parent” has remarried, the school will also look at the income and assets of the stepparent. Fun fact. Knowing how the FAFSA ensnares stepparents, many divorced parents of high school and college aid children who are in relationships choose to delay getting married until the kids are in their final year of college!

Social Security Provides Benefits for Older Widows Too

By Cash Flow Planning, Financial Planning, Social Security, Widows and Money

Widows 60 or older (50 if disabled) are entitled to receive survivors’ benefits from Social Security based on their late husband’s work record. This includes divorced women whose ex-husbands have died if they were married to the deceased for 10+ years and did not remarry before the age of 60.

These widows receive 71.5% – 100% of what their late husband would have collected at his full retirement age (“FRA”), which is 66 plus some number of months for those born 1945-1959, and 67 for those born in 1960 and later. The exact percentage of their late husband’s benefit that they will receive as widows depends on the widow’s age and how close she is to her own full retirement age. If she has reached her own FRA, she’ll receive 100% of what her late husband would have received at his FRA. The further away she is from her own FRA, the lower the percentage.

What could this mean, in dollar terms?

Currently, the average Social Security benefit is $1,461 per month, while the maximum benefit for someone who’s reached his FRA is $2,861. Thus a widow could receive something in the range of $1,045 to $2,861 per month in survivors’ benefits. This can provide valuable support while a widow is in transition.

That said, there are a couple of things to think about.

First, for women who work and who have not reached their own FRA(1), these widow’s benefits will be taxed at $1 for every $2 of income they earns above $17,640 (2019). For those who have reached their FRA, their widow’s benefits will not be reduced by any income earned from work.

Second, collecting survivors’ benefits will not impact the retirement benefits a woman can claim on her own work record or that of her late husband.

Third, once she is 62 and can collect her own retirement benefit, a woman cannot collect both a survivor’s benefit and a retirement benefit. Social Security will pay only one benefit, and will pay whichever is the higher of the two.

It’s important for widows to file for survivors’ benefits as soon as possible. The Social Security Administration will pay claims retroactively to the date of the filing, but not the date of death.

(1)66 plus some number of months for those born 1995-1959, and 67 for those born in 1960 and later