Jeff Witz, CFP

What are the best options to save for my child’s future?

Whether it’s for a college education, a down payment on a house, a future wedding, or just giving them a little leg up once they reach adulthood, saving for a child’s future is an important goal for many physicians. With costs rising across the board, many physicians wonder what is the best way to save. The answer, as with many things, depends. Parents should ask themselves: Do I want this money to go toward a specific goal? Do I want my children to have access to the funds all at once? Will my child manage this money responsibly? The answers to these questions can determine what type of account is best.

A common goal for many parents is to start saving early for their children’s college educations. With the rising cost of college, this can seem like a daunting task. The Internal Revenue Service allows those who wish to save, the ability to contribute to a 529 plan. A 529 account is an investment account that provides favorable tax treatments if the money is used for qualified education expenses such as tuition, room and board, equipment, student loan payments, and apprenticeships.

Money contributed to a 529 plan can be invested in various mutual funds. These investments will (hopefully) grow as the child does. If withdrawals are taken to pay for a qualified education expense, the balance including the investment gain comes out of the account tax free. In addition, some states give a state income tax deduction for contributing to a 529 account, so there may be additional tax incentives for contributing.

However, if money is withdrawn from the account for a nonqualified reason, the account owner will need to include the investment gain in their income and pay ordinary income tax. In addition, nonqualified distributions are subject to a 10% penalty. Withdrawing money from a 529 for a nonqualified purpose can be very costly, but if used for to pay for education expenses, it can be a very useful savings tool.

What if your goal is to save for a down payment on a home, pay for a wedding, or simply give your child a financial head start?

First determine the level of control you want to retain over the account and its ultimate use. Parents who have a specific purpose in mind or are unsure their child will be responsible enough to manage the money in a sensible way, will want to make sure they or someone else controls how the money can be distributed.

There are 2 primary ways to accomplish this. The first is to keep the money yourself. You control the assets and their distribution. However, depending on your estate planning goals, this may not distribute the assets as intended in the event of your death.

The other option is to create a trust. Establishing a trust fund creates a vehicle that sets terms for the way assets are to be held, gathered, or distributed in the future. Common reasons for distribution often include health, education, maintenance, and support (HEMS), but can expand beyond these. The definitions of HEMS or other allowed distributions can be as strict or relaxed as you choose.

Most trusts also create a timeline for when the beneficiary can access a greater portion or the full balance of the assets. Creating a trust ensures the assets are controlled until the recipient is deemed old enough or responsible enough to take over the money themselves.

If control is not a primary motivation, then custodial accounts can be opened. Commonly referred to as UTMA (Uniform Transfers to Minors Act) accounts, custodial accounts have lots of flexibility in terms of the assets that can be held. However, once the minor reaches the legal age of adulthood in their state of residence, control of the account officially transfers to the named beneficiary, and they claim full use of the funds.

There are many ways to save for your child’s future, but the intent and the level of control you want to maintain will determine which account type is best.

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Articles

529 plans and trusts help save and manage money destined for your children.

Saving for your child’s future: What should you consider?

What are some financial planning tasks I should focus on before year-end?

We are now in the final months of what has been a difficult 2020 for many. Every year, we like to present a number of year-end tasks everyone should cross off their checklist. This time of year presents the perfect opportunity to review and possibly adjust your financial planning strategies. You should update your accounts and see where you stand with many of the goals you set at the beginning of the year.

Check on the status of your emergency fund.

 Did you need to dip into it at all this year? Have your necessary expenses changed? It’s always a good idea to review the balance of the account as well as your budget to see whether additional funds need to be added to bolster the account. The general rule of thumb for emergency funds is to have 3 months of necessary expenses if you are a dual-
income household and 6 months to a year if you are a single-income household.

 You have until the tax filing date next spring to make a 2020 contribution to an individual retirement account (IRA), but 401(k) and 403(b) contributions are deductible only when made in the same calendar year. The 2020 contribution limit is $19,500 for 401(k)s and 403(b)s and $6000 for IRAs. If you are over age 50, catch-up contributions may be available as well.

Use the remaining money in your flexible spending accounts (FSAs). 

If you still have money set aside in an FSA for health care or dependent care expenses, try to use those funds before the end of the year, or you’ll risk forfeiting the money. Some employers offer a grace period into the spring of the following year or a $500 FSA carry-over from one year to the next, but most do not.

Make contributions to your children’s 529 accounts.

 College costs continue to rise, and it is important to start saving early if you hope to reach your college funding goals. Additionally, some states offer a state income tax deduction if you are a resident and contribute to their 529 plan. In some cases, the tax savings can be substantial.

Designate individuals to whom you wish to gift assets. 

The annual gift tax exclusion is $15,000 for 2020 ($30,000 for married couples). You can gift this amount to as many individuals as you would like without having to pay gift tax or have it count against your lifetime gift and estate tax exemption.

Giving to charity can be a very powerful tax-savings tool. Check whether you have any appreciated investment assets that you could gift instead of cash. This way, you will avoid paying capital gains tax on those investments, and you get to claim a deduction for the full value of the donated asset. When the charitable organization sells it, there’s no tax to them. Be aware, however, that under the current tax law, you may need to donate a substantial amount of assets to be eligible to claim a charitable deduction on your tax return.

 The markets have certainly fluctuated a lot this year. If you own stocks and other marketable securities that have lost money in taxable accounts like individual or joint accounts, consider selling those investments to capture the loss. The losses can be used to cancel out taxable gains elsewhere or potentially lower your 2020 tax bill. If your losses exceed your gains, you will have a net capital loss. You can deduct up to $3000 of net capital loss (or $1500 if you are married and file separately) against ordinary income, including your salary, self-employment income, and interest income. Any excess net capital loss is carried forward to future years and puts you in a position for tax savings in 2021 and beyond.

 If you have had a major change in your personal life, such as a recent marriage or divorce, the birth or adoption of a child, or a death in the family, you may need to revise the beneficiaries on your retirement accounts and life insurance policies. You may also need to update your will and power of attorney documents.

These are just a handful of financial issues to consider as you approach year-end. Your financial and legal advisers can run through a more comprehensive checklist of planning options based on your personal circumstances.

Now is the time to assess your emergency fund and update beneficiaries.

Close out 2020 with these key financial planning tasks

Making heads or tails of the financial news can be difficult. What does it really mean when the market was up or down? News reports about the stock market that you see or hear every day often report the movement of groups of stocks, and much less so the price movement of an individual company’s stock. “The Dow Jones Industrial Average (DJIA) was up 120 points today” or “the S&P 500 remained relatively flat today” are common vernacular you may hear financial news pundits use.

Citing a specific index or average provides a general sense of the direction of stock prices. They will not, however, tell you whether the stocks in your own portfolio are up or down. Understanding what these reports mean is important because they are commonly used as benchmarks to measure the performance of individual stocks.

Stock indexes and averages are simply ways to measure changes in the market value of certain groups of stocks. An average, as the name implies, is the arithmetic average price of a group of stocks. The DJIA is such an average. Made up of 30 large industrial stocks, the DJIA was originally calculated by adding up the prices of the stocks included in the average and then dividing by 30. This divisor has been adjusted numerous times to account for mergers, stock splits, and other factors.

An index, on the other hand, is a total value expressed in relation to a previously determined base number. The S&P 500 (formerly known as the Standard and Poor’s 500 index), for example, uses a base value of 10. The total market capitalization of all companies in the S&P 500 is about $33,391,900,000,000 as of September 10, 2020. To make this number more easily reportable, the base value of 10 is applied, and the number is reported as 3,339.19.

It is also important to understand the components of the most commonly used indexes and averages:

 This index is the benchmark against which many portfolio managers compare themselves. It consists of 500 blue-chip stocks, separated by industry, so that almost all key industries are represented.

 The commonly quoted average tracks the price-weighted movement of 30 of the largest blue-chip stocks traded on the New York Stock Exchange.

This index tracks the movement of all companies traded on the Nasdaq Stock Market, which tend to be smaller and more volatile than those in the DJIA or the S&P 500. The Nasdaq is market-value weighted, giving more influence to larger and higher-priced stocks.

This is the key barometer and indicator of companies on the smaller end of the capitalization spectrum. This domestic small-cap index is made up of the bottom two-thirds of the Russell 3000 index, a larger index of 3000 publicly traded companies that represent nearly 98% of the investable US stock market.

 This market-weighted index consists of about 1600 foreign stocks listed on the exchanges of 22 developed countries (excluding the United States and Canada), representing all major industry groups.

Index and average tracking can be very useful as a comparison against your own portfolio. But a valid comparison depends on your ability to determine which index is the best benchmark for your holdings. Remember, none of these indices is available for direct investment. You can, however, buy mutual funds and exchange traded funds designed to resemble a certain index.

 is educational program director at MEDIQUS Asset Advisors, Inc in Chicago, Illinois.
He welcomes readers’ questions and can be reached at 800-883-8555 or witz@mediqus.com.

The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice. If you would like assistance with your individual investment strategy, please email witz@mediqus.com.

Reports on indexes and averages can help benchmark stock performance.

Financial news: What does it mean and how can it help you?

Have there been any changes to how inherited individual retirement accounts (IRAs) must be distributed under the most recent legislation?

Last fall, we wrote an article about inherited individual retirement accounts (IRAs) and how they must be treated and distributed.

 As is the author’s curse, Congress changed the rules as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Under this act, no changes were made to the distribution rules if the person you inherited the account from died prior to January 1, 2020. The new rules only apply if the person died after that date.

Note: Due to the coronavirus disease 2019 pandemic, all required minimum distributions (RMDs) have been suspended for the remainder of 2020. If you already took an RMD from a retirement account, you can roll it back into your account before August 31, 2020.

Previously, if you were a nonspouse beneficiary of an IRA, 401(k), or 403(b) you could distribute the assets from the account 1 of 2 ways. You could distribute the entirety of the account no later than December 31 of the fifth year following the year the account owner died, or you could transfer the money into an inherited IRA and distribute the money incrementally based on your own life expectancy. The second option allowed you to keep the money in the account for years, staying invested on a tax-deferred basis without being forced to take the full balance. The IRS found this undesirable as it prevented them from getting their full share of taxes for many years.

Under the SECURE Act, a nonspouse beneficiary of an IRA must now directly roll over the assets to an inherited IRA and will need to withdraw all assets from the inherited IRA by the end of the 10th year after the year of death. For example, a beneficiary who inherits an IRA during 2020 would have 10 years to distribute the balance of their inherited account beginning on January 1, 2021, the year after the year of death, and ending on December 31, 2030. If the original account was a 401(k) or 403(b), the beneficiary can leave the assets in the plan, if the plan allows it, or roll them into an inherited IRA. Regardless of which scenario the beneficiary chooses, the same 10-year distribution rule will apply.

Forcing distributions to occur in a 10-year window means inheritors will need to carefully plan their distributions. If you wait until the deadline to distribute the full account, it is possible the distribution could be substantial and push you into a higher income tax bracket. Typically, spreading the distributions out over the full 10 years will result in the most favorable tax treatment, but you should consult with your tax professional before doing so.

Exceptions to the 10-year distribution requirement apply to assets left to an eligible designated beneficiary. Eligible designated beneficiaries are those who have a disability or chronic illness, those not more than 10 years younger than the decedent, or minor children of the decedent. These beneficiaries have the option to take RMDs based on their life expectancy.

When an individual inherits an IRA from a spouse, they can roll the assets into an IRA in their own name or transfer the assets into an inherited IRA. If the surviving spouse chooses to roll over the assets into their own IRA, then they would follow the regular RMD rules for their own IRA. These rules require RMDs begin once they reach age 72. If the surviving spouse chooses to transfer the assets into an inherited IRA, the timing of the initial distribution will be based on the decedent’s age at the time of his or her death. If the decedent was older than age 72, the surviving spouse must begin taking RMDs by December 31 of the year following the decedent’s death. If the IRA owner was younger than age 72 at death, the surviving spouse may be able to delay RMDs until the decedent would have turned 72.

If a spouse inherits a 401(k) or 403(b), they can keep the assets in the 401(k) plan (if the plan allows it). If the spouse is still working, they may be able to roll the 401(k) into their own company’s 401(k) if their company plan permits rollovers. As a final option, they can roll over the inherited 401(k) to their own IRA or an inherited IRA. Distributions would then follow the same RMD rules as if the spouse inherited an IRA.

1. Witz J. Inherited retirement accounts: What are your options? 

®. November 22, 2019. Accessed August 14, 2020. 

https://www.urologytimes.com/view/inherited-retirement-accounts-what-are-your-options

Legislation sets 10-year withdrawal window for nonspouse beneficiaries.

Jeff Witz, CFP

Articles

Saving for your child’s future: What should you consider?

Close out 2020 with these key financial planning tasks

Financial news: What does it mean and how can it help you?

How the SECURE Act affects inherited IRAs