Author: Tom Schmitt

Investing in education and preserving wealth for future generations are two essential goals for many families – and they do not have to be mutually exclusive.

529 plans can be used as an effective strategy to fund your child’s education expenses while also reducing the value of your taxable estate.

Learn about the intricacies of 529 accounts and why you may want to consider them as part of your estate plan.

Understanding 529 Plans

Also known as qualified tuition programs, 529 plans are tax-advantaged savings accounts that can be used to pay educational expenses from kindergarten through graduate school. A parent or grandparent can create a 529 account as part of their estate plan to support their loved ones’ education while also enjoying certain tax benefits.

Funds in a 529 plan grow tax-free until they are taken out. If the funds are used for qualified education expenses such as tuition fees, books, and other supplies, they typically aren’t subject to federal and estate taxes. Beneficiaries typically don’t have to include their plan earnings as income. However, if the distribution exceeds your beneficiary’s expenses, a portion of the profits is taxable.¹

Contributions to 529 plans are considered complete gifts, which means the funds and future earnings are excluded from your taxable estate.² But unlike other estate planning tools like irrevocable trusts, you maintain ownership over the assets in your account. This means you can choose investments, change account beneficiaries, and control withdrawals.

Estate and Other Tax Benefits

You can establish 529 accounts in 50 states and the District of Columbia and contribute funds to help decrease the overall value of your taxable estate. However, additional tax benefits can vary significantly depending on where you live, your contribution level, and your income.

For example, Indiana, Minnesota, Oregon, Utah, and Vermont currently provide state income tax credits for contributions to 529 plans, while 30 states and the District of Columbia allow you to deduct 529 contributions from your taxable income.

Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania offer state tax parity, which means you can deduct your taxable income on contributions to 529 accounts in any state.²  This is important because most states only allow tax deductions for their state-sponsored plans.

Contributions to 529 plans can also qualify for the annual gift tax exclusion (up to $18,000 for individuals or $36,000 for married couples filing jointly).³

A unique benefit of investing in a 529 account is the option to “super-fund” it with a lump sum of up to 5 years’ worth of contributions ($90,000 for 2024) at once.⁴  As long as you don’t make additional contributions to the same beneficiary during this period, this lump sum will not be included against your lifetime gift exemption.

If you are a parent or grandparent living in one of the above states that offer additional tax benefits—or you’re concerned about exceeding your federal gift exclusion—consider embracing 529 accounts in your estate plan.

A Flexible Solution for Estate Planning & Retirement

Another advantage of using 529 accounts as an estate planning tool is their flexibility. If you want to set up plans for multiple children or grandchildren, you can do so—and anyone who contributes to them can potentially qualify for the gift tax exclusion.

Additionally, you are not required to change 529 plans to change beneficiaries—and you can transfer a plan to a child, sibling, parent, first cousin, and certain relatives by marriage.⁵

Starting in 2024, the Secure 2.0 Act allows people to transfer unused funds from a 529 plan into a Roth IRA without incurring additional taxes or penalties – turning education savings into retirement funds. This can be beneficial if your child no longer needs money for their education or if there are leftover funds in your account that you’d like to reinvest in a tax-advantaged account. However, there are some caveats⁶:

• The 529 account must have been active for at least 15 years
• The Roth IRA account beneficiary must be the same as the 529 account
• The money transferred into the Roth IRA must have been in the 529 account for at least five years
• There is a lifetime rollover cap of $35,000 for each beneficiary
• Roth IRA contributions are subject to annual limits

Invest Today in Your Family’s Tomorrow

A 529 plan may be a good fit if you want to invest in a loved one’s education, boost future retirement savings, and reduce the value of your taxable estate to benefit future generations.

The earlier you start contributing, the more time you have to take advantage of compound interest and potential growth.

Crescent Harbor can provide objective advice and work with your family’s attorney and tax specialist to determine whether 529 accounts align with your unique situation and estate planning goals.  

Let’s connect today.

Sources

¹ https://www.irs.gov/taxtopics/tc313

² https://www.collegeaccess529.com/college-savings/529-benefits/estate-planning-and-gifting-benefits-of-529-plans

³https://www.morningstar.com/personal-finance/how-do-your-states-529-tax-benefits-stack-up

⁴https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024

⁵ https://www.savingforcollege.com/article/how-much-can-you-contribute-to-a-529-plan

⁶ https://www.investopedia.com/terms/1/529plan.asp

⁷ https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira

This material is for informational purposes only and should not be construed as tax or legal advice.

Registered Representatives of Sanctuary Securities Inc. and Investment Advisor Representatives of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Crescent Harbor Private Wealth is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

Most people look forward to enjoying the rewards of their hard work in retirement.

Unfortunately, too many families are unprepared with studies showing that almost half of American households have no retirement savings¹ and 39% of American households are at risk of being unable to maintain their pre-retirement standard of living in retirement².

Even the top 5% of income workers³ who are currently positioned to meet their retirement spending requirements will need a plan, as greater wealth can lead to greater complexity, including the need to integrate your financial, retirement and estate planning for future generations.

Whatever your level of wealth and retirement readiness, the key is to take control and have a plan. If you are in the early stages of your career, starting now will empower retirement readiness later. If you’ve fallen behind, it’s never too late to get back on track.

We’ve outlined answers to common questions about retirement so you can take action to secure your financial future.

What is Retirement Planning?

A retirement plan is the process of accumulating enough money to live comfortably once you stop working. It includes defining your goals, risk tolerance and desired lifestyle, estimating your future expenses and income requirements, and establishing a long-term savings and investing strategy to ensure financial security during your retirement years.

Your plan will evolve with your age and life circumstances and must cover everything from how you will pay for essentials (home, food, healthcare, etc.) to family needs and emergencies to personal and social interests (travel, golf, favorite charities, etc.).

How Much Money Do You Need to Retire?

While there is no magic formula, different organizations offer various rules of thumb. For example, the Employee Benefits Security Administration suggests that people save 70 to 90 percent of their pre-retirement annual income to maintain their current standard of living⁴. Fidelity guides people to save at least 15% of their income annually for retirement⁵.

The reality is your retirement plan – and number – will be personal to you, based on your goals, age, lifestyle, location, health, and more. The objective is to develop a reasonable estimate of how much money you will need to save to achieve your desired lifestyle.

For example, younger investors can take more risks with investments and capitalize on decades of compounding by investing early—or earning returns on both your original investment and previous returns. Pre-retirees who are underprepared will likely need to adjust their strategy to save more and get on track. Successful retirees who have accumulated more than they will spend in their lifetime can consider more aggressive estate planning, gifting, and investment approaches to create generational wealth.

Regardless of your situation, we recommend you start early and get professional advice to help design a plan specific to your needs so you can enjoy a comfortable retirement.

What Are Common Types of Retirement Plans?

Most retirees will need to plan beyond their bank accounts and expected social security benefits if they want to secure their desired standard of living in retirement.

There are many ways to accumulate retirement savings, including tax-advantaged employer-sponsored plans, Traditional and Roth IRAs, and Health Savings Accounts (HSAs); some retirees may also have pension plans, profit-sharing plans and more.

401k: tax-deferred employer-sponsored plans; they are easy to set up and maintain, especially with automatic payroll deductions; contributions are typically with pre-tax dollars unless it is a Roth 401(k); if they come with an employer match, it is advantageous to take advantage; catch-up contributions are allowed for employees over the age of 50.

403(b): similar to a 401(k) but designed for employees of public schools, tax-exempt organizations, and churches, e.g., teachers, school administrators, professors, and government employees; catch-up contributions are allowed for employees over the age of 50; “special catch-up” provisions also allow an additional $15,000 lifetime contribution for employees who have worked with a qualifying organization for 15 years

Traditional IRA: tax-deferred individual retirement account; contributions can be made with pre-tax dollars and may be fully or partially tax-deductible depending on your filing status; money grows tax-free and is not taxed until you start to take distributions.

Roth IRAs: contributions are made with after-tax dollars; money grows tax free and can be withdrawn tax-free in retirement if the account has been open for at least five years and you are over the age of 59½.

HSAs: savings accounts for people with high-deductible health plans used for medical expenses – a big cost for many retirees; contributions are made with pre-tax dollars, money invested grows tax-free, and withdrawals are tax-free if used for qualified expenses.

If you are a small business owner or self-employed, you may want to consider solo 401(k), SEP IRAs, and SIMPLE IRAs as part of your planning. Depending on your circumstances, a retirement trust or other estate planning strategies to help shield your family and estate from against creditors, lawsuits, divorce, and other challenges.

Start Planning for Your Lifetime

Planning for retirement today can provide you with financial preparedness and peace of mind tomorrow. Crescent Harbor can help you create a personalized plan to achieve your goals for your financial future – guiding you to accumulate and compound wealth, manage retirement income and spending, and ensure the most tax-effective tax strategies to optimize your assets throughout your retirement years and beyond.

Let’s get started together.

Footnotes

1 ASAFacts (November 9, 2023; referencing 2022 Survey of Consumer Finances (SCF); https://usafacts.org/data-projects/retirement-savings)

2 The National Retirement Risk Index – Center for Retirement research at Boston College (https://crr.bc.edu/the-national-retirement-risk-index-an-update-from-the-2022-scf/)

3 Vanguard – The Vanguard Retirement Outlook: A national perspective on retirement readiness (https://institutional.vanguard.com/content/dam/inst/iig-transformation/insights/pdf/2023/the-vanguard-retirement-outlook.pdf)

4 Employee Benefits Security Administration – Top 10 Ways to Prepare for Retirement( https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf

5 Fidelity – How much should I save for retirement? (https://www.fidelity.com/viewpoints/retirement/how-much-money-should-I-save)

This material is for informational purposes only and should not be construed as tax or legal advice.

Registered Representatives of Sanctuary Securities Inc. and Investment Advisor Representatives of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Crescent Harbor Private Wealth is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

Estate planning is essential to protecting your loved ones, preserving family wealth, and directing how your assets should be managed and distributed when you pass away or become incapacitated.

However, the topic can be complex and emotional, causing too many families to procrastinate rather than be proactive. To help ease the stress, we’ve simplified estate planning into a few fundamental components to help you and your family get started.

Effective planning encompasses:

• Performing a comprehensive review of your assets, including bank accounts, investments, real estate, cars, insurance, etc.
• Compiling critical documents that outline decisions involving how your assets will be distributed, who will care for dependents, and instructions for your medical care.
• Employing strategies to mitigate estate taxes, such as setting up trusts or gifting throughout the year.

Wills and Trusts

A will is a simple legal document that defines your wishes for the distribution of your assets and guardianship of your minor children, dependents, or pets after your death. It does not take effect until you pass away.  

Wills typically go through probate, a costly and time-consuming process that becomes a part of the public record. If you die without a will in place—called “intestate”—the state court system will decide the transfer of your property.

A trust is a more sophisticated legal agreement that allows you to direct the management and distribution of your assets during your lifetime and after your death. A trust takes effect as soon as it is signed and funded.

Trusts can give you greater control over your estate, ease your tax burden, help you avoid probate, and provide more privacy than a will. Crescent Harbor can guide you through the nuances of different trusts—including revocable, irrevocable, special needs, and assets protection trusts—and align with estate attorneys to choose the option that best suits your goals.

Power of Attorney

A durable power of attorney (POA) gives a trusted individual (known as an agent) legal authority to act on your behalf should you become physically or mentally incapacitated.

You can choose to give your agent as much or as little power as you wish, including making decisions involved with:

• Buying, selling, and maintaining real estate and other property
• Using your assets to pay for you and your family’s regular expenses
• Filing taxes and collecting government benefits
• Investing money in bonds, stocks, and mutual funds
• Transferring property to existing trusts

Medical Decisions

A crucial part of your estate plan involves providing instructions for your medical care if you become seriously sick, injured, or unable to communicate your intentions.

Typically called an advance medical directive, this may include the following:

• Durable POA for health care that designates a medical proxy to make decisions if you are unable to do so.
• HIPPA authorization form that names who can access your medical records and discuss your care.
• Living will that details guidelines for life-saving treatments such as CPR, ventilators, or feeding tubes in the case of a medical emergency.

Three taxes to consider as a part of your estate plan include:

• Estate tax: This federal tax is currently levied on assets over the cap of $13.61 million per individual, which will be reduced by close to 50% at the end of 2025.  Twelve states currently impose their own estate taxes.
• Inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania currently impose this tax, which is paid by estate beneficiaries (above specific thresholds).
• Gift tax: The donor is responsible for paying this tax on gifts that exceed the annual exclusion for the calendar year. Qualifying charitable donations, political contributions, gifts to a spouse, and funds used for another person’s tuition or medical expenses are generally excluded from this tax.

Crescent Harbor can help you crystalize your vision, provide objective and tailored advice, and collaborate with your estate planning attorneys to achieve your goals. Let’s discuss your goals and create a clear road map to achieving them.

This material is for informational purposes only and should not be construed as tax or legal advice.

Registered Representatives of Sanctuary Securities Inc. and Investment Advisor Representatives of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., an SEC Registered Investment Advisor. Crescent Harbor Private Wealth is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.