When’s the right time to start a 529? Tax Strategy Scan

Register now

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

Average start for 529 college savings (age 7) is costly, study finds
Many parents are waiting until their child reaches the age of 7 to fund a 529 college savings plan, according to a study by Morningstar in this article from The New York Times. By doing so, these clients are missing out on the opportunity to maximize the plan's tax benefits as they offer tax-free growth on investments and tax-free withdrawals for qualified education expenses, such as tuition and books, according to the article. “Your greatest asset as a parent is time," an expert says.

How to lower taxes when tapping retirement funds
Taking RMDs from tax-deferred retirement accounts can boost the taxable income, however there are ways for retirees who don't need the mandatory withdrawals to minimize the tax impact, according to an expert in this Forbes article. For example, seniors who are still working past the age of 70 1/2 may transfer their IRA savings to their 401(k), as they won't be compelled to take the mandatory distributions from their workplace plan, the expert says. Retirees may also opt to donate their RMDs directly from IRAs to charity through a qualified charitable distribution.

Is your client eligible to contribute to a Roth IRA in 2020?
The IRS has adjusted the income limits for Roth IRA investing in 2020, which means clients with a higher income may be allowed to contribute directly to a Roth account next year, according to this article in Motley Fool. For example, Roth IRA income limits for single or head of household will increase to $124,000 next year from $122,000, according to the article. Those who will not qualify to make direct Roth contributions next year because of the income limits may opt for the backdoor strategy, which allows them to convert traditional IRA assets into a Roth as soon as they make the contributions and pay taxes on the conversion.

Year-end checklist to prevent penalties and missed planning opportunities
As the end of the year is approaching fast, clients are advised to take note of financial deadlines and cutoffs to ensure that they don't miss out on saving opportunities and avoid whopping penalties, a CFP in Kiplinger writes. In addition to making RMDs from their tax-deferred retirement at the right time, clients are also advised to watch for capital gains distributions from funds held outside of a tax-advantaged account this time of the year, as these distributions will be subject to taxes.

The average expense ratio among the top-performers is 40 basis points higher than the average.
April 9

Tax rules have been largely written by rich, white men — and it shows, researchers say
The federal tax code is replete with double standards that are more favorable to wealthy, white men, according to recent studies in this MarketWatch article. “The tax code is a social document. What these tax preferences are saying is this pain is more important than that pain,” says Melissa Boteach of the National Women’s Law Center. “The people in the room where tax laws are being written are predominantly white and male.”

For reprint and licensing requests for this article, click here.
529 plans Retirement planning 401(k) Roth IRAs Tax planning Morningstar Tax code RMDs