The $900 billion Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (CRRSA Act), signed into law on Dec. 27, 2020, delivered a second round of economic stimulus for individuals, families, and businesses. It also expands many of the provisions already in place under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), including a second direct stimulus payment to individuals who qualify. WATCH THE VIDEO
According to data released by the U.S. Treasury Department, the majority of stimulus payments are already in householders’ bank accounts… up to $600 for eligible individuals, $1,200 for joint taxpayers, and an additional $600 for each dependent child under 17 (e.g., a family with two children could receive $2,400).
This second round of stimulus payments ($164 billion), like the first round, IS NOT TAXABLE... nor is it repayable to the government at some later date. And there’s no action required on your part to receive the stimulus money. The IRS is using the most recent information on file – most likely your 2019 tax return or Social Security address – to get the stimulus payment to you either by direct deposit or by check.
Expect to receive the full entitlement if your adjusted gross income (AGI) is not more than $75,000 ($150,000 if married filing jointly). AGI is gross income like wages, salaries, or interest minus adjustments for deductions like student loan interest or traditional IRA deductions. Folks receiving Social Security retirement, disability, Railroad Retirement, VA, or SSI income and who are not typically required to file a tax return, will again receive a stimulus payment. The IRS will use the information from Form SSA-1099, Form RRB-1099, or the Veterans Administration to generate the stimulus payment.
As AGI increases over $75,000 ($150,000 if married filing jointly), the stimulus amount ratchets down and will completely phase out at $87,000 for single filers with no qualifying dependents ($174,000 if married filing jointly with no dependents).
By the way, this bill expands stimulus payments to include households with different immigration and citizenship statuses not included in the first round; so, retroactively, some individuals ineligible for the first (CARES ACT) stimulus may receive that payment as a recovery rebate credit when filing a 2020 tax return.
Unemployment checks will increase by $300 per week, and benefits will extend to March 14, 2021 (unemployment compensation is taxable, tempered by the fact that tax rates drop as income drops). Also extended is the Pandemic Unemployment Assistance (PUA), which expands unemployment to include those not usually eligible for regular unemployment insurance benefits (i.e., self-employed, freelancers, and side-giggers – a hobby, seasonal, or occasional work – will continue to remain eligible for unemployment benefits). Certain workers with at least $5,000 per year in self-employment income but are disqualified from receiving PUA because they also have an employer, could also be eligible for an additional $100 per week in unemployment benefits.
This important provision will help workers who experienced lower 2020 income – or who received unemployment income in lieu of their regular wages – get bigger tax credits and larger refunds in the coming year. It allows lower income individuals to use their earned income from 2019 to determine their Earned Income Tax Credit and the refundable portion of the Child Tax Credit in 2020, since their lower 2020 income might reduce the amount they are eligible for.
The Earned Income Tax Credit is the federal government’s largest program for working people with low to moderate income. Last tax season, over 25 million eligible tax filers received, on average, an Earned Income Tax Credit of $2,476.
Of utmost importance from an employment perspective, the 2021 Act provides a second round of payments under the Paycheck Protection Program (PPP). Self-employed individuals, small businesses, small 501(c)(6) organizations, restaurants, live venues, and Economic Injury Disaster Loans (EIDL) are again eligible. And businesses that continue to experience severe revenue reductions can apply for a second PPP loan.
Businesses with 300 or fewer workers that have experienced 25% revenue loss in any 2020 quarter and small 501(c )(6) organizations that have 150 employees or fewer are eligible for a Paycheck Protection Program under the COVID-19 Emergency Relief Package. And the 2021 Act broadens the type of business expenses forgiven under the loan to include supplier costs, allows business expenses paid utilizing PPP proceeds to be tax deductible, and simplifies the loan forgiveness process.
Importantly, both students and parents carrying federal student loans will receive an additional extension on (both principal and interest) loan payments and will not be required to make any payments until April 1, 2021.
Contractors temporarily unable to work due to facility closures and other restrictions could receive reimbursement for paid leave from federal agencies.
The CRRSA Act also extends the moratorium on evictions under the CARES Act, which will protect renters from eviction until January 31, 2021… a big boost for struggling families who will receive assistance for paying past due and future rent payments, as well as utility bills. The stimulus package includes $25 billion in emergency rental assistance and extends the deadline to use relief funds set aside in the CARES Act. This assistance is in addition to the stimulus checks of $600 and a 10-week period of $300 in pandemic-related jobless benefits.
The CRRSA Act also includes the permanent passage – in some cases, a multi-year extension – of many additional tax provisions commonly referred to as tax extenders, which provide tax relief and support for families and individuals through various mortgage relief, education, and medical expense relief. For example, participants in Flexible Spending Accounts (FSAs) can carry over unused funds from 2020 to 2021 and 2021 to 2022, assuming company plans opt into the new rules.
The 2021 law also has a permanent provision that allows victims of declared disasters to make withdrawals of up to $100,000 of IRA and 401(k) assets until Dec. 31, 2021. Withdrawals from IRA and 401(k) plans will be included in taxable income or can be restored to the account over as long as three years. For those younger than 59½ taking such payouts will not be assessed the 10% penalty on early withdrawals.
"A former farm kid's perspective: If a farmer always looks to the sky to see if rain is on the way, he might never plow his fields. If an investor is forever looking for the 'best time' to get back into the stock market [after a big downturn], he will probably never do it...on a timely basis."
― Hugh F. WynnSights
A new year ignites my obsession for Rainy Day - or emergency - funds. A couple of this week's Qs touch on this vital topic and my strong recommendation to establish one (if you don't already have one) before even focusing on saving and investing. I also answer a 401(k) Q, per usual. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO
A: As I often preach, you should set aside several months of income in a secure and very liquid account for emergencies. In my opinion, the least risky approach is a bank savings account because deposits have FDIC protection should the bank fail (the standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category). However, the yield on a bank savings account is virtually zero these days.
Another option is a money market account usually associated with a brokerage account with limited SIPC protection, which is not the same as protection for cash at an FDIC-insured bank. SIPC protects cash in a brokerage firm account from the sale of or for the purchase of securities. Investors often use money market accounts to store funds while deciding how to invest their “stored” dollars. These accounts allow investors to write larger checks and offer a more competitive interest rate than do banks. Alternatively, investors can access their non-retirement liquid assets for quick money, but this involves selling such assets into what could be a weak marketplace, increasing the risk of loss. My personal preference is a money market account.
A: The nature of your question suggests to me that you’re new to the investment game, and if that’s the case, my answer is no. You should be saving instead of borrowing. Why? The stock market has reached recent new highs, and there is still a good deal of unresolved chaos with regard to the coronavirus vaccination process and with a new administration coming to power. In short, there is ample uncertainty, which affects uninitiated as well as seasoned investors.
If you are a new investor, now is a good time to develop a routine savings program and to start investing on a ***dollar-cost averaging basis*** but only after you’ve covered your short-term exposure to unexpected events with an emergency or Rainy Day fund. Once you’ve established this emergency fund, start easing into the market keeping in mind the importance of diversification, quality and patience – quality and diversification initially through a broad-based index fund and patience by having the courage of your convictions.
Borrowing money to invest (in whatever) comes later… once you’ve established a good investment strategy and a track record supported by a robust and growing portfolio.
A: In my opinion, yes. As you seem to be doing, it’s always wise to diversify your investments… in stocks and/or mutual funds… in bonds… and in other investments such as REITs or CDs.
When markets make their inevitable “corrections” along the way, you'll be exposed to less risk because of asset allocation, hopefully providing sufficient time to recover before the money is needed. Diversification within an allocation is also important. For example, if an investor has stocks, bonds and money market accounts, but if those stocks are all in one industry, the investor still faces a greater potential for loss.
An easy way to diversify is through mutual funds, particularly index funds. Additional diversification can be gained through investment in different sized companies… large cap, mid cap and small cap… in growth and value stocks… and in different industries. For investors who prefer not to personally involve themselves in the act of rebalancing, they might consider Target-date funds-of-funds, which automatically rebalance (to a heavier allocation of bonds) as retirement approaches.
Again, there is absolutely a benefit to rebalancing, particularly as one grows older. In theory, at least, it attenuates risk during market corrections.
With a new year less than 24 hours away (as I write this), I am happy to welcome 2021 for many obvious reasons but also strangely nostalgic about leaving 2020. It was a year that forced many difficult changes on us, but not all were bad. I hope that 2021 brings you and your family peace, prosperity and a much-needed break from difficulties you may have faced in the past 365 days. I mark the end of the year/beginning of the new year with my recommendations for educational gifting options, practicing patience during perceived threats of market crashes and 401(k) transfer options. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO
A: Upfront, let me stress maintaining control of your financial gifts because of the young ages involved. No doubt, your heart is in the right place, but I assume you want a positive outcome for such generosity. It is a great idea to help the older kids establish a Roth IRA. Just remember, contributions to Roth IRAs must be made with “earned income” dollars…yours through gifting or with the recipient’s own earnings. It doesn’t need to be your niece or nephew’s $2,100 that is contributed. As long as he/she has sufficient earned income to justify the $2,100 contribution, there's no reason why you can't gift the contribution to him/her, who can then contribute the money to the Roth IRA In short, you cannot make contributions directly to another person's IRA. Each IRA is linked to one person's Social Security number; thus, only that person can contribute to that account.
The same earned income rules would apply to the next younger kin, but on the chance that they won’t have much, if any, earned income you might set aside portions of your own holdings (e.g., 15% of mutual fund X) as an addendum to your will specifying when and how the recipients would gain access to the changing value of those set-asides. This allows you to retain control of fund investments until specified dates of disbursement are reached… for whatever purpose. I like this increased bit of control over younger, less mature recipients.
Regarding the youngest kids, you might consider 529 education funds (with you as custodian… again, control) because they are still young enough for 529 investments to achieve meaningful gains by the time they reach college age. And if the youngsters decide not to pursue additional education, you can direct the money to other kin seeking higher learning.
A: Absolutely. And please call me the day before the crash so that I can dump mine, too. My apologies… sometimes I can’t resist being a wise guy. My point is simply this. Not even the Omaha Oracle can time the market. Granted, some folks are luckier than others in that particular guessing game, but the game I play is to “not join the thundering herd”. I stay invested and exercise patience. In fact, I keep investing on a dollar-cost-averaging basis during a correction on the premise that an investor has to be there to enjoy the benefits of investing. True, it’s painful to endure the stress of a downturn, but historically the long-term trend is up.
A: Let’s discuss 401(k) rollover options. Having decided to transfer money from one company’s 401(k) plan to another, an individual has two options: a direct rollover or an indirect rollover.
In a direct rollover, the money is transferred directly to another retirement account, untouched by the owner of the account. No taxes or penalties on the money being transferred are assessed and the transfer is done.
Indirect rollovers (as in your case) are more complicated…and more risky. instead of the money going straight into the new account, the cash goes to the individual. And, yes, the individual has 60 days to deposit the funds into a new retirement plan. But failure to do so will trigger withholding taxes and early withdrawal penalties. My question is why take the chance? Most 401(k)s offer at least one very liquid, very safe, cash equivalent (i.e., money fund) option. Why not park your money there until you decide what to do?
I understand your reluctance to reinvest in a strong market, but you risk certain opportunity costs by not doing so. Strong markets have upward momentum. Ask yourself this question. How many additional market highs have I missed since the day I “cashed in”? My point is this. You’re either a market timer or you’re not. And in order for the market to optimally work on your behalf, you have to remain invested in it.
In the short-term, the saw-tooth shape of the trend line will cause you occasional anxiety, but as it smooths out over the long-term, enjoy the fact that you exercised the needed patient to allow the Amazing Power of Compounding to work on your behalf. Good luck, whatever course you follow.
In this episode of Q&A: Real World WynnSights, we explore a growing movement toward employer-promoted savings vehicles, admit the 2020 equities market wasn't all that bad and applaud excellent investing prowess. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. WATCH THE VIDEO
There are many ways to save, but the key in every case is the saver’s self-control and ability to leave it alone.
There’s a movement growing in popularity among employers that offer 401(k) and other retirement plans. More companies are considering programs that promote savings through payroll deductions to encourage workers to build personal savings accounts. Such non-retirement funds can cover unexpected expenses (Rainy Day funds)… and avoid invasive raids on their retirement funds. Some existing programs are basic, e.g., simply allowing employees to request **split paycheck deposits**. Employers that use the direct deposit method generally offer split deposits to an employee’s checking and savings accounts.
Other employers offer sidecar accounts attached to existing 401(k) plans that allow employees to use payroll deductions to build savings in-house to avoid traditional banks’ minimum balance requirements and account fees. Also, some 401(k) providers offer savings features that permit workers to contribute to 401(k) savings accounts as well as pretax contributions to retirement accounts. This savings feature allows employees to withdraw money from savings accounts for emergencies. But…always a but… in this case, the portion of withdrawals that represents *earnings on the contributions is subject to income taxes*, maybe even penalties.
A survey by AARP found that 71% of employees polled would probably participate in a payroll-deduction, Rainy Day savings program if offered. And… no surprise here… the possibility of an employer match increased the probable participation level of such plans to 87%. But these same folks voiced aversion to a bunch of restrictions on these savings accounts. The survey indicated that folks considered a successful plan one that allowed the freedom to start or stop saving at will, the ability to choose the financial institution where the money is deposited, and immediate access to their funds... in short, to have the cash readily available when needed. Which raises the question of self-control.
Do these employer-related savings plans – or any plan without withdrawal disincentives – run the risk of making it too hard to leave it alone?
Despite the unsettling market events of 2020, I would surmise that, so far, 2020 has been a surprisingly good year for equity investors. The so-called Coronavirus Crash, a global bear event that began in late February 2020 and ended in early April 2020, was the fastest fall in financial history… the most devastating since 1929. The abbreviated five-week 30+% decline in February and March was no doubt gut-wrenching for all concerned, but so far, so good for the patient investors among us. On Monday, December 1, 2020, the S&P 500 closed at a high of 3,662.45 (up 431.67 or 13.4% from 2019’s 3230.78 close). From the March 23 low (2,237.40), the December 1, 2020 close (3,662.45) represented a recovery of 1,425.05 or 63.7%. If the market can hold this high ground, it won’t match up with 2019’s outsized gain of 28.9%, but a gain of 13% would be a good year by anyone’s definition, particularly in light of 2020’s pandemic travails.
On 12-31-2019, the S&P 500 closed at 3230.78, up 28.9% for the year.
On 12-01-2020, the S&P 500 closed at 3,662.45, up 13.4% thru November.
On 03-23-2020, the S&P 500 closed at 2,237.40, down 30.7% from 12-31-2019.
On 12-01-2020, the S&P 500 closed at 3662.45, up 63.7% from the 3-23-2020 low.
I suggest that you keep maxing out that Health Savings Account. and begin maxing out your Roth IRA versus investing in your company stock. I have a personal bias against folks investing in the stock of the company that also pays their salary… even at a 10% discount. Enron was once a thriving company, too (yes, the origin of my bias has been revealed). You seem to be a very discerning investor – no debt, a routine saver going the Roth route, optimizing the match, and maxing out an HSA. I like your style. Stay the course.
In this episode of Q&A: Real World WynnSights, I voice support in favor of Health Savings Accounts (HSAs), talk mortgage loan modifications and ponder what is the best use of a $30,000 nest egg. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
First, let’s place buying a house on the back burner. And as to “starting a new career”, why not first zero in on your educational needs – if any? Reaching a decision about the need for additional education might help clarify what career to pursue… and when. If back to school becomes your choice, it also adds clarity to what to do with the $30,000. School will require financing (unless you get a loan), and any residue should probably be set aside in a safe, liquid Rainy Day Fund and/or in a conservative, short-term investment that might help fund your own business once you reach that decision point.
In short, you have several balls in the air that require strategic prioritization to best meet your current objectives. Housing and retirement savings can follow at the appropriate time, but at your age I would strongly suggest that you do some prioritizing, and then set your course… age 50 isn’t that far down the road!
Absolutely, but this question requires some background information for those unfamiliar with HSAs. Unlike a Flexible Spending Account (FSA), money contributed to a Health Savings Account (HSA) can be invested much like contributions to a 401(k) or an IRA. And unlike an FSA, HSA contributions are not lost if not spent in a given plan year. They can be carried over from year-to-year, year-after-year. This makes HSAs excellent vehicles for saving and investing to cover healthcare expenses after retirement – when such expenses are likely to increase. BUT, unless you’re enrolled in a health insurance plan with an annual deductible of at least $1,400 for single coverage ($2,800 for a family), you aren’t eligible to contribute to an HSA. And the IRS sets annual contribution limits. In 2020, they're $3,550 for self-only coverage and $7,100 for a family (if 55 or older, participants can contribute an additional $1,000 as a catch-up contribution).
HSA funds can be invested in a selection of options not unlike 401(k) choices. Also, if invested wisely… and if affordable… it makes sense to pay certain healthcare costs out-of-pocket and leave your invested HSA dollars intact. This approach allows the participant to use an HSA’s investment feature to build a long-term health savings account – one of several tax advantages offered by HSAs.
Curiously, very few HSA participants invest their fund accounts – in my mind, the most compelling reason to enroll in an HSA. Using a Bankrate investment calculator, suppose that at age 25 your qualifying family joins an HSA and contributes the tax-deductible annual maximum of $7,100 (about $592 per month). Suppose further that this money is invested at 7%, compounded annually and grows tax-deferred for 25 years. Suppose after 25 years, tax-free withdrawals from the HSA (now totaling $469,400) are available to pay for qualified healthcare expenses. Quite a stress-reliever, wouldn’t you say? In short, your HSA combines the tax-free withdrawals of a Roth IRA with the tax-deductible contributions of a traditional IRA or 401(k). Or you could simply let it continue to grow another 15 years to provide you with an even larger nest egg ($1,472,000) for healthcare expenses going into retirement at age 65. Assuming a 2% annual inflation rate, you would still have spending power equivalent to $667,000 in today’s dollars. And don’t forget the $284,000 of contributions from age 25 to 65 that your family has been able to exclude from income. The kicker, of course, is that the money must be spent on qualified healthcare expenses… BUT NOT AFTER YOU TURN AGE 65!
When you turn 65, money can be withdrawn for any reason, but if not used for qualified medical expenses, those withdrawals would be treated as taxable income… but no penalty would apply. In short, over age 65 HSA withdrawals would be treated the same as withdrawals from a traditional IRA or 401(k). It’s worth mentioning that the penalty-free withdrawal age for most other retirement accounts is 59½ years old. This treatment is still another reason why HSAs make good retirement savings vehicles.
Wrapping up, those other characteristics that make an HSA such a good retirement savings vehicle include the enhanced family contribution limit of $7,100 ($1,100 greater per annum than for a 2020 IRA); no maximum income threshold as with a Roth IRA; upon retiring, no fretting about Required Minimum Distributions (RMDs) after reaching age 72 as is the case with other tax-deferred retirement accounts; and don’t forget the absence of that onerous “use it or lose it” provision, which enables HSA contributions to be carried over year-to-year, year-after-year and invested.
Generally speaking, a mortgage loan modification means extending the length of term, lowering the interest rate, or changing from an adjustable-rate mortgage to a fixed-rate loan. The terms of a modification are up to the lender, but the desired outcome to a borrower is a more affordable monthly mortgage payments. Lenders are often willing to consider loan modification to avoid a costly foreclosure process.
Not everyone can qualify for a loan modification. Typically, homeowners must either be delinquent or facing imminent default, meaning they’re not delinquent yet, but there’s a high probability they soon will be. Without knowing the size of your mortgage, to go from a 30-year, 4.75% note to a 15-year 2.75% note doesn’t seem to accomplish your goal – lowering a burdensome monthly cash outlay – although it would save you a bundle of cash over the long haul. I doubt it’s possible to find a low enough 15-year rate to even approach your current 30-year rate; thus, it appears to me that your best option is to negotiate a lower rate on your current loan, and when your finances permit, do a 15-year refinance to lock in those long-term savings.
In this episode of Q&A: Real World WynnSights, I tackle questions about investing in a tough economy, liquidating a 401(k), retirement allocation strategy and alternatives to the 529. Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion. VIEW VIDEO
A: Since I seldom invest in individual stocks (I’m primarily an index fund guy) and most of my investing is on a dollar-cost averaging basis, any current state of economic affairs has very little impact on what I might consider “the best investment opportunities now.” Frankly, I don’t think our economy is in rough waters right now. With a 30,000 Dow and a 3,600-plus S&P 500 at new highs, the average investor seems to be quite comfortable with America’s state of economic affairs.
Yeah, our markets might be bordering on overbought, but they don’t yet seem frothy. Since I seldom follow individual stocks, any opinion I have about them should be taken with a grain of salt, but long-suffering Big Oil and its generous dividends might be worth taking a look at. And I’d be somewhat cautious of Big Tech. They’ve had quite a run (for good reason). I loll in the comfort of low-cost, highly diversified mutual funds… and dare to be average.
A: I question taking such action. Because interest rates are so low, a cash position is a lot like a bar of gold. Gold produces nothing unless someone is willing to pay more for it than you did. Cash produces more only if interest rates improve. Other than setting aside some cash in a safe Rainy Day fund, it seems to me you need to have exposure to marketplace investments, perhaps earning dividends, interest, and hopefully, capital gains as a result. How do you benefit from the marketplace without being exposed to it? Remember, folks who cash out fearing market declines – or for other reasons – often absorb capital losses, create tax liabilities, or suffer “opportunity costs” by not reinvesting on a timely basis. We invest for good reason. In my mind, setting on surplus cash is not investing.
A: Because interest rates are so low, and because the current climate doesn’t suggest much upward drift in rates, I would be in no particular hurry to adjust my allocation away from equities particularly in light of future inflation potential. In a few years, however, it might make sense to consider investing in some target-date [equity/bond] funds of funds that would automatically involve you in a growing percentage of both domestic and international bond funds. By the way, I like the fact that you keep things simple. As to your pension, a lump sum versus an annuity payout really boils down to greater control of your assets and whether or not you have other regular cash flow sources (social security, part-time work, etc.) to handle monthly expenses. The fact that you have long been a financially independent sort indicates to me that you’re a knowledgeable investor, in which case, I’d be inclined to consider taking a lump sum. You can always purchase an annuity later in life if circumstances indicate the wisdom of such a move.
A: You have a number of options, but upfront let me emphasize that using a 529 Education Account is a really wise means of accumulating funds for educational purposes. I recently wrote a blog (The Coverdell vs 529s; 10-22-2020) detailing a 529’s many advantages. But 529 funds must be used specifically for education purposes or the tax-advantaged benefit is lost… as it should be.
A more free-wheeling approach that allows the “benefactor” greater control over investment and disbursement involves devoting a Roth IRA to the education of a child. Roth IRAs have tax advantages similar to 529 plans and are primarily intended as retirement savings vehicles. But they can be used for college planning. Of course, the benefactor won't get upfront tax deductions, but the account will grow tax-deferred and withdrawals will be tax-free no matter how used (as long as you're 59½ or older and have had the Roth IRA for at least five years). However, the benefactor can withdraw Roth contributions (but not their earnings) at any time and for any reason, tax-free. Also, the money held in retirement plans isn't counted as an asset when an application is made for financial aid through the FAFSA. Drawbacks to using a Roth versus a 529 include the annual limitation of contributions to $6,000 (or $7,000 if 50 or older), and using a Roth IRA to pay for college leaves less money for the benefactor’s retirement. Keep in mind, a child will have more years to repay an education loan than the benefactor will have to recoup lost retirement savings.
Technically, another type of 529, a prepaid tuition plan, allows the benefactor to pay for future tuition at current rates. However, they generally apply only to certain colleges and universities in certain states. And unlike regular 529’s, these plans are often limited to covering tuition only.
A more limited but tax-favored alternative to 529s is the Coverdell Education Savings Account (ESA). The Coverdell has a more restrictive $2,000 annual contribution limit for a particular child. Investors filing joint returns are further discouraged from setting up an ESA if their modified adjusted gross income (MAGI) is greater than $190,000 ($95,000 for single filers). Specifically, the $2,000 annual maximum is phased out for joint files with MAGIs falling between $190,000 and 220,000. Such monetary limitations represent downsides to many… and in addition, ESAs are age-limited. Contributions to a Coverdell plan must end when the beneficiary turns 18, and withdrawals for qualified expenses must be distributed by the time a beneficiary turns 30. These limitations are particularly discouraging to investors with large incomes. On the other hand, these same limits appeal to prospective benefactors with lessor resources.
Custodial accounts such as Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) do not provide tax benefits like a 529 plan, but allow account holders much more discretion regarding investment options (virtually unlimited like Coverdells) and how the money is eventually used. Although proceeds are to be used for a child’s benefit, they’re not specifically earmarked for education… a useful feature for parents unsure if their offspring will actually go to college. Unfortunately, UGMA/UTMA contributions won't earn tax deductions or credits, and such accounts’ earnings are taxable. Also, because they are considered the child’s assets, up to 20% of their balance is counted in computing the Expected Family Contribution on the FAFSA. This is not so with 529 accounts because they are considered to be parental assets - only up to 5.64% of their balance is counted.