For Grandparents: Save for Retirement and Grandchildren’s Education

Posted by Haddad Nadworny on Sat, Jan 13, 2018 @ 07:36 AM

The Special Needs Financial Planning Team  Cynthia Haddad, CFP | John  Nadworny, CFP | Alexandria Nadworny, CFP  We are committed to offering educational workshops to organizations and parent  groups.  Please call Alex or click here to attend a workshop or discuss a presentation  to your group.


pexels-photo-355948.jpegA Roth IRA may be an option for grandparents to consider when saving for retirement and while also saving for their grandchildren’s education. The Roth IRA allows account owners to save with tax-free growth* and with the added flexibility to allocate and use the funds when they choose and for any purpose.

What is a Roth IRA:

 A Roth IRA is a retirement account funded with after-tax dollars. The contributions generally are not tax deductible but when you start withdrawing funds, qualified distributions are tax-free.

 Defining characteristics of a Roth IRA:

  • The money invested in a Roth grows tax-free*.
  • Contributions can continue to be made once the taxpayer is past the age of 70½, as long as he or she has earned income, which may be basically defined as W2 income.
  • Eligibility for a Roth account depends on taxable income.       Generally, in 2018 you are eligible if :
  • you are a couple filing jointly and your MAGI (modified adjusted gross income) is less than $189,000.
  • you file as an individual and your MAGI is $133,000.
  • Contribution amounts: In 2018 an individual may make an annual contribution of up to $5,500 to a Roth IRA. Individuals who are age 50 and older by the end of the year for which the contribution applies can make additional catch-up contributions (up to $1,000 in 2018). An individual may also establish a Roth IRA for their spouse with little or no income.
  • The taxpayer can maintain the Roth IRA indefinitely; there is no required minimum distribution (RMD) during the account holder's lifetime.

* Withdrawals from the account may be tax-free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.

Case Study

John and Alice (fictional names) are grandparents of 2 grandchildren, one of whom has special needs.  John and Alice have $10, 000/year to contribute toward their retirement savings should an emergency or unforeseen need arise. They also want the opportunity to put these funds toward the goal of funding their grandchildren’s educational expenses and don’t want to miss this opportunity to save for them should the unforeseen or emergency never happen.

 Their first thought was to establish a 529 plan & ABLE account for each of their grandchildren. However, while John and Alice feel saving for college is an important goal toward which they want to contribute, they need and want flexibility and control over these funds. Their grandchildren may opt not go to college or John and Alice may have an unforeseen need come along for which they would use this savings. 

In meeting with John and Alice and discussing this goal, we suggested another alternative: establishing and funding a Roth IRA. This alternative is open to John and Alice as they both have earned income, file taxes jointly and do not exceed the $189,000 combined household maximum income threshold for Roth IRA contributions. There is no age limitation on opening or contributing to a Roth IRA.

The benefits of saving the $10,000/year in a Roth IRA are tax-free growth, with no limitations on use of funds or withdrawal rules( with exceptions noted above- see *).  John and Alice may each contribute up to $5500/ year to a Roth IRA. Today they feel as though they can afford to give their grandchildren money for their futures, but ideally John and Alice would like the option to have the money available to them if there was an unforeseen need. Should they have additional grandchildren, having the money in the Roth IRA can make it easier to distribute the money amongst all grandchildren.

 Potential drawbacks to using this approach might occur if the funds were left in the account and John and Alice required nursing care. This savings would be considered in their assets and also, should they pass away, this account would be included as a part of their estate assets. To control disposition of the assets upon their death, they may designate their children or grandchildren as beneficiaries of the account.

When making the decision of how best to save for your grandchild’s future, recognize that every family’s situation is different and that will have an impact on the final decision regarding the best savings option to consider.    

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for individualized tax advice. There is no assurance that the techniques and strategies discussed are suitable for all individuals or will yield positive outcomes. Please consult tax advisor regarding your specific situation.The Roth IRA offers tax deferral on any earnings in the account. Future tax law can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. The experiences described here may not be representative of any future experience of our clients, nor considered a recommendation of the advisor’s services or abilities or indicate a favorable client experience. Individual results will vary.

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Tags: planning for college, financial planning, Retirement Planning, Special Needs Financial Planning

Planning for College for People with Disabilities- Webinar on April 6

Posted by Patty Manko on Sat, Apr 01, 2017 @ 08:00 AM

The Special Needs Financial Planning Team  Cynthia Haddad, CFP | John  Nadworny, CFP | Alexandria Nadworny, CFP  We are committed to offering educational workshops to organizations and parent  groups.  Please call Alex or click here to attend a workshop or discuss a presentation  to your group.

Workshops Calendar


lower_logo.gifThink College
is a national organization dedicated to developing, expanding, and improving inclusive higher education options for people with intellectual disability. With a commitment to equity and excellence, Think College supports evidence-based and student centered research and practice by generating and sharing knowledge, guiding institutional change, informing public policy, and engaging with students, professionals and families.

We are presenting a webinar for Think College on Thursday, April 6, Let's Talk About the Money: Planning for College . On the agenda are:

  • Special Needs Planning Timeline
  • Cost of a College Education
  • Personal Resources, Savings, and Taxes
  • UTMA, 529, 529(a), Coverdell, Savings Bonds, Taxable Accounts and Cash Flow, Gifts
  • Public Resources
  • Borrowing and ‘Gift Aid’
  • State Initiatives
  • Advocacy
  • Q&A

 If this is a planning goal for your family, we encourage you to tune in!  It is free however, you must register.  Here are the webinar details and link to registration: https://events-na6.adobeconnect.com/content/connect/c1/839220836/en/events/event/private/1017458897/1378465648/event_landing.html?sco-id=1378867298&campaign-id= . 

 

Tags: planning for college

Saving for College for Students with Special Needs

Posted by Patty Manko on Thu, May 15, 2014 @ 03:38 PM

clemson resized 600Faced with the increasing cost of higher education, students and their families must begin saving for college from an early age -- often from birth. 529 College Savings Plans offer families a great opportunity to set aside money for a child's college education, especially since funds held in 529 Plans grow tax-free. However, when a child with special needs is setting aside money for college, a 529 Plan may not be the best option. Given  the increase in population diagnosed with special needs and the leveling of government funding, the important thing is to plan or save for an individual with special needs; regardless of the funding vehicle!

 Here are some things to think about when family members ask about the best way to provide funds for a child with special needs' college education.

How Does a 529 Plan Work?

529 College Savings Plans are named after a provision of the tax code, and for good reason -- these savings accounts provide a substantial income tax benefit to the account beneficiary. Basically, a 529 Plan is a specialized account established for the benefit of someone who is planning to attend college. Anyone can create the 529 account for a relative, and once the account is created, anyone can contribute to it, with gifts into a 529 account qualifying for the $14,000 annual gift tax exclusion. But the best feature of a 529 Plan involves income tax savings, since all of the funds placed into a 529 account grow free from income taxes so long as they are spent on qualified educational expenses. For example, if parents fund a child's 529 Plan with $30,000 at birth and those funds grow to $60,000 by the time the child has reached college, there will be no income tax on the $30,000 gain in value. Because of this significant tax advantage, many families set up and fund 529 accounts when their children are young in order to obtain the best value over time.

 As mentioned above, the main advantage of a 529 Plan is that it provides the opportunity for tax free savings if the distributions meet the definition of the plan’s qualified college expenses.  Generally speaking, the sooner the funds are in the account, the longer the funds will be set aside for growth potential.  Unfortunately, the timing for college planning for individuals with disabilities is challenging because the younger a child is, the greater the uncertainty regarding college as an appropriate opportunity.

Another consideration in choosing a 529 Account is whether the child with special needs has siblings.  If they will not need the funds for college, the funds may be transferred with no penalty to a sibling.

How Do 529 Plans Affect Someone's Government Benefits?

Some government benefits, like Supplemental Security Income, have very strict income and asset limits. Because of these restrictions, it is vitally important that the 529 account is not owned by the person with special needs. Furthermore, if the 529 account was set up when a child was younger and it becomes clear that the child is not going to need the funds in the account for a college education, the funds should not be withdrawn and given directly to the person with special needs. Not only can such a gift cause a loss of government benefits, but the distribution for a non-qualified expense triggers state and federal income taxes and a 10 percent penalty for spending the 529 funds on something other than a college education. Because some of these problems can be avoided through the use of other savings devices, it is important to talk with a qualified special needs planner before creating, funding or spending money from a 529 Plan for the benefit of a child with special needs.

What Other College Savings Options Are Available for People With Special Needs?

An alternative to a 529 Plan is to simply fund a properly drafted special needs trust for the benefit of a person with special needs. Anyone can establish a special needs trust for the benefit of a child with special needs, however the funds in the trust do not grow tax-free. The trust is treated as a separate taxable entity and requires an annual tax return. For this reason, many times trusts are  funded at upon the death of a parent(s).

On the plus side, a special needs trust provides much more flexibility than a 529 account in terms of spending the trust assets for the benefit of the child. While a donor may not be able to guarantee that the funds held in the trust will be used entirely for education, there are mechanisms that can be put into a special needs trust to ensure that a child's educational expenses are taken into consideration when funds are distributed, and the donor of the trust can retain some powers over how distributions are made.

Another way to save for college is for parents or grandparents to establish a savings or investment account in their own names and then simply spend the funds in that account for the college education of a child with special needs. Since payment of educational expenses by a third party does not trigger a loss of benefits, this option avoids potential conflicts in terms of account ownership. However, the funds in the account will still belong to the donors, limiting the estate and income tax benefits that make contributions to a 529 Plan so appealing.

If you are interested in setting funds aside so that a person with special needs can attend college, it is important to act as soon as possible. A qualified special needs planner can assist you in mapping a college savings strategy that is right for your family.

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We are proud to be amongst the first financial planning members of the Academy of Special Needs Planners in the US. This
 article appears in it's original form on the Academy webiste.  We have supplemented the material with additional information and suggestions for our readers.

Talk with us about financing your child's education.   We craft solutions for families with complex situations.

Tags: financial planning, planning for college

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