Many of your have heard of the popular 529 savings plans that custodians can set up to fund their child or grandchild’s college education. Earlier this year, you likely also heard about the SECURE 2.0 Act which brought down some of the biggest changes to retirement and savings plans in recent years. But what does college planning have to do with retirement planning and how could the new legislation make 529s even more attractive than they were before?

Breaking Down the Benefits of SECURE 2.0 to 529s

But what does the SECURE Act 2.0 have to do with these 529s, you ask? Well, it broadens the definition of “qualified education expenses” and enhances the flexibility of these plans.

Thanks to SECURE 2.0, 529s now cover costs related to apprenticeships, and — here’s the big kicker — student loan repayments. Yes, you heard it right! You can now use the 529 plan to repay up to $10,000 in student loans. This new feature alone could make 529s far more appealing to many families.

Additionally, under SECURE 2.0, if your child gets a scholarship, you can now withdraw the amount of the scholarship without the usual 10% penalty. That means more flexibility to adapt to life’s surprises.

Balancing the Pros and Cons of 529 Plans

Now, does this make 529s more attractive? It’s not a simple “yes” or “no.” While these changes certainly sweeten the deal, they don’t fundamentally alter the nature of 529s.

529s remain an investment tool best suited for those quite certain about their children’s path to higher education. If your family’s situation matches this description, the expanded benefits under the SECURE 2.0 Act could indeed make the 529 plan more attractive.

However, if there’s considerable uncertainty about your child’s educational future, or if your family might not be able to take advantage of the new benefits (like the ability to pay off student loans), the enhanced 529 might not seem much more attractive than before.

The Risk? The Tax Costs of Overfunding a 529

The reason that we say 529s are an investment tool best suited for those “quite certain about their children’s path to higher education” is because a new J.P. Morgan study found that a 529 account is still the most tax-efficient way to save for a student’s education—but only if that account is actually used and depleted by the time the student completes their education.

That’s because removing the funds from the 529 for non-qualified expenses triggers a tax event. If the beneficiary does not go to school or does not finish school, the custodian has two choices:

• Take back the money in the 529 account or give it to the student. However, in both cases, taxes and a 10% penalty must be paid on the earnings at the recipient’s ordinary income tax rate. If the student is in a lower tax bracket, it makes most sense for the student to receive the funds and pay taxes at the lower ordinary income rate.
• Pass the account on to a lower generation (e.g., grandchildren). But there would be a tax liability for this option as well. The initial beneficiary might have to use some of the $12.92 million gift tax exclusion when a new beneficiary is named.

In other words, if you aren’t sure your child will attend college or may not complete a full four years, you’ll want to look at other options to avoid these tax implications. Other options include a pay-as-you-go approach, funding UTMA accounts, or setting up grantor trusts.

Choosing the Most Impactful Path

The SECURE 2.0 Act has brought some considerable enhancements to the 529 college savings plans, making them potentially more attractive to many families. However, whether these changes tip the scales in favor of a 529 plan for you and your family will largely depend on your specific situation and needs. A 529 account is the most tax-efficient education savings alternative, but only if the account is exhausted when the student’s education is completed.

As always, remember that financial planning is a personal journey. It’s essential to consult with a professional advisor who understands your financial goals and circumstances. If you’d like to discuss these changes and see how they impact your current financial strategy, don’t hesitate to get in touch!

At Platt Wealth Management, our team of financial advisors are ready to understand your goals and dreams in order to present the right solutions to your needs and opportunities that will simplify your financial life. We would love to learn more about you with a complimentary Discovery Call. Contact us today to discuss your opportunities.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

Retirement is supposed to be a time of relaxation and enjoyment, but sometimes things don’t go as planned. One of the biggest challenges retirees face is the unpredictability of the stock market. A bad sequence of returns early in retirement can be devastating and leave retirees with no options.

But it’s important to remember the effort you’ve put into building your financial foundation. You’ve put in years of hard work, and now it’s time to enjoy the rewards of your dedication! Like every other obstacle you’ve navigated, you will get through this. Focus on your long-term goals and adapt your financial strategy while maintaining a positive outlook because retirement—even in a market downturn—still offers numerous opportunities to explore new interests, spend quality time with loved ones, and pursue lifelong passions.

Let’s explore ways to recover from a bad sequence of returns early in retirement.

Keep Your Cool: Tackling Challenges with Poise and Positivity

 We’ve said it before, but it bears repeating; keep calm and remain positive. Take a deep breath and remind yourself that the market has ups and downs. Keep a cool head and avoid making impulsive decisions. And remember, staying positive in the face of market fluctuations is a choice. Embrace your inner optimist, and you’ll survive the storm, becoming stronger and more resilient.

With a few simple tips, you can transform your everyday routine into a serene sanctuary and remain focused on the positive.

• Get Outside and Practice Mindfulness: Enjoy a leisurely walk in a park or forest, letting nature help you relax. Inhale the fresh air and appreciate the sights, sounds, and smells of the outdoors. Allow your thoughts to come and go.
• Digital Detox: Allocate screen-free time daily, allowing your mind to rest. Read a book, engage in a hobby or daydream. Experience the joy of being present in the moment.
• Get Moving: Exercise is a natural stress reliever. Find an activity you enjoy, such as yoga, dancing, or swimming. Stay active, release endorphins, and enjoy a more relaxed state.
• Remember the Cycles and Focus on the Long Term: Keep in mind that downturns are a normal part of the ride, and eventually, things will improve. Think of your investments as a flourishing garden that needs time to grow. It might have a few weeds now and then, but with patience and care, it will blossom into something beautiful.
• Stay Informed: Knowledge is power. Keep yourself updated on market trends and seek professional advice to make informed decisions. Understanding the bigger picture can help you stay calm and optimistic.

Budget Reset: Confront Financial Changes with Confidence

A bad sequence of returns can mean that you’ll need to adjust your budget. Look at your expenses and see where you can cut back. It’s essential to be realistic about your spending and to prioritize your needs. If your retirement savings have taken a hit, consider working part-time, supplementing your income, and building up your savings again.

Expenses to Trim:

• That gym membership you’re not using? Swap it for free yoga videos or join a walking group.
• Cut back on dining out – become a kitchen connoisseur and host dinner parties instead. Bye-bye, overpriced takeout. Hello, gourmet goddess!
• Reevaluate your subscriptions – do you really need Netflix, Hulu, and HBO Max? Enjoy one at a time instead.
• Save on travel costs by exploring local hidden gems. Who knew there was so much to discover right in your backyard? Check out your local tourism websites and plan a staycation this year!

Part-time Work Opportunities:

• Share your wisdom by becoming a consultant in your field. You’ve got the experience. Why not spread the wealth (knowledge)?
• Flex your creative muscles and try your hand at writing, photography, or even pottery. Etsy, here we come!
• Teach a class or workshop at your local community center. Empower the next generation while making a little extra cash.

Expert Insight: Diversify for Success and Consult an Advisor

Diversifying an investment portfolio is crucial for managing risk and ensuring long-term financial stability. By spreading investments across various asset classes (like stocks, bonds, and alternative investments), you reduce the impact of any single underperforming asset on your overall portfolio. Diversification helps mitigate risks associated with market fluctuations and increases the potential for higher returns.

Here’s how to build a well-balanced, diversified investment portfolio:

• Combine Different Assets: Consider stocks, bonds, and cash as the essential components of your financial portfolio. Mixing them creates a diversified structure that can handle market fluctuations.
• Add Alternative Investments: Real estate, commodities, and private equity can add diversity to your portfolio and help reduce overall risk.
• Explore Various Investment Types: Be open to different styles of investments, like growth and value stocks or short- and long-term bonds.
• Regularly Review and Rebalance: Periodically assess and rebalance your portfolio. As markets change, your investments should adapt accordingly. Stay informed on trends and adjust when needed to maintain a balanced portfolio.
• Consult a Financial Planner: A financial planner can assist you in creating a diversified portfolio tailored to your specific needs and risk tolerance, ensuring that your investments remain aligned with your goals.

Key Takeaways

Recovering from a bad sequence of returns early in retirement can be a challenge, but you can overcome it with the right mindset and strategies. Remember to stay positive, keep calm, and focus on your long-term goals. Consider adjusting your budget and exploring part-time work opportunities. Also, be sure to diversify your investment portfolio and seek the advice of a trusted financial advisor. If you don’t have one, Platt Wealth Management can help.  Schedule an introductory call to learn more.

By taking these steps, you can get back on track and enjoy the retirement you’ve always envisioned. Take charge of your financial future, adapt to the market’s ebbs and flows, and embrace the next exciting chapter of your life with confidence and resilience.

Remember, all new experiences in life require an adjustment period. Sure, it might be a little uncomfortable initially, but with a few strategic tweaks, you’ll be strutting your stuff in no time. Cheers to living your best (retired) life!

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

As the years go by and your paychecks keep coming in, you diligently save for retirement, even benefiting from your employer’s match. Every now and then, you check your account statement, and that growing nest egg sure looks impressive!

So, when it’s time to fund your child’s college education, make a down payment on your dream home, or launch the small business you’ve been pondering for years, you might wonder: “Should I dip into my retirement savings?”

Our expert advice? A resounding “no!”

We understand the temptation, and as financial advisors, we often encounter this question. Let’s explore why using your retirement savings for other purposes isn’t a wise decision.

Reason #1: Penalties

Cashing out your retirement account early comes with several penalties:

• Early Withdrawal: Withdrawing from your 401(k) before age 59½ incurs a 10% penalty from the IRS.

• Taxes: The IRS mandates a 20% tax withholding on most 401(k) withdrawals.

For example, withdrawing $10,000 for a house down payment would result in a $1,000 penalty and $2,000 in taxes, leaving you with just $7,000.

Pro Caveat: If you’re set on using your 401(k) for a down payment with no other options, consider converting it to an IRA. First-time homebuyers can withdraw $10,000 without the 10% penalty.

Reason #2: Lost Growth

Early withdrawals disrupt the compounding process and may leave you with a smaller nest egg than you anticipated, potentially affecting your quality of life in retirement.

Like all investments, your retirement account grows through contributions and the power of compounding. The larger the balance, the greater the compounding effect. What does that mean for you? Essentially, that you have to contribute less to earn more over time.

By withdrawing $100,000 for your child’s college tuition or to kickstart your own business, not only are you reducing your account balance, but you’re also sacrificing the compounding benefits that this sum would have provided—which means you’ll have to put more money in to see the same net result.

Here’s an example. Imagine you’re 45 years old with $250,000 in your retirement account when you decide to withdraw $100,000 for college or a new business. Your account now has $150,000, and assuming an 8% interest rate and no further contributions for the next 20 years, your balance at age 65 would be around $699,000. However, if you had maintained the original $250,000 balance with the same 8% rate and no additional contributions, you’d retire with approximately $1,165,000. This difference of about $466,000 could significantly alter your retirement lifestyle.

Reason #3: A Later Retirement Start Date

It should come as no surprise that early withdrawals can push your retirement finish line way back, because your account balance is such a large part of what determines your retirement readiness. When you remove a large portion of your savings, you risk not having enough money to maintain your current lifestyle in retirement. With increased life expectancies and the rising costs of healthcare and living expenses, it’s more important than ever to ensure that your retirement savings remain intact and continue to grow.

You don’t want to find yourself struggling to make ends meet in your later years or being forced to work longer than you initially planned. This can be a huge blow to your overall well-being and quality of life.

Financial Planning: An Alternative to Withdrawing from Your Retirement Account

We understand that considering an early withdrawal from your retirement account is likely driven by financial necessity or concerns about the economy. However, there are alternative options to explore. From initiating college savings plans early to establishing emergency funds, we’re here to help you manage your overall financial well-being and achieve your savings and retirement objectives.

If you require guidance in this area, we invite you to schedule a consultation. The support and expertise of a financial advisor can significantly impact your ability to preserve and grow your wealth for the future, as well as help you meet your cash flow needs today.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.