Welcome back to the third article in a series dedicated to illustrating ways to prioritize saving for future milestones and the uncertainty of life. In this post, we will explore Estate Planning (Wills, Durable Power of Attorney, and Advance Directives) and Education Funding (529s). In the first post, we discussed prioritizing your emergency fund, the 401(k) company match, and tackling credit card debt. In the second post, we explored prioritizing your health savings accounts (HSAs) and reviewing your insurance coverage.
Successfully building your wealth can feel energizing, and with that success can come new stresses and complexities.
To help you visualize some potential next steps, let’s walk through a savings priority strategy. This approach prioritizes contributing to specific financial needs and their related investment accounts in a certain order.
This strategy utilizes both tax-advantaged and taxable accounts.
While this strategy can be effective and transformative to your personal finances, you’ll want to understand what it is and how it can be customized for your specific situation.
Table of Contents
Overview
Ideally, when you use this strategy, you fully fund each priority before turning your attention to the next priority. So, start with the first priority and when it’s fully funded, move on to Priority 2. Then shift to Priority 3, and so on.
While you can adopt this strategy specifically to attack debt and invest for retirement, you could also incorporate it to save for major purchases or life milestones. For example, a vacation home, a child’s wedding, or other financial goals. You should incorporate it into your comprehensive financial plan. Depending on your goals and personal situation, the order of these priorities can change.
Let’s walk through the two next steps in the savings priority strategy and begin to help you organize what comes next.
6. Estate Planning Essentials
Estate planning is the process of organizing and expressing your wishes for the management and distribution of your assets after your death. It is an important process, especially for parents of minor children, as it can help ensure that your children are taken care of, and your assets are distributed according to your wishes.
There are several key tools for you to consider in your estate planning, including a will, durable power of attorney, and advance directives.
- HIPAA Waiver: lets the people you name in the document to obtain access to your medical records if you’re incapacitated.
- Financial Power of Attorney and Healthcare Power of Attorney: these documents give another person the legal right to do certain things for you. What those powers are depends on the terms of the document. regarding medical treatment
- Your living will is another advance directive that allows you to express your wishes regarding end-of-life care.
- You can create a durable power of attorney to appoint someone to manage your financial affairs if you become incapacitated. So, when your intent is to designate your back-up decision-maker in the event of your incapacity, then a durable power of attorney should be used.
- A will is a legal document that outlines how you want your assets distributed after your death. It can also appoint a guardian for your minor children. A will is a revocable instrument. As such, you can amend, alter, and revoke your will.
These estate planning tools can protect you, and your family, if you become incapacitated or die. These estate planning tools can help ensure that your wishes are carried out. They can also ensure that your loved ones are taken care of.
You should consult with an attorney specializing in estate planning in your state. To get started, consider evaluating estate planning attorneys who are affiliated with the local estate planning council in your area. The right estate planning attorney for you can help create legally enforceable estate planning documents for your circumstances.
7. Education funding. Consider a 529 plan.
If you have children, it might be time to consider opening up 529 accounts for the children you intend to help through college. Contribute what fits your situation and make it easy for your relatives to contribute on those special occasions.
A 529 plan is a tax-advantaged investment account designed to help families save for higher education expenses. These plans are sponsored by either states, state agencies, or educational institutions.
Here are some key features of 529 plans to consider:
- Tax Treatment. Contributions to a 529 plan are not tax-deductible at the federal level. Many states offer a tax deduction or credit for residents who contribute to their own state’s plan.
- Earnings in the plan grow tax-free while invested in the plan.
- Distributions are not taxable when used to pay for qualified higher education expenses. Many, but not all, plans allow distributions up to $10,000 per year for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school[1]. Trade schools can often be included in this definition. However, if the total distributions exceed the beneficiary’s qualified higher education expenses (including tuition at an elementary or secondary public, private, or religious school), the excess portion of the earnings is taxable.
- Investment options. Most plans offer a variety of mutual fund options. Some offer FDIC-insured savings accounts. You can choose the investment option that best aligns with your risk tolerance and investment goals.
- Fees and expenses. Like many investment accounts, 529 plans may charge several types of fees, including an enrollment/application fee, an account maintenance fee, program management fees and/or underlying investment expense ratios. Some savings accounts and CDs can also have early redemption penalties. It is important to carefully review the fee structure of any plan you’re considering. High fees can erode your investment returns.
- Student Loan Payments. You can withdraw amounts to pay principal and/or interest on your designated beneficiary’s or their sibling’s student loan. The amount of distributions that can be used for loan repayments is limited to $10,000 per borrower during their lifetime. Interest paid with these funds doesn’t qualify for the student loan interest deduction.
While these are some of the key features and benefits of 529 accounts, what works well for one person might not be the perfect fit for you. It’s important to fully incorporate all the moving parts of your financial life into your decision.
It’s also important to note that each state has its own unique approach to taxes. While some states might offer you a tax deduction for your contributions, others might not extend this benefit. Similarly, when it comes to K-12 tuition, some states might view this as a non-qualified distribution, which could limit the state-tax benefits you receive.
Some states allow residents to use 529 plans from other states. It is important to keep in mind that each state’s agreement may have certain limitations or exclusions, so it is advisable to carefully review the details of each state’s agreement before enrolling in a 529 plan sponsored by a different state.
You should familiarize yourself with your state’s rules to optimize your financial planning.
Additionally, these agreements can change over time, so check with the plan’s administrator or a tax professional for the latest information.
Most importantly, you should prioritize your retirement over your children’s education in most circumstances.
In our next post, we will discuss Roth IRAs, enhancing your emergency fund and retirement accounts, paying down low-interest debt, and taxable investment accounts.
The Next Step
When you know who and what are truly important, you can create incredible clarity about your spending and saving.
Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life.
As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.
Start feeling more confident that you are making progress toward your savings priorities.
When you thoughtfully execute on this approach, you can increase the likelihood of achieving your goals, setting new ones, and enjoying the present moment.
Proactive and open collaboration with your financial, tax, and estate planning professionals can help you work towards your financial planning goals. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.
If you’re unsure about your next step, let’s talk.
[1] Source: “Topic No. 313 Qualified Tuition Programs (QTPs)” Internal Revenue Service.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.