Stretch IRAs are useful tools for the individual who wants to extend the life of their retirement accounts through multiple generations. Although there is often confusion surrounding stretch IRAs and how they work, the concept is straightforward. A stretch IRA is a strategy, not a product, used to “stretch” the life of Roth IRA and Traditional IRA assets by designating beneficiaries with the longest life expectancy, such as grandchildren or even great grandchildren. By selecting beneficiaries two to three generations younger than the account owner, as opposed to designating children, the IRS will have lower imposed required minimum distributions (RMDs) for the inherited IRA, leaving a greater asset base to grow and cover future distributions.
To calculate the RMD for an inherited IRA (Table 1 – IRS Single Life Expectancy Table), divide the previous year-end account balance by the divisor (beneficiary’s life expectancy) corresponding to their respective age in the year following the death. This divisor is the IRS’s actuarial-based remaining life expectancy for the beneficiary, so each year, the divisor will decrease by 1, causing an increase in the percent of the account balance taken for the RMD.
The IRS provides a list of distribution options available to inherited IRA owners. Distribution options vary depending on whether the beneficiary was a spouse or non-spouse, and also whether the IRA owner passed away before their required beginning date (RBD), which is April 1 after they turn 70½. (more…)
Successful families agree that higher education is essential to the success of future generations, and they also realize that costs are only going to continue to rise. If paying for your children or grandchildren’s tuition is a must (similar to a liability), and you know the exact number of years until they start undergraduate or graduate school (their investment horizon), why not approach saving for their education like you would saving for retirement?
One such way to tackle this goal is through the use of 529 college savings plans. 529s are unique in that there are no income restrictions on contributions, and the contributions can grow and be withdrawn tax-free as long as the distributions go toward qualified expenses (tuition and fees, room and board, books, supplies, and equipment). However, the benefits to your family go much further.
In addition to providing Roth-like advantaged growth and withdrawals, 529 plan assets are also removed from the owner’s estate. This means if a parent or grandparent, who owns a 529 plan with a family member as a beneficiary, were to pass away, the value of the 529 plans would not be included in their gross estate1. And, the total contributions as of 2016 to individual 529 plans can be as high as $235,000 to $452,210 (Pennsylvania) per beneficiary, depending on which state you choose to open the plan. (more…)
Maybe you’ve heard of this before. A letter of instruction is a document you write to your executor and family that contains your personalized wishes and instructions for settling your estate. Although it does not carry any legal authority, a letter of instruction can be used to provide tremendous added detail about your financial affairs that doesn’t fit within a will or trust.
One of the most important purposes of a letter of instruction is to lead the person in charge of settling your estate through the process step by step. A good letter of instruction should contain the following:
- Detailed list of your assets and belongings.
- Copy of your monthly budget.
- Login ID and password list.
- Contact information for financial professionals and beneficiaries.
- Location of important documents such as the will, trust, deeds, birth certificate, tax returns, bank statements, bills, life insurance, etc.
- Creditor statements for any mortgages, credit cards or other loans.
- Location of keys for house, auto or safe deposit box.
A key function of the letter of instruction is to specifically indicate which household belongings go to which heirs. Your will and/or trust will generally only address big ticket items. Through the letter you can decide who receives the family albums, the silverware, stamp collection, artworks or family knickknacks. Providing clear guidance can keep your family from devolving into arguments and resentment when emotions and grief run high.
You can also use a letter of instruction to tell your family how and where you would like to be buried or cremated. You can be as elaborate as you desire. If you want, you can choose funeral readings, pick your flowers, charitable donations, etc. You can even prewrite your own obituary here, so be creative. Whatever your desires, putting your wishes in writing will help reduce guesswork and potential arguments among those who will handle these arrangements when the time comes.
If desired, you may use the letter of instruction to voice personal requests and your expectations for how your heirs use their inherited assets. After all, these were your possessions! Some people also include their personal values, in a section known as the “ethical will,” which allows you to pass your core values and beliefs down to your family and beneficiaries.
Another benefit of this letter is that you can augment your living will with regard to end of life care, providing more detail about the circumstances under which you want to be kept alive or taken off of life support. This can be very helpful in reducing stress or uncertainty for your family if the health care directive or living will lacks this detail.
Remember, a letter of instruction does not replace a will, durable power of attorney or living will. If you don’t already have these documents in place, you should have them drawn up by a qualified estate planning attorney. A letter of instruction can be a fantastic tool to articulate your final wishes and decisions for your executor and heirs. Be sure to update it periodically and file it along with your other estate planning documents. At its heart, the letter of instruction is a last gift of your voice that you leave to your family, so make it count.
Part I of this three-part series reviews 529 plan basics. Part II examines Washington State’s 529 prepaid tuition plan, the GET. This final section focuses on the best 529 savings plan I know, the West Virginia Smart529 Select.
Five years ago, my younger sister gave birth to her first child, a beautiful baby girl named Sydney. I was there at the hospital right after Sydney was born, and I instantly fell in love with her. When her 1st birthday came around, I decided the best gift I could give to her was the gift of education (or at least help with it). I set up a 529 account and began making monthly contributions for her benefit. My examination of 529 plans four years ago led me to the West Virginia Smart529 Select, and I believe it’s still one of the best 529 plans available today.
Why the West Virginia Smart529 Select?
I like the WV Smart529 Select plan for three main reasons:
- It offers access to a world-class family of funds, Dimensional Fund Advisors (DFA).
- The costs are low and very reasonable.
- Set-up, maintenance and contributions are simple and easy.
Dimensional Fund Advisors (DFA)
The WV Smart529 Select is the only 529 plan in the country where 100% of the investment options are DFA funds. Clients who work with Merriman may recognize these as the same funds we use in our investment portfolios. DFA funds are rooted in the science of investing, and we believe they offer superior exposure, diversification and returns when compared to most other mutual funds and Exchange-Traded Funds. Ordinarily, you can’t get access to DFA funds unless you are an institutional client or you work with a DFA-registered advisor. However, through the WV Smart529 Select, all investors have access to this great fund family for college savings purposes!
The WV Smart529 Select has no sales charges, application fees or set-up charges. There is a $25 annual maintenance fee, but that is waived if you enroll in their Automatic Investment Program and contribute $25 or more each month, if the account value is $25,000 or more, or if you’re a resident of West Virginia. The annual program expense ranges from 0.65% to 0.88% of the account balance each year, depending on the investment options chosen—very reasonable for this type of plan.
Set-up, maintenance and contributions
Setting up a WV Smart529 Select account was a breeze. I was able to establish and fund the account directly online, and also enrolled in the Automatic Investment Program which transfers money from my bank account into the 529 account each month. The minimum initial investment to open an account is very low, only $250.
The plan also makes investing simple by offering Age-Based Portfolios, which are managed by DFA and automatically shift in allocation every 3 years as the beneficiary grows older. For example, when the child is between 0-3 years of age, the portfolio will be invested in 100% stocks. When the child turns 19 or older, the portfolio will be 20% stocks, 80% bonds and cash. This provides for greater growth potential while the child is younger, but increases capital preservation potential as the child approaches college. The plan also offers Static Portfolios that don’t change with age, but for my money the Age-Based Portfolios are a simple and elegant solution.
Four years into it, I’m still making monthly contributions into my niece’s WV Smart529 Select account. I intend to continue this until she finishes college, wherever she may go. She probably won’t realize all of the thought that went into selecting this plan for her; she may simply know that her uncle loves her and has planned ahead for her future. I, however, will know that I have used the best tool for the job, and that gives me tremendous satisfaction.
While all 50 states offer some type of 529 plan, only 18 states offer the prepaid tuition variety. Some of these prepaid tuition plans are now closed to new enrollment, but Washington’s Guaranteed Education Tuition (GET) plan is still available to Washington residents (and WA residents only). It is only one of five prepaid tuition plans in the country that is guaranteed by the full faith and credit of the state. The GET was created in 1998 and is Washington’s only 529 plan.
How GET works
In a nutshell, account owners can purchase up to a maximum of 500 GET “units” at a specified price and redeem those units for college expenses in the future. 100 units represent the cost of one year of resident, undergraduate tuition and state-mandated fees at Washington’s most expensive public university (either the University of Washington or Washington State University). Individual units are worth 1/100th of that cost. For the 2011-2012 academic year, GET units paid out at a rate of $102.23 per unit. Account owners can use up to 125 units per year, plus any rollover units from a prior year, to pay the cost of qualified education expenses.
At Merriman, we often help our clients plan for more than just retirement. One topic that commonly comes up is saving for college. My colleague, Lowell Lombardini Parker, wrote about the various college savings options in an earlier post, and this three-part series will focus specifically on the 529 plans highlighted in his article. Part I will review 529 plan basics; Part II will evaluate Washington’s 529 prepaid tuition plan, known as the GET; and Part III will take a look at the best 529 savings plan we know – the West Virginia Smart529 Select. (more…)