Author: Anders Skagerberg

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Are You Retiring In The Next 5 Years? Here Are 3 Critical Steps To Help You Prepare

Executive Summary:

  • As you approach retirement, it’s important to take steps to help ensure a smooth transition. This article highlights three critical steps you can take to get you ready for your work-free years.
  • First, figure out what you’re retiring to: Beyond financial readiness, it’s essential to plan for how you’ll spend your time in retirement, ensuring you maintain a sense of purpose, fulfillment, and connection.
  • Second, review your investments and adjust as needed: Assess your current asset allocation and make necessary adjustments to align with your risk tolerance and income needs as you near retirement.
  • Third, plan your retirement paycheck: Develop a detailed strategy for how you’ll draw income from your retirement accounts, considering the frequency of payments and the tax implications of withdrawals.

Retirement is one of the biggest financial transitions there is, marking a major shift from your working years to your work-free years. As such, it’s critical to prepare, often decades in advance, for this big moment.

But, while many start preparing for retirement in advance by funding retirement accounts and paying off debt, there are a few critical (and timely) steps that can easily get overlooked. In this article, we will cover three critical steps to prepare for retirement in the next five years.

Let’s dive in.

Step #1: Figure Out What You’re Retiring To

It’s natural to view retirement readiness as a math equation: you figure out how much money you need to stop working (adjusted for inflation), hit that number, and then sail off into the sunset. But, the reality is that financial readiness is just one piece of the puzzle, and for many, it’s the simple part.

The more challenging piece of the puzzle is figuring out a) what you’ll do every day and b) how you’ll maintain a sense of purpose. For many soon-to-be-retirees, this may sound silly, as people often imagine filling their free time will be a piece of cake, especially when they’ve had such little free time outside of their careers.

But, the truth is that retirement is a major lifestyle change so it’s important to have a plan in place for how you’ll spend your time.

So, as you approach retirement, take some time to think about what you want your retirement day-to-day to look like. Do you want to travel? Volunteer? If so, where will you travel, and where will you volunteer? Will you pursue a hobby or passion project? Again, get specific: what hobby or hobbies will you focus on?

Zooming in even further, what will an average day look like for you? What time will you wake up? How will you start your day? Answering each of these questions can help prepare you to make the transition as smooth as possible.

Additionally, consider how much physical activity and social interaction you will need.

Unfortunately, many retirees struggle with depression, stress, and anxiety, so finding activities that keep you active and engaged with others can greatly enhance your overall retirement experience. Also consider that, for many, work not only filled the majority of their time but also provided a sense of friendship and community through their coworkers. In addition, many received a sense of purpose through work as they were continually working toward and achieving goals and improving their craft. So, it’s essential to be mindful of the different areas of your life that work impacts and have a plan for how you will recreate that in retirement.

Ultimately, remember that planning for retirement goes beyond just financial readiness—it’s about designing a life that brings purpose and fulfillment. By considering how you’ll spend your time and maintaining connections, you can create a truly rewarding retirement.

For more insights on navigating the complexities of retirement, check out our previous post: Struggling in Retirement? How to Make the Most of Your Golden Years by Understanding and Navigating the 4 Phases of Retirement from Dr. Riley Moynes.

Step #2: Review Your Investments & Adjust As Needed

Next, as you approach retirement, it’s critical to review your investments and adjust as needed, specifically review and adjust how your investments are allocated.

But First, What is ‘Asset Allocation?’

Put simply, asset allocation is the process of dividing your investments among different types of assets, like stocks, bonds, and cash, to balance risk and reward based on your financial goals and risk tolerance.

In other words, your asset allocation is the mixture of stocks and bonds within your investments.

For many, when they are young and have a long time until retirement, their assets will be allocated more aggressively, often ranging anywhere from 100% stocks to 80% stocks and 20% bonds. Alternatively, those approaching or in retirement often dial down their stocks, adding more bonds to help limit the swings within their portfolio. This often ranges anywhere from 70% stocks and 30% bonds to a more balanced portfolio, with 50% stocks and 50% bonds.

All that said, the interesting thing about asset allocation is there’s really no one-size-fits-all.

For example, there are young people with a long time horizon who simply aren’t interested in the volatility that can come with a more aggressive investment portfolio, so they dial back their stock allocation early on. Alternatively, some retirees are comfortable taking more risk or simply have such significant assets that they can weather any volatility that could come their way without the impacting their financial plan. So, they may opt for a more aggressive asset allocation, realizing that they will have a more volatile portfolio over time, but they can often expect greater returns over time, though nothing is guaranteed.

The point is, while there’s no standard portfolio for every retiree, it is critical to review your investments and adjust as needed.

Here are some things to consider as you review and adjust:

  • Your Risk Tolerance: As you approach retirement, it’s important to assess how comfortable you are with the possibility of losing money in the short term. If the idea of seeing your investments drop in value keeps you up at night, you might want to consider shifting to a more conservative asset allocation. On the other hand, if you’re confident in your ability to ride out market ups and downs, you may decide to maintain a higher percentage of stocks.
  • Your Income Needs: Consider how much income you’ll need to generate from your investments once you retire. If you’ll be relying heavily on your portfolio for income, a more conservative allocation with a higher percentage of bonds or dividend-paying stocks could provide more stability and predictable income. However, if you have other sources of income, such as a pension or Social Security, you might be able to take on more risk in your investments.
  • Rebalancing: Over time, as different parts of your portfolio grow at different rates, your asset allocation can drift from your original plan. Regularly reviewing and rebalancing your portfolio ensures that it stays aligned with your goals and risk tolerance. This might mean trimming some of your winners and buying assets that haven’t performed as well to bring your portfolio back into balance.
  • Tax Implications: Keep in mind that selling investments to adjust your asset allocation can have tax consequences in certain accounts like trust accounts or taxable brokerage accounts. Be sure to factor in any potential capital gains taxes when making changes to your portfolio.
  • Consulting a Financial Advisor: Lastly, if you’re unsure about the best asset allocation for your situation, or if you’re finding it challenging to make these decisions on your own, consulting with a financial advisor can be invaluable. They can provide personalized advice based on your unique financial situation and help you create a plan that aligns with your retirement goals.

Ultimately, taking the time to carefully review and adjust your investments as you near retirement can help ensure that your portfolio is positioned to support your lifestyle and goals in the many years to come.

Step #3: Plan Your Retirement Paycheck

Lastly, as you approach retirement, it’s time to plan your retirement paycheck.

One of the biggest shifts you’ll experience from working to not working is that you’ll no longer receive a paycheck from your employer. And while this may seem obvious, it’s important to spend some time planning how you will create your new retirement paycheck.

In other words, what accounts will you distribute funds from each week, month, quarter, or year to cover your living expenses? How much do you need? What account will the money go into? How will you handle one-off expenses?

As you create a plan, get as detailed as possible by answering these three questions below:

1. How much do you need? One of the big questions to answer in retirement is how much money you will need to cover your lifestyle. For many it can be fairly simple: take what you were earning before retirement, add any new retirement expenses (think: bigger travel budget), subtract out any retirement savings or contributions you were making during your working years, and subtract out any expenses that fall off during retirement (think: paid off mortgage). That’s the amount you will need to generate with your retirement paycheck.

It’s also important to consider any one-off expenses that may come up during retirement, such as buying a new car or home renovations. When creating a retirement plan, be sure to factor in these potential expenses so you can have a cushion for these expenses that fall outside your normal ‘retirement paycheck.’

2. How often will you get paid? Next, when planning for retirement, it’s important to consider the frequency of your income. For many people, sticking with a payment schedule they are used to is the best option. This could mean receiving payments every two weeks, as they did during their working years. However, it’s also important to note that certain types of retirement income, such as pensions and social security, are typically paid monthly. In addition, depending on how your investments are set up and allocated, you may not like the extra work that comes with creating your own retirement paycheck each month or every couple of weeks (selling investments, raising cash, etc) so you may decide that quarterly or even annually feels like a better fit. Whatever the case, the important thing is to get specific about how often you’ll be getting paid so you have a plan.

3. Where will the money come from? Lastly, spend some time planning the breakdown of your retirement paycheck. In other words, if you need $10,000 per month, where will that money come from? If you’ve got pensions and Social Security that total around $5,000 per month then you’re already halfway there.

As you create a plan, consider all the different types of investments you have and the tax implications of each. For example, many retirees have a mixture of tax-deferred (often called pre-tax or “Traditional” assets), tax-free (often called after-tax or “Roth” assets), and taxable accounts. As you create your retirement paycheck, remember that taking money from each of these different investment accounts will have different tax implications.

  1. Traditional assets will be taxed as ordinary income at your highest marginal tax rate.
  2. Roth assets will be completely income tax-free.
  3. Taxable assets will have a mix of ordinary income rates (at your highest marginal tax rate) and more favorable long-term capital gains rates, ranging from 0 to 20%.

So, as you create your plan, be mindful of where you are each year from a tax perspective.

If you have the opportunity to fill lower tax brackets with ordinary income, that can be a great plan. Alternatively, if your income for the year is pushing you into a higher tax bracket than you want, consider utilizing your Roth accounts to create tax-free income. In the end, while this step will likely take some time and planning, it can be well worth it to create a tax-efficient retirement paycheck.

Conclusion: Wrapping Up Your Retirement Readiness

Ultimately, preparing for retirement in the next five years requires careful planning and thoughtful adjustments to ensure a smooth transition into this new chapter of life.

By taking the time to understand what your retirement will look like, reviewing and adjusting your investments, and planning your retirement paycheck, you can position yourself for a financially secure and fulfilling retirement. Remember, the key is to start now and stay proactive, so you can enjoy your golden years with confidence and peace of mind.

This blog post was also published as an article on LinkedIn

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

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‘Tis the Season of Giving: How to Maximize the Impact of Your Gifts with Smart Financial Planning

As the year draws to a close, many people feel inspired to give back, whether to the causes they care about or to the people who mean the most to them. 

Whether you’re considering charitable donations or financial gifts for family members, understanding the financial implications of these gifts can make your generosity go further. 

Here’s a financial planning guide to charitable and family gifting to make this season even more impactful.

Giving to Charity

Charitable giving allows you to support the causes you’re passionate about, often with the added benefit of tax savings. Understanding specific strategies for charitable contributions can maximize your impact, ensuring more of your gift reaches the charity and less goes to taxes.

Tax Benefits: Understanding the Basics

Tax benefits for charitable donations are only available when donations are made to qualified organizations, such as 501(c)(3) nonprofits. Additionally, these benefits apply only if you itemize deductions rather than taking the standard deduction. Some people maximize tax savings through a “bunching” strategy, where they combine donations in one tax year to surpass the standard deduction threshold.

Qualified Charitable Distributions (QCDs)

Qualified Charitable Distributions (QCDs) offer an effective way for individuals 70½ or older to make charitable donations directly from their IRAs, potentially reducing taxable income. Here are the main considerations:

  • Eligibility: You don’t have to be taking required minimum distributions (RMDs) to use a QCD. As long as you’re 70½, you can make QCDs.
  • Limit for 2024: The QCD limit is $105,000 per individual, adjusted annually for inflation.
  • Reporting Requirements: The forms used to report IRA distributions don’t indicate if a QCD was made. To ensure this distribution is not taxed, communicate with your tax preparer and inform them of your QCD and the amount.

Donating Appreciated Stock

If you have stocks or other assets that have appreciated in value, donating them to charity can provide substantial tax savings:

  • Comparison: If you sell appreciated stock, you’ll owe capital gains tax before donating the proceeds, reducing the overall impact of your gift. Donating the stock itself avoids capital gains tax and provides a deduction based on the stock’s full market value.
  • Additional Benefit for Charities: Charities can sell the stock without any tax obligation, keeping the full value. This effectively removes taxes from the equation, maximizing funds for both you and the charity.
  • Use with Donor-Advised Funds (DAFs): Appreciated stock can also be contributed to a DAF, offering an immediate tax deduction while allowing you to decide which charities to support over time.

Donor-Advised Funds (DAFs)

DAFs allow you to contribute assets, claim an immediate tax deduction, and choose when and how to distribute funds to charities. This flexibility can be especially useful in years of unusually high income:

  • Tax Savings in High-Income Years: By contributing more to a DAF during high-income years, you can reduce the amount taxed in the highest bracket, often resulting in significant savings.

Giving to Family

In addition to supporting charities, many people choose to share financial gifts with family members. By planning these gifts carefully, you can help loved ones while minimizing tax implications.

Annual Gift Exclusion

The annual gift exclusion is a straightforward way to transfer wealth to family members without incurring gift tax. For 2024, you can give up to $18,000 per recipient, per year. Here’s how it works:

  • Gift Limit: Each individual can gift up to $18,000 per recipient annually without affecting their lifetime estate exemption. For instance, a couple could gift a combined $36,000 to each child without using any of their lifetime exemption.

Advanced Strategy: Annual Gifting through Irrevocable Trusts

For high-net-worth families, annual gifting can be elevated by establishing irrevocable trusts for grandchildren or other heirs. This strategy allows assets to grow over time on behalf of the beneficiaries while still taking advantage of the annual gift exclusion:

  • How It Works: By contributing the annual exclusion amount into an irrevocable trust each year, you can gift money that grows tax-free within the trust for the grandchild’s future needs, ensuring that the funds remain in the family’s financial plan.
  • Legal Considerations: To qualify the gift for the annual exclusion, specific rules must be followed to show that it’s a “present interest” gift. This often involves Crummey Powers, which give beneficiaries a temporary right to withdraw the funds, ensuring eligibility under IRS guidelines.
  • Importance of Expert Guidance: This strategy is complex and requires precision. An estate attorney can guide you through the rules, explain Crummey Powers, and ensure the trust meets legal standards for tax purposes.

Lifetime Exemption and Gift Tax Considerations

For gifts that exceed the annual exclusion, the excess amount counts toward the lifetime estate and gift tax exemption, which is $13.61 million per individual ($27.22 million per couple) in 2024. However, this amount is set to change:

  • Upcoming Reduction: Under the Tax Cuts and Jobs Act (TCJA), the lifetime exemption is scheduled to revert to around $6 million per individual when (or if) the act sunsets in 2026. Staying informed of these changes can help guide your long-term estate and gifting strategies.

Direct Payments for Medical or Education Expenses

There is an exception to gift tax rules for direct payments made to healthcare providers or educational institutions:

  • How It Works: Payments made directly to cover medical or educational expenses don’t count toward your annual gift exclusion or lifetime exemption.
  • Important Caveat: To qualify for this exemption, payments must be made directly to the provider or institution. If you give the money to a family member to pay the expenses, it will count toward the annual exclusion.

Gifting to 529 Plans

Helping a family member with future education costs is a meaningful way to support their goals. 529 college savings plans grow tax-free when used for qualified educational expenses.

  • Gift Acceleration: You can front-load 529 plan contributions by making five years’ worth of gifts at once—up to $180,000 for a couple—without using your lifetime exemption. However, only the account owner is eligible for any state tax benefits associated with contributions, so it may make sense to let the primary contributor (often a parent or grandparent) own the account.

The Importance of Planning Your Giving

Whether you’re supporting a meaningful cause, helping family members, or both, strategic planning can enhance your impact and ensure your gifts align with your financial objectives. The holiday season provides a perfect opportunity to reflect on these goals, making the most of your giving today and for future generations.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

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From Shirtsleeves to Success: Ensuring a Lasting Financial Legacy

Executive Summary: 

  • Creating a lasting financial legacy involves more than just wealth; it requires instilling values, open communication, and comprehensive planning to avoid the common “shirtsleeves to shirtsleeves in three generations” cycle.
  • Key strategies include early and frequent communication, recognizing that a legacy is more than money, establishing a robust estate plan, educating the next generation on financial literacy, and empowering rather than entitling heirs.
  • By focusing on these areas, families can ensure their wealth continues to benefit future generations while preserving the values that matter most.

After securing your own financial success, it’s natural to look to the next generation and consider the financial legacy you will leave behind.

And for most, that financial legacy is more than just money; it’s the impact they have, the opportunities they create, and the values they instill. 

But, unfortunately, while many hope their legacy and wealth will provide lasting benefits for generations to come, that’s rarely the case, writes Courtney Pullen, author of Intentional Wealth: How Families Build Legacies of Stewardship and Financial Health. Instead, Pullen writes that roughly 90% of affluent families lose their wealth by the end of the third generation—a phenomenon referred to as going from “shirtsleeves to shirtsleeves in three generations.” 

In his book, he attempts to answer the critical question: What are the other 10% doing? And more importantly, how can you apply this to your family? To that end, here are five essential strategies to prevent the shirtsleeves to shirtsleeves in three generations cycle that plagues many wealthy families.

Strategy #1: Communicate Early and Often

Communication is key, especially when it comes to your financial legacy.

Through open, honest, and clear communication, you can create an environment of understanding, clear expectations, and continuity between generations. Alternatively, without it, you can end up with confusion, unclear or unmet expectations, and worst of all, family members fighting amongst themselves over who gets what. 

But, as Pullen writes, good communication doesn’t mean you discuss everything and of course, no family is going to be perfect, but successful families practice what he calls skillful communication. That is: they talk about the issues that need to be talked about and they do so without putting each other down. 

To highlight the importance of communication, Pullen uses the example of The Mitchells, a couple in their 60s who owned a successful manufacturing business and consulted Pullen over concerns about their son. Ultimately, Pullen discovered that their son, who had started his own manufacturing business but was running it into bankruptcy, “hated the business”, but was in it because he felt it was “the only way to get his parent’s approval.” 

But, when Pullen discussed this with his parents, they replied, “We don’t care what business he’s in as long as he’s happy. In fact, we’d just as soon he tried some other field that’s less risky.” Ultimately, this knowledge led their son to sell his business, go back to school for an advanced degree in history, and pursue a rewarding career as a professor at a community college. 

Pullen goes on to explain that he’s seen many similar situations when working with wealthy families, especially when there’s a family-owned business involved, and often, he can trace the roots of these long-term challenges back to failed communication.  

To avoid this, here are some practical tips to consider:

Practical Tips:

  • Schedule Regular Family Meetings: Set up regular family meetings to discuss the family’s financial situation, goals, and plans. These meetings can be a platform for educating younger family members and addressing any concerns.
  • Encourage Questions: Foster an environment where family members feel comfortable asking questions and seeking clarity on financial matters. This builds their confidence and understanding over time.
  • Involve Multiple Generations in Planning: Include younger generations in financial discussions and legacy planning. This not only educates them about financial management but also ensures that they understand the values and intentions behind the legacy, leading to better stewardship in the future.

Strategy #2: Realize That Your Financial Legacy Is More Than Money

Next, it’s important to keep in mind that a financial legacy isn’t just about passing on money; it’s about passing on the core values and ethics that will guide how that money and opportunity are used. In other words, it’s about passing on what your family stands for.

But, before you can do that, families must first identify what they stand for.

And the beauty of this is that there is no one-size-fits-all for every family, every generation, or every individual. So, Pullen recommends that families first work to establish what is important to them and create their own family culture by defining their core values. 

Some examples of core values could include:

  • Intentionality: Making deliberate and thoughtful decisions about how wealth is managed and utilized.
  • Work Ethic: Valuing hard work and dedication as key components to sustaining and growing wealth.
  • Responsibility: Understanding the importance of stewardship and being accountable for financial decisions. 
  • Humility: Recognizing that wealth is a tool, not a measure of self-worth, and staying grounded in one’s values.
  • Philanthropy: Committing to using wealth to give back to the community and support causes that align with family values.

One of my favorite lines in Pullen’s book comes from a “second-generation owner of a flourishing family business” who said that one of their core family values is: “We don’t go around acting like rich folks.” To their family, being humble with their wealth was critical to their family identity.

Again, these are just examples, and it’s up to each family to identify the core values that are important to them to ensure they are part of their legacy. At the end of the day, the most lasting financial legacies are those that carry forward the values and beliefs that make your family unique, making sure that the money isn’t just preserved, but used in ways that matter to everyone involved.

Strategy #3: Establish a Comprehensive Estate Plan

Next, one of the most effective ways to preserve wealth across generations is with a well-structured estate plan. 

Done right, a comprehensive estate plan ensures your assets flow directly to who you want, when you want, according to your exact wishes. Alternatively, failing to create a comprehensive estate plan can lead to confusion, assets being distributed based on what the court decides, and even disagreements among family members about what your wishes may have been. 

Estate planning tools like wills, trusts, and powers of attorney are critical elements of your estate plan. These documents allow you to get very specific about who gets what, when they receive it, and any potential requirements or conditions they must meet to become eligible for an inheritance. 

Of course, the details of each plan will vary based on the specific circumstances of each family and their overall goals and desires with wealth, but the point is that these documents are the best way to ensure your wishes are carried out and avoid any confusion about how you want your wealth to be transferred to the next generation.

Practical Tips:

  • Professional Guidance: Work with a financial advisor and estate attorney to create or update your estate plan. These professionals can help you navigate the complexities of estate planning and ensure that your plan is tailored to your specific needs and goals.
  • Regular Reviews: Regularly review and adjust your estate plan as circumstances change, such as the birth of new family members, marriage or divorce, or shifts in financial goals. A good rule of thumb to consider is that if you’ve had a birthday that ends in a 5 or a 0, it’s a good time to review and potentially update your estate plan as needed. 
  • Discuss your Plan: Lastly, going back to the importance of communication – consider discussing your estate plan with the next generation. Of course, this doesn’t mean you need to share the details of who gets what or how much they get, but rather, this is an opportunity to explain why you’ve structured things the way you have, who will be in key roles, and any important decisions you’ve made. This can help avoid any confusion or conflicts down the line and ensure that your wishes are understood and respected.

By proactively establishing a comprehensive estate plan and regularly reviewing it, you can ensure your wealth is preserved and transferred according to your wishes, minimizing the risk of confusion or conflict among your heirs.

Strategy #4: Educate the Next Generation on Financial Literacy

Even with the best estate plan, generation wealth will not last if the next generation lacks the knowledge and skills to manage it effectively. That’s why financial literacy is a critical component of preserving and growing wealth across generations.

The Role of Education

Providing your heirs with a strong foundation in financial literacy equips them to make informed decisions and avoid common financial pitfalls. This education should go beyond the basics of saving and investing; it should include an understanding of the family’s financial goals, the responsibilities that come with wealth, and the tools available to manage it effectively.

For many affluent families, this expertise can be enhanced with the help of trusted financial professionals, like financial advisors, accountants, and attorneys. That said, it’s essential that each family member still have a baseline level of financial education, even if they work with trusted professionals. This ensures that they have the knowledge and skills to oversee their team of professionals and ensure their wealth is positioned to last for many generations to come. 

Practical Tips:

  • Formal Education: Consider providing formal financial education for your heirs, whether through courses, workshops, or seminars. This can help them build a solid understanding of financial concepts and strategies.
  • Practical Experience: Encourage your heirs to gain practical experience by managing smaller family funds, engaging in philanthropic activities, or overseeing specific investments. This hands-on experience can be invaluable in building their financial acumen.

By equipping the next generation with financial literacy and practical experience, you empower them to make informed decisions and maintain the family’s wealth for generations to come.

Strategy #5: Empower, Don’t Entitle

Last but not least, it’s critical to take steps to empower the next generation, not entitle them.

One of the interesting points that Pullen makes in his book is that it’s no surprise so many affluent families end up with an entitlement problem. In fact, he points out that entitlement is a pretty normal part of being human as he writes: “No matter what comforts, indulgences, or rewards we get, or whatever lifestyle we become accustomed to, it doesn’t take long for us to start assuming we’re entitled to that lifestyle and have a right to keep it.” 

The challenge is that those in affluent families typically don’t come up against many of the common financial limitations that others face as Pullen writes “money dissolves many limits.” As a result, Pullen explains that it’s common for kids in affluent families to grow up thinking things like: 

  • “I deserve it and I should have it.”
  • “I should always get everything I want.”
  • “My needs and wants should always come first.”

So how can you avoid this? Fortunately, Pullen highlights five key factors that successful families incorporate to shift from entitlement to empowerment:

  1. Be intentional: Accept the responsibility and advantages of wealth and create an intentional plan for how you will use your wealth.
  2. Focus on future generations: Educate the next generation on financial literacy. 
  3. Communicate Openly: Again, successful families talk about the issues that need to be talked about and do so without putting each other down.
  4. Create a family identity: Remember that financial legacy is more than just wealth and spend time discussing the core values that will make up your family identity. 
  5. Redefine success: Lastly, keep in mind that “success” will look different for each generation. For example, success for the first generation is often defined by the businesses they’ve built or the wealth they have created. But, for second and third generations, success could mean ensuring that the wealth is managed effectively and each member of the family is realizing their full potential. 

By focusing on intentionality, education, open communication, and a strong family identity, you can shift from entitlement to empowerment, ensuring that each generation is prepared to uphold and build upon the family legacy.

Conclusion: How to Build a Legacy That Lasts

In the end, creating a lasting financial legacy requires more than just accumulating wealth; it involves careful planning, open communication, and a commitment to instilling values and educating the next generation. By taking these steps, you can help ensure that your wealth not only endures but also continues to benefit your family for generations to come. 

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

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Transferring Wealth: The Pros and Cons of Giving While You’re Alive vs After You’re Gone

Executive Summary

  • When transferring wealth, there are pros and cons to giving while you’re alive versus after you’ve passed.
  • For starters, transferring wealth after death ensures control during your lifetime and potential tax benefits after death, but may come too late to be truly impactful for your heirs.
  • Alternatively, gifting wealth during your lifetime allows you to see the positive effects and provides immediate support for your beneficiaries but could risk your financial security and possibly create financial dependence.
  • In the end, balancing these approaches involves considering tax implications, family dynamics, and your own financial security.

When it comes to transferring wealth, the default approach for most is to pass along an inheritance after you die, or give with a “cold hand.” And this makes sense in many ways, not only because of the tax benefits involved (your heirs can receive a favorable “step-up” in cost basis for certain assets) but also because it ensures that you still have access to your wealth while you’re alive—a key concern for many as people are living longer and medical costs are rising.

However, some financial experts argue that inheritances often come too late to be truly beneficial. Bill Perkins, author of “Die with Zero,” suggests that gifting money earlier, when it’s the most needed, can be a wise decision. He believes that waiting until after death to transfer wealth means missing the opportunity to see the positive impact your gifts can have and possibly delaying support until a time when it is less meaningful. 

In his book, Bill tells the story of a woman who had recently gone through a divorce and was struggling to make ends meet as a single mom. Decades later, after her financial situation had stabilized, she inherited a significant sum from her parents. Reflecting on that experience, Bill writes that she would have much rather received even a fraction of the money decades earlier when it would have had a major impact on her ability to make ends meet at a critical time. This example highlights the importance of timing and not waiting until it is too late to make a difference.

In this article, we will explore the pros and cons of giving with a “warm hand” and a “cold hand”. By considering different factors such as tax implications, family dynamics, timing, and your own financial security, our goal is to help you make an informed decision that aligns with your unique values, goals, and personal situation.

Giving With a Cold Hand

Simply put, giving with a cold hand means waiting to transfer your wealth until after you die.

First, let’s explore some of the benefits to this approach:

Pros of Giving with a Cold Hand

Here are some of the key benefits of waiting until after death to transfer your wealth:

Tax Benefits: One of the main advantages of waiting to transfer wealth until after your death is the potential for significant tax savings. Your heirs may benefit from a “step-up” in cost basis for certain assets, which can reduce capital gains taxes if they decide to sell the inherited assets. For example, if you bought stock for $20/share but it is now worth $100/share, typically if you sold the stock you would have to pay taxes on the gain of $80. But, if your heirs inherit the stock when it’s worth $100/share, the cost basis (the amount you paid for it) then shifts from $20 to the current market value of $100/share. The result is that if your heirs sold the stock immediately when they inherited it, there would be no taxable gain. 

Control and Security: By retaining your assets during your lifetime, you maintain total control over your wealth. This can provide peace of mind, knowing you have the necessary funds for any unexpected expenses or long-term care needs.

Legacy Planning: Waiting until after death to distribute your wealth can also allow for a more structured and planned approach. This can include setting up trusts with specific instructions to ensure your wealth is used and distributed for generations to come, according to your wishes.

Ultimately, there are some key benefits to giving after death as it can provide tax benefits for your heirs, allow for more control and security during your lifetime, and enable you to create a lasting legacy. 

Cons of Giving with a Cold Hand

Alternatively, here are some of the cons of giving with a cold hand:

No Immediate Benefit: First, a major drawback to this approach is that you won’t be able to witness the positive impact your wealth can have on your heirs right now, reducing the satisfaction you can get when transferring wealth.

Potential for Higher Taxes: Also, despite the tax benefits that can come from passing on assets after death, depending on the size of your estate and the current estate tax laws, your heirs might face significant estate taxes, which could reduce the amount of wealth they ultimately receive. Currently, with the lifetime exemption amount hovering around $13.61M per person (the amount you can transfer to your heirs free of estate taxes) this is not a huge consideration for many. That said, the current amount is set to expire on December 31st, 2025, and will be reduced to $5.6M per person if Congress does not extend the current laws. This is where smart financial planning can be critical as you navigate the complexities of estate taxes.

Family Disputes: Delaying the distribution of your wealth until after your death can sometimes lead to family disputes or conflicts over the inheritance, particularly if there are disagreements about your intentions or the terms of your will. Alternatively, by making gifts while you’re alive, your heirs can rest assured that your wishes are being carried out as you intended. 

Less Impactful Timing: As Perkins highlights, inheritances often come when recipients are already financially stable. On average, people receive inheritances around the age of 50, a time when many are already financially secure. Alternatively, many could have used the funds in their 30s or 40s as they were starting families, buying homes, and often paying off student loan debt.

In summary, while giving with a cold hand allows for tax benefits, control, and security during your lifetime, it means you won’t see the positive impact on your heirs and could lead to less impactful timing of the inheritance. Next, let’s explore “giving with a warm hand,” which involves making gifts during your lifetime to ensure your wealth benefits your loved ones when they need it most.

Giving with a Warm Hand

Giving with a warm hand is the concept of transferring wealth to your heirs while you are still alive.

This approach to estate planning goes against the traditional notion of passing down assets after death and instead focuses on sharing your wealth with loved ones during your lifetime. By giving with a warm hand, you can witness the impact of your generosity and ensure that your loved ones are financially secure and supported while you are still here. In some ways, it can also allow for more control over how your wealth is distributed today and can help minimize potential conflicts among heirs. 

Ultimately, for some, giving with a warm hand can allow for a more personal and fulfilling way of passing down wealth to future generations.

Pros of Giving with a Warm Hand

Immediate Impact: By gifting your wealth during your lifetime, you can see firsthand how your generosity benefits your heirs. This can be especially rewarding if the funds are used for meaningful purposes such as education, starting a business, or buying a home.

Tax Benefits: There are also certain tax advantages to gifting during your lifetime. For example, you can take advantage of the annual gift tax exclusion ($18,000 per person per year for 2024) and potentially reduce the size of your taxable estate, which could lower total estate taxes upon your death.

Strengthened Relationships: Providing financial support while you’re alive could also strengthen family bonds and foster a sense of gratitude and responsibility among your heirs. It also allows you to offer guidance and support in managing their inheritance.

More Meaningful Timing: As mentioned, by giving to your heirs in their 30s and 40s, you may be able to give financial support when they need it most – when starting a business, buying a home, or raising a family. This can make your gift even more meaningful and impactful for both you and your heirs.

Cons of Giving with a Warm Hand

While giving with a warm hand has many benefits, there are also potential drawbacks to consider:

Reduced Financial Security: Gifting substantial amounts of wealth during your lifetime can potentially compromise your financial security, especially if unexpected expenses arise or if you live longer than anticipated. That’s why it is critical to understand how much you need to sustain yourself throughout the rest of your life, build in a very conservative and healthy buffer, and ensure that you have adequate resources to cover yourself before giving away large sums of money.

Complexity: Lifetime gifting can also add complexity to your financial plan, especially when gifting different amounts to different beneficiaries over time, which may ultimately affect how you want the remainder of your wealth transferred after you pass. 

Dependency Risks: Of course, each situation is unique, but there’s a risk that your heirs may also become overly reliant on, or have an ongoing expectation of your financial support, which could hinder their ability to manage their own finances independently. 

In the end, giving with a warm hand involves transferring wealth to your heirs while you are still alive, allowing you to witness the positive impact and provide support when it is most needed. Though it can foster stronger family bonds and offer tax benefits, it requires careful planning to avoid compromising your financial security and creating dependency among your heirs.

Deciding Which Approach is Right for You


Ultimately, understanding your family’s dynamics and financial needs is crucial when deciding how and when to transfer your wealth. Remember, personal finance is personal, and there’s no one-size-fits-all approach.

Fortunately, open communication with your heirs about your intentions and their needs can help prevent misunderstandings and conflicts. Additionally, consulting with a trusted professional is essential to navigate the complex tax landscape associated with transferring your wealth, both before and after death. They can help you understand the tax benefits and drawbacks of both lifetime gifting and bequests. 

And of course, ensuring your own financial security should be a top priority, so working with a wealth advisor to create a comprehensive plan that helps you understand how much money you need to be secure is essential. 

Finally, remember that there are benefits to both approaches, and for some, it may be best to do a little bit of both, rather than focusing exclusively on one approach or the other. As an example, this could mean making annual tax-free gifts to your heirs during your lifetime while still transferring a larger sum after you pass.

In The End

In the end, whether you choose to give with a ‘warm hand’ or a ‘cold hand,’ thoughtful planning, open communication, and professional advice are key. 

By carefully considering the pros and cons, as well as the unique needs of your family, you can create a wealth transfer strategy that provides meaningful support to your heirs while ensuring your own financial security. 

Ultimately, the best approach is the one that aligns with your values and helps you achieve your unique financial goals.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

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Understanding Employee Stock Options

Executive Summary:

  • Employee stock options allow employees to purchase company stock at a fixed price, offering potential gains if the stock price goes up.
  • There are two main types of stock options: Incentive Stock Options (ISOs) with favorable tax treatment and Non-Qualified Stock Options (NQSOs) with more flexibility but less favorable tax treatment.
  • Key considerations for managing stock options include understanding the vesting schedule, timing of exercise, tax implications, concentration risk, market conditions, and aligning with your financial goals.
  • Lastly, consulting with trusted advisors is critical to making informed decisions and maximizing the benefits of your stock options.

Employee stock options are a powerful tool used by many companies to attract, retain, and motivate employees. 

At a high level, they provide employees with the opportunity to purchase company stock at a fixed price, potentially leading to big gains if the stock price goes up. Many well-known companies, like Apple, Google, Microsoft, Amazon, and Tesla, use stock options, including both Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs), to align employee interests with company performance. 

But, it’s not just large publicly traded companies that offer stock options. Many startups and small businesses use stock options as an attractive alternative to high salaries to conserve cash and reward early employees.

If you have stock options, understanding how they work and how to manage them effectively can help you make smart decisions and maximize the benefits they can provide.

First, What are Employee Stock Options?

Employee stock options are contracts that grant employees the right to buy a specific number of shares of the company’s stock at a predetermined price, known as the exercise or strike price, after a certain period known as the vesting period. These options typically have an expiration date, by which time they must be exercised or they will expire. Stock options provide employees with the potential to become shareholders in the company and benefit from its success.

Stock Option Example: 

As an example, a typical stock option might give an employee the right to purchase 1,000 shares of the company’s stock at a strike price of $50 per share. If the stock price rises above $50, the employee can exercise their options and buy 1,000 shares at that lower price, effectively making a profit. Then, employees can decide whether to hold onto the stock or sell it for a profit.

Alternatively, if the stock price drops below $50, the employee can simply choose to wait, either until the price goes up beyond the strike price, or until the options expire, avoiding any potential loss.

Two Main Types of Employee Stock Options

When it comes to stock options, there are two main types: Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs).

What are Incentive Stock Options (ISOs)?

Incentive stock options are company stock options granted to employees that may provide tax benefits if certain conditions are met.

  • Tax Advantages: ISOs offer favorable tax treatment if certain conditions are met. When employees exercise ISOs, they do not have to pay regular income tax on the difference between the exercise price and the fair market value of the stock. Instead, this difference, known as the “bargain element,” is subject to Alternative Minimum Tax (AMT). Then, if the shares are held for at least one year after exercise and two years after the grant date, any gain on the sale of the shares is taxed at the more favorable long-term capital gains rate.
  • Eligibility: ISOs can only be granted to employees (not to directors, contractors, or consultants).

Ultimately, ISOs can be a valuable tool for both employers and employees. They can serve as a way to incentivize and reward top-performing employees, while also providing tax benefits for both parties. But, because there’s a layer of complexity involved in receiving favorable tax treatment, it’s essential to consult with a trusted advisor before executing your options.

What are Non-Qualified Stock Options (NQSOs)?

Non-qualified stock options are a type of employee stock option that allows employees to purchase company stock at a fixed price, with fewer restrictions and no special tax benefits compared to incentive stock options.

  • Tax Treatment: NQSOs do not qualify for special tax treatments. When employees exercise NQSOs, the difference between the exercise price and the fair market value of the stock is taxed as ordinary income at their highest marginal rate. This amount is also subject to payroll taxes. Then, any subsequent gain or loss upon selling the stock is treated as capital gain or loss.
  • Flexibility: NQSOs can be granted to employees, directors, contractors, and others, providing greater flexibility for the company.

Ultimately, NQSOs can be a valuable tool for companies looking to attract and retain top talent, even without the same tax benefits as ISOs. By offering employees the opportunity to purchase company stock at a discounted price, NQSOs can act as a powerful incentive for them to perform well and contribute to the company’s success.

Key Considerations for Managing Stock Options

When it comes to your stock options, planning is key. Here are some important considerations to keep in mind when managing your stock options:

  1. Vesting Schedule: Understand the vesting schedule of your options. Vesting determines when you can exercise your options and purchase the shares. Options typically vest over a period of time, such as four years, with a portion of the options vesting each year.
  1. Exercise Timing: Deciding when to exercise your options can have significant implications. For example, when exercising ISOs, many try to avoid exercising during a year with high income to minimize the alternative minimum tax (AMT) implications. In addition, there are certain rules to consider, such as not exercising more than $100,000 in ISOs in a given year AND the 10-year time limit to exercise your options from the grant date.
  1. Tax Implications: Consult a tax advisor to understand the tax consequences of exercising and selling stock options. The timing of your exercise and sale, as well as the type of option (ISO or NQSO), can significantly impact your tax liability.
  1. Concentration Risk: While stock options can provide substantial financial rewards, they also carry risk. Relying too heavily on company stock (when you already rely on them for a paycheck) can expose you to significant financial risk if the company’s stock price falls or the business falters. Diversifying your investment portfolio is crucial to managing this risk.
  1. Market Conditions: Consider the current market conditions and the performance of your company when deciding to exercise and sell your options. While no one knows what the future holds, it’s wise to weigh everything you know about the company with what you know about the current state of the market as market volatility can affect the value of your stock options.
  1. Financial Goals: Align your stock option strategy with your overall financial goals. Whether you plan to use the proceeds for retirement, buying a home, or other financial objectives, having a clear plan can guide your decisions.

These are just a few of the key considerations to keep in mind when it comes to managing your stock options. As always, it is important to consult with a trusted professional for personalized advice based on your unique situation.

Remember that stock options can be a valuable asset but also come with potential risks and complexities. By understanding the basics and carefully considering your options, you can make informed decisions that align with your financial goals.

Conclusion

In the end, employee stock options can be a valuable component of your compensation that can lead to significant gains if managed wisely. Understanding the different types of options, their tax implications, and the strategies for exercising and selling them is essential. By considering these factors and consulting with trusted advisors, you can make informed decisions that align with your unique goals and risk tolerance.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

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How to Make the Most of Your Golden Years

Understanding and Navigating the 4 Phases of Retirement from Dr. Riley Moynes

Executive Summary:

  • Retirement involves significant financial and emotional transitions, impacting routines, identity, and purpose.
  • Dr. Riley Moynes’ framework of four phases helps retirees navigate these changes: the vacation phase, the loss and lost phase, the trial and error phase, and the reinvent and rewire phase.
  • Addressing emotional challenges is crucial to avoid depression and find fulfillment in retirement.
  • Engaging in meaningful activities and serving others can lead to a rewarding and purpose-driven retirement.
  • Lastly, understanding these phases and staying proactive ensures retirees can make the most of their golden years.

Retirement is one of the biggest financial transitions of your life, so many prepare for years or even decades in advance. 

From maximizing workplace retirement plans to optimizing Social Security benefits timing, retirees-to-be invest significant time understanding the financial nuances and tradeoffs needed for a secure and lasting retirement.

But, while many prepare financially, few consider the non-financial side of retirement, specifically, the emotional and psychological transition they will experience in retirement. 

And that can be hard, because the reality is that leaving behind your career, whether you were financially ready or not, can create significant challenges, ultimately leading to higher rates of divorce and depression among retirees.

Fortunately, just like you can prepare for the financial aspects of retirement, there are things you can do to smooth out the emotional and psychological ride into retirement, helping you to “squeeze all the juice out of retirement.” 

In his book, “The Four Phases of Retirement: What to Expect When You’re Retiring” and viral Ted Talk, Dr. Riley Moynes presents a framework to help retirees understand and navigate this significant life event through the 4 Phases of Retirement, which we will explore below.

The 4 Phases of Retirement from Dr. Riley Moynes

Phase 1: The Vacation Phase

The first phase of retirement is the vacation phase – a time when you enjoy your newfound freedom.

Just like being on vacation, you can wake up whenever you want and spend your time however you want – pure bliss, right? Well, just like being on vacation, there often comes a point where you’re ready to go back home, settle into your routines, and “sleep in your own bed again.”

In other words, the new, fun, and exciting feeling of being able to do anything at any time wears off, and you’re left to wonder: is this all there is? 

According to Dr. Riley Moynes, the vacation phase of retirement typically lasts a year before it starts to lose its luster. He says that once you find yourself questioning if this is all there is, you have officially moved on to phase 2. 

Phase 2: Loss and Lost

As the name implies, phase 2 is not a fun place to be, and in his Ted Talk, Dr. Moynes describes it for many as “feeling like getting hit by a bus.”

In this phase, retirees can experience 5 major losses:

The 5 Major Losses in Retirement

  1. Loss of Routine: While work provides structure and routine, the newfound freedom of retirement can be unsettling for many.
  1. Loss of Identity: Many people intertwine their identity with their work, often defining themselves by their job (e.g., “I am a doctor” or “I am an accountant”).
  1. Loss of Relationships: Strong career relationships built over decades can suffer as you no longer interact with colleagues daily.
  1. Loss of Purpose: Many derive their sense of purpose from their work, especially those who feel they are doing their life’s work.
  1. Loss of Power: Retirees often lose the power and influence they once had as key decision-makers in their careers.

Ultimately, these major losses can lead to what Dr. Moynes refers to as the 3 D’s: depression, divorce, and cognitive decline. This period can be incredibly challenging as retirees struggle to find a new sense of purpose and direction without the familiar structure of their careers. Many may feel isolated and uncertain about how to move forward, which can exacerbate these feelings of loss.

Fortunately, by the time retirees decide they can’t go on like this, they have officially entered phase 3: trial and error.

Phase 3: Trial & Error

Phase 3 is all about throwing things at the wall to see what sticks.

It’s a time when retirees ask themselves a couple of powerful questions: 

  1. How can I make my life meaningful again?
  2. How can I contribute?

Dr. Moyne’s advice is simple: do more of the things you love and the things you’re good at. 

And he says if you are having trouble figuring out what that is, start with some reflection. Ask yourself: a) what are some of your greatest accomplishments and b) what do you love doing? 

Where those two things overlap is where you should focus your time. 

Remember, this phase is all about experimenting and finding what brings you joy and fulfillment. Interested in volunteering at your local community garden or library? Go ahead and give it a try. 

And if you’re struggling to come up with ideas, here are ten activities to consider during retirement:

10 Ideas to Find Purpose in Retirement

  1. Volunteering: Engage in volunteer work at local non-profits, schools, hospitals, or community gardens. Volunteering allows you to give back to the community, meet new people, and find a sense of fulfillment.
  1. Mentorship: Offer your expertise and experience to mentor younger professionals in your previous field or other areas of interest. This can be done through formal programs or informal networks.
  1. Lifelong Learning: Enroll in classes at local community colleges or online platforms. You can study subjects that interest you, ranging from history and literature to science and technology.
  1. Hobbies and Crafts: Dive deeper into hobbies you’ve always enjoyed or pick up new ones. Whether it’s painting, woodworking, gardening, or cooking, engaging in creative activities can be very fulfilling.
  1. Fitness and Wellness: Focus on maintaining your physical health through activities like yoga, swimming, hiking, or joining a fitness group. This can also include mental wellness practices like meditation or mindfulness.
  1. Travel and Exploration: If you enjoy traveling, consider planning trips to places you’ve always wanted to visit. Travel can broaden your horizons and provide new experiences and memories.
  1. Writing and Blogging: Share your life experiences, knowledge, or interests through writing. Start a blog, write a memoir, or even work on a novel. This can be a great outlet for self-expression.
  1. Part-Time Work: Find part-time work or freelance opportunities in areas you’re passionate about. This can help maintain a sense of structure and purpose while allowing you to use your skills.
  1. Community Involvement: Get involved in local community groups or organizations. This can include joining clubs, attending town meetings, or participating in community events.
  1. Family and Friends: Spend quality time with family and friends. Strengthen your relationships by organizing regular get-togethers, outings, or family vacations. Being an active part of your loved ones’ lives can bring immense joy and fulfillment.

Phase 3 is all about experimenting with different activities until you find what brings you joy. Remember, this process is unique for everyone—there is no right or wrong—and it can continue to evolve throughout retirement

Last but not least, on to Phase 4: Reinvent and Rewire.

Phase 4: Reinvent & Rewire

In phase 4, retirees find answers to the most important question of them all: what’s the point?

But, in Dr. Moynes’ experience, not everyone makes it to phase 4, with some retirees bouncing back and forth between phases 2 and 3. But, for those that do, he finds that it almost always involves service to others, in some capacity. 

This could involve giving back to your community through volunteer work or mentorship. In his TED Talk, Dr. Moynes mentions a retiree who found joy in delivering “piping hot pizzas to hungry humans” part-time, not for the money, but for the satisfaction of serving others.”

For Dr. Moynes, success in phase 4 came through a friendship he formed that evolved into community classes teaching other friends how to use their iPhones and iPads. He joked that it all started because he and his fellow retirees were all given various Apple products for Christmas from their kids, but half of them could barely figure out how to turn them on, let alone use them. So, he and a friend taught a class on how to use their devices that snowballed into hundreds of classes on a variety of subjects over the years: from how to repair bikes, to learning different languages. 

The best part of all? Dr. Moynes has found that through Phase 4, retirees can recover many of the losses from Phase 2: routine, identity, relationships, purpose, and power. This phase not only helps retirees regain a sense of stability but can also bring renewed meaning and satisfaction to their lives.

So, knowing what you know now, where do you go from here? 

Dr. Moynes’ advice is simple:

Here Are 4 Steps You Can Take to “Squeeze the Most Juice” out of Retirement

  1. Enjoy the vacation in phase 1.
  2. Be prepared for the losses in phase 2.
  3. Try as many different things as possible in phase 3.
  4. And lastly, squeeze all the juice out of retirement in phase 4. 

In the end, with 10,000 people hitting retirement age every day and retirement potentially lasting a third of their life: a) you are not alone and b) this is a problem worth solving. 

By understanding and embracing these four phases, you can turn the challenges of retirement into opportunities for growth, fulfillment, and happiness. Whether you are just beginning your retirement journey or are already navigating its complexities, remember that each phase is a step towards a richer, more rewarding life. The key is to stay open, flexible, and proactive in finding what makes your retirement truly golden.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

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From College Savings to Retirement: How to Fund a Roth IRA with Extra 529 Money 

Executive Summary: 

  • Overfunded 529 Plans can be rolled into a Roth IRA to jumpstart retirement savings. 
  • This can be a great strategy in certain situations, avoiding the 10% penalty on non-qualified distributions and receiving tax-free growth and withdrawals in retirement. 
  • However, there are complex rules to consider, like the 15-year account age requirement and the $35,000 lifetime rollover cap. 
  • In addition, the beneficiary must have earned income, and the rollover amount must stay within annual contribution limits.  
  • Lastly, changing the beneficiary may restart the 15-year clock, though the IRS has not released official guidance at the time of writing. 

While 529 plans are often the best way to save for college expenses, many worry about over funding these accounts. 

And it makes sense, because while a 529 plan is great for qualified education expenses (benefitting from tax-free growth and tax-free distributions), when used for other purposes, 529 distributions can incur unwanted taxes and penalties. 

Of course, in a perfect world, savers would end up with the exact amount they need to fund their education expenses, but the reality is not so simple. Instead, many wind up with extra funds, opting for overfunding rather than underfunding their college needs.  

Which raises the question: what should you do with the extra 529 funds? 

Fortunately, you’ve got options: from simply withdrawing the funds and incurring taxes and penalties, to changing the beneficiary of the account to an eligible family member and funding their college needs.  

And now, with the passage of SECURE 2.0 you’ve got another powerful option: Roll the funds into a Roth IRA for the beneficiary, helping them jumpstart their retirement savings. 

In this article, we will explore the pros and cons of this approach and highlight the key rules and regulations to consider. 

First, let’s look at the pros and cons of rolling unused 529 money into a Roth IRA. 

Pros of Funding a Roth IRA with Unused 529 Money: 

  1. Jumpstart retirement savings: Rolling unused 529 money into a Roth IRA can help the beneficiary get an early start on retirement savings. 
  1. Avoid Penalties: By rolling funds into a Roth IRA, you can avoid the 10% penalty on non-qualified distributions. 
  1. Tax benefits: Roth IRAs benefit from tax-free growth and tax-free distributions in retirement, making them a powerful investment account.  

Ultimately, rolling unused 529 money into a Roth IRA can jumpstart retirement savings for the beneficiary, avoid the 10% penalty on non-qualified distributions, and offer tax benefits with tax-free growth and distributions in retirement. 

Cons of Funding a Roth IRA with Unused 529 Money: 

  1. Withdrawal Rules: While Roth IRAs are great for retirement savings, they do have certain withdrawal rules that can limit your ability to access funds penalty-free. 
  1. Loss of control: With a 529 plan, you own the funds, no matter who the beneficiary is. Alternatively, if you contribute to a Roth IRA for your child or grandchild, they have full control over the account, assuming they have reached the age of majority.  
  1. Complex rules: Lastly, there are several rules that you need to be aware of when rolling unused 529 money into a Roth IRA, which we will cover in detail below. 

Ultimately, this can be a great strategy, but be aware of the cons: Roth IRAs have withdrawal rules that may limit penalty-free access to funds, you lose control of the funds once they are in the beneficiary’s account, and the process involves navigating complex rules and regulations. 

Next, Here Are The Key Rules and Regulations When Rolling 529 Funds into a Roth IRA 

Next, let’s explore the key rules and regulations for rolling 529 money into a Roth IRA. These guidelines are essential to ensure compliance and to maximize the benefits of this strategy.  

  • The 529 plan must have been open for a minimum of 15 years. (Important note: Changing the designated beneficiary of the 529 plan may restart the 15-year waiting period*.) 
  • The Roth IRA must be in the same name as the beneficiary of the 529 plan. 
  • The beneficiary must have earned income during the year the rollover is conducted. 
  • The beneficiary’s income must be below the annual limit for Roth IRA contributions. 
  • The rollover amount cannot exceed the annual contribution limit for IRAs. 
  • The amount rolled over cannot be more than the contributions made to the 529 plan, plus any earnings, within the last five years before the rollover.  
  • The total amount that can be transferred from 529 plans to Roth IRAs is capped at $35,000 per beneficiary. 
  • Contributions made to the 529 plan within the last five years are not eligible for rollover.  

*The 529 industry submitted a letter to the IRS in September of 2023 to determine whether a change in beneficiary would reset the 15-year clock. That said, at the time of writing, the IRS hasn’t released official guidance on this issue, and it is unclear if or when they will.  

The Bottom Line 

In the end, rolling unused 529 money into a Roth IRA can be a powerful way to give your kids or grandkids a jumpstart on their retirement savings. But, like many complex strategies, it’s essential to be aware of the different rules and regulations to avoid running into issues. Consulting with a financial advisor can ensure you’re making the most of this opportunity while staying compliant. By strategically executing this strategy, you can provide a solid foundation for your loved ones’ financial future. 

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.