Investment Trends, Tips and Taxation Archives

How Grandparents Can Help Fund Their Grandchildren’s Education with a 529 Plan

Andrew Lemay on July 6, 2026

Discover how 529 plans can help support future education costs through tax-advantaged savings, strategic gifting, and long-term planning.

In my first month at Note Advisors, I’ve noticed a wonderful trend: many grandparents are incredibly eager to make a lasting impact on their grandchildren’s education.

Recently, someone asked whether they could contribute appreciated stock directly to a grandchild’s 529 plan to bypass capital gains taxes.

While the short answer is no, it highlights a great opportunity to break down how 529 plans work and how to navigate this exact scenario.

What Is a 529 Plan?

Authorized by Section 529 of the Internal Revenue Code, 529 plans are tax-advantaged savings accounts designed to encourage saving for future education costs. Here are some key benefits of opening one:

Tax Benefits

Contributions are made with after-tax dollars.
Earnings grow 100% tax-free.
Withdrawals are tax-free when used for Qualified Higher Education Expenses.

Diverse Educational Pathways

Traditional 2- and 4-year public and private colleges and universities
Graduate programs
Technical and trade schools
Registered apprenticeship programs

No Income or Age Restrictions
The beneficiary must be a U.S. citizen or resident alien with a valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).

Contribution Rules

By law, all 529 contributions must be made in cash or cash equivalents, such as checks, electronic transfers, or payroll deductions. While you cannot transfer stock directly into a 529 plan, there are ways to maximize contributions.

Maximizing Contributions: It’s Per Giver, Not Per Plan

There is no limit on how many different people can contribute to a single child’s plan. The 2026 rules apply to each individual donor:

Annual Exclusion

Each individual can contribute up to $19,000 per year (or $38,000 for married couples filing jointly) per beneficiary without triggering gift tax reporting.

Superfunding

An individual can front-load five years of gifts at once—up to $95,000 individually or $190,000 jointly—provided no further gifts are made by that specific donor to that beneficiary for five years.

Lifetime Plan Caps

Contribution limits vary by state. For example, New York caps the maximum aggregate balance per beneficiary at $520,000.
Once the cap is reached, no new contributions are allowed from any source, although the account may continue growing through investment returns.

Solving the Appreciated Stock Dilemma

Since you cannot transfer appreciated stock directly into a 529 plan, you have two primary pathways to consider, each with its own tax trade-offs.

Strategy 1: Liquidate and Gift

You can sell the stock, pay any applicable capital gains tax, and contribute the cash proceeds to the 529 plan.

While this approach may create an immediate tax liability, it is often the simplest and most straightforward option. Once the cash is contributed, future growth inside the 529 plan can compound tax-free, and qualified withdrawals for education expenses can also be taken tax-free.

Optimization Strategy: If the stock has appreciated, you may be able to reduce the tax impact by harvesting capital losses elsewhere in your portfolio to offset some or all of the gains recognized on the sale. In certain situations, it may also make sense to spread stock sales over multiple tax years to help manage the overall tax burden.

Although paying capital gains taxes upfront may seem undesirable, it can be worthwhile when weighed against the long-term tax benefits and flexibility that a 529 plan provides.

Strategy 2: Gift Stock Through a Custodial Account

You can gift the stock to a custodial account in your grandchild’s name. Your grandchild assumes your original cost basis, and the stock can later be sold to help fund the 529 plan.

However, there is an important tax consideration.

Many families assume that because the stock now belongs to the grandchild, any capital gains will automatically be taxed at the grandchild’s lower tax rate. In some cases, that is true. However, the IRS has established “Kiddie Tax” rules to prevent families from shifting investment income to children solely to take advantage of lower tax brackets.

As a result, if your grandchild is under age 18 (or under age 24 and a full-time student) and realizes more than $2,700 of unearned income, such as dividends, interest, or capital gains, a portion of that income may be taxed at their parents’ higher marginal tax rate instead of the child’s rate.

There is an important exception for grandchildren who are 18 or are full-time students between the ages of 19 and 23. If they file their own tax return and provide more than 50% of their own financial support specifically through their own earned income, such as wages or self-employment income, they may avoid the Kiddie Tax and instead use their own individual tax rate, which can be as low as 0% for long-term capital gains.

If they do not meet this earned-income support test, you may need to wait until the Kiddie Tax rules no longer apply—generally age 19 for non-students or age 24 for full-time students—before selling the stock.

What Counts as a Qualified Withdrawal?

Funds can be used at qualified colleges, universities, graduate schools, technical and trade schools, and registered apprenticeship programs.

Higher Education & Trade Schools

Qualified expenses include:

Tuition
Mandatory fees
Books
Supplies
Equipment
Computers and internet access used by the beneficiary for educational purposes

Room & Board

Room and board expenses qualify only if the student is enrolled at least half-time and are generally capped at the school’s published cost-of-attendance figures.

Apprenticeships

Qualified expenses include fees, textbooks, and equipment required for participation in a U.S. Department of Labor registered apprenticeship program.

K-12 Tuition

At the federal level, up to $20,000 per year per beneficiary may be used for elementary or secondary public, private, or religious school tuition.

However, New York State treats K-12 tuition withdrawals as nonqualified distributions for New York State tax purposes.

Student Loans

Up to a $10,000 lifetime maximum per beneficiary may be used to repay qualified student loans.

Understanding Adjusted Qualified Education Expenses (AQEE)

Adjusted Qualified Education Expenses (AQEE) are calculated as total qualified education expenses minus any tax-free educational assistance received.

You can only take tax-free withdrawals up to the final AQEE amount. Any withdrawal exceeding AQEE is considered nonqualified, and the earnings portion of the withdrawal is subject to ordinary income tax plus a 10% penalty.

New York State Tax Deduction

Contributions to a New York State 529 plan may help lower your tax bill.

New York taxpayers may deduct:

Up to $5,000 for individual filers
Up to $10,000 for married couples filing jointly

Certain limitations may apply depending on each individual’s situation.

Leftover Funds & “What-If” Scenarios

If a beneficiary receives a full scholarship, chooses not to attend college or trade school, or simply has money remaining in the account, the funds are not lost.

Scholarship Exception

You may withdraw an amount equal to the scholarship penalty-free. However, ordinary income tax will still apply to the earnings portion of the withdrawal.

Beneficiary Change

You can change the beneficiary to another qualifying family member, including children, siblings, cousins, spouses, and others.

Maintain the Account

If the beneficiary plans to pursue future education, the funds can remain invested and available for future qualified expenses.

Roth IRA Rollover

If the 529 account has been open for at least 15 years, leftover funds may be rolled directly into the beneficiary’s Roth IRA.

This strategy is subject to:

A $35,000 lifetime rollover limit
Annual Roth IRA contribution limits ($7,500 for 2026, or $8,600 if the beneficiary is age 50 or older)

Take a Nonqualified Withdrawal

You may withdraw funds for nonqualified purposes, but the earnings portion may be subject to:

Federal and state income taxes
A 10% penalty tax

The original after-tax contributions are treated as a return of capital and are generally not taxable.

Key Takeaways

The Ultimate College Safety Net

529 plans are one of the most effective tools for building a dedicated education fund and helping students graduate without the burden of significant student loan debt.

The Triple-Tax Advantage

Tax-Deferred Growth

Investments compound tax-free while inside the account.

Tax-Free Withdrawals

Qualified withdrawals are free from federal income tax and, in most cases, state income tax.

State Tax Benefits

Many states offer an upfront state income tax deduction or tax credit for contributions.

Significant Flexibility

If the original beneficiary decides not to pursue higher education, you are not locked into one outcome. The beneficiary can be changed to another qualifying family member without triggering taxes or penalties.

No More “Use-It-or-Lose-It” Concerns

Recent tax law changes allow a lifetime limit of up to $35,000 of unused 529 assets to be rolled into a Roth IRA for the beneficiary, potentially giving them a meaningful head start on retirement savings.

If you have questions or need help setting up a 529, don’t hesitate to reach out by either scheduling a call using the button below or emailing us directly at connect@noteadvisor.com.

Schedule a Call

Andrew Lemay, CPA, MBA, is a Tax & Financial Planning Associate at Note Advisors. He works closely with the firm’s CERTIFIED FINANCIAL PLANNER® professionals to help clients align tax strategy, preparation, and compliance with their broader financial goals. As he works toward earning his CFP® certification, Andrew is committed to delivering the integrated planning experience that is central to Note Advisors’ approach. Connect with him on LinkedIn.

No portion of this commentary is to be construed as the provision of personalized investment, tax or legal advice. Please consult with the appropriate professionals for advice that is specific to your situation. Note Advisors, LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

What Parents Should Know About the New Section 530A “Trump Accounts”

Andrew Lemay on June 1, 2026

Insights From a Recent Kitces Webinar

I recently attended an informative webinar through Kitces.com covering the newly introduced Section 530A “Trump Accounts,” and I wanted to share some key insights because there have already been a lot of questions surrounding who can open these accounts, how they work, and whether they may create planning opportunities for families.

Authorized under the One Big Beautiful Bill Act (OBBBA), Section 530A accounts introduce a brand new tax-advantaged investment vehicle for minors. At their core, they function like an early start retirement account, designed to give children the opportunity to benefit from decades of tax-deferred compounding growth.

While the legislation is still very new and additional guidance will likely continue to emerge, there are several important takeaways worth understanding now.

Who is Eligible and How to Open an Account?

Any U.S. citizen under the age of 18 with a valid Social Security number is eligible for a Section 530A account.

A parent and/or legal guardian, adult sibling, or grandparent, in that order of priority, can establish the account beginning July 4, 2026, through either:

The official government portal at trumpaccounts.gov
IRS Form 4547, filed concurrently with your federal income tax return.

Understanding the Growth Period

From the time the account is opened until the end of the year before the child turns 18, the account enters what’s called the “Growth Period.”

During this phase:

Assets grow tax-deferred
Distributions are generally prohibited
Investments are limited to broad U.S. equity index mutual funds or ETFs with expense ratios capped at 0.1% annually.

The goal appears to be keeping these accounts relatively simple, low cost, and focused on long-term growth.

The 4 Ways These Accounts Can Be Funded

One of the more interesting aspects of the legislation is the flexibility around contributions.

1. Direct After-Tax Contributions

Parents, grandparents, family members, friends, or even the child themselves can contribute cash directly to the account.

Annual contribution limit: $5,000
Contributions are after tax
No tax deduction is received

2. Employer Contributions

Employers can voluntarily contribute up to $2,500 annually to either:

An employee’s account, or
Their dependent’s account

These contributions are excluded from the employee’s gross income under Section 128, though they still count toward the $5,000 annual limit.

3. The $1,000 Federal Pilot Program

One of the most discussed provisions is the government-funded pilot program contribution.

Children born between January 1, 2025 and December 31, 2028 qualify for a one-time $1,000 contribution funded directly by the U.S. Treasury.

Importantly:

This does not count toward the $5,000 annual contribution limit
Families must actively elect the contribution through Form 4547 or the online portal

For young families, this may represent a meaningful opportunity to begin investing early.

4. Qualified General Contributions

Approved charitable or government organizations can inject large-scale capital aimed at broad geographic or age-based classes of beneficiaries.

These do not count toward the $5,000 annual contribution limit

The Power of Starting Early

Even relatively small amounts invested early can potentially become substantial over time because of compound growth. Section 530A accounts are uniquely designed to maximize this compounding effect, as these accounts are established for minors and the initial investments have nearly two decades to grow.

What Happens at Age 18?

Once the beneficiary turns 18, control of the account transfers entirely to them, and the account essentially adopts the rules of a Traditional IRA.

At that point, they generally have four options:

Maintain the Account

Keep the account invested and continue allowing it to grow tax-deferred.

Roll It Into a Traditional IRA

Transfer the balance into a Traditional IRA without penalty and continue deferring taxes until retirement distributions begin.

Convert to a Roth IRA

Potentially one of the more powerful planning opportunities.

The beneficiary can convert the account into a Roth IRA without a 10% penalty, though income taxes would still apply at the time of conversion to the non-basis portion of the account, including:

Employer contributions
Government pilot contributions
Qualified General Contributions
Investment growth

Because many 18-year-olds are often in relatively low tax brackets, this could create an opportunity for lower-cost Roth conversions early in life.

That said, families will want to pay close attention to Kiddie Tax rules, since large conversions could potentially trigger taxation at the parents’ higher marginal tax rates.

Take a Distribution

The beneficiary can also withdraw funds directly.

Original direct after-tax contributions are considered a return of your basis and are tax-free
Growth, employer, charitable, and government contributions are taxable as ordinary income
Withdrawals before age 59½ may also trigger a 10% early withdrawal penalty unless an IRA exception applies

The Biggest Planning Consideration May Not Be Taxes

One of the more interesting discussion points from the webinar had less to do with taxes and more to do with behavior.

At age 18, the beneficiary legally gains control of the account.

For some families, that may prompt an important conversation about financial education and long-term decision-making.

An 18-year-old may understandably feel tempted to cash out funds for short-term wants, especially if they don’t fully understand the long-term value of compounding.

That makes financial literacy and ongoing education incredibly important.

Because ultimately, the real power of these accounts is not necessarily the initial contribution itself. It’s the time horizon attached to it.

We’ll continue monitoring guidance and developments surrounding Section 530A accounts and helping families evaluate how they may fit into a broader long-term financial plan. If you have questions, don’t hesitate to reach out by either scheduling a call using the button below or emailing us directly at connect@noteadvisor.com.

Schedule a Call

Debt Isn’t Always the Enemy

TJ Conway on April 24, 2026

Debt isn’t inherently good or bad. It’s a tool, and like any tool, it depends on how you use it.

“I don’t want any debt and want to pay off my loans as quickly as possible.”

That’s how the conversation started.

We recently built a financial plan for a younger couple with dual income, no kids, and who were in a very strong financial position. From the start, it was clear they saw debt as something that needed to be eliminated as quickly as possible. It was one of the main reasons they wanted to meet.

For many people, debt feels heavy. In their words, it was “something hanging over them.”

It’s a very real and understandable mindset. At the same time, they were missing an important part of the bigger picture.

Debt is a Two-Sided Coin

Not all debt is created equal.

There’s the kind that works against you, such as high-interest credit cards, for example, where the cost of borrowing can quietly erode your progress.

And then there’s debt that can actually work for you, such as a mortgage, a business loan, or even strategically managed low-interest debt.

Some of the wealthiest individuals and families carry significant amounts of debt. Not because they have to, but because they strategically choose to.

They understand something important that some people tend to miss.

If your money can earn more elsewhere than your debt costs, while still staying accessible, aggressively paying it off may not be the most effective strategy in terms of the numbers.

But you also have to consider the other side of the coin—not just the math, but how it fits into your overall plan and priorities.

The Bucket Philosophy

One way I like to simplify this is what I call the bucket philosophy.

Think of your financial life as a series of buckets. Each one represents a different place your money can go—retirement accounts, investment accounts, savings, or paying down debt.

The question becomes:
Which buckets are giving you the best return?

If you have money left over each month, it may make sense to first fill the buckets that are working hardest for you.

For example:

Contributing to your 401(k) or 403(b), especially if there’s an employer match
Funding a Roth IRA, where growth can be tax-free
Investing in accounts that have long-term growth potential

These buckets have the ability to compound over time in a way that debt repayment simply doesn’t.

Once those higher-opportunity buckets are being filled, that’s when you shift focus.

Now it may make more sense to accelerate paying down debt, especially if it’s higher interest or no longer serving a strategic purpose.

This isn’t about ignoring debt, but about putting it in the right place within the bigger picture of your financial plan, making your money work more efficiently for you.

It’s Not Just Math. It’s Behavior

There’s an important layer to all of this.

Even if the math says one thing, your comfort level matters.

If having debt keeps you up at night, that’s real. And part of good planning is balancing both the numbers and how you feel about them.

But what I’ve found is that many people have been conditioned to view all debt the same way without ever stepping back to ask:

“Is this debt actually holding me back… or could it be part of a more strategic strategy?”

A Different Way to Think About It

The goal isn’t to carry debt for the sake of it. The goal is to be intentional.

To understand:

What your money is doing
Where it’s working hardest
And how each decision fits into your long-term plan

Because sometimes, the fastest path forward isn’t about eliminating debt as quickly as possible, but about making sure your money is positioned in the places that can do the most for you over time.

TJ Conway, CFP^® APMA™ is a Financial Advisor and Retirement Planning Associate at Note Advisors. As a Certified Financial Planner® and Accredited Portfolio Management Advisor℠ (APMA®), TJ is committed to providing client-focused, high-quality financial advice. Connect with him on LinkedIn or Schedule an Introductory Call

Fiduciary vs Suitability: What’s the Difference in Financial Advisors?

Note Team on April 13, 2026

If you’re searching for a financial advisor, you’ve likely come across terms like fiduciary, suitability, RIA, and CFP® professional.

These aren’t just industry jargon. They directly impact the kind of advice you receive.

Understanding the difference between the fiduciary standard vs. suitability standard can help you choose an advisor who truly aligns with your best interests.

What Is a Fiduciary Financial Advisor?

A fiduciary financial advisor is legally required to act in your best interest at all times.

This standard applies to Registered Investment Advisors (RIAs) and certain financial professionals.

Key characteristics of a fiduciary:

Must put the client’s interests ahead of their own
Required to provide full transparency on fees and conflicts
Must act with care, prudence, and diligence
Obligated to avoid or properly manage conflicts of interest

In short, a fiduciary is held to the highest standard of care in the financial industry.

What Is the Suitability Standard?

The suitability standard is a lower standard that applies to many brokers and financial sales professionals.

Under this model:

Recommendations must be suitable based on your situation
They are not required to be the best option available
Advisors may recommend products that pay them higher commissions
The responsibility often falls on the client to identify poor advice

This means a recommendation can meet the standard even if a better, lower-cost, or more appropriate option exists.

Fiduciary vs. Suitability: Key Differences

Fiduciary Standard	Suitability Standard
Must act in your best interest	Must provide suitable recommendations
Full fee and conflict transparency	Limited disclosure requirements
Ongoing duty of care	Transaction-based relationship
Conflict management required	Conflicts may exist without full alignment
Higher legal accountability	Lower legal obligation

Why the Fiduciary Standard Matters

Choosing a fiduciary financial advisor can lead to:

More objective advice
Greater transparency around costs
Fewer conflicts of interest
A more comprehensive financial plan

For investors, this often translates into clearer guidance and greater confidence in decision-making.

What Is an RIA (Registered Investment Advisor)?

A Registered Investment Advisor (RIA) is a firm that operates under the fiduciary standard.

RIA firms are required to:

Act in the client’s best interest
Disclose how they are compensated
Provide ongoing advice and portfolio oversight

If you’re looking for a fiduciary advisor, working with an RIA is a strong place to start.

What Does CFP® Certification Mean?

A Certified Financial Planner (CFP®) professional is someone who has met rigorous standards in:

Financial planning education
Examination and technical knowledge
Ethics and professional conduct

Importantly, CFP® professionals are also held to a fiduciary standard when providing financial advice.

How to Choose the Right Financial Advisor

When evaluating advisors, ask these key questions:

Are you a fiduciary at all times?
How are you compensated (fees vs. commissions)?
Do you provide comprehensive financial planning or just investment advice?
Are you a CFP®?

These answers will help you understand how advice is delivered and whether it aligns with your goals.

Our Approach at Note Advisors

At Note Advisors, we are a Registered Investment Advisor (RIA) and operate under a fiduciary standard.

Our approach includes:

Putting your interests first. Always
Transparent and fee-based advisement
Delivering holistic financial planning, not just investment recommendations

Our team includes Certified Financial Planner® professionals who are committed to helping you make thoughtful, informed decisions about your financial future.

Final Thoughts: Why This Distinction Matters

Not all financial advisors operate under the same rules.

Understanding the difference between fiduciary vs. suitability can help you:

Avoid conflicts of interest
Ask better questions
Choose an advisor you can trust

Because when it comes to your financial future, the standard your advisor follows matters more than most people realize.

If you want to learn more, schedule an introductory call with one of our Certified Financial Planners (CFP®) to see if we are the right fit.

Schedule a Call

Why Every Retiree Needs a War Chest

Mario Riccadonna on December 3, 2025

Murphy’s Law is the adage that “Anything that can go wrong, will go wrong,” and usually at the worst possible time.

There’s a retirement version of this, too: “The day you retire, the market will drop 20–30%.”

It’s not always literally true, but ask anyone who retired in 2000, 2008, or early 2022, and they’ll tell you that it sure felt like it. After decades of saving, the moment you finally start spending, the markets seem to turn against you.

That fear is real. But instead of trying to time the market (which no one can), the solution is to prepare for downturns with what we call a retirement war chest.

What is a War Chest?

A war chest is a 5–7 year bucket of cash and bonds that you maintain throughout retirement.

Think of it as a self-funded pension. No matter what the stock market does, you know you can cover your expenses for the next several years.

Why 5-7 years? History shows that’s usually enough time for markets to recover from even the worst downturns.

Take 2008. The S&P 500 lost nearly 37% that year. Painful. But what if you had 5 years of living expenses set aside in cash and bonds? You wouldn’t have been forced to sell stocks at the bottom.

By 2012, were we out of it? Yes… for the most part. While the market didn’t reach its pre-crash peak until early 2013, by 2012 the S&P 500 had climbed back significantly. In fact, from the March 2009 bottom through 2012, the S&P 500 gained over 100%.

In other words, by 2012, we were through the thick of it. A retiree with a war chest could have safely lived off that bucket while letting their stock portfolio heal.

Here’s a 5-year chart from that time period from Bloomberg as a reference:

So, how do you build a War Chest?

Figure out your spending needs
Example: $100,000 per year
Multiply by 5-7 years
That means setting aside $500,000-$700,000 in a mix of cash, CDs, and bonds
Keep the rest invested for growth
Your remaining portfolio stays in the stock market, giving you the growth needed for a decades-long retirement
Replenish as you go
In good years, refill the war chest by trimming gains from your stock portfolio. In bad years, let the bucket carry you until the markets recover.

The Psychology Bonus

This isn’t just about numbers, it’s about peace of mind. When you know your next 5–7 years of income are covered, market downturns feel less scary. You don’t feel forced to sell at the wrong time. You don’t panic. And you give your long-term investments the time they need to bounce back.

The Bottom Line

You don’t need to predict when the next downturn will happen. You need to be prepared for it. By building and maintaining a 5–7 year war chest, you can retire confidently—even if Murphy’s Law shows up on your first day of retirement.

The goal isn’t just financial security. It’s peace of mind so you can stop worrying about market headlines and start enjoying the retirement you’ve worked so hard to create.

Ready to build your War Chest?

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How to Take Money Out of Your IRA Completely Income-Tax Free

Mario Riccadonna on November 13, 2025

The Power of Qualified Charitable Distributions

When you’ve saved diligently for decades, the last thing you want in retirement is to watch your hard-earned nest egg get eaten away by taxes. If you’re charitably inclined, there’s a powerful tax planning tool available to retirees that can allow you to support the causes you care about and reduce your tax burden: the Qualified Charitable Distribution (QCD).

Let’s unpack what it is, why it matters, and how you can use it to take money from your IRA completely income-tax free.

What is a Qualified Charitable Distribution (QCD)?

A QCD allows individuals aged 70½ or older to donate directly from their IRA to a qualified charity. Instead of taking money out of your IRA, paying taxes, and then writing a check to charity, the funds go directly from your IRA to the nonprofit.

Age requirement: You must be at least 70½.
Annual limit: Up to $100,000 per year, per person, can be donated.
Eligible accounts: Traditional IRAs (not 401(k)s or other plans, unless rolled into an IRA first).
Qualified charities: Must be 501(c)(3) organizations (not donor-advised funds or private foundations).

The key benefit? The amount distributed is not reported as taxable income on your return.

Why QCDs Are So Valuable in Retirement

At first glance, you might think, “Well, I already donate to charity, why not just deduct it?” But here’s why QCDs can be much more powerful:

They Work Even If You Don’t Itemize:
Most retirees take the standard deduction. If that’s you, a QCD gives you tax credit for charitable giving that you wouldn’t otherwise receive.

They Reduce Required Minimum Distributions (RMDs):
Depending on your birth year at age 72, 73, or 75, the IRS requires you to start withdrawing from your IRA. These withdrawals are fully taxable as ordinary income. QCDs count toward your RMD, but they’re excluded from taxable income.

They Lower Adjusted Gross Income (AGI):
Unlike a normal charitable deduction, which reduces taxable income only if you itemize, a QCD reduces your AGI directly. Why does that matter? Lower AGI can reduce:

-The taxable portion of your Social Security benefits.

-Medicare IRMAA surcharges (the extra premium charges on Parts B & D).

-Phaseouts for other deductions and credits.

The Power of a QCD in Action

Let’s look at an example of how this works. Let’s say you’re 74 years old with $2 million in a traditional IRA. Your RMD for the year is about $78,000. You also typically give $20,000 a year to your church and a local hospital foundation.

Option 1: Traditional Giving

You withdraw the $78,000 RMD.
You owe income tax on the full $78,000 (let’s say ~24%, or $18,720).
You write a $20,000 check to charity.
Since you take the standard deduction, you don’t get any tax benefit for your giving.

Option 2: Using a QCD

You direct $20,000 of your RMD to the charities as a QCD.
That $20,000 never hits your tax return as income.
You only report $58,000 of taxable income instead of $78,000.
That lower AGI could potentially reduce and shadow tax (i.e. Medicare premiums or the amount of your Social Security subject to tax)

Result: You supported the same charities, but you saved $4,800 in taxes simply by changing how the gift was made.

Common Mistakes to Avoid with QCDs

Don’t withdraw first. The money has to go directly from your IRA custodian to the charity. If you take possession, it’s taxable.
Don’t wait until December 31st. Processing times can get messy, and if it’s not completed in the calendar year, it doesn’t count.
Don’t use QCDs for donor-advised funds or private foundations. They don’t qualify.

Don’t forget to tell your tax preparer. IRA custodians report distributions on Form 1099-R without showing which were QCDs. If you don’t flag it, your return may show the full distribution as taxable.

Who Should Consider QCDs?

QCDs are especially valuable if:

You’re charitably inclined and already give annually.
You’re 70.5 or older.
You want to reduce Medicare IRMAA surcharges or taxes on Social Security.
You take the standard deduction and wouldn’t otherwise benefit from charitable contributions.

Final Thoughts

Qualified Charitable Distributions aren’t just about giving, but about giving smarter. They allow you to align your wealth with your values, while also reducing one of the largest expenses in retirement: taxes. If you’re over 70½ and have a traditional IRA, QCDs could be one of the most tax-efficient strategies available to you. Whether you’re giving $5,000 or $100,000, it pays to be intentional about how you give.

Learn more about how to save on taxes before year-end by scheduling a call with us!

Schedule a call

5 Myths of Tax Planning

Mario Riccadonna on September 28, 2023

They say all you need to survive is food, shelter, and love.

I think they forgot tax planning.

It doesn’t have the kind of marketing that love gets, but it’s the most unbelievably useful financial practice you might never have heard of.

Picture this: over the past 40 years you have been stockpiling savings into your employer retirement plan. But on your retirement date, it’s worth less than what the statement says. Sound alarming? Well, this would be the case if you haven’t given any thought about tax planning for those 40 years, especially around your retirement.

The IRS is not-so-patiently waiting to take anywhere from 0% to 47% of your pre-tax retirement account. Our goal as tax planner is to reduce your total lifetime tax to get you closer to the 0% than the 47%.

When I first mention tax planning, I often find that people have some pretty profound mistaken beliefs about it. Here are five myths I hear the most:

#1 – Tax planning has to be complex.

Surprised? Don’t be, even though an alarming number of tax planning “experts” insist that the only way to lower your total lifetime tax bill is to implement some ultra-obscure tax strategy. While yes, these strategies may work for a select few, the “experts” often gloss over the “boring” and easy-to-implement strategies.

For example, implementing annual Roth conversions, HSA strategies, or selecting between pre-tax or Roth contributions can potentially reduce your total lifetime tax by tens of thousands of dollars.

There’s an old adage that’s a great frame of mind for your tax planning strategy:

“Small hinges swing big doors.”

Little choices now can make a big difference later.

#2 – The goal of tax planning is to pay zero tax every year.

A year where you pay zero tax is a lost opportunity in the realm of tax planning. When we look at successful tax planning, we want to see a reduction in your total lifetime tax paid.

This means potentially paying more tax one year and less the next. Years with lower income can provide a great opportunity to implement a number of tax strategies (capital gain recognition, Roth conversions, etc.)

The professional handling your tax planning should be computing tax projections each year to determine what strategies are best to implement. As we like to say at Note, “pay the IRS every dollar you owe, but don’t leave them a tip.”

If your wallet’s feeling too heavy or you’re just feeling extra patriotic, the U.S. government happily takes donations against the national debt.

#3 – Your accountant does tax planning for you.

I’m sure there are some accountants who do real tax planning, but speaking from experience, the vast majority do not. While having a rockstar accountant in your corner helps, they tend to make better historians than planners.

Your accountant is more like a rearview mirror. They’re useful, but unless you plan on driving in reverse, you’re going to need someone looking down the road with you. Your tax planner is more like a windshield. It’s crucial to look through the windshield and have someone planning out your future tax strategies.

Know what’s even better? If your financial planner and accountant can work together closely to ensure the tax strategies get reported and implemented correctly.

#4 – The benefits of tax planning can be seen quickly.

Tax planning (when done right) is more like well-aged bourbon than lemonade. If you have a short-term frame of mind, you might still come out with a good outcome. However, if you keep your sights on the long-term and give it years to mature, you can have an amazing product to enjoy.

There are almost always strategies to implement now to see a payoff in the short term, like safe harbor payments to avoid an underpayment penalty. But most strategies need time to mature.

For example, if we decide to do a six-figure Roth conversion, it might take decades to benefit from that strategy. But the models suggest that a conversion like that could generate seven figures worth of tax savings.

Patience can pay off.

#5 – Tax planning is only for the “rich.”

Ever read a book on tax planning? Probably not! But if you had, it would probably sound like you need to own a yacht or a villa before tax planning is relevant. It’s not true!

Every person who is paying taxes can and should implement some sort of tax planning strategy.

There are strategies to utilize no matter your income or net worth. It all comes down to being intentional with your personal finances. As we’ve seen with our clients, what you give your attention to makes all the difference.

Whether that’s making the intentional choice to save in pre-tax dollars, or after-tax dollars, or both. Knowing how different retirement accounts work is tax planning. Deciding which ones are best for you and your goals is tax planning!

If you want to be intentional with your tax planning and/or your personal finances and don’t know where to start, I’d urge you to seek the help of a tax planning professional.

It’s never “one and done”.

Tax planning is not just a one-time thing. You should have eyes on your tax return and tax planning strategies each and every year.

Here’s three easy steps to get you started:

Review your prior year tax return. It’s important to understand your income and how it affects your total tax. Take note of your total income, taxable income, total tax paid, and marginal tax rate.
Understand your eligibility to contribute to pretax, Roth, and After-tax retirement accounts. Be intentional with how you will fund each.
If all of this seems overwhelming, I urge you to reach out to your financial advisor.

If tax planning isn’t in your advisor’s arsenal, we should talk. Schedule a 15-minute consultation to see how we can help.

Schedule a call with me

Does Asset Allocation Make Sense for You?

Tom Waring on January 22, 2021

At Note, we frequently encounter business owners who tell us they get approached by “wealth” managers preaching asset allocation. These managers possess little information about them, their businesses, their objectives, or the headwinds they’re facing. These managers then readily preach about the importance of diversification and the investments that owners need to make.

The thing is, most business owners aren’t thinking about asset allocation at all. Rather, they’re focused on asset concentration.

Why?

Because their life savings and sweat equity are tied up in their business. This is punctuated by the debt they’ve taken on in order to feed the engine of their business – their most concentrated investment.

While asset allocation may be wise advice from an “Investment 101” standpoint, it is not an effective conversation with most small business owners. Many I’ve spoken to over the years are quick to say, “I have nothing to invest.”

However, if I have their ear, I’m able to persuade them they have everything to invest.

They have themselves, their tomorrows, and the investments they’ve already made. With good fortune and perseverance, those assets will give them the kind of financial capital that wealth managers very much want under their management. However, it can take a decade or two before that happens. Only then does asset allocation advice become relevant.

An effective financial advisor must be able to see you – the business owner working to build equity. They must recognize the importance of promoting asset concentration, not preaching diversification. They should fully understand your business, your objectives, and the headwinds you are facing. Only then can they be dedicated to working with you to mitigate the risks associated with business ownership. Only then can you more easily move from concentration through liquidity, and onto successful allocation.

Who’s Got Your Back?

Tom Waring on January 6, 2021

Have you ever explored the full meaning when someone says, “I’ve got your back?”

Is it that they’re committed to watching out for you and taking care of things that you are likely to miss?

Are they dedicated to being that second set of eyes and hands for you when necessary?

Is it someone willing to help when you need assistance, even before you know you need it?

How about somebody who will literally enter into a physical battle on your behalf?

Have you ever taken the time to consider who’s got your back in your business?

Perhaps it’s an advisor who has a single-minded area, whether it be law, accounting, or lending.

Maybe it’s that individual who’s able to rise 30,000 feet for a broad view of your world and then tell you how your business fits in your life, particularly during stressful times.

Maybe it’s the person who can keep the bigger picture in mind when aiding you in your day-to-day business battles. Or someone who can pull you aside – despite your protests that you ‘don’t have time’ – and offer strategic perspectives and advice you can trust.

These “have your back” individuals will ask questions that stop you in your tracks, that allow you to take a deep breath while the stress of the moment leaves your body. They do this without fear that their questions might be simple, naïve, or lacking a complete understanding of your business.

They don’t worry if they’re the biggest thought leader or genius in the room. They’re focused on helping you slow down, making certain that you’re not ignoring the larger implications of whatever task is at hand.

They maintain the big picture, yet they are at the street level, working right alongside you. They open their network and introduce you to the accountant, the attorney, the banker, even the medical professional, and ask them for exceptions on your behalf, all because they truly believe you are exceptional.

These are the people who see you for who you are, believe in what you are trying to accomplish, and give all they’ve got to help you get there. In effect, fully defining what it means to say, “I’ve got your back.”

We all need someone like this, don’t we? I know who it is for myself and the impact they continue to make in my world. Who has your back, in your business, and in your life?

AUM vs. LUM

Tom Waring on December 14, 2020

“What’s your AUM, Tom?”

During financial industry conferences and meetings, this seemingly innocent question surfaces almost without fail.

AUM = “assets under management.”

To me, that question is a veiled and vulgar way of trying to find out the total assets being managed by our firm. When using the term “assets,” the person inquiring doesn’t mean the humans and their lives that we’re helping to navigate. Rather, it’s all about the dollars and cents under our direction. The question they’re really asking is, “How much of other people’s money do you control?” To many in our industry, this is the badge of honor that they believe measures success.

I believe that “assets under management” is a crappy way to categorize clients.

I also believe that if all you have is financial capital, then you don’t really have all that much.

While it’s an important data point for valuing a business, it unfortunately doesn’t indicate the true value of a financial professional or their client base. At Note, we have a different standard of that value for both.

We like to think in terms of “lives under management.”

When considering the “assets” we manage, our focus turns to people we advise. The human beings we help to successfully navigate their personal and financial challenges. Challenges such as:

Investing their limited resources of time and money in starting a business.
Taking on the financial capital risks of borrowing money to begin and/or grow a business.
Sweating-out the personal guarantees needed to secure loans in early-stage businesses, or businesses under stress.
Lost sleep and compromised health due to the pressures of financial and business risks.
Business distractions that prevent clients from being “present” with their family, spouse or significant other, and the resultant dissatisfaction over a loved one being mentally somewhere else.

Often when we begin advising clients, they find themselves in uncharted waters as we help them navigate their “lives under management.” Yet because of our years of experience, we know the management plan we are creating for them will deliver results. We’ve seen it. We can smell it. We know it, often before those we are working with actually experience it.

We also know that helping people transition their sweat and tears into something of value, and extracting that value over time in the form of financial capital, can give them valued independence. People can live in ways that allow them increased control over their time. They can enjoy extended vacations. They create the ability to transition their business to family or employees, or sell their businesses and move on to their next venture with a smile on their face.

Most importantly, they become fully aware that they are not simply “assets under management.” They are human beings who we value and whose lives we are helping to build and enjoy.