Raising the RMD, Repaying Student Loans and Other Potential Changes to Retirement Accounts
Helping Americans save more for retirement is very much on the mind of Congress.
In the spring, Senators Ben Cardin of Maryland and Rob Portman of Ohio reintroduced legislation (Retirement Security and Savings Act of 2019) that proposes raising the required minimum distribution (RMD) age for retirement accounts to 75, with increases to be phased in over several years from age 70½. Additionally, it would potentially increase savings in 401(k)s and IRAs, help with small employer coverage for part-time workers, and remove obstacles for including lifetime income options in retirement plans.
NOTE: Currently, account holders of Traditional IRAs and SEP IRAs must start taking required minimum distributions no later than 70-1/2 but this rule does not apply to Roth IRAs, Coverdell ESAs and some other plans.
A different bill, Retirement Parity for Student Loans Act, contains a provision that would enable workers to make student loan payments while their employers make matching contributions into their retirement account “as if the student loan payments were salary contributions.” These elements give Americans more time and more financial freedom to save for retirement.
The House of Representatives has also been looking at retirement legislation; in late May, the House passed the SECURE Act—Setting Every Community Up for Retirement Enhancement, which currently awaits passage in the Senate. The bill’s significant retirement policy changes are designed to improve access to financial products in order to encourage more Americans to save for retirement. It also contains incentives for employers to expand access to 401(k) plans, particularly to employees of small businesses and part-time employees.
Is a self-directed IRA on your mind?
Here are some reasons why it should be:
- The flexibility to take RMDs from one’s retirement plan at a later age can help account holders continue to grow their retirement savings for a longer period of time if they wish—and for those investors with self-directed IRAs, to continue building more diverse portfolios for a longer time horizon.
- Self-directed investors who are including alternative assets within their plans would have the potential to accrue more retirement income from real estate, precious metals, commodities, private equity, and many more nontraditional investments these plans allow.
- Two of the nontraditional investments allowed in a self-directed account are secured and unsecured loans. This means the plan can make loans to qualified individuals for tuition or other education-related expenses. Terms of that loan are worked out between the two parties, with all income flowing back into the tax-advantaged self-directed retirement plan.
- Individuals can also self-direct a Coverdell ESA, which—as noted above—does not carry with it the mandatory RMDs by age 70-1/2. Coverdell ESAs can be set up to pay for education-related expenses, as we explored in a prior post.
If you’re thinking about opening a self-directed IRA of any kind, please register for a complimentary educational session with one of our knowledgeable representatives. Alternatively, you can call our team directly at 888.857.8058 or email NewAccounts@NextGenerationTrust.com with any questions.
Is that Education Savings Account Ready to go Back to School?
Before we know it, tuition bills for fall semester will be due, books will need to be purchased, and school fees must be paid. The tuition at colleges and trade schools can be pricey, and student loans may not be the answer for all students. However, paying for school and school-related expenses with money from a Coverdell Education Savings Account (ESA) can be a big help for many.
Any adult can establish an ESA for any child under 18 years old—the beneficiary does not need to be a relative. ESAs offer flexible options as a tool for saving for education:
- The ESA can be used by the beneficiary up until age 30 for all qualified expenses, such as tuition and books.
- The money can be transferred to another family member under age 30 if it will not be used by the original beneficiary in time.
- The money is not restricted to college – the ESA can be used for primary and secondary school as well.
- You don’t have to contribute every year.
- A trust or corporation may make contributions to an ESA for an eligible student.
- The money grows in the account tax free and qualified withdrawals are also tax free. If the money is used for a nonqualified expense, there could be taxes or penalties associate with the withdrawal.
Although ESAs are somewhat similar to 529 plans, there are a few key differences, such as income restrictions for the contributing individuals and annual contribution limits. It’s always wise to check with your tax advisor or financial planner before opening a Coverdell Education Savings Account to ensure you are opening the type of investment account that makes the most sense for your specific financial situation and goals.
Self-directing the funds in an ESA can help boost that return
Whether you want to help cover expenses for private school, college, or trade school, you can give your student extra help if you choose to self-direct a Coverdell ESA.
Savvy investors may choose to self-direct an ESA and hold real estate, precious metals, commodities and more – they may even already be invested in these types of assets outside one of these accounts. The difference is that the returns from those investments will be tax-free as they grow. Although you potentially have a maximum of 18 years in which to build up a Coverdell ESA (from a child’s birth through age 18), investors who self-direct their retirement plans know that by including alternative assets, they are able to build a more diverse portfolio that is not dependent on the ups and downs of the stock market. One can look at it as an investment strategy that could make a great high school graduation gift.
You can open an education savings account with Next Generation and fund the account via transfer, by initiating a rollover, or by contributing funds with a check. If you have any questions about self-direction as an education savings strategy, or need assistance getting your ESA open, contact Next Generation by email at NewAccounts@NextGenerationTrust.com or by calling 888.857.8058.
Alternatively, you can schedule a complimentary education session with one of our representatives.
Getting Educated About Self-Directed Education Savings Accounts
Thoughts of college are in the air at this time of year, with PSATs, SATs, ACTs and other tests. High school juniors are deciding where to apply to school and seniors have decided where they’ll enroll in the fall.
While college is an exciting time for students, it can be a bit stressful for parents when it comes to making those tuition payments. Even with financial aid, there are plenty of expenses to cover and in many cases, the financial aid does not go far enough.
That’s where Coverdell Education Savings Accounts (ESAs) come in. Many parents and grandparents set up these accounts when a child is born, and contribute to the ESA annually to build up savings to pay education-related expenses. The 2019 annual contribution limit is $2000 per beneficiary (contributed up to age 18), which can be invested and earn tax-free income.
Here are some of the benefits that ESAs have to offer:
- Coverdell ESAs are tax-advantaged so long as the money in them is used to pay for education expenses—which are not limited to higher education only; the funds may be used for qualified elementary and secondary school expenses as well.
- If the distribution is less than the beneficiary’s qualified education expense, the beneficiary (student) will not owe federal income tax.
- The money is considered the beneficiary’s money when applying for federal student aid, which may reduce the amount of student aid the student receives.
- The funds in the account can be used by the beneficiary up to age 30 or be rolled over to another plan.
Self-directed ESAs – the flexible way to build up education savings
Did you know that when ESAs were first introduced in 1997, they were called Education IRAs?
And did you know that, like all other types of IRAs a Coverdell ESA can be self-directed, so that the funds can be invested in alternative assets?
A Coverdell ESA that is opened with a custodian of self-directed retirement plans—like Next Generation—can include the same types of nontraditional investments as other self-directed plans. That way, if the stock market tumbles, the account provides a hedge through the use of those nontraditional investments, such as real estate, precious metals, private equity, notes, and more. Parents or grandparents who already have the knowledge and experience with these types of investments can apply that experience to the student’s education savings through self-direction—and help grow their contributions over time.
Think of the high school graduation gift you could give your child or grandchild years from now, with a self-directed ESA that has grown in value through nontraditional investments. At Next Generation, we offer a plethora of resources to learn more about Coverdell ESAs and the benefits of self-direction. Because client education is so important to us, we’re here to answer your questions about self-direction as a savings strategy—for education expenses or retirement. Contact Next Generation at 1.888.857.8058 or email NewAccounts@NextGenerationTrust.com if you need assistance.
Alternatively, you can sign-up for a complimentary educational session with one of our representatives.