Not Spending It? The Low Hanging Fruit of Gifting to Family

For some retirees, a point in life may be reached where the likelihood of you spending down your assets becomes a low probability. A factor of positive market returns or low levels of spending earlier on in retirement may have left you with a larger nest egg than what you started with. The problem isn’t uncommon.

Lifetime gifting is a popular subject that we often speak with clients about who may find themselves in such a circumstance. But the most popular question isn’t often around the intention, but the “how” do I go about it? There are pros and cons to funding various types of accounts for the next generation and several other factors. However, the low hanging fruit of gifting is to start by identifying simple accounts that you can fund for kids or grandchildren for their benefit over their lifetime.

The first is a 529 plan. 529 plans are education savings vehicles that are administered by each state. A common misconception about these plans is that they may only be used for college. Not true. As a result of recent legislation, they can be used for virtually any education and even some trade or vocational schools. You can gift up to the annual gift exclusion as an individual ($17,000 in 2023) or twice that as a married couple. You can also super-fund this with a one-time $100,000 contribution that counts for 5 years’ worth. These funds may be subject to a state tax deduction, but more importantly grow tax deferred and the gains can be pulled out tax-free if used to reimburse educational costs. The worst case is that if not used for education you may owe tax and a 10% penalty on any earnings. As a result of very recent legislation, up to $35,000 of these dollars if unused can be rolled over to a Roth IRA for the beneficiary as well if certain rules are met.

The second is a Uniform Transfer to Minors Account (UTMA). UTMA accounts act as a taxable brokerage account for someone who is under the age of majority. Funding these accounts is permitted up to the annual exclusion or if greater, would be required to file a gift tax return. Dividends, capital gains, or other income generated as part of the investments must be paid annually. Also, once the beneficiary reaches the age of majority they are entitled to the funds. At age 18 in most states, that might not be desirable.

Then there is outright gifting. As mentioned above, you can gift anyone for any reason $17,000 per year without tax implications. So, if you’d like to help your grandchild buy their first car, home, or just because, you can do so! This can be a rewarding experience to see these funds put to good use during your lifetime and making an impact in your family’s life. Of course, there may be benefits to you of getting IRA money out at a lower tax rate than your heirs pay or avoiding estate or transfer taxes.

There are several easy solutions to make an impact on your family or to a charitable cause later in life with assets you may not “need” to continue to fund your retirement. It can be a lot more fun to see the impact of your gift than to leave it behind.

This article is written by Robert Jeter, CFP®, CRPC®, Financial Advisor and Vice-President of InFocus Financial Advisors Inc., whose firm focuses on the needs of people in retirement.  He can be reached at 410-677-4848 or robertj@retireinfocus.com for questions or comments. His website is www.retireinfocus.com.

Investment Advisor Representative offering securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC, a broker dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.

The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.