6 Tips to Kickstart Succession Planning with Your Business Owner Clients
Here are 6 tips you can share with your business owner clients to help kickstart their succession planning.
As the cost of college continues to rise, your clients might be faced with the often-daunting challenge of saving for their children’s future education expenses. One popular option for college savings is a 529 plan, a tax-advantaged investment account designed specifically for education savings which can be used for qualified education expenses1. Tax-free growth, potentially high-return investment options, and potential tax-breaks are just a few of the benefits parents or guardians could take advantage of when saving for college via 529 plan. Coverdell Education Savings Accounts and UGMA accounts are options for college savings accounts as well.
However, the market can be volatile and it can be challenging to navigate the ups and downs of the economy while trying to save for college, even with a plan.
When it comes to volatility and why it matters when investing, most investors welcome upside volatility, while downside volatility tends to lead to anxiety and concern. In this sense, volatility can be like a funhouse mirror, exaggerating whatever emotions investors may be experiencing at a given time. But volatility can also highlight the importance of investors understanding their own unique risk tolerance.
Downside volatility can present opportunities for you and your clients to re-assess risk and reset college savings account portfolio allocations if warranted. Maintaining a clear perspective and focusing on long-term goals can help investors effectively navigate periods of market volatility. Right now, many people are understandably worried, attempting to prepare for an incoming recession.
Age-based and static college saving portfolios are two different approaches to investing money for college education expenses.
As the name suggests, age-based portfolios are designed to change over time based on the age of the child. When the child is young, the portfolio may consist of more aggressive investments, such as stocks, which carry a higher risk but also have the potential for higher returns. As the child gets closer to college age, the portfolio will gradually shift towards more conservative investments, such as bonds or cash, which have lower risk but also lower returns.
Static portfolios, on the other hand, maintain a fixed asset allocation over time, regardless of the child’s age. For example, the portfolio may consist of 50% stocks and 50% bonds, and this allocation will not change.
The key difference between these two approaches is that age-based portfolios are designed to adapt to the changing needs of the child as they get closer to college age, while static portfolios maintain the same risk and return characteristics regardless of the child’s age.
Overall, age-based portfolios tend to be more popular because they provide greater flexibility and can help parents manage risk as the child approaches college age—and they can be used as an option when the market is highly volatile, as there is more control. However, static portfolios may be appropriate for some families who prefer a more hands-off approach to investing. Ultimately, as always, the best approach depends on individual circumstances, investment goals, and risk tolerance.
Based on individual circumstances, cashing out a 529 plan could be an option for your clients, if necessary, but will come with tax implications. If you withdraw funds from a 529 plan for non-qualified expenses, the earnings portion of the withdrawal is subject to federal income tax and a 10% penalty2. Cashing out during a volatile market locks in losses, without the chance to see that money come back during a more favorable market.
There are also options for how to use 529 plan money beyond just college tuition fees—and depending on your client’s reasoning for wanting to cash out, 529 funds can be used for private primary and secondary schools, apprenticeship programs, or to repay student loans. They can also be transferred to a new beneficiary, rolled into a Roth IRA, and more.
However, there are some exceptions to the 529 withdraw penalty, such as if the beneficiary becomes disabled, dies, receives a scholarship, or enters into military service. Additionally, if you decide to close a 529 plan, you may be able to transfer the funds to another 529 plan (such as a sibling) without incurring taxes or penalties.
Best course of action will always depend on your clients’ personal needs and risk tolerance. In general, many economists and financial professionals agree that trying to “time the market” isn’t the best option for most people—and when the market hits a downturn, depending on the circumstances, there is usually opportunity for the market to recover.
One way to combat the anxiety that can come with inflation and volatile markets is taking advantage of age-based portfolios (mentioned above), that become more conservative as time goes on. Looking into options for cashing out or transferring or utilizing funds for qualified purchases outside of tuition could also be an option if a client really needs it.
Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.
Federal income tax laws are complex and subject to change. The information is based on current interpretations of the law and is not guaranteed. Nationwide and its representatives do not give legal or tax advice. Please consult an attorney or tax advisor for answers to specific questions.