As you plan for your estate, one important decision you’ll have to make will be your choice of trustee. This is also often one of the most challenging choices.

Your trustee holds legal title to the assets in your trust and has a responsibility to act in the best interests of the trust beneficiaries. They must follow the instructions in the trust document as well as the rules laid out by state and federal laws. Unlike a personal representative or executor who may serve for one to two years, a trustee may serve for a much longer term.

If you have a revocable trust, you will probably serve as trustee during your life, but you will also need to name a successor to take over after you die or if you become incapacitated. Many people wonder if they should choose a family member or close friend, or whether they will be better off with a professional trustee. Each of these options has its advantages and disadvantages.

Choosing Family or Friends as Trustees

A family member or friend may be more likely to understand your wishes and family dynamics. In addition, a family member may charge little or no fee. At the same time, they may lack the skills to carry out this role. If there are disagreements between the trustee and the beneficiaries, family relationships can be strained.

If the trustee is also a beneficiary, then the trust must be carefully drafted to avoid any adverse income or estate tax consequences. Finally, if the trust is intended to last for generations, the trustee will need a successor, or successors, to take over in the event of death or disability.

Choosing a Corporate or Professional Trustee

A corporate or professional trustee will have the expertise to manage the trust and handle the administrative details. In addition, they can deal objectively and unemotionally with the beneficiaries. A corporate trustee will not die, which provides continuity.

One drawback is that a corporate trustee may charge a fee, while a family member may not. Furthermore, the trustee may not know your beneficiaries very well and may act more conservatively than you would have intended. However, this may be less of a factor if you choose a trustee with whom you have a relationship so that they understand your wishes and can carry them out.

Making the Decision

Your decision will depend on a variety of factors. In some cases, especially if the trust is large, grantors will name a family member and a corporate trustee as co-trustees to get the best of both worlds.

It is also important to consider the goals of the trust, along with its size, expected duration, and the types of assets it will hold. For example, a complicated trust that is expected to last for generations may mean that a professional trustee is more suitable. You should also consider whether you have an individual in mind whom you can trust completely, and how they would negotiate family dynamics.

As you make this decision, pay attention to some of the provisions in your trust that relate to your trustees. You may think some of the sections in the back of the trust are unimportant or are standard, boilerplate language, but these sections can have significant consequences. Read them and know what they entail.

You should review who has the power to remove trustees and appoint successors after your death. If you have multiple trustees, the trust should specify how decisions are made when trustees disagree. If you do choose a family member or friend, the trust should give that individual the authority to hire professionals to assist them.

Ultimately, your choice of trustee is a personal decision, and there is no one right answer for everyone. For this reason, it is important that you take the time to make this decision thoughtfully and intentionally. By making your wishes regarding your successor clear, you can help clear the path to a smooth transition for your beneficiaries.

It is common for businesses and nonprofit organizations to have large asset pools, like cash or operating reserves, that aren’t yet designated for a specific goal or need. Often, these asset pools have been set aside as rainy-day funds and have grown over time beyond their necessary size. Properly managed, these pools can swell to be a source of capital growth for an organization, but a surprising number of institutional asset pools (IAPs) remain highly conservative when they could be growing.

Typically, IAPs are managed by either an organization’s internal investment committee or a third-party advisor. In both scenarios, the portfolio manager aims to maximize earning power so that the asset pools are not losing value or simply sitting stagnant without growth.

For example, consider a privately owned business that has recently accumulated quite a bit of cash after two consecutive quarters of strong sales. The owners want to keep the money accessible to the company but are also interested in taking advantage of a current market dip to grow their assets over time. In this case, they may choose to manage the funds themselves, investing in stocks, bonds, and other assets of their own choosing, or assign management to an independent advisor.

Depending on the type of organization and the state in which it operates, each institution may or may not be subject to legal regulations regarding fiduciary responsibilities. But even if the organization falls outside the legal definition of a fiduciary, companies still have an ethical responsibility to their constituents to manage assets prudently, says Grant Verhaeghe, CAPTRUST senior director of institutional portfolios.

“Any person who works as a steward of an organization’s assets should be thinking about and learning best practices for institutional asset pool management,” Verhaeghe says. For institutions that use an internal investment committee for asset management, here are some best practices to consider.

Consider Investment

When considering whether to invest institutional asset pools, there is no one-size-fits-all threshold or standard investment strategy, says Verhaeghe. “Depending on the organization’s unique goals and liquidity needs, each one will use these pools differently and have different objectives,” he says.

Eric Bailey, head of CAPTRUST’s endowment and foundation practice, agrees: “The threshold will be different for every organization, but in general, if you think your organization could be earning a material amount of money through investment, then it’s a good idea to talk about investment strategies so you can put existing IAPs to work.”

For example, Bailey says, imagine a business has $10 million sitting on its balance sheet in a variety of places, earning zero dollars. Through strategic investment, the business could potentially earn a 4 percent return—or $400,000—an amount that could make a material difference to its annual profit-and-loss statement. “The company could then deploy those earnings on a discretionary basis,” he says, “for instance, as bonuses in client services or by hiring more people.”

What’s key is understanding both the upside potential and risks involved in IAP investment so that the organization can make informed decisions with appropriate short- and long-term perspectives.

Account for Time Horizons

Another best practice for IAP management is to consider time horizons for invested assets, or how quickly you might need to deploy the capital. Some asset pools will need to be spent in the next month; others in the next one to three years; and still others can sit in waiting for a longer period. Which asset pools will be good candidates for investment depends on the organization’s cash-flow needs and vulnerabilities.

As Bailey says, “One of the keys to managing IAPs is matching the money to the right time horizon to create the right investment strategy.”

A nonprofit, he says, may need a larger rainy-day fund of liquid assets that are easily accessible and safely stored, just in case donations diminish or the organization doesn’t receive a particular grant they were used to receiving. “These reserves are typically managed conservatively, with capital preservation at center of mind,” says Bailey. “They need to be liquid, safe, and readily available. But asset pools with longer time horizons may be good options for a little more risk, and you may potentially see a higher rate of return.”

Manage Risk

Evaluating how much risk to take with your IAPs depends on how a market decline would affect your organization both now and in the long-term future. Again, each institution will be unique. “The important piece is to fully consider the implications of potential growth or potential loss before you make IAP investment decisions,” says Bailey.

For example, Bailey says, consider a healthcare organization—a hospital that has issued municipal bonds to upgrade its equipment. The bond underwriters give the hospital a credit rating based on its debt, and the hospital will have debt covenants it must meet. “If investments drop too far in value because of a market decline, the hospital can be downgraded by credit rating agencies. This downgrade could cost the organization additional interest expense in future bond issuances or make their bonds less desirable,” he says.

A publicly traded company, on the other hand, will need to consider how investment gains and losses may impact its quarterly earnings statements and, therefore, its stock value.

“Investments on a balance sheet are naturally going to go up and down over time,” Bailey says, “and those changes will flow through to impact other areas of the organization. The critical element is understanding what areas will be impacted and how so that you can make the best possible decisions.”

At times, an investment committee or financial advisor may be managing institutional assets that have liabilities attached. In this case, Verhaeghe recommends organizations create risk models that explain the conditions under which it may be appropriate to take risk, and when it is not. Factors to consider include when the money will be needed, what the expected return will be, and how much risk the organization is able and willing to take.

Document the Process

“Regardless of whether the organization is considered a fiduciary, it’s a good idea to follow a sound process around your investment decisions and document each step,” says Verhaeghe. “That way, if anyone ever asks questions about what you chose or why you chose it, you have the answers.”

These answers may include articulating the organization’s financial needs, goals, and vulnerabilities; documenting practices in an investment policy statement; gathering regular reporting statements; or revisiting goals as the facts and circumstances change over time, Verhaeghe says.

“No two institutions are the same,” says Bailey, “There are dozens of different variables that will impact how each organization should be investing.” For instance, whereas a retirement plan will have a long-term time horizon and specific goal as it relates to each participant or beneficiary, a small, privately owned business may have the goal to maintain purchasing power of its operating reserves and potentially grow that purchasing power over time.

By following these practices, organizations that are independently managing their IAPs can deliver on their fiduciary responsibilities, whether legally mandated or not. However, for organizations that want assistance, managing institutional asset pools is an easy add-on to a trusted relationship with an existing financial advisor. Whichever path these institutions choose, they can be sure they are engaging in healthy financial practices to ensure long-term viability and, potentially, a healthy return as well.

The passage of the SECURE 2.0 Act introduced a range of retirement plan enhancements designed to bolster financial security for American workers. So far, however, most of its optional provisions are seeing minimal uptake. Taken at face value, slow uptake may seem discouraging, but it does not mean the act isn’t having an impact on improving financial wellness. Consider SECURE 2.0 as part of a bigger financial wellness snowball instead. Its power is likely to grow over time, especially as it converges with other financial technologies and trends.

“The lightbulb is turning on,” says Mike Webb, CAPTRUST senior manager of plan consulting. “Employers are thinking: There are so many other ways I can look out for people financially, beyond just pay and a retirement plan.” SECURE 2.0 helped kickstart those conversations and bring them into the spotlight.

Different Offering, Equal Impact

“Uptake of optional provisions is just one part of the story,” says Audrey Wheat, CAPTRUST senior manager of vendor analysis and strategic relations. “First, there are a number of mandatory provisions for which we can assume universal uptake. Second, it’s important to point out that plan sponsors and their vendor-partners are also exploring other avenues to offer financial wellness features outside the plan itself.”

For example, one optional provision offers the ability for employers to establish emergency savings accounts within retirement plans. These accounts allow non-highly compensated employees to contribute up to $2,500 of after-tax dollars.

Wheat says the overall sentiment about this provision is that’s its overly complicated and carries a heavy administrative burden. “Plan sponsors may not choose to integrate this provision, but they still realize they need to have an emergency savings option,” she says.

According to CAPTRUST research, some plans are choosing to offer stand-alone emergency savings programs instead. These programs often include payroll-deducted savings accounts with employer-sponsored financial coaching. The goal is to help employees build short-term financial security without modifying their retirement plan contributions or taking withdrawals, such as loans, from their plan balances.

“Sometimes, it’s easier to provide an alternative solution than to change the plan itself,” says Webb. Another example: Some companies now provide direct student loan repayment assistance instead of using SECURE 2.0’s student loan matching feature—another one of its optional provisions.

Cumulative Impact

Employers don’t need to overhaul their retirement plans to support financial wellness. Sometimes, simple tools and good guidance can be just as effective.

“When people have access to good information and tools, they’re able to manage their finances more confidently,” says Chris Whitlow, CAPTRUST senior director and head of CAPTRUST at Work, the firm’s financial wellness solution for institutional clients. “Confidence reduces financial stress today and helps people stay focused on the future.”

Whitlow says he sees employers integrating a range of third-party benefits and tools, from financial wellness platforms to artificial-intelligence-enabled budgeting tools to automated savings programs, in addition to SECURE 2.0 provisions.

“What’s really exciting is watching these different technologies and programs start to come together,” says Whitlow. “As that happens, we’re going to see financial wellness evolve much faster, and that’s going to create real, meaningful change for people.”

Webb agrees. “First, we saw the natural rise of auto-enrollment. Then the mandatory rise of auto-enrollment, automatic increases in deduction rates, emergency savings accounts, and the saver’s match, which—when combined—will add up to tremendous growth in retirement plan and other savings accounts in the future. All these layers on top of one another. The snowball is getting bigger, and it’s picking up speed.”

The Saver’s Match and a Savings Mindset

Webb says he is especially excited about the retirement saver’s match, a part of SECURE 2.0 that comes into effect in 2027. “The savers match has the potential to transform this industry as much as automatic enrollment and target-date funds did.”

The saver’s match is a government-funded matching contribution to an eligible employer-sponsored or individual retirement account. Through the savers’ match, the federal government will match 50 percent of retirement account contributions up to $2,000 for low- and middle-income taxpayers. Sponsor participation in the saver’s match is optional, so the success of the program will depend on two key factors: overall adoption rates and taxpayer education. Participants will need to elect to add a saver’s match account when filing their taxes.

“We will see a tipping point,” Webb says. “A lot of people have no savings at all. Suddenly, they’re going to have a retirement plan account that might have $10,000 in it within two years, and if we haven’t incentivized a savings mindset in them before that time, they’re going to want to withdraw that money to pay bills. Now’s the time to get ahead.”

Having a savings mindset means staying focused on long-term financial goals. The saver’s match and employer-sponsored emergency savings accounts are two ways to incentivize this type of long-term thinking. Having access to emergency savings might also help employees avoid withdrawing funds from their retirement plans.

“The truth is that most people who take loans out of their plans are taking smallish amounts of money—$1,000 to $3,000—that could easily come from emergency savings instead,” says Whitlow. “Participants may not be so tempted to take loans, hardships, and other in-service distributions if they have a separate pot of money for emergencies.”

Especially for early- and mid-career workers, withdrawing small sums can have detrimental long-term effects because they’ll miss out on compound earnings. “If employers can automate the emergency savings piece, employees are more likely to be in better shape, both in the near and long term,” says Webb.

Retirement Rich, Cash Poor?

According to Fidelity, the number of 401(k) millionaires rose 27 percent in 2024, rising from 422,000 to 537,000 people. These are historic numbers, but they’re likely to look less impressive over time as younger generations get an early start at saving.

“We talk so much about the state of retirement for baby boomers and Gen Xers,” says Webb. “What most people aren’t talking about yet is what this all means for Gen Z and Gen Alpha. If you’re in your early 20s right now with $10,000 in a retirement account, and you don’t touch it, with the compounding power of continued savings and earnings, you have the potential to be able to retire as a millionaire.”

“We’re going to see so many people who earned modest middle-class salaries retiring with seven-figure balances in their retirement accounts,” he says. “They may still be liquid-asset poor if they don’t have good guidance and education, but they will retire well.”

That’s one of the reasons financial wellness programs are critical, and it may help explain why employers aren’t rushing to integrate all SECURE 2.0’s optional provisions. “Most plan sponsors and recordkeepers see SECURE and SECURE 2.0 as parts of a bigger conversation about employee attraction, retention, and financial wellness,” says Wheat. The question employers are asking isn’t as simple as “Which SECURE 2.0 provisions should we offer?” Instead, they’re asking “What are our ideal financial outcomes for our workforce?” Then, they’re working backward to decide which means can help them achieve their goals. SECURE 2.0 is just one of the tools in the toolbox.

When it comes to safeguarding your family’s financial future and protecting your wealth, life insurance plays a pivotal role. Regularly reviewing your life insurance portfolio with an experienced advisor should be an integral part of your financial planning.

Understanding Your Portfolio

Life insurance is often an undermanaged asset. Periodic reviews can identify weaknesses and lead to opportunities for improvement that can substantially reduce risk and potentially improve your long-term results.

Over time, policies acquired may not perform as originally expected. Couple this with life’s changing financial, family, and health circumstances, and it becomes imperative to monitor your life insurance policies and coverage needs regularly.

Key Considerations in a Life Insurance Review

  1. Tax Efficiency: Life insurance can have significant income and estate tax implications, both during your lifetime and after. Strategies like creating an irrevocable life insurance trust or using tax-advantaged investment options within your policy can lead to reduced tax consequences.
  2. Identifying Coverage Gaps: Over time, financial obligations, taxes, and other liabilities can change. Your financial advisor can conduct a thorough review of your insurance coverage to identify any gaps and recommend appropriate adjustments to help ensure you and your family are adequately protected.
  3. Optimizing Your Insurance Portfolio: Life insurance policies vary widely in terms of structure and features. Ask your financial advisor to help you assess whether your current policies are suitable for your needs. They can explore options to optimize your policies, such as converting term life insurance to permanent insurance or adjusting the coverage amount to align with your current financial situation and objectives. In some cases, policies can lapse before life expectancy, or there will be deadlines within the policies that must be adhered to.
  4. Investment Performance: Some life insurance policies, particularly permanent policies such as variable universal life insurance, include cash value components that can be invested. When reviewing your life insurance portfolio, an advisor can assess the performance of these investments within your policies and assist with adjustments or reallocations to optimize returns and align with your risk tolerance.
  5. Cost Efficiency: As you age and your circumstances change, the cost-effectiveness of your policies will also be an important consideration. An advisor can help you evaluate whether you’re getting a fair value for your premiums and explore cost-efficient alternative options, if necessary.

As you develop your financial plan, many elements could be labeled as set-it-and-forget-it aspects. Life insurance is not one of them. To remain effective, it requires regular attention and adjustment. Regularly reviewing your life insurance portfolio within the context of your wealth, estate, and business preservation planning is not just a prudent practice; it’s essential.

The first 50 days of President Trump’s second term have seen a surge of policy actions spanning a broad range of issues. While any one of these initiatives could serve as a stand-alone policy agenda for a president, this administration is ambitiously advancing multiple items through the policy funnel simultaneously.  

The result has been a steady stream of headlines that has left investors navigating an increasingly complex and unpredictable landscape, akin to a multidimensional chess game. Capturing the most headlines over the past week has been the impending levy of tariffs on Mexico, Canada, and China. Here, we outline what we believe are the primary goals and potential risks of these rapidly evolving trade policy initiatives. We also highlight how economic uncertainty stemming from the crosscurrents of several policy shifts is influencing our investment decision-making process.

Figure One: The Policy Agenda Funnel

Source: CAPTRUST research. For illustrative purposes only.

Primary Goals

We believe the administration’s trade policy reforms are designed to pursue four main objectives.

  1. Reshoring and Foreign Investment: By making it more expensive to buy foreign goods, tariffs incentivize U.S. manufacturing. This has the potential to drive an increase in domestic and foreign investment into the U.S. For example, in the past week, we saw companies, including Apple and Taiwan Semiconductor, announce significant investments in domestic research and development and in semiconductor chip-making facilities.
  2. Balancing the Playing Field: The president strongly believes there are imbalances within existing trade relationships that create an unfair competitive advantage for other countries. He is seeking to counteract tariffs on U.S.-made goods and foreign subsidies for industries such as agriculture, forestry, and auto manufacturing.
  3. Creating Sources of Revenue: Tariffs are direct payments made to the U.S. government, which could improve our current fiscal condition. They could also potentially offset the cost of other proposed policy items, most notably the extension of the cuts included in the Tax Cuts and Jobs Act (TCJA). However, it is important to understand that the true revenue impact is far from certain, as tariffs and any potential retaliation could dampen economic growth conditions.
  4. Leveraging for Non-Trade Negotiations: Tariffs are a bargaining tool that extends beyond trade policy. They can be used to pressure foreign governments on issues such as border security, drug enforcement, and other geopolitical objectives.

Potential Outcomes with Meaningful Impacts

The immense scale, complexity, and importance of international trade mean that policy shifts introduce significant potential risks. This is particularly true at present, because the initial round of proposed tariffs targets nations that currently represent more than 40 percent of total U.S. annual imports. However, because these issues continue to be negotiated, the ultimate extent of impact on consumers, businesses, markets, and the economy will depend on the breadth and depth of actual imposed tariffs. We believe the most likely outcomes include the following.

Investment Implications

In this uncertain and rapidly evolving environment, it is extremely challenging to determine specific investment implications with a high degree of confidence. Despite this uncertainty, what is becoming clear is that the decision-making landscape is being reshaped.

Some of the most important underlying economic assumptions that investors have historically modeled with confidence, such as trade relationships, security alliances, and free markets, are now being scrutinized and, in some cases, completely reset.

Although the final contours of the administration’s policy changes are far from certain, many of the fundamental factors that have shaped markets and investment outcomes for the past decade are now changing at an unprecedented pace and scale. These changes should not necessarily be viewed as bearish in the long term. Rather, changing assumptions are an indication that future winners may be different than past ones, and an uncertain transitional period is likely.

The two biggest questions the CAPTRUST Investment Committee is focusing on are “What bearing will this new environment have on U.S. technology leadership in global markets?” and “How will it influence unity and competitiveness in Europe?”

By any account, this is a historical moment. Investors are rarely faced with a true regime change, but the scale and speed of recent policy actions suggest that investors and businesses may need to adjust to a new set of economic conditions.

New environments can create risks—but also opportunities—for investors who adapt. The Trump administration has already demonstrated a willingness to employ unconventional negotiation strategies. While the ultimate outcome of various policy shifts is still unknown, what does appear evident is that market volatility is likely to persist as investors attempt to understand and adjust to this shifting economic landscape.

As financial advisors, we are paying close attention to fiscal policy outcomes. While we may experience short-term volatility as markets adjust to shifting policy, our core investment principles will not change: remain diversified, resist emotional decision-making, and maintain a long-term perspective to best capture the long-term compounding power of time.

It’s nice to own stocks, bonds, and other investments. Nice, that is, until it’s time to fill out your federal income tax return. At that point, you may be left scratching your head. Just how do you report your investments, and how are they taxed?

Do I Define It as Ordinary Income or a Capital Gain?

To determine how an investment will be taxed in any given year, first ask yourself what went on with the investment that year. Did it generate interest income? If so, the income is probably considered ordinary. Did you sell the investment? If so, a capital gain or loss is probably involved. (It’s worth noting that an investment can generate both ordinary income and, when later disposed of, capital gain income as well.)

If you receive dividend income, it may be taxed at either ordinary income tax rates or the rates that apply to long-term capital gain income. Dividends paid to an individual shareholder from a domestic corporation or qualified foreign corporation are generally taxed at the same rates that apply to long-term capital gains. But special rules and exclusions apply, and some dividends (such as those from money market mutual funds) continue to be treated as ordinary income.

The distinction between ordinary income and capital gain income is important because different tax rates may apply, and different reporting procedures may be involved. Here are some of the things you need to know.

It’s Ordinary Income, But is it Taxable?

Investments often produce ordinary income, like interest and rent produced from owning a rental property. Savings accounts, certificates of deposit, money market accounts, annuities, bonds, and some preferred stocks can also generate ordinary income. Ordinary income is taxed at ordinary (as opposed to capital gains) tax rates.

But not all ordinary income is taxable—and even if it is taxable, it may not be taxed immediately. If you receive ordinary income, the income can be categorized as taxable, tax-exempt, or tax-deferred.

A quick word about ordinary losses: It’s possible for an investment to generate an ordinary loss, rather than ordinary income. These losses reduce ordinary income.

What is Basis?

To understand what happens when you sell an investment vehicle, you also need to understand one key term: basis.

Generally speaking, basis refers to the amount of your investment in an asset. To calculate the capital gain or loss when you sell or exchange an asset, you must know how to determine both your initial basis and your adjusted basis in the asset.

Usually, your initial basis equals your cost—what you paid for the asset. For example, if you purchased 10 shares of stock for $1,000 each, your initial basis in the stock is $10,000. However, your initial basis can differ from the cost if you did not purchase an asset but received it as a gift, as an inheritance, or in a tax-free exchange.

Your initial basis in an asset can increase or decrease over time. This is your adjusted basis. For example, if you buy a house for $100,000, your initial basis in the house will be $100,000. If you later improve your home by installing a $5,000 deck, your adjusted basis in the house may be $105,000. To learn more about which items increase or decrease the basis of an asset, see IRS Publication 551 for details.

How Do I Calculate Capital Gain or Loss?

If you sell stocks, bonds, or other capital assets, you’ll end up with a capital gain or loss. Special capital gains tax rates may apply and may be lower than ordinary income tax rates. Basically, capital gain or loss equals the amount that you realize on the sale of your asset (i.e., the amount of cash or the value of any property you receive) minus your adjusted basis in the asset.

If you sell an asset for more than its adjusted basis, you’ll have a capital gain. Returning to the earlier example, assume you had an initial basis in stock of $10,000. If you sell those stocks for $15,000, your capital gain will be $5,000. The opposite is true as well. If you sell an asset for less than your adjusted basis in the asset, you’ll have a capital loss. That means if you sell those same stocks for $8,000—with its adjusted basis of $10,000—your capital loss will be $2,000.

Schedule D of your income tax return is where you’ll calculate your short-term and long-term capital gains and losses and figure out the tax due, if any. In order to compute your tax on capital gains for the year, the gain will be compared to your overall tax, if there were no special rates. See IRS Publication 544 for details.

In plain language, here are the three key terms you’ll need to know to fill out Schedule D correctly:

Can I Use Capital Losses to Reduce My Tax Liability?

The short answer is yes. You can use capital losses from one investment to reduce your tax liability on capital gains from other investments. Any losses not used this year can be used later to offset future capital gains. Schedule D of your federal income tax return can lead you through this process.

The Medicare Contribution Tax on Unearned Income May Apply

One last thing to note: High-income individuals may be subject to a 3.8 percent Medicare contribution tax on unearned income. This tax, which first took effect in 2013, also applies to estates and trusts, although slightly different rules apply.

The tax is equal to 3.8 percent of the lesser of your net investment income, including net income from interest, dividends, annuities, royalties and rents, and capital gains, as well as income from a business that is considered a passive activity, or the amount of your modified adjusted gross income that exceeds this year’s threshold.

The best way to think of it is this: If your adjusted gross income exceeds the dollar thresholds, you will be subject to the additional 3.8 percent tax. It’s also worth mentioning that interest on tax-exempt bonds is not considered net investment income for purposes of this additional tax. Qualified retirement plan and IRA distributions are also not considered investment income.

Ask for Help When Things Get Complicated

Remember that every person’s tax situation is unique, and the sales of some assets are more difficult to calculate and report than others. IRS publications may help you correctly calculate your capital gains or losses, but when you need it, don’t hesitate to ask for help from an accountant or tax professional.

Source: Broadridge Investor Communication Solutions, Inc.

The income tax benefits offered by 529 plans make these plans attractive to parents and others who are saving for college or K-12 tuition. Qualified withdrawals from a 529 plan are tax-free at the federal level, and many states also offer tax breaks to their residents. It’s important to evaluate the federal and state tax consequences of plan withdrawals and contributions before you invest in a 529 plan.

Federal Income Tax Treatment of Qualified Withdrawals

There are two types of 529 plans: savings plans and prepaid tuition plans. The federal income tax treatment of these plans is identical. Your contributions accumulate tax-deferred, meaning you don’t pay income taxes on the earnings each year. Then, if you withdraw funds to pay the beneficiary’s qualified education expenses, the earnings portion of your withdrawal is free from federal income tax. This feature presents a significant opportunity to help you accumulate funds for education.

Qualified education expenses for 529 savings plans include the following:

Additionally, up to a certain amount per year can be used for K-12 tuition expenses for enrollment at an elementary or secondary public, private, or religious school. Furthermore, under the SECURE Act of 2019, a portion of funds from a 529 plan can be used toward student loan expenses.

Qualified education expenses for 529 prepaid tuition plans generally include tuition and fees for college only (not graduate school) at the colleges that participate in the plan.

State Income Tax Treatment of Qualified Withdrawals

States differ in the 529 plan tax benefits they offer to their residents. Some states offer no tax benefits, while others may exempt earnings on qualified withdrawals from state income tax or offer a deduction for contributions. Keep in mind that states may limit their tax benefits to individuals who participate in its in-state 529 plan. For example, some states allow residents to deduct a portion of their 529 plan contributions on their state income tax returns, while others do not offer any deduction or credit. It is important to check with your state’s tax authority or plan administrator for details on available benefits.

You should also consult your state’s laws to determine the income tax treatment of contributions and withdrawals. In general, you won’t be required to pay income taxes to another state simply because you opened a 529 account in that state. However, you’ll probably be taxed in your state of residency on the earnings distributed by your 529 plan if the withdrawal is not used to pay the beneficiary’s qualified education expenses.

529 account owners interested in making K-12 contributions or withdrawals should understand their state’s rules regarding how K-12 funds will be treated for tax purposes, as states may not follow the federal tax treatment.

Income Tax Treatment of Nonqualified Withdrawals (Federal and State)

If you make a nonqualified withdrawal (i.e., one not used for qualified education expenses), the earnings portion of the distribution will generally be taxable on your federal (and probably state) income tax return in the year of the distribution. The earnings are usually taxed at the rate of the person who receives the distribution (known as the distributee). In most cases, the account owner will be the distributee. Some plans specify who the distributee is, while others may allow you (as the account owner) to determine the recipient of a nonqualified withdrawal.

You’ll also pay a federal 10 percent penalty on the earnings portion of the nonqualified withdrawal. There are exceptions, though. The penalty is generally waived if you terminate the 529 account because the beneficiary has died or become disabled, or if you withdraw funds not needed for college because the beneficiary has received a scholarship. A state penalty may also apply.

Deducting Your Contributions to a 529 Plan

Contributions to a 529 plan are not deductible on your federal income tax return. However, depending on where you live, you may qualify for a deduction or credit on your state income tax return. Many states offer a state income tax deduction or credit for contributions to a 529 plan. Keep in mind that most states let you claim an income tax deduction or credit on your state tax return only if you contribute to your own state’s 529 plan.

Many states that offer a deduction for contributions impose a deduction cap or limitation on the amount of the deduction. For example, if you contribute a certain amount to your child’s 529 plan this year, your state might allow you to deduct only a portion of that amount on your state income tax return. Check the details of your 529 plan and the tax laws of your state to learn whether your state imposes a deduction cap. Your financial advisor can help you understand 529 plan rules in your state.

If you’re planning to claim a state income tax deduction for your contributions, you should learn whether your state applies income recapture rules to 529 plans. Income recapture means that deductions allowed in one year may be required to be reported as taxable income if you make a nonqualified withdrawal from the 529 plan in a later year. Again, check the laws of your state for details, or talk to your financial advisor.

Coordination with Coverdell Accounts and Education Tax Credits

You can fund a Coverdell education savings account and a 529 account in the same year for the same beneficiary without triggering a penalty.

You can also claim an education tax credit (American Opportunity credit or Lifetime Learning credit) in the same year you withdraw funds from a 529 plan to pay for qualified education expenses. However, your 529 plan withdrawal will not be completely tax-free on your federal income tax return if it’s used to cover the same education expenses that you are using to qualify for an education credit. When calculating the amount of your qualified education expenses for purposes of your 529 withdrawal, you’ll have to reduce your qualified expenses figure by any expenses used to compute the education tax credit.

Note: Before investing in a 529 plan, consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

The Fed’s September 2024 decision to start lowering the fed funds rate marked a big policy shift from recent years’ rising rates. Its effects will ripple through various sectors of the economy.

For the real estate market, lower interest rates generally mean good news. As the Fed cuts rates, mortgage rates tend to follow suit, although not always in perfect sync. Federal funds rate cuts have a direct impact on short-term interest rates. Other factors also influence mortgage rates, including long-term bond yields, inflation expectations, and each lender’s appetite for risk.

To understand the impact of easing rates, it’s helpful to look at this question through the eyes of two audiences: first-time homebuyers and existing homeowners.

While lower interest rates could encourage first-time buyers, home prices are near record highs and could remain prohibitive for some time. Home values have appreciated significantly since the beginning of the pandemic, so one or two rate cuts may not be enough to bring mortgage payments to a level where affordability meaningfully improves.

Existing homeowners have benefited from price appreciation, adding more than $14 trillion to their home equity. Having locked in ultra-low mortgage rates during the pandemic, these owners are unlikely to sell. Yet as rates fall, they may seek to unlock value by borrowing through home equity lines of credit (HELOCs). This form of borrowing, which slowed as interest rates climbed over the past few years, could help fund renovations, investments outside the home, and debt consolidation.

In his remarks over the past few years, Fed Chair Jerome Powell has used the word recalibration many times, suggesting that this easing cycle is about returning rates to levels that neither restrict nor overstimulate the economy. This begs the question: How fast and how far will the Fed cut rates? Fed economists will be watching the economic data for signs of recession, which would likely prompt faster or deeper rate cuts. At the same time, they are mindful of the possibility that inflation could reignite, which could slow its rate-cut trajectory.

Of course, housing is not the only sector that stands to benefit from falling interest rates. A lower-rate environment can reduce variable-rate debt on credit cards and auto loans, opening room in budgets for more consumer spending. Businesses may also step up their capital investments and hiring plans.

A Roth conversion involves transferring funds from a traditional retirement account—such as a 401(k), 403(b), or individual retirement account (IRA) funded with pre-tax dollars—into a Roth IRA.

Why would someone consider a Roth conversion? The biggest benefit lies in the tax treatment of the converted funds. Once the funds are in the Roth IRA, future growth of those assets is tax-free. Withdrawals in retirement are also tax-free, assuming they meet certain criteria. As with any strategy, there are important considerations to keep in mind.

When you convert funds to a Roth IRA, the amount converted is taxable income in that tax year. For example, if you convert $100,000 from a traditional IRA to a Roth IRA, that $100,000 will be added to your taxable income in the conversion year.

Converting large amounts can result in a significant tax bill and may push you into a higher tax bracket. Even so, using retirement funds to pay taxes may make sense for those looking to convert large IRAs to reduce their future required minimum distributions (RMDs).

The timing of your Roth conversion matters too. Generally, it’s a good idea to convert when your income is lower—for example, after you’ve retired and before you begin drawing Social Security. You may also choose to convert over the course of several years to spread out the tax impacts. But if you can get comfortable with these considerations, a Roth conversion can provide you with benefits beyond tax-free growth and withdrawals. Some of these benefits are:

As always, you should consult your tax and financial advisors and consider your unique situation and goals.

Life is uncertain, and it’s often these unknowns that cause the most worry—for instance, the future of Social Security benefits.

Financial planning can help alleviate some of these worries by providing clarity and by making sure your Social Security benefits are appropriately accounted for in your long-term financial strategy.

How Social Security Began

Congress established the Social Security program to provide a reliable fixed income for retirees. In the beginning, there were more workers paying their share of the payroll tax—now known as Federal Insurance Contributions Act (FICA) tax—into the plan than there were retirees receiving benefits, so excess funds were used to create a trust to house the growing surplus.

From 1984 to 2009, the total amount of money gathered from FICA taxes exceeded the amount of money that the Social Security program was paying in benefits, and funds accumulated in the trust.

However, by 2010, things changed. The number of retirees receiving benefits was higher than originally expected, likely due to high unemployment rates and an aging population that collectively retired after the 2008–2009 financial crisis. The fund began paying out more than it was receiving. To meet its financial obligations, the Social Security program needed to use a portion of its trust to cover the deficit.

Social Security Changes, Past and Future

Multiple adjustments have already been made to the program, like increasing the Social Security wage base limit, which is the amount of income subject to Social Security taxes. Another change redefined full retirement age, which is the age when a person can begin collecting their full Social Security benefits. Changes such as these began in 1983, and small adjustments continue to be made.

Some likely future adjustments could include another change to full retirement age or further adjustments to the amount of income that is subject to Social Security taxes. Both major political parties have proposed these changes, and other strategies, as solutions to shore up any gap in benefits. Although privatization of the Social Security trust has been proposed a few times over the years, recently, it has not been a major topic of discussion. We believe privatization is an unlikely change.

2025 Social Security Changes

The Social Security Fairness Act, signed into law on January 5, 2025, effectively repeals the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) rules. This means that individuals who were previously subject to WEP and GPO may benefit from an increase in their Social Security benefits. However, the timeline of when these changes will take effect has not yet been determined by the Social Security Administration.

What impact will this change have on the viability of Social Security? Likely, it will speed up the timeline for when Congress must make Social Security decisions, but it won’t change how likely or unlikely those changes are.

The Viability of Benefits

When people talk about potential Social Security changes, they often express concern that the program will be eliminated, and they won’t receive the benefits they’re counting on.

Even in the unlikely event that Congress doesn’t make further adjustments, and the trust fund portion becomes depleted, Social Security benefits won’t vanish overnight. Benefits would be reduced but not eliminated entirely.

According to a recent study by the Social Security Trustees, by 2035, even if the fund were depleted, Social Security would still be able to pay 83 percent of scheduled benefits from the incoming payroll tax portion of the fund. In 2098, it would still be able to cover 73 percent of scheduled benefits.

In other words, even if Congress chose to do nothing at the time to correct the depletion (a highly unlikely strategy for any Congressional delegation), the program would still be able to pay a sizeable portion of benefits for multiple generations.

Regardless of what happens in future legislation, planning for Social Security benefits is an important part of building your retirement income plan. To prepare for a range of potential futures, talk with your financial advisor. They can help you model different scenarios and stress-test your plan against outcomes like a reduction in benefits. Knowing you’re prepared for whatever may happen can help provide perspective.