What You Need to Know About the One Big Beautiful Bill Act
Last week Congress approved, and the President signed into law, new tax legislation, called the “One Big Beautiful Bill Act” (OBBB), which could impact financial planning strategies going forward.
Please see below a summary of what is inside the Big Beautiful Bill and how it could impact you:
Individual Income Tax Brackets and Standard Deduction
The lower individual tax brackets from the 2017 Tax Cuts and Jobs Act (10%, 12%, 22%, 24%, 32%, 35%, 37%) are made permanent.
The higher standard deduction is also made permanent and increases to $31,500 for married filing jointly ($15,750 single), indexed annually for inflation.
This will maintain lower taxes for many middle- and upper-income households.
State and Local Tax (SALT) Deduction
The SALT deduction cap increases to $40,000 in 2025 for households with income up to $500,000.
A steep phaseout applies from $500,000 to $600,000 of income, effectively reducing the deduction back to $10,000. Planning notes:
Non-grantor trusts can each claim a separate $40,000 SALT deduction, which may present additional planning opportunities.
Pass-Through Entity Tax (PTET) elections remain in place, enabling business owners to deduct state taxes at the entity level.
Roth Conversions
With income tax rates unchanged, Roth conversions remain attractive for clients expecting higher tax rates in retirement.
Estate and Gift Tax Exemption
For 2025, the federal estate, gift and generation skipping transfer tax (GST) exemption is $13.99 million per individual ($27.98 million for married couples).
Starting in 2026, the estate, gift, and GST exemption will increase to $15 million per individual ($30 million for married couples), indexed for inflation.
Strategies such as Spousal Lifetime Access Trusts (SLATs), Dynasty Trusts, and permanent life insurance within those structures will remain central planning tools.
Corporate Rate & Bonus Depreciation
While the OBBB does contain a number of business provisions, it is important to note that the corporate tax rate, set permanently at 21% by prior law, will not change.
100% bonus depreciation is reinstated for assets placed in service from 2025 to 2030.
Section 179 expensing limit increases to $2.5 million, phasing out at $4 million—beneficial for real estate investors and business owners.
Qualified Business Income (QBI) Deduction – Section 199A
The 20% deduction for pass-through income is made permanent, preserving tax planning opportunities for business owners.
Phaseout thresholds for this deduction will increase modestly starting in 2026.
Qualified Small Business Stock (QSBS) – Section 1202
The QSBS exclusion allows eligible investors to exclude a significant portion of capital gains from the sale of qualified small business stock.
The OBBB raises the QSBS exclusion cap from $10 million to $15 million, raises the corporate asset limit from $50 million to $75 million, and reduces the required holding period from 5 years to 3 years.
These changes will prompt a renewed evaluation of using C-corporations for startup ventures, especially where a sale is anticipated.
Qualified Opportunity Zones
Set to return in 2027 with continued tax-deferral and exemption benefits.
Limited utility in 2026 due to the sunset of deferral provisions.
Techniques such as installment sales or charitable remainder trusts may help bridge gains from 2026 into 2027.
Alternative Minimum Tax (AMT)
The higher AMT exemption is made permanent.
Phaseout thresholds revert to $500,000 (individual) and $1 million (joint filers), affecting some higher earners.
Health and Family Benefits
HSAs can now be paired with more health plans, including Bronze and Catastrophic ACA options.
Dependent Care FSA limits increase to $7,500 (married filing jointly) starting in 2026.
Child Tax Credit increases to $2,200 per child (indexed for inflation).
Charitable Contributions
New $2,000 above-the-line deduction for joint filers ($1,000 for single filers).
A 0.5% AGI floor now applies to itemized charitable deductions.
Other Noteworthy Provisions
Car Loan Interest: Deduct up to $10,000 of interest paid, even without itemizing (phases out above $200,000 of income).
Tips and Overtime Pay: Above-the-line deduction up to $25,000 for married filers ($12,500 single), with phaseouts beginning at $300,000 of income.
Individual Trust Accounts for Minors: New tax-advantaged account for children under age 18, with $5,000 contribution limit and $1,000 federal match for children born between 12/31/24 and 1/1/29.
For questions regarding the potential impact of these changes, please do not hesitate to reach out.
Rory O’Hara, CFP®, CRPC®, is the founder and senior managing partner at Ausperity Private Wealth.
For years, a tired narrative has persisted: Millennials are lazy, entitled and financially irresponsible. The reality couldn’t be more different. Millennials are not only reshaping industries, they are rewriting the rules of wealth creation.
Yet far too many people view this generation as drowning in debt, wasting money on silly purchases and living in their parents’ basements. Unfortunately, this perception persists among many of my fellow financial advisors nationwide.
That’s a huge mistake. This group, a key driving force in the success of today’s economy, should not be ignored, let alone scoffed at based on a series of cartoonish delusions and misplaced presumptions.
An Entrepreneurial Generation
So, where do some of these views of millennials come from?
For starters, it’s important to point out that the generation wasn’t dealt the best hand. Many millennials came of age during the financial crisis, which sapped their lifetime earning power, thanks to older workers putting off retirement, which left fewer available jobs.
Also, it’s impossible to ignore student loan obligations and rising living costs, issues that are only exasperated by getting a late professional start. Even so, countless millennials have faced those challenges head-on and emerged triumphant, establishing themselves as one of the most entrepreneurial and adaptive generations in history.
Consider that a growing number of millennials are starting small businesses in the wake of the pandemic,which is consistent with findings suggesting that the generation wants to pursue entrepreneurialism. And that is not all.
In corporate America, millennials are increasingly rising through the ranks, assuming C-suite-level jobs every day. As part of that trend, they sometimes negotiate compensation packages that include stock options, restricted stock units and other somewhat opaque pay structures.
Millennials Have Money—Advisors Are Just Ignoring It
Despite the above, financial advisors continue to focus on baby boomers, wrongly assuming millennials lack investible assets. The truth is that millennials have plenty of money. In fact, millennials have nearly $16 trillion in wealth and are set to inherit another $72 trillion by 2045 as part of the Great Wealth Transfer.
Even so, estimates suggest that less than 25% of millennials (caution: study is behind a paywall) work with financial professionals. A nice way of looking at this is that this is an enormous missed opportunity for the financial planning industry. Another less charitable way of looking at it? It’s borderline shameful.
That’s because surveys also reveal that nearly 65% of millennial and Gen Z investors believe that a financial advisor is important to achieve financial success, compared to just 56% of baby boomers who said the same. The only way to explain the disconnect between these numbers (i.e., millennials who want to work with a financial advisor and those who actually do) is that my profession has ignored them.
What High-Income Millennials Are Really Thinking About
Unlike previous generations, millennials don’t trust that Social Security will be there when they retire, based on my interactions with them. They’re laser-focused on building wealth independently. Still, they have critical questions:
• Should I prioritize maxing out my 401(k), a Roth IRA or investing in emerging alternative assets like private equity?
• How should I structure my stock options and restricted stock units?
• Is it smarter to pay my mortgage aggressively or invest that capital elsewhere?
• What’s the best way to reduce taxes on my growing income?
They need a trusted advisor who understands their challenges—someone who doesn’t just push a one-size-fits-all retirement plan but helps them optimize their wealth strategy in real time.
What Millennials Want
Winning over millennials requires more than just a slick app or a trendy social media presence. The millennials I serve want a strategic partner—a wealth advisor who understands their ambition, financial complexity and drive for independence.
Indeed, based on my experience, they most want a thoughtful confidant. They don’t need general advice. Instead, they want to work with someone who understands their ambitions, challenges and priorities.
The best advisors will invest as much time into building those sorts of relationships as they do on other important offerings like crafting individualized portfolio strategies and delivering cutting-edge tech tools.
The Now Generation
It’s time for financial advisors to rethink their approach. Millennials aren’t just the future—they’re the now. Advisors who adapt their services to meet millennial needs will find a highly loyal and highly lucrative client base. Those who ignore this generation risk missing one of our time’s most significant wealth-building opportunities.
The message to millennials is clear: Don’t settle. Find an advisor who listens, understands your goals and offers solutions that work with your vision for the future. Whether seeking to save for retirement, buy a house or sort out a complex compensation package, having the right advisor can help get you there.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Rory O’Hara, CFP®, CRPC®, is the founder and senior managing partner at Ausperity Private Wealth.
For many wealthy families, passing down financial assets invokes more anxiety and fear than a sense of accomplishment or relief. And for good reason: Very often, transferring familial wealth can lead to its destruction.
The easiest way to avoid that fate is by confronting the challenges of family wealth planning head-on. That way, wealthy families can allow their children to manage their inheritance responsibly and, hopefully, in a way that reflects and reinforces their values for generations to come.
The Challenge For Wealthy Families
The key to solving the challenges associated with transferring wealth is mainly behavioral. Indeed, while many children of wealthy parents have the skills to manage wealth, inheriting a large amount of money tends to change how even the most well-intentioned people act.
Granted, shouldering that responsibility can be a wake-up call for some, giving them a sense of purpose and making them more productive citizens. However, something entirely different happens for others: They become more entitled, arrogant and materialistic. And that’s when the problems begin.
Inheriting a large sum of money will likely impact a person’s lifestyle, behavior and relationships in one way or another. That’s why transferring wealth is so difficult. In fact, familial wealth often ends up being lost by second-generation recipients. Unfortunately, the odds of disrupting this pattern are close to zero in the absence of adequate preparation.
Best Practices For Successful Family Wealth Planning
Family wealth planning can be incredibly complex and stress-inducing, so it’s no surprise that many wealthy families either continuously delay the process or struggle to know where to start. However, if families are intentional and have an unwavering commitment to getting things right, they can transfer wealth to the next generation—and the one after that.
Here are two things that every wealthy family should do:
• Identify values and characteristics to pass on to children. In almost all cases, family wealth is associated with a distinct set of values and principles. It’s what author Stephen Covey called a “combined, unified expression from all family members of what your family is all about—what it is you really want to do and be—and the principles you choose to govern your family life.”
Start by identifying your values. Then, communicate them as early and as often as possible. By doing that, you have a better chance of ensuring your children absorb those lessons and pass them on to future generations.
This could mean instilling a sense of independence, encouraging entrepreneurialism or stressing the importance of philanthropy. Some like to teach children that wealth is, first and foremost, a social responsibility. Whatever you decide is most important to you, write it down and consider it a family mission statement. It will serve as the foundation of everything you do.
• Establish and communicate expectations and responsibilities. One huge hurdle for wealthy families is when children have no boundaries or clear expectations regarding financial support. This is especially true for adult children who have grown up privileged. They often rely too much on their parents for assistance, sometimes to the point of not having any sense of responsibility.
For this reason, it’s critical that wealthy families not only establish but frequently communicate expectations in this area. This includes teaching children the difference between wants and needs at a young age, which encourages positive spending and saving habits later in life. It also means being comfortable refusing to offer support when they cross certain boundaries.
Additionally, don’t be shy about putting regular family meetings on the calendar. Good things can happen when everyone can discuss their values and the importance of personal responsibility in an open and positive setting.
Plus, once they become regular occurrences, these meetings will make issues related to wealth planning easier to solve, including each member’s role in the process and, most importantly, what that will look like in a carefully thought-out action plan.
Ultimately, successful family wealth planning transcends mere financial transactions. It involves instilling a legacy of values, responsibility and purpose that can sustain generations. By proactively tackling the intricate challenges associated with wealth transfer, families can ensure not only the preservation but also the enhancement of their legacy.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Investing can be exciting and rewarding, but it can also be fraught with psychological pitfalls and emotional detours. While charts and numbers play a pivotal role, it’s important to recognize that your financial journey is impacted by behavioral biases that lurk beneath the surface of your investment decisions.
Behavioral finance dispels the myth of market efficiency, revealing how our human flaws give rise to systematic errors in judgment.
Below, I’ll discuss some of the top behavioral biases that can potentially derail your investment goals and then share tips for not letting your emotions run the show.
Top Behavioral Biases Of Investors
1. Overconfidence: People often overestimate their ability and that of market strategists to make accurate near-term forecasts. This can lead to hasty short-term allocation decisions and excessive trading.
2. Recency Bias: Investors tend to give undue weight to recent information in their decision-making framework. This can result in overreacting to news flow and chasing the latest trend, rather than adhering to a sound investment strategy rooted in long-term principles.
3. Anchoring: Investors often cling to readily available information, such as analyst forecasts, and use them as anchors, making it challenging to objectively assess new data.
4. Confirmation Bias: People actively seek evidence that supports their preconceived opinions, which can lead to subjective decision making.
5. Loss Aversion: Human psychology is wired to feel losses more acutely than gains. This bias leads investors to cling to losing investments, hoping for a miraculous turnaround, while readily letting go of winners to avoid potential losses.
Examples Of Biases In Action
The market outlook for 2023 illustrates the impact of these biases. At the end of 2022, market strategists predicted that stocks would perform poorly the following year, suggesting that the negative momentum seen in 2022 would persist into 2023. This consensus view likely influenced at least some investors to trim their stock holdings, driven by their overconfidence bias in believing that these forecasts were directionally accurate.
Both the market prognosticators and individual investors were likely influenced by anchoring to the prevailing market sentiment and the recency effect following the financial market downturn of 2022. This negative sentiment and gloomy predictions led to loss aversion, prompting investors to park their money in safe assets such as money market funds while awaiting an all-clear signal.
Ironically, as the year progressed, the S&P 500 defied expectations by surging 26.3%. In hindsight, it became clear that these investment decisions, influenced by biases such as overconfidence, recency and anchoring, had proven to be suboptimal, underscoring how behavioral biases can lead investors astray.
Another example of recency bias is from the Federal Reserve and investors who assumed that the pickup in inflation above the Fed target of 2.0% in the middle of 2021 was transitory. Many market participants were anchored to inflation readings that were persistently below the Fed’s target for the past decade, which caused them to miss significant changes that occurred during the pandemic including to the labor market, supply chains and stimulus that had the effect of changing the inflation environment.
The failure to accurately assess incoming information led to policy being too easy for too long, and investors that were not positioned well for a sharp rise in interest rates in 2022 once it became apparent that the surge in inflation was not transitory.
Unfortunately, these types of examples are not uncommon. According to data from JPMorgan Asset Management and Dalbar, the average investor significantly lags broad market indices. From 2002 to 2021, the average investor returned just 3.6% per year, compared to the S&P 500’s 9.5% and a 60/40 portfolio’s 7.4%. The primary reason for this underperformance over time is the impact of behavioral biases on decision making.
Navigating Emotions While Investing
So, how can you harness the power of behavioral finance to become better investors? Here are some key take-aways:
• Acknowledge Your Biases: The first step in mitigating their impact is awareness. Identify your personal risk tolerance, and analyze past investment decisions.
• Embrace A Long-Term Mindset: Avoid chasing short-term gains or panicking during market downturns. Focus on your long-term financial goals, and stick to your plan, even when emotions threaten to steer you off course.
• Automate Your Investments: Setting up automatic contributions and rebalancing strategies helps counteract emotional impulses and keeps you on track.
• Educate Yourself: Learn more about behavioral biases and how financial markets work. The more knowledge you acquire, the better equipped you are to make informed decisions.
There are a number of good resources for people looking to learn more about behavioral finance. For the layperson, a good read is The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel. For a more sophisticated audience or people looking for a deep understanding, there’s Personal Benchmark: Integrating Behavioral Finance and Investment Management by Chuck Widger and Daniel Crosby.
Remember that while the market may have a target, your financial journey is unique. By uncovering your own behavioral biases and adopting deliberate investment habits, you can tame the turbulent world of investing from an emotional roller coaster into a path toward a secure and fulfilling financial future. Review your financial plan periodically and reach out to your financial advisor to assess your progress and gain valuable insights into optimizing your investment strategy.
Past performance is no guarantee of future performance. No investment strategy can guarantee a profit or protect against a loss. For more information and important disclosures, please visit: https://sa.nm.com/
Life insurance is one way to provide financial protection for your family and loved ones. Your monthly or yearly premiums bring peace of mind, because you know your family will be financially secure if you die.
The two main types of life insurance are term and permanent (cash value). Term insurance covers you for a specific period and delivers the coverage amount to your beneficiaries if you die before the term expires. Permanent insurance covers you for your lifetime and pays when you die, no matter when that happens. Both types of insurance require timely premium payments to maintain coverage.
Term vs. permanent life insurance: key differences
Term life insurance is simple and easy to understand. Some companies, such as Fabric Life Insurane by Gerber, sell only term policies based on both the simplicity and economy of this type of coverage. With term, you pay so much a month for so many years and are covered for a specific amount for that time period. It’s uncomplicated, effective, and economical.
Permanent life insurance, on the other hand, combines term insurance with an investment option, making it more expensive and more complicated. This is because part of your premium pays for term insurance and part is invested to provide potential future wealth or premium support.
Term Life Insurance
Permanent Life Insurance
Duration
Typically five to 30 years
Lifetime
Cost*
About $30/month
About $460/month
Access to funds
No cash value to access
Cash value accumulates and can be borrowed or withdrawn
Coverage
Up to $3 million
Up to $1 million
*For a healthy 30-year-old male buying a 30-year, $500,000 policy – Source: aven Life by Mass Mutual.
What is term life insurance?
Term insurance is a life insurance policy that provides coverage for a specified time, typically five to 30 years. With this type of insurance you pay a monthly or annual premium. If you die before the term expires, the insurance company pays the death benefit to your beneficiaries.
Term insurance has no cash value. Your premiums only pay for insurance during the life of the policy. This typically makes term insurance less expensive than permanent life insurance. Term life insurance is usually available in several different configurations, which in some cases can be combined.
A level term policy pays the same benefit amount if you die at any point during the term. Typically, level term charges the same premium for the policy’s life and is calculated at the beginning of the term based on your current age and health. Level term policies may require a medical exam.
Decreasing term
Decreasing term life insurance also has a set coverage period, but the benefit drops over the policy’s life. Decreasing term covers a debt (such as a mortgage) that decreases over time. Premiums remain the same for the term of the insurance and take into account the fact that the payout will decrease. Ladder Life, for example, offers adjustable coverage, up or down, as needs change, utilizing a digital platform.
Renewable term
A renewable policy continues for an additional term (or terms) up to a specified age, usually 80. With each renewal—five, 10, 15, or 20 years—the premium increases based on your age at that time.
Renewable term guarantees that you can renew the policy even if your health would cause rejection if applying for a new policy. It allows for the flexibility of term insurance while providing continuity, just like permanent insurance.
Return of premium (ROP)
Term insurance, by definition, includes coverage for a set period with no savings or investment. One exception is called “return of premium (ROP)” insurance. With this type of insurance, if you live to the end of the term, you get back all or most of the premiums you have paid. While this sounds like a good deal, there is a cost. First, the premiums are significantly higher than with regular term insurance. You must keep the policy in force until the end of the term, and you only get back the premiums you paid; you don’t earn any interest or dividends on those premiums.
Term life insurance pros and cons
There are several advantages and disadvantages of term insurance, driven chiefly by your circumstances and insurance needs.
Pros
Affordable premiums. Term insurance is the most budget-friendly insurance available, making it a good fit for people who need maximum coverage at minimum cost.
Coverage for a specified period. If your insurance needs have a time horizon—such as until you pay off your mortgage or your children are on their own—term insurance is ideal.
Straightforward and easy to understand. Term insurance is simple. It insures the policyholder for a specific period and pays only if the policyholder dies during that period. There are no cash value, loan, or complicated contract provisions.
Cons
No cash value. Term insurance is just that: insurance. Your premiums do not go into savings or investments; at the end of the term there is no balance.
Premiums can increase at renewal. Permanent insurance premiums stay the same for life, while term insurance premiums can increase at policy renewal.
Not as flexible as permanent insurance. The simplicity of term insurance can also be a problem for those who need the flexibility of permanent insurance, including savings.
What is permanent life insurance?
Permanent life insurance lasts until you die, as long as you pay the premiums. Unlike term insurance, permanent life insurance policies accumulate cash value over time, which can be used as a source of savings to pay future premiums or borrowed against and repaid.
Permanent life insurance policies are more expensive than term insurance policies. They can be more complicated, as they contain savings or investment options and other features not commonly found in term life insurance policies. While there are many variations in permanent life insurance, four types make up the majority of policies.
Whole or ordinary life
This is the most common type of permanent life insurance, and it offers both insurance and savings. Part of your premium pays for insurance, and the balance goes into a savings account that pays dividends and grows over the years. You can withdraw from your savings or borrow (and pay back) funds. Everyday Life, which offers term policies with up to $2 million coverage, also provides whole life insurance for people up to age 85, and says 90% of applicants never have to take a medical exam.
Universal or adjustable life
This type of policy is more flexible than whole life. For example, you may increase the death benefit if you take and pass a medical exam. The savings part of this type of policy usually earns an interest rate equivalent to that of a money market account. You can lower your premium payments if you have enough savings to cover the cost. However, if you use up your savings, your policy may lapse.
Variable life
A variable life policy combines insurance with a savings account that you can invest in stocks, bonds, and money market mutual funds. This type of savings is riskier than a guaranteed interest rate, but it can grow more quickly. If your investments do not do well, your death benefit and cash value may decrease. Some variable life policies guarantee that your death benefit will not fall below a certain level.
Variable-universal life
This hybrid policy combines variable and universal life features. The investment side carries risks and rewards similar to variable life, and the life insurance side lets you adjust your death benefit and premiums like universal life.
Permanent life insurance pros and cons
The pros and cons of permanent life insurance reflect the primary differences between permanent and term policies.
Pros
Lifetime coverage. This type of insurance covers your lifetime, providing you keep up with premium payments.
Cash value. Permanent life insurance can accumulate cash value over time.
Flexibility. The cash value can be used as a source of savings, to pay for future premiums, or as collateral to back up a repayable loan.
Cons
Expensive. Permanent life insurance policies tend to be more expensive than term policies.
Complicated. This type of policy can be more complex and challenging to understand than straightforward term insurance.
Cancellation fees may apply. Your contract may contain cancellation fees or loss of interest. Read the agreement carefully before you sign up.
When is term life insurance the right choice?
Term insurance is best if you need coverage for a specific period, including covering mortgage payments for your beneficiaries, providing college tuition or other financial support, or until your retirement nest egg can take on your financial burdens. Another excellent use for term insurance is for final expenses. Although burial insurance exists, some companies such as Ethos Life, recommend one of their low-coverage term or whole life policies for this type of coverage.
As term insurance tends to be less expensive than permanent life insurance, it is the best option for those with limited resources but significant financial responsibilities. While it doesn’t offer cash value or loan options, it provides the one thing most people need, especially early in their careers and lives: insurance against catastrophic loss of income.
When is permanent life insurance the right choice?
Permanent life insurance makes the most sense if you know you want coverage for your entire lifetime, not just a set period. It can also be a good choice if you want to build cash value and create an inheritance for your loved ones or a favorite charity while paying a set premium.
It’s essential to weigh these factors against the higher cost of permanent life insurance and the difficulty of canceling a policy if circumstances change. For those who want a set amount of coverage over their entire lifetime and want to know how much it will cost them in advance, permanent life insurance is the way to go.
Alternatives to term and permanent life insurance
Although life insurance is the first thing most people consider when contemplating financial protection for loved ones, it’s not the only way to provide that protection.
Will
Whether you have life insurance or other assets to pass on, you should have a will. A will is a legal document that explains how your assets will be distributed after you pass away. You can name beneficiaries and assign them specific assets or percentages of your estate.
Trust
A trust is a legal entity that distributes your accumulated wealth to your heirs, much like a will, after you die. There are many different types of trusts, including revocable, irrevocable, living, and testamentary. The primary advantages of a trust over a will are potential tax benefits and better control over how the trust distributes your assets.
Family bank
One creative way to distribute your assets would be to form a family bank as a legal entity that enables family members to borrow money at a low (or no) interest rate. They would have to pay the money back, making their inheritance self-perpetuating.
Inheritable Roth IRA
Instead of purchasing insurance, you could put your money into an inheritable Roth individual retirement account (IRA) with designated beneficiaries. The funds continue to grow tax free and may be withdrawn tax free. You could convert a traditional IRA to a Roth to avoid saddling your heirs with taxes upon withdrawal. You could do the same with a traditional 401(k) account. In both those cases, you’d need to pay taxes on the funds you convert.
Annuity
Another option, similar to an inheritable IRA, is an annuity. The advantage is that the annuity could be a lump sum or an income stream for the beneficiary’s life. The younger the beneficiary, the more valuable an annuity could be. Of course, though, its cash value lessens as inflation rises.
Self insurance
As simple as it sounds, self insurance means your personal wealth and assets are sufficient to provide for your loved ones after you die. Funds for self insurance could come from savings, investments, even an inheritance you received. Self insurance may also be appropriate if you are debt free and have no dependents.
Real estate
This tactic could include rental properties, a vacation home, or other types of property. You would want to set up a family limited partnership or trust to make transferring the property easier after you die.
TIME Stamp: Term insurance provides maximum protection at minimum cost
When it comes to bang for your buck, it’s no contest. Term life insurance provides the most coverage for the least amount of money. If you want to guarantee your loved ones will be taken care of if you die before you have accumulated enough wealth to do that on your own, term insurance is an inexpensive, easy-to-understand way of achieving your goal.
This does not mean permanent life insurance, in all its permutations, is a wrong choice. If you want to provide protection and build an inheritance by paying a fixed monthly sum for life, permanent life insurance is certainly one way to get there. And, as with term insurance, the proceeds are distributed tax free.
Frequently asked questions (FAQs)
How much life insurance do I need?
You need enough life insurance to equal 10 to 12 times your annual income, according to most experts. Your final figure should take into account other sources of income and assets, such as real estate or valuables, that may alter that figure. The best way to determine how much life insurance you need is to consult with a trusted financial professional. Keep in mind that the coverage you need may change over time, so reassessment on a regular basis is important.
What happens at the end of term life insurance?
Coverage expires at the end of a term life insurance policy. To provide continuing protection for your loved ones, you must renew or take out another policy. Some term policies offer renewal, and some even offer conversion to permanent life insurance if you want to do that. Read your policy carefully before signing up, so that you know your options.
Can you have both term and permanent life insurance at the same time?
Yes. There is no law against simultaneously having a term policy and a permanent life policy. This combination may be desirable in some cases, as it can provide additional short-term coverage at a low cost when you need it most, plus a long-term policy for later in life. As with all life insurance, consult a trusted financial advisor to ensure that this strategy makes sense.
Rolling over a 401(k) into an IRA is an effective way to keep retirement savings growing when you plan to switch jobs or retire from the 9-to-5 for good. This type of rollover can also confer tax benefits and give you more control over your investments.
A 401(k), of course, is an employer-sponsored retirement savings plan. In contrast, an IRA, or individual retirement plan, is a personal account set up at a brokerage firm or mutual fund company that the saver manages.
Rolling over a 401(k) to an IRA allows you to move funds from your previous employer’s retirement plan into an IRA. The big benefits of a rollover is that you can preserve the tax-deferred status of your retirement account, avoid a distribution that results in a tax bill, and sidestep early withdrawal penalties if you haven’t yet reached the full retirement age of 59 ½ when you move the money to the IRA.
“A rollover from a 401(k) to an IRA is about the added flexibility, the greater range of investment options, and continuing to maintain the same tax advantages that you had in your 401(k),” said Rob Williams, managing director of financial planning at Charles Schwab.
Rolling over a 401(k) into an IRA
Of course, rolling over a 401(k) plan into an IRA isn’t your only option. “You have a choice,” said Williams. You can always leave your nest egg in your former employer’s 401(k) if they permit you to do so. You may also have the option of rolling your money into your new employer’s retirement plan. You could also opt for a cash distribution and take the money and run, but that option could result in taxes and paying a 10% penalty if you’re younger than 59 ½.
There are many reasons why rolling over a 401(k) plan to an IRA makes the most financial sense.
Rollovers are tax-friendly. You’ll maintain the tax-deferred status of your retirement account and avoid taxes and potential penalties. If you move your account balance from a 401(k) to an IRA your money will continue to grow tax-free and allow more of your savings to benefit from compounding.
IRAs offer a wider range of investment choices. 401(k) plans have a limited number of investment options to choose from, and typically include broadly diversified stock and bond funds, as well as target-date funds that adjust the fund’s risk profile as the investor gets older. In contrast, IRAs provide investors with a much wider array of investment choices, including the ability to invest in any mutual fund or ETF offered by a slew of different mutual fund companies, but also individual stocks, bonds, and CDs.
Rollovers keep you from raiding your nest egg. Saving for retirement is a long game. Building wealth through automatic payroll deductions to a 401(k) takes decades. Your path to a secure retirement gets that much tougher if you raid your 401(k) or take a lump-sum payout if you leave a job or retire before age 59 ½. “Taking a lump sum can be tempting, but avoid the temptation,” said Williams. Rolling over a 401(k) to an IRA helps you avoid shrinking your account balance as well as paying taxes and penalties on early distributions.
It makes sense to roll over a 401(k) to an IRA if your ex-employer’s retirement plan doesn’t offer a wide breadth of investment options and charges high fund investment fees and administration expenses, notes Christine Benz, director of personal finance and retirement planning for fund-tracker Morningstar.
Knowing the difference between a direct IRA rollover and an indirect rollover is also important. A direct rollover — which personal finance experts recommend — is when the administrator of your 401(k) plan delivers your distribution check directly to the financial company where your IRA rollover is set up. The main benefit of a direct rollover is you never touch the money and, therefore, avoid the risk of being hit with a tax bill on the distribution from the IRS or paying the 10% early withdrawal penalty if you’re not yet at full retirement age.
In contrast, an indirect rollover is when your 401(k) administrator sends your assets directly to you, typically in the form of a check. It is then your responsibility to roll over all the assets into an eligible plan, such as a rollover IRA, within 60 days of receiving the distribution. The 60-day rule is important to understand. If you don’t roll over your 401(k) to an IRA within the 60-day grace period, the money will be treated as a distribution and will be taxed at your ordinary income rate. If you’re younger than 59 ½, you’ll also be subject to a 10% penalty. If your employer-sponsored plan sends a check directly, they might be required to withhold 20% in federal income taxes, although you can recover that money if you rollover your total 401(k) balance. (The IRS, however, may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control. But it’s best to avoid this inconvenience if possible.)
Rolling a 401(k) into a Roth IRA
Savers in traditional 401(k)s — accounts funded with pre-tax dollars that are taxed as ordinary income at the time of withdrawal — can roll over their money into a Roth IRA. But there’s a catch. “The transaction is effectively a Roth conversion,” said Nilay Gandhi, senior wealth advisor at Vanguard. Since Roth accounts are funded with dollars that have already been taxed but come with tax-free withdrawals, you will have to pay taxes at your personal income tax rate on any traditional 401(k) assets you roll over to the Roth IRA at the time of the conversion, according to IRS rules.
The calculus — or bet you’re making — when rolling over a 401(k) into a Roth IRA is that you will be in a higher tax bracket in retirement than you are now, says Gandhi. Here are ways to reduce your tax burden now if you opt for a rollover from a traditional 401(k) to a Roth IRA.
Do the rollover in years when your reported taxable income is lower. The timing of your rollover to a Roth IRA is also critical. Just as a contestant on The Price Is Right who wins a new car is responsible for the tax bill on that “extra” earned income the car’s value represents, so too is a retirement saver responsible for paying taxes on the 401(k) assets he or she rolls over into a Roth IRA.
One way to reduce the hit is to do the conversions over a number of years rather than converting the whole thing at once. Say you have $500,000 in your 401(k). You could roll over the total balance over four or five years, which means you’ll only add $100,000 or $125,000 to your taxable income in a single tax year instead of the entire $500,000.
But remember, in order to take tax-free withdrawals from a Roth, you must be at least 59½ and have held the account for at least five years. Otherwise, you could owe taxes on your earnings and a 10 percent early-withdrawal penalty, too. So, rolling over a 401(k) to a Roth IRA makes less sense if you need access to the money now.
There are reasons, though, to keep your money in your existing 401(k) plan. Such factors include things like finding value in the tools and advice that your employe-sponsored plan offers. And for those under the age of 59 ½ who think they might need to tap their retirement account at some point, a 401(k) allows you to take loans against your balance, whereas an IRA does not. “Where there are needs for liquidity or access to the funds, it may still make sense to leave the money in the 401(k),” said Gandhi.
One way to increase your retirement savings is to use a tax-advantaged retirement account. These are accounts for which the government offers special provisions in an effort to encourage people to build a nest egg.
A Roth IRA makes sense for someone who doesn’t mind paying taxes now in order to avoid paying them on withdrawals later. Conversely, a traditional 401(k) makes sense for those who look for a tax deduction today and are prepared to pay taxes on distributions. It’s also an important choice if your employer offers matching contributions.
It’s possible to have both types of accounts to manage your tax situation in retirement. Let’s take a look at how each operates, so you have a better idea of what might work for you.
Examining the differences between a Roth IRA and a 401(k)
First, it’s important to understand the differences between these two categories of tax-advantaged accounts. Here are the issues you need to consider.
Tax treatment
A traditional 401(k) offers a tax benefit today. You make contributions, and those contributions are then deducted from your taxable income in the year you make them, lowering your tax bill. In your account, your investments grow tax deferred, meaning that you’ll eventually have to pay taxes on the money you withdraw from your account.
With a Roth IRA you make contributions using after-tax dollars, so you don’t see a lower tax bill today. As with a 401(k), your investments grow tax free. But when you take distributions later on, you won’t pay taxes on your Roth IRA money. That means, unlike with a 401(k), all the earnings on your Roth come to you tax-free at retirement.
You may have a third choice. Some employers offer a designated Roth 401(k) option. This combines elements of both categories: As with an IRA, you contribute after-tax dollars and get no tax deduction in the year when you contribute. However, the amount you can contribute is the same as for a traditional 401(k). And that makes a big difference.
Additionally, there are income limitations on a Roth IRA. Once you reach a certain income threshold based on your filing status, you can no longer contribute directly to one. Instead, if you want to make contributions, you need to use a “backdoor” Roth, which involves contributing to a traditional IRA and rolling over the money. Be aware of tax consequences—and complicated tax rules, such as the pro rata rule—entailed in using this method.
Early withdrawal rules
It’s possible to withdraw money early from a traditional 401(k) for limited purposes or by using various rules (such as the rule of 55, which lets you take penalty-free distributions if you leave your job at age 55 or older). However, for the most part you’re likely to see a penalty if you take distributions prior to age 59½. You’ll also pay taxes on the amount you withdraw.
With a Roth IRA it’s possible to withdraw your contributions to it penalty free and tax free at any time. There is a penalty for withdrawing any investment earnings on those contributions prior to age 59½, though. Some exceptions exist for early withdrawals, even for earnings, but it’s important to check with a financial professional or tax professional to understand the consequences.
Required minimum distributions (RMDs)
Your 401(k) comes with required minimum distributions (RMDs) once you reach 72—73 if you reached 73 after Dec. 31, 2022. You’re required to take a certain amount from your account at that point based on the account size and your age. If you don’t take RMDs, you’re subject to penalties. With a traditional IRA, you owe taxes on your RMDs; with a designated Roth, you don’t (but you lose the tax-free growth you get within the account).
Depending on your goals, one account might work better for you. A Roth IRA offers tax-free investment growth and no RMDs, but there are bigger limits on contributions, and you don’t get a tax benefit today. A traditional 401(k) offers the opportunity to put away more and get a tax benefit today, but you will owe taxes later when you withdraw and must take RMDs. A designated Roth 401(k) doesn’t provide tax benefits today, but all your withdrawals will be tax-free, including RMDs.
This chart can help you compare the features of traditional and designated Roth 401(k)s vs. a Roth IRA.
Feature
Traditional 401(k)
Designated Roth 401(k)
Roth IRA
Contribution limits
$22,500 in 2023, with a catch-up contribution of $7,500; $23,000 in 2024, with a catchup contribution of $7,500
$22,500 in 2023, with a catch-up contribution of $7,500; $23,000 in 2024, with a catchup contribution of $7,500
$6,500 in 2023, with a catch-up contribution of $1,000; $7,000 in 2023, with a catch-up contribution of $1,000
Tax deduction on contribution, pay taxes when taking distributions
Contributions with after-tax dollars, but there are no taxes on distributions
Contributions with after-tax dollars, but there are no taxes on distributions
RMDs
Yes
Yes, but tax-free
No (in account owner’s lifetime)
When is a 401(k) a better retirement savings option?
A traditional 401(k) works well if you want a tax benefit today and plan to set aside more for the future. The higher contribution limit, plus the potential for an employer match, can help you build a nest egg faster. There are also no income limits on contributing to a 401(k) the way there are for a Roth IRA.
However, you also need to engage in tax planning for later. The hope is that you’ll have lower taxes during retirement, so your withdrawals won’t cost you more. And unlike with a Roth IRA, you will pay taxes both on your original contributions and on all the earnings they accrued while in your account.
A designated Roth 401(k) offers the higher contributions of a traditional 401(k) with the tax-free withdrawals of a Roth IRA and has no income limits. However, you don’t get a tax deduction when you make your contributions.
When is a Roth IRA a better retirement savings option?
If you want to diversify your tax situation in retirement, a Roth IRA can make sense. For those who are just starting out and don’t expect to pay much in taxes today, it can be a good vehicle. It’s possible to pay taxes on the money at a lower rate and then take advantage of tax-free growth.
And because you can withdraw your contributions (not earnings) at any time without penalty, a Roth may be a less daunting way to put aside money. It’s not the best choice because you lose future savings,, but in an emergency you have easy access to Roth contributions.
What’s more, without RMDs it’s possible to let the Roth IRA grow for as long as you wish. You can even leave it to someone in your will.
Other retirement investment options
You don’t have to rely on either type of 401(k) or a Roth IRA. There are other ways to invest for your future.
Traditional IRA
You can contribute to a traditional IRA if you don’t qualify for the Roth IRA. You receive a tax deduction for your contributions and they grow tax free while in the account. However, you have to pay taxes when you withdraw at retirement. Additionally, you’ll be subject to early withdrawal penalties on contributions.
Another version of the traditional IRA is the SEP IRA, which is aimed at business owners. If you’re self-employed, you can take advantage of a higher contribution limit with a SEP IRA. For example, you can contribute up to $66,000 in 2023 and up to $69,000 in 2024.
Health Savings Account (HSA)
If you qualify for a health savings account (HSA), you will be able to set aside money for current and future medical expenses. You can invest a portion of your account, which rolls over year to year. Contributions to an HSA are tax deductible, and the money is tax free when you withdraw it for qualified expenses. You might be able to use the HSA as a healthcare account in retirement. However, to be eligible to open this account, you must have a high-deductible health plan (HDHP), which may not meet your health insurance needs.
Taxable investment account
Don’t forget about a “regular” taxable investment account. You don’t have to worry about contribution limits or early withdrawals with one of these accounts. This can be a way to supplement your plans for early retirement. Just be aware of the capital gains taxes that come with investment earnings.
TIME Stamp: Consider a plan with a combination of accounts
There are several different accounts you can use to increase your wealth for retirement. There’s no one right answer, and it’s possible to use a combination of accounts to better manage your taxes later. Create a plan that includes different accounts designed to help you meet your goals. You can invest with confidence online while managing your accounts with tools such as Empower.
Frequently asked questions (FAQs}
At what age does a Roth IRA make sense?
While a Roth IRA can make sense at any age, some experts suggest it might be best for younger workers early in their careers. At this point taxes are generally lower, so it might make sense to contribute to a Roth IRA and take advantage of tax-free withdrawals later on. What’s more, younger workers are more likely to have lower earnings and qualify to contribute to a Roth IRA.
Can I take a loan from my Roth IRA?
Generally you can’t take loans from a Roth IRA. However, there are certain circumstances under which you can take early withdrawals without penalty, including that you can withdraw your contributions (not earnings) at any time. You can also temporarily remove money from your Roth IRA—then roll it over back into your account within 60 days—to avoid having it considered an early or a hardship withdrawal.
What is a typical company match for a 401(k)?
It’s not uncommon to see companies match 50 cents on the dollar, up to 6% of income. However, according to a Fidelity analysis from 2019, the average 401(k) match is around 4.7% of income.
TIME Stamped is paid a flat fee for each successful referral to Herring RIA Sub, LLC (“Playbook”) made through our links. TIME Stamped is not a Playbook client. There is no guarantee that clients will have similar experiences or success.
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Joint bank account or separate? The approach you choose depends on you and your partner’s financial history and goals, says financial therapist Lindsay Bryan-Podvin.
If you’re in a serious romantic relationship, you and your partner may be thinking about how to combine your finances. Should you share a joint bank account? Keep your accounts separate? Do a combination of both?
The path depends on you and your partner’s financial goals and history. So before you decide, have an open and honest conversation, says Lindsay Bryan-Podvin, financial therapist and author of The Financial Anxiety Solution — “ideally before relationship-changing events such as moving in together or purchasing a car together.”
Talking about money can feel like awkward, but it can also strengthen relationships. “We’re deepening our connection. We’re dreaming ahead together and creating a plan,” she adds.
Bryan-Podvin talks to Life Kit about what it means to successfully merge your finances with your partner, the merits of each approach – and strategies for success. This conversation has been edited for length and clarity.
Sharing a joint bank account seems to come with a lot of benefits. One large-scale study from 2023 found that couples who put all their money into one pot tended to be happier. They stayed together longer than those who kept some or all of their money separate. Why do you think that is?
My hypothesis is that it decreases the likelihood of financial infidelity. One of the biggest issues couples argue about is the financial secrets that can happen when we have completely separate accounts. Maybe somebody is racking up a ton of credit card debt or taking out personal loans. Or maybe they don’t have a great credit score and aren’t working on improving it. [If you have a joint bank account], your partner is in [on these issues] from the beginning.
For this reason, you recommend that couples share a joint account.
Having a fully joint account feels great because couples are able to spend and save and talk about that very openly.
You also like an approach that the financial community calls “theirs, mine and ours.” It’s an arrangement where couples have a joint account for shared expenses and individual accounts for personal expenses.
“Theirs, mine, and ours” can work really well when the bulk of your money is shared. You [can use your joint account to] make sure your bills and rent are paid on time and save toward future goals together. But you each have a little bit of money to spend how you want without having to text your partner and say, “Hey, can I buy a new pair of shoes?” None of us want to feel like we are under the control of our partner, so having some financial autonomy is important.
Are there some situations where it might make sense to have separate accounts?
If you’ve experienced financial abuse or have seen someone steal someone else’s credit or identity, you might have very strong feelings about having to share your money with other people. Then it makes sense to keep your finances separate.
And I think it’s important for people who have had a divorce or separation to keep separate bank accounts or do “theirs, mine and ours” for financial protection [to avoid assets getting mixed up with court proceedings for example].
Is there such a thing as splitting everything 50-50 in a relationship?
This idea of splitting everything 50-50 makes sense in theory, but we just don’t live in a theoretical world. Even if you’re earning the same amount, it doesn’t necessarily mean your financial background is equal. One partner may have $150,000 in student loans, for example. And there will be times when one person is taking on more of the emotional labor or more of the household tasks.
So keeping all this in consideration is really important. I think about [a couple’s finances] as a big old soup. Everything goes into the pot and it all blends up together, and it’s really hard to know who gave what.
So among these three approaches — joint bank account, “theirs, mine and ours” and separate accounts — how do you figure out which approach is right for you?
Have money conversations. Don’t just ask, “What’s your credit score? How much do you earn?” Also ask: “What were you taught about money? What are you proud of that you do financially? What are things you wish you were a little better at financially?” Get a sense of what matters to your partner so you have a clear understanding of their relationship with money.
