Planning FAQs

 September 11 2017     Anna Pfaehler

I field many questions from clients and colleagues every day. Here are a few recent ones from the trenches:

1. If I take all of the money out of my child’s 529 what happens?

Qualified Educational Plans (AKA 529 Plans) are meant to fund qualified education expenses such as college tuition and fees. Distributions not used for qualified education expenses will incur income tax, at ordinary rates, and a 10% penalty on the earnings of the account.

I typically do not recommend anyone “abandon ship” on their 529 plan. Many states allow rollovers from other state plans. If you do not like the investment choices or fees in your current 529 plan, you may be able to roll the account to a preferable plan in a different state. Additionally, you can change the beneficiary of a 529 plan. If your granddaughter earns a big scholarship, you can use the funds for your grandson instead. Liquidation should be a last resort for using 529 funds.

2. Should I use an online program to make my estate documents?

Generally, no. Online programs typically only provide the most basic of documents. If your fact pattern is unique in any way, it may not be appropriate. Furthermore, it is difficult to judge whether or not the online document is appropriate without the help of an attorney!

You also want to make sure the documents you have are consistent and work well together. A new document from the internet might not fit with the estate planning you already have.

I typically recommend clients visit with an estate planning attorney to have their documents drafted. The upfront cost will be worth it to avoid a potentially more expensive mess at death. However, certain standardized documents, like a living will or health care Power of Attorney may be fine to pull from online depending on where you live.

3. If I apply for Social Security after full retirement age, can I take a lump-sum for retroactive benefits? Why wouldn’t I do this?

Yes, you can take a lump-sum payment of benefits retroactive up to 6 months if you are beyond full retirement age. (Note that the retroactivity can only go back to your full retirement age, so if you are 3 months past full retirement age the lump-sum will be for only 3 months of benefits.)

If you take a lump-sum, your monthly benefit going forward will be calculated as if you claimed 6 months ago. By taking the lump-sum, you lose 6 months of delayed retirement credits and your monthly benefit will be permanently lower.

For example suppose your benefit at 66 is $2,000 per month. If you were to wait until 70 your benefit would be $2,640. If you were to file at 70 and request 6 months of retroactive benefits, your monthly benefit will only be $2,560 for the remainder of your life.

In some cases, it does not make sense to take the additional lump-sum. For example, taking the lump-sum would reduce the benefit of a surviving spouse too. If you have a younger spouse who is can benefit from this many years beyond your life expectancy, it may not make sense to take a retroactive payment.

Going back to the above example, suppose my spouse is 10 years younger than me. I’m expected to live for 25 more years and he will live another 10 beyond that. By taking that lump sum, we’re missing out on $33,600.

For those who utilized File & Suspend before it expired in 2016, you can still take a lump-sum of benefits retroactive to the date you filed for Social Security. Similarly, you will lose any delayed retirement credits if you choose to take the lump-sum and your benefit will be lower.