The Risks Of Not Investing In A 401k

When it comes to retirement planning, there are a lot of options and strategies out there. But one of the most common and basic questions people have is whether or not they should invest in a 401k.

The answer, in short, is yes – you should absolutely invest in a 401k if you have the opportunity to do so. Here’s why:

You’re essentially leaving money on the table if you don’t.

If your employer offers a 401k plan and you don’t take advantage of it, you’re essentially leaving money on the table. That’s because most 401k plans come with some sort of employer match – meaning that your employer will match a certain percentage of your contributions, up to a certain amount.

For example, let’s say your employer offers a 50% match on 401k contributions up to 6% of your salary. That means that if you contribute 6% of your salary to your 401k, your employer will also contribute an additional 3% (50% of your contribution).

In other words, you’re essentially getting free money by investing in a 401k – so there’s really no reason not to do it.

It’s a great way to save for retirement

Investing in a 401k is also a great way to save for retirement. That’s because 401k contributions are made with pre-tax dollars, which means you’ll be able to reduce your taxable income for the year.

And the more you can reduce your taxable income, the less taxes you’ll have to pay.

In addition, the money in your 401k will grow tax-deferred, which means you won’t have to pay taxes on any investment gains until you withdraw the money in retirement.

It’s a simple and easy way to invest

Investing in a 401k is also a simple and easy way to get started with investing. That’s because most 401k plans offer a limited selection of investment options, which helps to simplify the investment process.

In addition, 401k contributions are typically made automatically through payroll deductions, which makes it easy to save and invest without having to think about it.

You may get access to employer stock

If you work for a publicly-traded company, you may also have the opportunity to invest in employer stock through your 401k plan. And while investing in employer stock comes with its own set of risks, it can also be a great way to boost your retirement savings.

For example, if you had invested $10,000 in Apple stock in 2001, your investment would be worth over $1 million today.

You may be able to take advantage of a 401k loan.

Another benefit of investing in a 401k is that you may be able to take advantage of a 401k loan.

A 401k loan allows you to borrow money from your 401k account, without having to pay taxes or penalties. And while you will have to pay interest on the loan, the interest will go back into your 401k account.

401k loans can be a great way to access cash in a pinch, without having to tap into your retirement savings.

The Bottom Line

Investing in a 401k is a no-brainer for most people. Not only do you get access to employer matching contributions, but you also get to enjoy the benefits of tax-deferred growth and potentially lower taxes in retirement.

So if you have the opportunity to invest in a 401k, be sure to take advantage of it.

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The 401k Limits For 2022 – What You Need To Know

The 401k contribution limits for 2022 have been announced by the IRS. Here’s what you need to know.

The contribution limit for employees who participate in 401k, 403b, most 457 plans, and the federal government’s Thrift Savings Plan will be $19,500.

The catch-up contribution limit for employees aged 50 and over who participate in these plans will remain $6,500.

The contribution limit for employees who participate in SIMPLE retirement accounts will be $13,500.

The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE retirement accounts will be $3,000.

The contribution limit for employees who participate in SEP retirement accounts will remain at the lesser of $58,000 or 25% of compensation.

The contribution limit for employees who participate in SARSEP retirement accounts will remain at the lesser of $75,000 or 25% of compensation.

The contribution limit for employees who participate in qualified retirement plans, such as 401k, 403b, most 457 plans, and the federal government’s Thrift Savings Plan, will be $19,500 in 2022. The catch-up contribution limit for employees aged 50 and over who participate in these plans will remain $6,500.

The contribution limit for employees who participate in SIMPLE retirement accounts will be $13,500 in 2022. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE retirement accounts will be $3,000.

The contribution limit for employees who participate in SEP retirement accounts will remain at the lesser of $58,000 or 25% of compensation in 2022.

The contribution limit for employees who participate in SARSEP retirement accounts will remain at the lesser of $75,000 or 25% of compensation in 2022.

The 401k contribution limits for 2022 have been announced by the IRS. Here’s what you need to know.

The 401k contribution limit for 2022 will be $19,500, an increase of $500 from the limit in 2021. The catch-up contribution limit for those aged 50 and over will remain at $6,500.

The 401k contribution limit is the maximum amount of money that you can contribute to your 401k plan each year. The IRS adjusts the limit each year to keep up with inflation.

The 401k contribution limit is important because it determines how much money you can save for retirement. The more money you can contribute, the more money you’ll have saved when you retire.

If you’re already maxing out your 401k contributions, then you don’t need to do anything differently for 2022. If you’re not maxing out your contributions, then you’ll need to contribute more money to reach the new limit.

If you have any questions about the 401k contribution limits for 2022, please contact a financial advisor.

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Tax time can be stressful for many people, for two reasons – the filing process itself and the knowledge that if you’d made different decisions the year before, you might be facing a smaller tax hit this year. Let’s explore ways to lower the stress level – and the tax burden – at this time of year.

Make the Process Easier

Getting organized and filing your return can be a chore. Even just pulling together your information to get started can be overwhelming. Here are a few tips to ease the process:

Organize Your Paperwork

The first step is to gather your information and receipts. I recommend you keep these in a paper or electronic folder organized by category. Your main categories should include:

– Business income and expenses, which can be exported from financial software such as QuickBooks.
– Personal income, from forms such as W-2s and 1099s.
– Rental and other income.
– Charitable deductions.
– Taxes paid on property, vehicles or purchases.
– 529 plan contributions and distributions.
– Investment income (dividends, interest, sale info).
– Retirement contributions or distributions.

Decide on Your Method

Next, decide whether you want to do your taxes yourself using an online tool or you should seek the help of a tax professional. If you have rental property, real estate investments or a complex investment portfolio, if you own a business, or if you don’t have the desire to take this on, it’s wise to turn to a professional.

Take Your Time

If you’re going to do it yourself, don’t try to rush through the task in one day. I find it’s best to break it up over a few days. Give yourself plenty of time to gather all of the information you need and complete the process.

Some years it takes until mid-February to get the necessary documents for your various investment holdings. For example, Vanguard issues tax documents for mutual funds much earlier than for funds on the brokerage platform. If you rush through your return and file early, you might inadvertently exclude some of your funds, forcing you to amend your return.

You’ll also want to take the time to review your return thoroughly for accuracy before you file.

Finally, save your return and all of the backup documentation in a safe place for at least three years in case you are audited.

Keep an Eye on Your Withholding

If your tax liability is too high or you’ll be receiving a large refund, consider adjusting your withholding. Also, try to determine how your income and deductions will change in the coming year so you can adjust further.

Lessen your tax burden

At tax time, it’s easy to see that decisions you made the year before have a major impact. Here are some things you can do that will pay off next tax season:

Max Out Your Retirement Contributions

Contributing the maximum to your retirement savings accounts is the simplest way to reduce your tax burden, but many people are not doing it. For 2015 and 2016, you can contribute 100% of your salary, up to $18,000, to your 401(k), with a $6,000 ‘catch-up’ for people 50 and over.

You can still contribute to a traditional IRA for 2015 up to the tax filing date, which is April 18. Check the IRS website to see if you’re eligible to deduct your IRA contribution based on your income. You can contribute $5,500 to an IRA with an additional catch-up of $1,000 for those 50 and over.

If you’re in a high tax bracket, say 28% or higher, consider increasing your 401(k) contributions, because these pretax contributions will reduce your taxable income. If you are in the 25% tax bracket or lower, consider increasing your contributions to a Roth 401(k) or contributing to a Roth IRA if you are eligible, as those contributions are made after taxes. The deadline for Roth contributions for 2015 is April 18.

With Roth plans, although you will be taxed on the income now, your investment will grow tax-free and you will be able to withdraw it without paying taxes, if you meet certain conditions. This can be a powerful way to avoid paying taxes on future income, especially if you are young and have time on your side.

Document Your Charitable Contributions

Make sure you have documentation for all cash and noncash donations. Make an itemized list for noncash items and their condition before you make the donation. Remember that you can also deduct mileage for your volunteer work.

If you have substantial charitable donations, say $10,000 a year or more, you might want to consider donating appreciated stocks or mutual funds. This can provide a triple tax benefit – you can deduct the amount of the donated securities, you can eliminate future capital gains on the sale of the securities, and you can buy back the same shares at the higher current market value, resulting in a lower tax bill when you sell the securities in the future.

Track College Expenses

Deduct only qualified expenses and make sure that any distributions from your 529 college-savings plans coincide with expenses incurred in the same calendar year. I use an Excel spreadsheet to keep track of this for my son’s education. It itemizes tuition, books, and room and board fees offset by scholarship amounts.

Don’t forget to deduct your annual contributions to your state 529 if you get a state tax break. I often notice that clients forget to tell their CPA about these contributions or forget to include this info when they prepare their own return. Since South Carolina, where I live, provides a dollar-for-dollar tax deduction for contributions to the Future Scholar 529 plan, this results in a 7% instant return on your money, for example. (I recommend the Future Scholar Direct program, which is no-load and includes index funds with low expense ratios.)

Optimize Your Investments

Capital gains: Review the capital gain distributions for your funds to see if you can improve the tax efficiency of your investments. It may make sense to sell one of your funds if it continually throws off high capital gains. Replacing an active high-expense fund with a more tax-efficient index mutual fund or exchange-traded fund will reduce your taxes and will likely perform better over time due to lower expenses.

U.S. bonds: If you have taxable bond funds in your after-tax (non-retirement) accounts, don’t forget to adjust for U.S. government bond income. You can contact the fund, or it may mail you a sheet that breaks down income by source. The interest from Treasury bills and bonds as well as U.S. government agency securities is taxable at the federal level only.

Municipal bonds: Likewise, adjust your municipal bond dividends and interest for ‘in state’ income as you are not taxed on municipal bond income from your state. This should also be provided by the mutual fund or broker where the bonds are held.

Foreign mutual funds: If you invest in foreign mutual funds, you can take a foreign tax credit or deduction for income, such as dividends, that you received from outside the U.S. The tax credit is generally more beneficial than the deduction. Contact the mutual fund company to find out the percentage of the dividends that are from foreign holdings and adjust accordingly.

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6 Non-Taxable Income

In the midst of this pandemic, it is undeniable that the unemployment rate continues to grow. Uncertainty, when the vaccine or drug for the Sars-Cov-2 virus was found, made the economy sluggish. Companies began to streamline employees to cover operational costs because of declining revenues during COVID -19.

However, if you are one of the employees who have been laid off, you don’t have to be hopeless. Keep doing health protocols while you work or work at home. It’s not easy to start your own business. Besides you have to pay taxes, you need capital. But it turns out, not everything you produce or get taxable. Quoted from Forbes, here are 10 non-taxable income.

Fund from GoFundMe or another fun campaign

Assuming there is no business purpose or other non-donor intent, funds received by fundraising campaigns like GoFundMe are not taxable. The donations would be considered gifts: there are no consideration given in returns, no rendered services, no products being touted (there are no premiums for donations, and it doesn’t fit the crowd funding for business models). The result can be different when crowd funding is used for business or investment purposes.

Child Support Payment

Some parents are hesitant to seek out a child support order because, among other things, they fear the extra check would add to taxable income and reduce other benefits, such as the Earned Income Tax Credit (EITC). While alimony may have tax consequences (depending on the timing), child support is completely tax-neutral, meaning that there is no deduction to the payor, and it’s not taxable to the recipient.

Short Term Rental Income

 If you rent out your personal residence for less than 15 days in a year, you need not report any of the rental income for federal income tax purposes (nor do you deduct any expenses as rental expenses).

Kiddie income

The general rule for children and other dependents is that if income is earned (salary or wages through full-or part-time employment), it is taxed at the child’s tax rate, which means that income under the filing threshold is not taxable. For 2020, what’s old is new again since the SECURE Act repealed the more draconian kiddie tax rules put in place under the Tax Cuts and Jobs Act (TJCA).

Dependent care benefits.

Benefits made available by your employer in the form of a dependent care assistance plan (DCAP) or dependent care flexible spending account (FSA) are not taxable so long as the employer contributions do not exceed $ 5,000 ($ 2,500 if married filing separately).

Health savings accounts (HSA).

If you are an eligible individual, you and any other person, including your employer or a family member, can make contributions to your HSA; those contributions are not included in your income. Additionally, when you take the money out to pay for qualified medical expenses, it’s not included in your income. There is additional flexibility in some plans as a result of the pandemic; check with your HR person for more.

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Avoiding 529 Account Pitfalls

The South Carolina Future Scholar 529 plan is an excellent way for parents to save for college, but there are some important rules to understand in order to ensure that you make only “qualifying “ distributions, so that you don’t have a surprise tax liability.

Time Distribution

Courtesy :

First and most importantly, make sure that you time distributions to coincide with expenses paid. The regulations are such that money not spent within a calendar year that it is withdrawn may be subject to taxes and penalties.

For example, say Pete Sr. receives Pete Jr.’s college bill in late November of 2013 for $10,000 for the Spring semester that starts January 15th, 2014. He decides to pay the bill in December, but with the hectic holiday schedule he forgets to withdraw the 529 funds in 2013. Instead, he requests the 529 distribution in 2014. His expenses don’t match the withdrawals for 2013 or for 2014. He will not be able to claim the distribution for the 2013 as it was disbursed in 2014 and the 2014 distributions will also not be qualified, as the expenses were paid in 2013. So if $10,000 was disbursed in 2014 and $3,000 of that was earnings*, the $3,000 would be taxable and a 10% penalty would be assessed.

Reimbursement Are Qualified

Second, you want to make sure that the expenses you are seeking reimbursement for are qualified and are net of any scholarships or other tax credits. Qualified expenses include tuition, books, and mandatory fees and supplies in conjunction with enrollment in all eligible institution. The student must also attend school at least halftime.

Say Mary Alice attends USC full time and her tuition, books, room and board are $10,000 a year for one semester. She also, however, receives $2,000 of scholarships a semester. Her parents should only withdraw $8,000, not $10,000.

Rent Is Consistent

Note: Rent for off-campus apartments is qualified as long as the rent is consistent with on campus housing. If a student prefers cooking in her apartment instead of the cafeteria, she can get reimbursed for meals as long as the expenses are in line with the school’s cafeteria plan charges. She will also want to keep receipts for any food and dining expenditures in case of an audit.

Any taxable distributions are subject to a 10% penalty, but there are exceptions. The 10% penalty will not be assessed if the distribution is due to a death or disability. A more common exception is that no penalty is assessed on any tax-free scholarships or fellowships. So, although the earnings portion of any distribution will be taxed, the penalty will be waived for an amount equivalent to scholarships or grants received by the student.

So from the example with Mary Alice above, she will pay taxes on the $2,000 of earnings if her parents withdraw the full $10,000, but no penalty will be incurred.

*you don’t pay taxes or penalties on contributions, as they were already taxed. 529 contributions are made with post tax dollars.

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A common mistake investors make is to continue to contribute to their Roth IRA even though they are no longer eligible. Most people will start a Roth IRA when there income is lower and mistakenly think that they can continue to make annual contributions; but unfortunately, the IRS limits Roth contributions at higher income levels. Luckily, there are ways to continue to build these accounts, regardless of income. Here is what you need to consider if you want to increase your investments to Roth accounts.

First off, what is a Roth?

A Roth account is a great way to save on your tax bill to Uncle Sam. Roth accounts are unique in that they are only taxed once. When you contribute to the account you are adding after-tax dollars, the money then grows tax-free, and it is not taxed when it is withdrawn. (Earnings may be taxed and or penalized if they are taken prior to 59 ½ or within 5 years of the first contribution to the account.)

Why should I invest in a Roth?

A Roth account is particularly valuable when contributions are made when your tax bracket is relatively low, and you have a long time for the money to grow. For example, let’s say you start to contribute to a Roth IRA at age 20 and contribute $5,000 a year until age 30. Even if you do not contribute to it at all after age 30, your balance, assuming a rate of return of 8%, at age 65 would be roughly $1,070,900. You only paid taxes on the $50,000 of contributions and will never pay taxes on over $1M worth of growth. That is the power of tax-free compounding.

Who can contribute?

Generally, you can contribute to a Roth IRA if you have taxable compensation, are less than 70 ½ years of age, and your Modified Adjusted Gross Income is less than:

  • $191,000 for married filing jointly
  • $129,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

The maximum contribution is the lessor of $5,500 ($6,500 if you are age 50 or older), or your taxable compensation.

If you have income over these amounts, you are disqualified from adding to your Roth account. (In addition, you will also be over the limit for a deductible traditional IRA.)

If my income disqualifies me from contributing to my Roth IRA, do I have any other options?

Yes. You have three options a Roth conversion, Roth 401K, or backdoor Roth conversion.

Roth Conversion

Even though you are unable to contribute to a Roth, there are no income limits to Roth conversions, so you may decide to convert your traditional IRAs to Roth IRAs and take advantage of your investment growing tax-free with no future required minimum distributions. A conversion would make sense if you expect your tax rate to be higher in the future and are willing to pay the taxes on the conversion with funds outside of the IRA account.

Roth 401K

Another way to build some tax-free investment growth via a Roth is to sign up for your Roth 401K if your workplace offers the option. Unlike the Roth IRA, the Roth 401K has no income limitations for eligibility. Since we prefer income that will be taxed at relatively low rates to fund a Roth, it may make sense to contribute after-tax payroll deductions to the Roth 401K up to point where your taxable income puts you in the top of the 25% income tax bracket, after which point, any additional contributions could be made to the traditional 401K, so as to keep you in the 25% marginal tax bracket. This not only helps diversify the taxability of your investments but also provides added flexibility for your withdraws in retirement.

Note that you will likely want to roll over the Roth 401K at retirement and or prior to age 70, as the Roth 401K does require that you take annual RMDs (Required Minimum Distributions) during your lifetime, whereas the Roth IRA does not.

Back door Roth conversion

Another way to add funds to your Roth IRA is through a “backdoor” Roth conversion. Here is how it works. You make a non-deductible contribution (after-tax dollars) to a traditional IRA and then, convert the IRA to a Roth IRA. If done correctly, this conversion will result in minimal taxation.

Ex: Tony and Tina make over $225K a year. They are in their 40s and want to build some tax-free funds into a Roth for their retirement. They each make a $5,500 contribution to a traditional IRA in January which has a zero balance, as they have already converted all of their traditional IRA accounts. Six months later, they convert the funds to their Roth account. The tax impact of the conversion will be based on the difference in the value of the account at conversion and the original $5,500 contribution.

When would you not want to do a backdoor conversion?

  • If you have substantial traditional IRA assets which have been deductible, the back door conversion becomes tougher as the pro rata rule comes into play. The pro rata rule aggregates all of the existing IRA balances and taxes the conversion based on the ratio of deductible funds to the total. For example, say that Lars has $94,500 in several traditional IRAs in which he contributed deductible pre-tax money. He makes a contribution of $5,500 to a non-deductible IRA this year and then converts the $5,500 account using the backdoor strategy. If he did not have any existing IRAs, the conversion would likely not be a huge taxable event (depending on the account value when he converted that year). However, since the total IRAs are now $100,000 and his conversion amount is $5,500, 94.5% of his IRAs are deductible, so $5,198 of his conversion would be taxable.
  • If you are going to need the funds within 5 years, this strategy will not be optimal, because a backdoor Roth is considered a conversion and not a contribution. Converted funds will incur a 10 percent penalty if withdrawn within five years unless you are age 59 ½ or older.
  • As always with a Roth, if you are in a higher tax bracket now then you expect to be in retirement, you may want to keep the money in the traditional IRA.
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Can an Animal Rescuer Help You? An Alternate Look at College Funding

Over Memorial Day weekend my company was an exhibitor at the San Francisco Birth & Baby Fair. As usual, many expectant and new parents wondered by my table, and when I asked them about their financial plan, they hesitated, “Well, we’re going to get a 529 Plan….right??”

Not so fast, I caution you. College funding is often detrimentally the primary focus of new parents’ financial plans. With the birth of a child, parents suddenly feel a need to start saving for college. Before their child can eat solids — let alone order out a late night pizza —parents feel the stress of the tuition bill. This is not surprising. The cost of college is increasing at a rate that is almost double inflation, and it does not appear to be changing any time soon. If you have had a baby recently, you are looking at shelling out approximately $250,000-$450,000 (depending on cost and investment assumptions) if you decide you want to pay for your sweet baby’s college. This means you have to save $500-$1000 a month for 18 years (more or less, again depending on assumptions) to fund a college education fully. Yikes!

You may think it is almost blasphemous to say that parents should not save for college yet. I shock many parents when I don’t jump in and quickly answer their question, “Should we get a 529 Plan?” They may expect that I start listing the states’ plans which I would select, but I truly do not know how to answer that question. It’s like my son’s favorite Animal Rescuer. Once his trusty camera locates the crying wolf pup, she has to “zoom out” to see more of the picture. That is what I have to do before I can answer the inevitable 529 question.

What is your Big Picture? How is your retirement savings? Are you on target to have enough saved for your later years (probably not—that’ll be a different article)? Have you switched from two incomes to one? Do you plan to move into a more expensive home soon? What are your values? What are your priorities? And the list goes on …

Let’s say you’ve met with your financial planner and/or you’ve had a focused exploration of all areas of your financial situation in another manner. You’ve decided you do have college savings as a top priority, and you are ready to contribute some cash. Should you have a 529 Plan?

The answer is a very clear “maybe.”

While there are many vehicles for college savings, I will focus on the common dilemma I address with most parents, “Should we fund a 529 Plan or just put our savings in a tax-deductible account (a regular brokerage account)?”

If you are not familiar, a 529 Plan is a college savings account into which you make after-tax contributions and invest in funds as offered by your selected state’s plan. As long as you use the funds in the account for qualified education expenses (tuition, room, board, etc.) for the named beneficiary, you will not have to pay tax on the investment gains. This tax advantage makes these accounts very exciting!

However, 529 Plans may have limited investment choices, narrowing your options and potentially limiting your ability for maximum gain or adequate diversity. Finally, non-qualified distributions will be taxed at ordinary income tax rates and assessed a 10% penalty, so if you do not use the money for education and you do not transfer it to someone else, you pay the price.

You do not have to take advantage of any of the college savings vehicles to pay for college—-or use them exclusively. Many people choose to invest in a regular brokerage account, paying capital gains (15% in many cases) on the sale of assets when it is time to pay for college. This route opens up the potential use of the funds (rather than limiting it to education and the rules of the education accounts) and gives ultimate flexibility in investment choices.

How do you decide which vehicle to choose? Take a look at your situation and your habits:

1. Check in on your total financial picture, especially your retirement goals. Do you know how much money you will need when you retire (it’s a higher number than you think!)? Are you on track? Most couples I meet with get my “oxygen mask” speech, “Secure your mask before putting on your child’s…..” In other words, save first for your retirement, then focus on education, especially if dollars are limited. You can borrow for college, but not for your retirement. And who would have to step in to care for you if you run out of money? Your children.

As you look at where to put your investment dollars, remember that IRAs have special rules for using funds for education expenses, and taxable investment accounts can be used for retirement or education. The tax argument for using a 529 may be a moot point when you finally want to use that money —- it depends on the investments available, the rates of return, fees charged, capital gains tax rates, and cost of borrowing if you need other funds to name a few factors. If you want to leave your options open for use of your savings, then a 529 Plan probably does not work best for you.

2. Do you have parents/grandparents who want to contribute money for your son’s or daughter’s education? Do they care what kind of account the money goes to? Often times, grandparents like to be assured that their money will go to pay for college and not your next vacation. This is where a 529 Plan comes in handy. 529 Plans give family members the comfort of knowing their contributions are earmarked for education. Plus, you may encourage ongoing giving by having an account in place into which anyone can contribute.

3. What are your savings habits? Would you be too tempted by an accessible brokerage account? Will having a specific education account for which you’d be penalized if you withdraw money for other uses be the most assured way you will save for children’s college? Do you just like the idea of having money set aside in an account specifically labeled for college? If yes, then a 529 Plan could work well for you since it would separate these savings from other funds.

When it comes to college savings, you will probably want to utilize a few different vehicles. Which one(s) are best for your situation — and whether or not you should even save for college right now— should only be answered after looking at your total financial picture. Before you jump right into making a large contribution to a 529 Plan, make sure you “zoom out” to see more of the picture first.

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