Latest news with #InvestmentCompanyInstitute
CNBC
23-05-2025
- Business
- CNBC
Mutual funds can trigger hefty yearly capital gains taxes. Some lawmakers want to change that
If you own mutual funds, year-end payouts can trigger a surprise tax bill — even when you haven't sold the underlying investment. But some lawmakers want to change that. Sen. John Cornyn, R-Texas, this week introduced a bill, known as the Generate Retirement Ownership Through Long-Term Holding, or GROWTH, Act. If enacted, the bill would defer reinvested mutual fund capital gains taxes until investors sell their shares. Bipartisan House lawmakers introduced a similar bill in March. When you own mutual funds in a pre-tax 401(k) or individual retirement account, growth is tax-deferred. But if you hold assets in a brokerage account, capital gains distributions and dividends incur yearly taxes. More from Personal Finance:What the House GOP budget bill means for your moneyTax bill includes $1,000 baby bonus in 'Trump Accounts' House GOP tax bill passes 'SALT' deduction cap of $40,000 Depending on performance, some mutual funds can spit off substantial gains during the fourth quarter. In 2024, some paid double-digit distributions, Morningstar estimated. These payouts are subject to long-term capital gains taxes of 0%, 15% or 20%, depending on your taxable income. Some higher earners also pay an extra 3.8% surcharge on investment earnings. About $7 trillion of long-term mutual fund assets held outside of retirement accounts could be impacted by the legislation, according to the Investment Company Institute, which represents the asset management industry. In a statement Wednesday, Cornyn described the mutual fund proposal as a "no-brainer" that would "help provide parity with other investment options." If enacted, the proposal would "incentivize Americans to save and invest for their long-term goals" without the stress of an "unexpected tax bill," Eric Pan, president and CEO of the Investment Company Institute, said in a statement following the bill's introduction. However, it's unclear whether the bill will advance amid competing priorities. Lawmakers are wrestling over President Donald Trump's multi-trillion-dollar tax and spending package, which passed in the House on Thursday, and could face hurdles in the Senate. The U.S. Department of the Treasury has also asked Congress to raise the debt ceiling before August to avert a government shutdown. While deferring yearly taxes could benefit some investors, you could also make portfolio changes, financial experts say. You can avoid mutual fund payouts by switching to similar exchange-traded funds, or ETFs, which typically disburse less income, Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, previously told CNBC. Of course, the trade could also trigger taxes if the mutual fund has embedded gains, which may require some planning, he said. Alternatively, investors could opt to keep mutual funds in tax-deferred accounts, such as pre-tax 401(k)s or IRAs.
Miami Herald
15-05-2025
- Business
- Miami Herald
Major changes to 529 plan and HSA benefits may be in the cards
Nearly 10 million U.S. households-about 13% of the 74 million that owned mutual funds in 2024-identified education as a primary goal for their investments, according to the Investment Company Institute (ICI) Of those, 15%, 11.1 million households, reported owning 529 plans, the tax-advantaged accounts designed to help families save for future education costs. Related: Secretary Bessent hints Social Security income tax changes are coming As of year-end 2024, there were 16.1 million 529 savings plan accounts nationwide, with an average account balance of approximately $31,100. Total assets in these plans reached $500.6 billion. And while that's a meaningful sum, it represents just a fraction of the broader mutual fund market, which totaled $38.8 trillion in U.S. assets in open-end funds at year-end 2024. Don't miss the move: Subscribe to TheStreet's free daily newsletter Indeed, the ICI noted in its most recent yearbook that the demand for education savings vehicles has been moderate since their introduction in the 1990s, partly because of their limited availability and partly due to investors' lack of familiarity with them. Sebastian Latorre on Unsplash According to the ICI, households that save for college tend to skew younger and more educated. About 52% of households using 529 plans, Coverdell ESAs, or regular mutual funds and ETFs to save for education were under age 45. These savers also spanned a broad range of educational backgrounds: 63% had completed college, 19% had some college or an associate's degree, and 18% had a high school diploma or less. Related: Social Security income tax cuts may include a huge new deduction for retirees Income levels varied as well. More than a third, 35%, of college-saving households had annual incomes under $100,000, suggesting that education savings is not limited to higher earners. What most of these households had in common was children under age 18 at home, reinforcing the connection between early family planning and proactive education savings. And those savings are necessary, given the cost of education. Based on the most recent data from the College Board's 2024 "Trends in College Pricing" report, covering the 2024-2025 academic year: Public Two-Year Colleges (in-district students): The average total budget for full-time undergraduate students, including living expenses, was $20, Four-Year Colleges (in-state students): The average total budget for full-time undergraduate students, including living expenses, was $29, Four-Year Colleges (out-of-state students): The average total budget for full-time undergraduate students, including living expenses, was $49, Nonprofit Four-Year Colleges: The average total budget for full-time undergraduate students, including living expenses, was $62,990. Over the past two decades, a series of federal laws have steadily expanded the appeal and flexibility of education savings accounts, particularly 529 plans and Coverdell Education Savings Accounts (ESAs). Related: Medicare recipients face a growing problem It began with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which made 529s and Coverdells more attractive by increasing contribution limits and adding flexibility. The Pension Protection Act of 2006 made those changes permanent for 529 plans. For Coverdell ESAs, permanence took longer. The 2010 Tax Relief Act extended the EGTRRA enhancements for two years, and the American Taxpayer Relief Act of 2012 finally made those changes permanent. More recently, the SECURE Act of 2019 expanded what 529 plans can pay for, including apprenticeships and up to $10,000 in student loan repayments. The SECURE 2.0 Act of 2022 added another major benefit: starting in 2024, unused 529 plan assets can be rolled over – withing limits – into a Roth IRA for the plan's beneficiary, offering a new way to repurpose leftover education savings for retirement. And now, the proposed House Ways and Means tax bill introduces some major changes yet again to 529 plans. According to Ben Henry-Moreland, senior financial planning nerd at certain K–12 education costs, such as textbooks, tutoring, and standardized test fees, would be eligible for tax-free 529 distributions if the legislation becomes the law of the land as written. In addition, Henry-Moreland said the plans could be used to cover expenses related to earning and maintaining post-secondary credentials. That would include not only traditional college degrees but also professional certifications, potentially even the Certified Financial Planner (CFP) designation. Thus, the legislation would make 529s a more flexible tool for lifelong learning and career development, not just college savings. Moreland also noted that the proposed legislation addresses longstanding quirks in the health savings account (HSA) rules. For instance, when spouses make catch-up contributions starting at age 55, they're required to each make the catch-up contribution to their own HSA. "The proposed rule would allow both contributions to be made to the same account, as is the case with regular, non-catch-up contributions," Henry-Moreland said. The proposed rule would also ensure that one spouse being covered by a flexible spending account (FSA) at work wouldn't automatically make both spouses ineligible to contribute to an HSA. "Few people even know that this can be a problem, so it's good to see Congress trying to address it," he said. Related: Workers struggle with one big problem when they retire Got questions about retirement? Email The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
Associated Press
15-05-2025
- Business
- Associated Press
ICI Applauds Reintroduction of House Bill to Protect Investors and Expand Private Market Access
WASHINGTON, May 15, 2025 /PRNewswire/ -- Today, Investment Company Institute (ICI) President and CEO Eric Pan released the following statement on the reintroduction in the US House of Representatives of legislation to protect closed-end funds (CEFs) and their investors. The Increasing Investor Opportunities Act, was cosponsored by Reps. Ann Wagner (MO-02) and Gregory Meeks (NY-05). 'This bipartisan Increasing Investor Opportunities Act would allow CEFs to invest their assets more freely in securities issued by private funds, increasing opportunities for retail investors to access private markets. The bill also would protect retail investors, including many seniors, from harmful activists that misuse closed-end funds to extract quick profits for themselves. ICI applauds Representatives Wagner and Meeks for continuing to advocate for American investors, and we look forward to seeing the legislation pass both the House and the Senate for the President's signature.' Background: The Increasing Investor Opportunities Act would allow a CEF to invest more assets in private market securities, expanding access for retail investors to these growing markets. It also would restrict the proportion of CEF shares that activist investors and their affiliates could acquire to no more than 10 percent, closing the loophole that activists exploit at the expense of CEFs' long-term shareholders. This restriction would prevent predatory activist investors from extracting money from CEFs by taking over the funds to force them into liquidity events or to radically change their investment strategies. Contact: [email protected] View original content to download multimedia: SOURCE Investment Company Institute
Miami Herald
14-05-2025
- Business
- Miami Herald
‘MAGA accounts' may be a great way to kickstart your kids' savings
The proposed House Ways and Means tax bill introduces a new type of investment account that could change how American families save for their children's future. The legislation includes a provision to create a new tax-advantaged savings vehicle called the Money Account for Growth and Advancement, or what's being referred to as a "MAGA" account. These accounts, according to Ben Henry-Moreland, a senior financial planning nerd at aim "towards encouraging parents to provide some savings to their children that they can later use to go to college, start a business, or buy a home as young adults." Related: Social Security income tax cuts may include a huge new deduction for retirees The proposal, according to some, including the Investment Company Institute, the lobbying group for the mutual fund industry, represents a significant addition to the landscape of tax-advantaged accounts available to American families. It would join familiar vehicles like 529 plans, ABLE accounts, Roth IRAs, and custodial accounts. Don't miss the move: SIGN UP for TheStreet's FREE daily newsletter "The inclusion of the new "money accounts for growth and advancement" would foster a culture of investing among young people," the ICI said in a statement. "The accounts will help put a generation of young Americans on track to a lifetime of financial security as they see the power of compounding first-hand." UnSplash Jeffrey Levine, the chief planning officer at Focus Partners, stated on X that the accounts can be established for beneficiaries under age 8. He added that "new contributions would be accepted beginning in 2026 for beneficiaries ('beneficiary' similar to a 529 plan) under 18." There's a $5,000 maximum annual contribution, which is inflation-adjusted, according to Levine. No distributions, according to Levine, are allowed before the beneficiary's age 18, and "distributions from 18-24 are limited to 50% of the beneficiary's age 18 value." Related: How the IRS taxes Social Security income in retirement Of note, "when the account beneficiary turns 31, the account is terminated and fully distributed to the beneficiary," according to Henry-Moreland. According to Levine, investments "MUST be invested in the 'stock of a regulated investment company' that invests in diversified U.S. equities, does not use leverage, and 'minimizes fees and expenses.'" The tax treatment of these accounts creates a hybrid model that borrows elements from several existing account types. Henry-Moreland points out that "there's no tax deduction for contributing" to these accounts, placing them in the same after-tax contribution category as Roth IRAs and 529 plans. Unlike Roth IRAs, which require the account owner to have earned income, MAGA accounts would share a key feature with 529 plans by not imposing an earned income requirement for contributions. This flexibility would allow parents, grandparents, and other interested parties to fund these accounts regardless of the child beneficiary's employment status. Levine also notes that "distributions of principal would be tax-free" when withdrawals are made. What's more, "distributions used 'exclusively' for 'qualified expenses' would be a capital gain for the distributee," providing some tax advantages for specific uses, said Levine. Ordinarily, a distribution from a traditional IRA would be taxed as ordinary income while distributions from a 529 plan used for qualified education expenses are exempt from federal income tax. According to Levine, "all other distributions (from a MAGA account) would be ordinary income and, if the beneficiary is under 30, subject to an additional 10% penalty," creating a disincentive for early withdrawals unrelated to the account's intended purposes. Qualified expenses would include higher education costs, purchase of a primary residence by a first-time homebuyer, expenses related to a small business that has taken a small business loan, and post-secondary credentialing costs. To encourage adoption, the bill includes a pilot program that provides a $1,000 refundable credit from the Treasury Department-automatically deposited into a MAGA account-for every child born between Jan. 1, 2025, and Dec. 31, 2028, according to Robert Westley, regional wealth advisor at Northern Trust. Henry-Moreland described the initiative as an effort by Congress to "jumpstart the use of these accounts by establishing and funding a $1,000 MAGA account for each U.S. citizen born during that period." Related: Social Security pays U.S. workers $14.8 billion retirement windfall Despite the government's attempt to incentivize these accounts, financial planning experts remain skeptical about their relative value compared to existing options. "I don't honestly see much benefit in having a MAGA account," said Henry-Moreland. "Taxable custodial accounts have more flexibility and are nearly identical from a tax perspective, but don't have any tax penalties for nonqualified distributions, while Roth IRAs and 529 plans are more restrictive in how they can be used, but have much better tax benefits. And it's hard to argue that we need yet another type of tax-preferenced account with its own set of rules and restrictions to navigate." Others share that point of view. With government seed money, MAGA accounts provide a head start on savings that is not offered by 529 plans, IRAs, or other custodial accounts, said Westley. However, MAGA accounts come with fewer tax advantages and more withdrawal restrictions as compared with other types of accounts," he said. To be sure, the proposed legislation is part of ongoing efforts to address the financial preparedness for young Americans entering adulthood with significant expenses ahead. The proposal comes at a time when higher education costs continue to rise, housing affordability presents challenges for first-time homebuyers, and young entrepreneurs face barriers to starting businesses. Still, experts question whether this solution offers advantages compelling enough to warrant adding yet another specialized account type to America's already complex financial landscape. Related: The 9 worst states for Social Security income taxes Learn more about 529 plans. The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
Business Mayor
14-05-2025
- Business
- Business Mayor
How college savers can manage 529 plans in a turbulent market
Stephanie Phillips | Getty Images Here's a look at other stories impacting the financial advisor business. 'Markets go up and down, but students' goals remain the same,' said Chris McGee, chair of the College Savings Foundation. 529 plan popularity has soared In 2024, the number of 529 plan accounts increased to 17 million, up more than 3% percent from the year before, according to Investment Company Institute. Total investments in 529s rose to $525 billion as of December, up 11% from a year earlier, while the average 529 plan account balance hit a record of $30,961, data from the College Savings Plans Network, a network of state-administered college savings programs, also showed. 'The industry is coming off its best year ever in terms of new inflows,' said Richard Polimeni, head of education savings at Merrill Lynch. However, 'in terms of the current market volatility, that creates some concern,' he added. Even as concerns over college costs are driving more would-be college students to rethink their plans, college savings accounts are still as vital as ever. Roughly 42% of students are pivoting to technical and career training or credentialing, or are opting to enroll in a local and less-expensive community college or in-state public school, according to a recent survey of 1,000 high schoolers by the College Savings Foundation. That's up from 37% last year. As a result of those shifting education choices, 69% of students are expecting to live at home during their studies, the highest percentage in three years. Despite those adjustments, some recent changes have helped make 529 plans even more worthwhile: As of 2024, families can roll over unused 529 funds to the account beneficiary's Roth individual retirement account, without triggering income taxes or penalties, so long as they meet certain requirements. Restrictions have also loosened to allow 529 plan funds to be used for continuing education classes, apprenticeship programs and student loan payments. For grandparents, there is also a new 'loophole,' which allows them to fund a grandchild's college without impacting that student's financial aid eligibility. Managing 529 allocations in a volatile market For parents worried about their account's recent performance, Mary Morris, CEO of Commonwealth Savers, advises checking the asset allocation. 'What you need to think about is assessing your risk appetite,' she said. Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child's life and then become more conservative as college nears. By the time high school graduation is around the corner, families likely have very little invested in stocks and more in investments like bonds and cash. That can help blunt their losses. Pay attention to your fund's approach toward shifting from stocks to bonds, Morris said. 'If you are in a total stock portfolio, you may not want that ride,' she said: 'You don't want to get seasick.' If the market volatility is still too much to bear, consider adjusting your allocation. 'One strategy is to start de-risking a portion of their portfolio and reallocate a portion into cash equivalent, which will provide a protection of principle while also proving a competitive return and peace of mind,' Polimeni said. Still, financial experts strongly caution against shifting your entire 529 balance to cash. 'The worst thing an investor can do in a down market is panic and sell investments prematurely and lock in losses,' Polimeni said. Often that is the last resort. In the wake of the 2008 financial crisis, only 10% of investors liquidated their entire 529 accounts, and 20% switched to less risky assets, according to an earlier survey by higher education expert Mark Kantrowitz. How to help 529 assets recover For those who must make a hefty withdrawal for tuition payments now due, Polimeni suggests considering using income or savings outside the 529 to cover immediate college expenses, and requesting a reimbursement later. You can get reimbursed from your 529 plan for any eligible out-of-pocket expenses within the same calendar year. 'Using that strategy gives another six to seven months for the market to recover,' Polimeni said. Another option is to tap a federal student loan and take a qualified distribution from the 529 plan to pay off the debt down the road. However, if you're thinking of taking out private student loans or a personal loan that starts incurring interest immediately, you may want to spend 529 funds first in that case, and defer that borrowing until later. Once you have a withdrawal plan, you can — and should — keep contributing to your 529, experts say. Not only can you get a tax deduction or credit for contributions, but earnings will grow on a tax-advantaged basis, whether over 18 years or just a few. 'The major advantage is the tax-deferred growth, so the longer you are invested, the more tax-deferred growth you will have,' Polimeni said. Subscribe to CNBC on YouTube.
