If Chicago fails to convince you spring is right around the corner, I can assure you: Chicago is miserable until like May. March shows up acting optimistic, then the wind cuts through your coat like Edward Scissorhands. April flirts with 60 degrees for eight minutes, then disappears. So you stay inside, which turns you into perfect prey for virus predators. One person coughs on the Blue Line and suddenly you’re updating your will.
This time of year is dreadful. But it does give me an opportunity to answer the important questions our clients have. So I’ve got that going for me, which is nice.
Anyway, this week we’re covering Trump Accounts, in-plan Roth conversions, and a $2M lottery winner. Let’s get rolling.
We are trying to do this the smart way. My wife’s pregnant and we want to give our future kid a head start. Yet we also want the simplest plan that stays flexible. Our accountant keeps talking about Trump Accounts like they are the obvious play, and we keep hearing “Just open it early.” We’re also considering opening a 529 too.
- Future Parent
First of all, congratulations! There’s nothing more exciting than bringing a new child into this world. And I should add, he or she is very fortunate to have a parent looking to their academic and financial future so early (or before) their life gets going.
Here is the clean way to think about it, both accounts serve unique purposes. 529s are strictly for education while the new Trump Accounts function closer to a Custodial IRA with flexible exemptions for qualified distributions designed to help your child start their adult life.
In short, opening both accounts probably makes sense - Your accountant is eager for you to make the election on your form 4547 due to the special contribution opportunities that come with the Trump Account program going live later this year.
New Trump Accounts can receive non-parental contributions from up to three sources:
There are already some qualified general contributions funded by larger philanthropic donors that will go to the earliest adopters of these accounts and the PILOT program established by the government provides a sound argument to getting the appropriate form filed as early as possible – hence your accountant bringing this to you as they prep your filing this tax season.
Beyond the initial contributions – determine what your goal is for helping your future child establish themselves in early adulthood and come up with an ongoing funding plan if you see fit.
Once your future child turns 18, they can use the accounts to cover:
If the focus is higher education funding, 529s may provide a more tax advantaged approach to investing and saving ongoing funding – especially when considering state specific deductions.
Your accountant should be able to provide additional guidance here, and I’d recommend speaking to a wealth manager to assess how each account type fits into your greater financial plan.
I think the question is pretty straightforward. I’ve gotten advice from friends and some other professionals outside of wealth management. Any help would be greatly appreciated.
- Tax-Surprise Dodger
We always recommend working with your CPA to finalize the amount for each year’s Roth conversion – whether that’s from the 401(k) via in-plan conversions, between traditional and Roth IRAs, or a combination of both.
We commonly field questions along the lines of: “when and why should I do conversions and how will I know?”
There are a few important considerations to cover here when determining when, how much, and why…
Let’s put #1 to the test:
The key mechanic is simple: the taxable portion you convert generally shows up in income for that year. The IRS also states there is zero income tax withholding required on an in-plan Roth direct rollover, which is exactly how people get surprised at filing time.
Here is a simple example with round numbers. Assume you convert $60,000 this year.
Federal bracket proxy: 24% → $60,000 × 0.24 = $14,400
State proxy: 5% → $60,000 × 0.05 = $3,000
Total tax proxy: $17,400
If you pay $17,400 from cash reserves, the full $60,000 lands in the Roth bucket. If you shrink the conversion to cover taxes, the Roth balance starts smaller, and long-run compounding has less fuel.
Here is how I would move forward this week: pull the plan’s guide from HR, confirm which sources are eligible and how often conversions are allowed, then pick a bracket cap for the year and convert up to that point. Then adjust payroll withholding or estimated taxes early, so filing season feels boring.
A sneaky trap is timing. Conversions stack on top of wages, bonus, and investment income, so a year that felt manageable in January can feel expensive in November.
I hit for $2M. I am 45, I already saved about $2M as well, and I want to be done working by 50. I have zero kids. I have one ex-wife who suddenly wants a “congrats cut” because she “believed in me” during the marriage. She is texting like this is a group project and she did the slides. I want to handle this smart, fast, and quietly.
I have also got the “helpful” chorus showing up. My college buddy has already pitched a restaurant idea that sounds like a tax write-off cosplay. A cousin I have not seen since childhood suddenly remembers my birthday and has a “small bridge loan” situation. The people coming out of the woodwork here is fascinating.
Meanwhile, I am sitting here trying to keep my blood pressure under control and my mouth shut. I do not want to celebrate this by turning it into a spectacle, and I really do not want to make a rushed decision that hands future-me a problem.
I simply want a plan that lets me retire by 50 without inviting chaos into my life, and I want to know what I should do first before I do something dumb with a number that big.
- Retire-By-50 With Receipts
You can make a 50-year-old retirement plan work from here, yet the first move is control: taxes, privacy, and a short cooling-off window before lifestyle upgrades. The legal side matters too, because feelings turn loud when money turns visible.
If you haven’t already done so, it’s worth hiring a quality CPA, wealth manager, and attorney to help you get your affairs in order. Especially on the tax side of the aisle.
Here is a proxy example with simple math. Assume $2,000,000 is taxable and 24% is withheld.
Withholding proxy: $2,000,000 × 0.24 = $480,000
Rough cash received: $2,000,000 − $480,000 = $1,520,000
Assume your effective total tax ends up closer to 35% after income stacking:
Total tax proxy: $2,000,000 × 0.35 = $700,000
Extra due at filing proxy: $700,000 − $480,000 = $220,000
A wealth manager will help you build out a holistic financial plan, encompassing your retirement plan, organize your investments, and gauge what is affordable on the lifestyle and gifting front.
For example, let’s blend the windfall with what you already saved. If your existing savings are $2,000,000 and the after-tax windfall proxy is $1,300,000, your combined pool is roughly $3,300,000.
A conservative starting spend-rate proxy of 3.5% looks like this:
$3,300,000 × 0.035 = $115,500 per year
Monthly: $115,500 ÷ 12 = $9,625
Here is how I would handle the spice without letting it burn the house down.
Put the winnings in a quiet account, set aside a tax reserve immediately, and give yourself a 90-day pause before major gifts, major purchases, or major announcements.
This is where a quality attorney comes into play. They’ll help you build out a legal framework for your estate, protect you from egregious claims now that your finances are known by others. It also adds an extra buffer while dealing with folks coming to your doorstep with their hands out.
Your ex-wife gets the same script and the same boundary as everyone else: “I am reviewing everything with counsel and I will respond in writing once I have clarity.” If she keeps escalating, that becomes a reason to communicate through attorneys, because the fastest way to turn a windfall into a long problem is to negotiate in real time over text. That keeps it practical, keeps it calm, and ties directly to the drama you added.
Then pull your divorce decree with an attorney and get a clean read on what is owed versus what is emotional noise. Keep communication in writing, keep it short, and keep it boring.
One miss: urgency drives generosity. Windfalls attract “immediate needs” from people who used to survive fine without your help. Your best defense is structure: separate accounts, updated beneficiaries, and a written spending policy that makes you boring on purpose. Also, drama has a time-cost, and time-cost is a tax.