Aggregation in the futures markets is a process that combines of all futures positions owned or controlled by a single trader or group of traders into one aggregate position. Aggregation in a financial planning sense, however, is a time-saving accounting method that consolidates an individual’s financial data from various institutions.
Aggregation is increasingly popular with advisors when servicing clients’ accounts, as they are able to discuss the accounts with the client in a cleaner, more easily understood way before they break down the account into its respective categories.
Key Takeaways
Financial advisors and banks aggregate their customer’s information so that they are able to easily produce a clear picture of that client’s finances. Also, it adds an additional level of protection for the client.
Advisors and planners hit a wall when their clients do not give them full access, and they argue that it does not allow them the full-picture view needed to give accurate advice on their client’s finances.
Aggregation is beneficial for both parties but the edge goes to the financial advisor, who may or may not see a gap in a client’s servicing where they might be able to upsell a product or service.
How Aggregation Works
Financial advisors use account-aggregation technology to gather position and transaction information from investors’ retail accounts held at other financial institutions. Aggregators provide investors and their advisors with a centralized view of the investor’s complete financial situation, including daily updates.
Financial planners handle both managed and non-managed accounts. Managed accounts contain assets under the advisor’s control that are held by the advisor’s custodian. The planners utilize portfolio management and reporting software to capture a client’s data through a direct link from the custodian. It is important for the planner to have all the accounts because aggregating them without the complete collection would paint an inaccurate picture of that client’s finances.
Additionally, non-managed accounts contain assets that are not under the advisor’s management but are nevertheless important to the client’s financial plan. Examples include 401(k) accounts, personal checking or savings accounts, pensions, and credit card accounts.
The advisor’s concern with managed accounts is lack of accessibility when the client does not provide log-in information. Advisors cannot offer an all-encompassing approach to financial planning and asset management without daily updates on non-managed accounts.
Importance of Account Aggregation
Account aggregation services solve the issue by providing a convenient method for obtaining current position and transaction information about accounts held at most retail banks or brokerages. Because investors’ privacy is protected, disclosing their personal-access information for each non-managed account is unnecessary.
Financial planners use aggregate account software for analyzing a client’s total assets, liabilities, and net worth; income and expenses; and trends in assets, liability, net worth, and transaction values. The advisor also assesses various risks in a client’s portfolio before making investment decisions.
Effects of Account Aggregation
Many aggregation services offer direct data connections between brokerage firms and financial institutions, rather than using banks’ consumer-facing websites. Clients give financial institutions their consent by providing personal information for the aggregate services.
An alternative minimum tax (AMT) places a floor on the percentage of taxes that a filer must pay to the government, no matter how many deductions or credits the filer may claim.
The United States currently has an alternative minimum tax for taxpayers who earn above certain income thresholds.
The AMT recalculates income tax after adding certain tax preference items back into adjusted gross income. It uses a separate set of rules to calculate taxable income after allowed deductions. Preferential deductions are added back into the taxpayer’s income to calculate their alternative minimum taxable income (AMTI), and then the AMT exemption is subtracted to determine the final taxable figure.
Key Takeaways
The AMT ensures that certain taxpayers pay their fair share or at least a minimum amount of tax.
It doesn’t kick in until income reaches beyond a certain exemption level.
For 2022, the exemption is $75,900 for single filers and $118,100 for couples filing jointly.
For 2023, the exemption is $81,300 for single filers and $126,500 for couples filing jointly.
In 2012, Congress passed the American Taxpayer Relief Act of 2012 that indexed the exemption amount to inflation to prevent middle-income taxpayers from owing AMT due to bracket creep.
How the Alternative Minimum Tax Works
The difference between a taxpayer’s alternative minimum taxable income and his AMT exemption is taxed using the relevant rate schedule. This yields the tentative minimum tax (TMT).
If the tentative minimum tax is higher than the taxpayer’s regular tax liability for the year, then they pay the regular tax and the amount by which the tentative minimum tax exceeds the regular tax. In other words, the taxpayer pays the full tentative minimum tax.
There are two alternative minimum tax rates, 26% and 28%. For 2022, the 28% rate applies to excess alternative minimum taxable income of $206,100 or more for all taxpayers ($103,050 for married couples filing separate returns). For 2023, the 28% rate applies to excess alternative minimum taxable income of $220,700 or more for all taxpayers ($110,350 for married couples filing separate returns). The 26% rate applies to incomes up to those levels.
A taxpayer who has a high income and uses large tax breaks may owe a smaller percentage under the standard rules. If so, the taxpayer is obliged to recalculate the taxes owed under the alternative minimum tax system, which eliminates some of those tax breaks.
The taxpayer will owe whichever amount is higher.
“The first individual minimum tax was enacted in 1969 and was an add-on minimum tax. That is, it was a tax that was paid in addition to the regular income tax. The tax rate for the add-on minimum tax was 10%, and its tax base consisted of eight tax preference items. The most significant of these tax preference items was the portion of capital gains income that was excluded from the regular income tax.“
Congressional Research Service
AMT Exemption Amounts
For tax year 2022, the AMT exemption for single filers is $75,900. For married joint filers, the figure is $118,100. For tax year 2023, the figures are $81,300 for single filers and $126,500 for married joint filers.
Taxpayers have to complete Form 6251 to see whether they might owe AMT. First, they subtract the exemption amount from their income. If their AMT is less than the exemption, they do not have to pay AMT.
It’s important to note, though, that taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For tax year 2022, the phase-out begins at $539,900 for single filers and $1,079,800 for couples filing jointly. For tax year 2023, the phase-out begins at $578,150 for single filers and $1,156,300.
Purpose of AMT
AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, in the past, the structure was not indexed to inflation or tax cuts. This can cause bracket creep, a condition in which middle-income taxpayers could be subject to this tax instead of just the wealthy taxpayers for whom AMT was invented. In 2012, however, Congress passed a law indexing the AMT exemption amount to inflation.
Calculating AMT
To determine if they owe AMT, individuals can use tax software that automatically does the calculation, or they can fill out IRS Form 6251. This form takes medical expenses, home mortgage interest, and several other miscellaneous deductions into account to help tax filers determine if their deductions are beyond an overall limit set by the IRS.
The form also requests information on certain types of income such as tax refunds, investment interest, and interest from private activity bonds, as well as numbers corresponding with capital gains or losses related to the disposition of property.
The IRS has specific formulas in place to determine which portion of this income and deductions the tax filers need to note on Form 6251. It uses another set of formulas to determine how these numbers lead to AMTI.
What Is the AMT?
It’s a tax that applies to high-income individuals who otherwise (under the standard U.S. tax system) might pay little or even no taxes. Essentially, it involves an alternate tax system that is used in addition to the standard system. Each calculates tax owed. The taxpayer pays whichever is greater.
What Is the AMT Exemption for Tax Years 2022 and 2023?
For tax year 2022, the AMT exemption for individuals is $75,900 and $118,100 for married couples filing jointly. For tax year 2023, the figures are $81,300 and $126,500, respectively.
Does the AMT Account for Inflation?
Yes, but it only did so periodically before the passage of the American Taxpayer Relief Act of 2012. With that legislation, the AMT was to be permanently indexed to inflation. The Tax Cuts and Jobs Act of 2017 also increased the AMT exemption and the income level at which the exemption began to phase out. This reduced the number of people affected by the AMT. These changes expire after 2025.
The Bottom Line
The Alternative Minimum Tax is an additional or parallel tax system in the U.S. that is designed to ensure that high-income individuals pay their fair share of taxes. Prior to the AMT, certain taxpayers paid little in the way of taxes, due to preferential treatment of certain income and expenses, or tax breaks.
A 529 plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to postsecondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.
The two major types of 529 plans are education savings plans and prepaid tuition plans.
Education savings plans grow tax-deferred, and withdrawals are tax-free if they’re used for qualified education expenses. Prepaid tuition plans allow the account owner to pay current tuition rates for future attendance at designated colleges and universities. That means that, most likely, you can lock in a lower cost of college attendance.
529 plans are also referred to as qualified tuition programs and Section 529 plans.
Key Takeaways
529 plans are tax-advantaged accounts that can be used to pay educational expenses from kindergarten through graduate school.
There are two basic types of 529 plans: educational savings plans and prepaid tuition plans.
529 plans are sponsored and run by the 50 states and the District of Columbia.
The rules and fees of 529 plans can differ by state.
529 plans can be purchased directly from a state or via a broker or financial advisor.
Starting on Jan. 1, 2024, up to $35,000 of leftover funds in a 529 account can be rolled over into a Roth IRA account, if the fund is at least 15 years old.
Understanding 529 Plans
Although 529 plans take their name from Section 529 of the federal tax code, the plans themselves are administered by the 50 states and the District of Columbia.
Anyone can open a 529 account, but they are typically established by parents or grandparents on behalf of a child or grandchild, who is the account’s beneficiary.
In some states, the person who funds the account may be eligible for a state tax deduction for their contributions.
The money in a 529 plan grows on a tax-deferred basis until it is withdrawn. What’s more, as long as the money is used for qualified education expenses as defined by the IRS, those withdrawals aren’t subject to either state or federal taxes. In addition, some states may offer tax deductions on contributions.
In the case of K-12 students, tax-free withdrawals are limited to $10,000 per year.
Since tax benefits vary depending on the state, it’s important that you check the details of any 529 plan to understand the specific tax benefits that you may or may not be entitled to.
Types of 529 Plans
The two main types of 529 plans have some significant differences.
Education Savings Plans
529 savings plans are the more common type. The account holder contributes money to the plan. That money is invested in a pre-set selection of investment options.
Account-holders can choose the investment (usually mutual funds) that they want to invest in. How those investments perform will determine how much the account value grows over time.
Many 529 plans offer target-date funds, which adjust their assets as the years go by, becoming more conservative as the beneficiary gets closer to college age.
Withdrawals from a 529 savings plan can be used for both college and K-12 qualified expenses. Qualified expenses include tuition, fees, room and board, and related costs.
The SECURE Act of 2019 expanded tax-free 529 plan withdrawals to include registered apprenticeship program expenses and up to $10,000 in student loan debt repayment for both account beneficiaries and their siblings.
And the SECURE Act of 2022, passed as part of the 2023 Omnibus funding bill, will permit rolling over up to $35,000 of unspent funds in a 529 account into a Roth IRA account, starting on Jan. 1, 2024. To qualify, the account must be at least 15 years old,
Prepaid Tuition Plans
Prepaid tuition plans are offered by a limited number of states and some higher education institutions. They vary in their specifics, but the general principle is that they allow you to lock in tuition at current rates for a student who may not be attending college for years to come. Prepaid plans are not available for K-12 education.
As with 529 savings plans, prepaid tuition plans grow in value over time. Eventual withdrawals from the account used to pay tuition are not taxable. However, unlike savings plans, prepaid tuition plans do not cover the costs of room and board.
Prepaid tuition plans may place a restriction on which colleges they may be used for. The money in a savings plan, by contrast, can be used at almost any eligible institution.
In addition, the money paid into a prepaid tuition plan isn’t guaranteed by the federal government and may not be guaranteed by some states. Be sure you understand all aspects of the prepaid tuition plan.
There are no limits on how much you can contribute to a 529 account each year. However, many states put a cap on how much you can contribute in total. Those limits recently ranged from $235,000 to over $525,000.
Tax Advantages of 529 Plans
Withdrawals from a 529 plan are exempt from federal and state income taxes, provided the money is used for qualified educational expenses.
Any other withdrawals are subject to taxes plus a 10% penalty, with exceptions for certain circumstances, such as death or disability.
The money you contribute to a 529 plan isn’t tax deductible for federal income tax purposes. However, more than 30 states provide tax deductions or credits of varying amounts for contributions to a 529 plan.
In general, you’ll need to invest in your home state’s plan if you want a state tax deduction or credit. If you’re willing to forgo a tax break, some states will allow you to invest in their plans as a nonresident.
Advantages and Disadvantages of 529 Plans
Advantages
Disadvantages
High contribution limit
Limited investment options
Flexible plan location
Different fee levels per state
Easy to open and maintain
Fees can vary; restriction on changing plans
Tax-deferred growth
Restriction on switching investments
Tax-free withdrawals
Must be used for education
Tax-deductible contributions
Depends on state; restrictions apply
529 Plan Transferability Rules
529 plans have specific transferability rules governed by the federal tax code (Section 529).
The owner (typically you) may transfer to another 529 plan just once per year unless a beneficiary change is involved. You are not required to change plans to change beneficiaries. You may transfer the plan to another family member, who is defined as:
Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
Brother, sister, stepbrother, or stepsister
Father or mother or ancestor of either
Stepfather or stepmother
Son or daughter of a brother or sister
Brother or sister of father or mother
Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
The spouse of any individual listed above
First cousin
You aren’t restricted to investing in your own state’s 529 plan, but doing so may get you a tax break. Be sure to check out that plan first.
Special Considerations
As with other kinds of investing, the earlier you get started, the better. With a 529 plan, your money will have more time to grow and compound the sooner it’s opened and funded.
With a prepaid tuition plan, you’ll most likely be able to lock in a lower tuition rate compared to what you’d pay down the road, since many schools raise their prices every year.
If you have money left over in a 529 plan—for instance, if the beneficiary gets a substantial scholarship or decides not to go to college at all—you’ll have several options.
One is to change the beneficiary on the account to another relative who qualifies according to the transferability rules. Another is to keep the current beneficiary in case they change their mind about attending college or later go on to graduate school. A third, starting in Jan. 2024, is to transfer unspent funds to a Roth IRA account if your account meets the requirements for doing so. Finally, you can always cash in the account and pay the taxes and 10% penalty.
How Can I Open a 529 Plan?
529 plans can be opened directly with a state. Alternatively, many brokers and financial advisors offer 529 plans. They can help you choose from a selection of plans located around the country.
How Much Does a 529 Plan Cost?
States often charge a one-time account setup fee for a 529 plan. These have ranged from as little as $25 (in Florida) to $964 (in West Virginia) for the lowest-cost option. In addition, if you bought your 529 plan through a broker or advisor, they may charge you as much as 5% or more on the assets under management. The individual investments and funds that you have inside of your 529 may also charge ongoing fees. Look for low-cost mutual funds and ETFs to keep management fees low.
Who Maintains Control Over a 529 Plan?
A 529 plan is technically a custodial account. So, an adult custodian will control the funds for the benefit of a minor. The beneficiary can assume control over the 529 once they reach age 18. However, the funds must still be used for qualifying education expenses.
What Are Qualified Expenses for a 529 Plan?
Qualified expenses for a 529 plan include:
College, graduate, or vocational school tuition and fees
Elementary or secondary school (K-12) tuition and fees
Books and school supplies
Student loan payments
Off-campus housing
Campus food and meal plans
Computers, Internet, and software used for schoolwork (student attendance required)
Special needs and accessibility equipment for students
The Bottom Line
Creating a 529 plan gives you a tax-advantaged way to save for educational expenses from kindergarten to graduate school, including apprenticeship programs. Now there is a new option to move up to $35,000 of unspent funds into a Roth IRA account if the 529 account is 15 or more years old .
An angel investor (also known as a private investor, seed investor or angel funder) is a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.
Key Takeaways
An angel investor is usually a high-net-worth individual who funds startups at the early stages, often with their own money.
Angel investing is often the primary source of funding for many startups who find it more appealing than other, more predatory, forms of funding.
The support that angel investors provide startups fosters innovation which translates into economic growth.
These types of investments are risky and usually do not represent more than 10% of the angel investor’s portfolio.
Understanding Angel Investors
Angel investors are individuals who seek to invest at the early stages of startups. These types of investments are risky and usually do not represent more than 10% of the angel investor’s portfolio. Most angel investors have excess funds available and are looking for a higher rate of return than those provided by traditional investment opportunities.
Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are individuals, normally affluent, who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool capital together.
Origins of Angel Investors
The term “angel” came from the Broadway theater, when wealthy individuals gave money to propel theatrical productions. The term “angel investor” was first used by the University of New Hampshire’s William Wetzel, founder of the Center for Venture Research. Wetzel completed a study on how entrepreneurs gathered capital.
Who Can Be an Angel Investor?
Angel investors are normally individuals who have gained “accredited investor” status but this isn’t a prerequisite. The Securities and Exchange Commission (SEC) defines an “accredited investor” as one with a net worth of $1M in assets or more (excluding personal residences), or having earned $200k in income for the previous two years, or having a combined income of $300k for married couples. Conversely, being an accredited investor is not synonymous with being an angel investor.
Essentially these individuals both have the finances and desire to provide funding for startups. This is welcomed by cash-hungry startups who find angel investors to be far more appealing than other, more predatory, forms of funding.
Sources of Funding
Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.
Though angel investors usually represent individuals, the entity that actually provides the funds may be a limited liability company (LLC), a business, a trust or an investment fund, among many other kinds of vehicles.
Investment Profile
Angel investors who seed startups that fail during their early stages lose their investments completely. This is why professional angel investors look for opportunities for a defined exit strategy, acquisitions or initial public offerings (IPOs).
The effective internal rate of return for a successful portfolio for angel investors is approximately 22%. Though this may look good for investors and seem too expensive for entrepreneurs with early-stage businesses, cheaper sources of financing such as banks are not usually available for such business ventures. This makes angel investments perfect for entrepreneurs who are still financially struggling during the startup phase of their business.
Angel investing has grown over the past few decades as the lure of profitability has allowed it to become a primary source of funding for many startups. This, in turn, has fostered innovation which translates into economic growth.
