There is a big change looming for the federal estate tax exemption after 2025 unless new legislation emerges -- a topic we discussed in this column in 2022. We are two years closer, and the time to plan (and potentially act) is now if you are a high-net-worth individual. What we're talking about here affects people who are in the lofty reaches of wealth, affecting likely only 1% of the population.

For deaths occurring in 2024, estates worth less than $13.6 million pass to heirs free of federal estate taxes. Estates worth more are taxable.

That exemption amount will drop dramatically in 2026, but there may be some ways to avoid or lessen the impact.

First, some background: The Tax Cuts and Jobs Act (TCJA) of 2017 brought a large increase in the estate exclusion amount -- from $5.49 million per person in tax year 2017 to $11.18 million in tax year 2018 (tinyurl.com/4h5yu88y). Yearly inflation adjustments have increased the exemption amount to the current 2024 level of $13.61 million. As of this writing, the exclusion amount for 2025 has not been announced.

However, the TCJA was not designed to be permanent. In 2026, the exclusion amount "is due to revert to its pre-2018 level," quoting the IRS Estate and Gift Tax FAQs (tinyurl.com/yc4ahmva).

The inflation-adjusted exemption for 2026 will, "barring action by Congress ... revert to approximately $7 million per individual, adjusted for inflation," according to the Northern Trust Institute report "Are You Prepared for Sunsetting Estate Tax Exemptions?" (tinyurl.com/49tskp8j). The Northern Trust Institute is a research center.

In other words, an estate that is fully exempt from federal estate taxes in 2025 can be subject to federal estate taxes in 2026. If you are in that situation (an estate worth $7 million or more), it's time to do some serious planning to see if there is a way to take advantage of the current exemption of over $13 million before it disappears.

What sort of planning? That usually calls for wealth transfer (gifting) considerations to reduce the size of the estate.

More background: The federal gift tax exemption has a relationship with the federal estate tax exclusion.

"The federal gift tax exemption is unified with the federal estate tax exemption, meaning that ... individual[s] can use part of lifetime gift tax exemption to make taxable gifts during their lifetime and the remaining portion to shelter their estate from federal estate tax after they pass away," according to the law firm Husch Blackwell LLP in "Understanding the 2026 Changes to the Estate, Gift, and Generation-Skipping Tax Exemptions" (tinyurl.com/u2sv3w76). "Whenever a portion of the federal gift tax exemption is used, the amount must be reported to the IRS on a Form 709 (Gift Tax Return) the following year."

A natural question is whether wealth transfer in advance of 2026 will cause you to lose the benefit of current exclusion amounts if the threshold decreases after 2025. The answer is no.

According to the IRS Estate and Gift Tax FAQs: "[P]eople planning to make large gifts between 2018 and 2025 can do so without being concerned that they will lose the tax benefit of the higher exclusion level once it decreases."

If you are examining your estate plan, what should you be considering with 2026 not that far away?

For starters, don't wait. Wealth transfer planning takes time and attention from your estate planning lawyer, working together with your money manager and accountant. It makes sense to begin soon to be ahead of the actual change in the law that takes effect in 2026.

Second, be prepared. If you are a high-net-worth individual, with 2026 just around the bend, have your money manager prepare you for meeting with your attorney. The attorney should already have your trusts and estate planning documents and knowledge of your family structure. Your money manager should prepare separate net-worth statements for you and your spouse, a list of your holdings and titling of assets, cash flow assumptions to plan for current and projected living expenses and a history of charitable gifting. That will save you and your lawyer some time and effort and open up planning opportunities.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Last week's column drew a comment from a 401(k) millionaire, having started his 401(k) participation right away -- "from day one."

He offered some advice to those who aren't convinced about the benefits of impactful participation: "Sacrifice if necessary but just do it. The future passes at warp speed, and before you know it, retirement ... is upon you." Thank you, J.H. This is good advice indeed.

With that advice in mind, let's look at mistakes that can keep you from achieving millionaire status, starting with the biggest mistake we touched on last week.

Most 401(k)s do provide matching contributions. If your plan is in the minority, use these data points from Plan Sponsor Council of America's 66th annual survey to ask for a change. The survey of 687 plans confirmed that only 20.6% of plans did NOT offer matching contributions. Instead, 13.8% offered non-matching contributions, and 6.8% offered no contributions of any type (tinyurl.com/yhucastw).

Not getting your full share of the company match is Mistake No. 1. Say your 401(k) is set up to match your contribution dollar for dollar up to 6% of compensation, but you are only contributing enough to trigger a 1% match. Explore your reasons. Sometimes, it's just something you haven't thought of checking on after you signed up for the 401(k). Get your contribution up to 6%.

Mistake No. 2: Cashing out of your 401(k) when you change jobs.

The U.S. Treasury would love for you to take every penny out of your 401(k) when you change jobs for one very good reason: more tax revenue. It's surprising but true that some 401(k) participants who cash out are not aware that withdrawals are taxed as income. Not only do you pay taxes on the withdrawal, but you may also pay a penalty for early withdrawals (before age 55 for a 401(k)).

What should you do instead of cashing out? Generally, you can leave the 401(k) with your old employer, move it to your new employer's plan (if transfers are permitted) or set up a rollover IRA working with your financial adviser. If you don't have an adviser, try your local bank or a national firm such as Vanguard or Fidelity. (I have no connection with either firm.)

Mistake No. 3: Borrowing from the 401(k) to make consumer purchases.

This is a biggie. Just about every 401(k) plan has a loan feature (82.9%, according to the Plan Sponsor Council of America survey).

While loan provisions may be a blessing in the case of emergencies, they should not be used for consumer purchases. "Should you borrow or take an early distribution from 401(k)?" an article by Merrill, discusses the considerations and risks involved (tinyurl.com/ytdm44dd).

Mistake No. 4: Defaulting on a loan.

If you do have to take out a loan, you need to know about timing, repayment and default.

Timing: According to an IRS resource (tinyurl.com/44z6wx7e), most loans have to be repaid within five years, unless the loan is used to buy a primary residence. Check your plan. What happens if you can't meet the timing?

Repayment: How do you repay the loan (usually payroll deductions), and what happens if you quit?

Default: Before you borrow, find out how a default is handled (for example, if you quit while a loan is outstanding). Usually, your 401(k) balance is used to pay the outstanding loan. When that happens, you will need to pay taxes on the withdrawal, along with a potential tax penalty.

Do your homework before taking out a loan, and include your tax adviser in the conversation.

These common mistakes highlight the importance of being informed. As part of my advocacy for financial literacy education, I created and fund the 401(k) Champion Competition. (Full disclosure: I am NOT in the 401(k) business.) This year's competition launched Sept. 9, and I encourage all 401(k) participants to apply now. Champions have the ability to help others learn about how 401(k)s work and contribute to retirement security. Visit 401kchampion.com.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION

Can you become a millionaire just by saving for retirement through a 401(k)? The answer is a clear yes. Fidelity Investments, which handles 24 million 401(k) accounts, revealed in its latest quarterly report that there are almost a half a million (497,000) 401(k)-created millionaires in their system (tinyurl.com/38rnert7).

According to Fidelity, the 401(k) millionaires "were able to reach this level of retirement savings by starting early and contributing consistently over many years." That's clearly a formula for success.

Overall, average account balances for 401(k)s with Fidelity were at $127,100 during the second quarter, with total average 401(k) savings rates being 14.2% (employees contributing 9.4%, and employers contributing 4.8%). Even younger participants (Gen Z's born between 1997 and 2012) have been saving, with average balances of $12,000, a solid start for this demographic slice that includes brand-new workers (tinyurl.com/4xxh4x87).

So here's a question for you: From your current position today, can you see a pathway to contributing more to your 401(k)? Or to start contributing if you don't already?

Before saying "no," do one thing for me:

If you are currently participating, find out if you are maximizing the employer match (if there is one). Also find out about the vesting schedule (some matches take a few years to vest, meaning if you leave the company before vesting, you can't take the full match with you).

If you are not participating, but your available plan does offer a match, my advice is to ask for help. You are losing money that your employer wants to give you for your retirement.

For example, a common employer match caps out at 6% of your compensation. That means if you make $60,000, the most your employer will match is up to $3,600 (6% of $60,000).

If the match is dollar-for-dollar, you would receive $3,600 as a contribution from your employer. To qualify for the full $3,600, you have to do your share by participating in the plan and contributing $3,600 as a payroll deduction.

If you look at the dollar-for-dollar match, as I do, from an investment point of view, you'll see a return of 100% on your investment. It helps to think of a match as immediate compounding. Try to get those results in a savings account.

Or, if the match is 50 cents on the dollar, which is more common, the maximum employer match on the $60,000 example would be $1,800 (one-half of $3,600). You contribute $3,600 through your payroll deduction, and your employer puts $1,800 in your 401(k) account as a match. This match gives you a 50% return on your investment -- without the wait that the math of compounding requires.

Do me a favor, check out your 401(k) plan's match. And, write to me with questions (readers@juliejason.com).

Another point. When you contribute to your 401(k) as we have discussed, your W-2 will not include the contributions nor the matches as taxable income, and you will lower your overall W-2 earnings, which means there is a potential for lower income taxes overall.

If you get a refund at tax time, you need to check your withholding allowances. Consider eliminating that refund so you can afford to put more into your 401(k). You may be able to maintain the size of your take-home paycheck by adjusting your withholding allowances. You will want to talk with your tax adviser to work out the details.

One final point: It's September, which means that 401(k) education is on my mind. As regular readers know, I'm an advocate of financial literacy education. That's why six years ago, I created and fund the 401(k) Champion Competition. Full disclosure: I am NOT in the 401(k) business.

The 2024 competition launched on Sept. 9, following National 401(k) Day, and I encourage all 401(k) participants to apply now to tell their stories about their 401(k) experiences. There is no cost. Three winners each earn the title of 401(k) Champion and a check for $1,000. The deadline for applying is Oct. 10, but please don't delay. Go to 401kchampion.com for more details.

There's something special about September, agreed?

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION