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Author: Didine M. Erskine

Protecting Your Legacy series Part 3 cover, hands cradling a young plant beside a leather journal

Protecting Your Legacy: Special Needs Planning and the Gift vs. Inherit Decision

Written by Didine M. Erskine on . Posted in Estate Planning.

Part 3 of the Estate Planning Series  |  Published: August 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

Quick Facts

Approximately 1 in 31 children is identified with autism spectrum disorder. Many will need financial and care support as adults long after their parents are gone.

Leaving assets directly to a special needs dependent may affect eligibility for Medicaid, SSI, and other means-tested benefits.

Assets passed at death generally receive a stepped-up cost basis, which can significantly reduce capital gains tax for heirs.

Gifting appreciated assets during life transfers the original cost basis to the recipient, creating embedded taxable gain. Timing matters.

What Does Estate Planning Look Like When a Dependent Has Special Needs?

The CDC reports that approximately 1 in 31 eight-year-old children studied across 16 U.S. communities had been identified with autism spectrum disorder. These children will become adults, and some will continue to need financial, legal, or care support long after their parents are gone. For their families, planning for that future is not optional, and it cannot wait.

One of the most common assumptions I hear is, “Their brother or sister will take care of them.” Love may make that possible, but good planning makes it sustainable. A sibling should not be expected to assume a lifetime of responsibility without clear instructions, appropriate resources, and a support system of their own.

The Benefits Eligibility Risk

Leaving an inheritance directly to a person who receives means-tested public benefits may affect eligibility for programs such as Supplemental Security Income or Medicaid. The outcome depends on the individual’s circumstances, the benefits involved, and how the inheritance is structured.

A well-intentioned bequest of $200,000 left directly to a special needs adult could trigger an immediate review of their benefits eligibility. Depending on the program and the state, it could interrupt or eliminate coverage they depend on for housing, medical care, and daily support. The inheritance that was meant to help them can instead create a gap in services that costs far more than the bequest was worth.

The Special Needs Trust

A properly designed special needs trust may allow assets to be used for a beneficiary’s supplemental needs while helping preserve eligibility for certain public benefits. The appropriate trust structure depends in part on whose assets will fund it, so families should coordinate the plan with an attorney experienced in special needs planning.

There are two primary types of special needs trusts. A first-party or self-settled trust holds the beneficiary’s own assets, such as a personal injury settlement. A third-party trust holds assets contributed by family members. The rules differ, and the right structure depends on the family’s specific situation.

The Trust Is Only the Beginning

The trust is only one part of the plan. Families should also consider who will serve as trustee and successor trustee, how future caregivers will understand the dependent’s routines and preferences, and how housing, transportation, medical care, advocacy, and financial support will be coordinated over time. A detailed letter of intent can help communicate information that legal documents alone cannot capture.

This is not a one-time legal transaction. It is an ongoing planning process that should evolve with the dependent, the family, and the available support system. The families who navigate it best are the ones who build a team early, document thoroughly, and revisit the plan as circumstances change.

A special needs trust is not a luxury for wealthy families. It is a foundational planning tool for any family with a dependent who receives means-tested government benefits.

The cost of not having one can exceed the cost of the trust many times over.

Is It Better to Gift Assets During Your Lifetime or Leave Them at Death?

One of the most meaningful conversations in estate planning involves knowing when it makes sense to transfer assets during your lifetime versus allowing them to pass at death. This is a planning question, not a generosity question, and the answer depends heavily on the type of asset involved.

The Stepped-Up Basis Rule

Assets passed at death generally receive a stepped-up cost basis, resetting the capital gains clock to the fair market value at the date of death. A piece of property purchased for $200,000 that is worth $800,000 at death transfers to heirs with an $800,000 basis. If they sell it immediately, generally little or no taxable gain is attributable to the earlier appreciation.

If the same property had been gifted during life, the recipient inherits the original $200,000 basis and a $600,000 embedded capital gain. When they eventually sell, they owe capital gains tax on that entire amount. The gift that was meant to be generous may cost the recipient significantly more in taxes than it would have had they simply inherited the asset.

Stepped-up basis at death: heirs receive the asset at its current fair market value.

Carryover basis during life: heirs receive the asset at your original purchase price.

For highly appreciated assets, the difference can be measured in tens of thousands of dollars of capital gains tax.

When Gifting During Life Makes Sense

Gifting during life is not always the wrong strategy. For assets that have not appreciated significantly, the basis issue is less consequential. For families who want to see the impact of their generosity during their lifetime, strategic gifting can be deeply meaningful. For estates that still have federal estate tax exposure even at the current $15 million exemption level, lifetime gifting reduces the taxable estate. And for certain assets such as cash or low-basis investments where the recipient has a lower tax rate than the donor, gifting may still produce the better overall outcome.

The right answer depends on the type of asset, the current and expected future value, your income, your estate size, the recipient’s tax situation, and your goals. A financial planner can model both scenarios before you make an irreversible transfer.

Frequently Asked Questions

What is a special needs trust and who needs one?

A special needs trust is a legal vehicle designed to hold assets for a beneficiary who receives means-tested government benefits such as Medicaid or Supplemental Security Income. A properly structured special needs trust may allow those assets to supplement the beneficiary’s care without affecting benefits eligibility. Any family with a dependent who has a disability or chronic condition that requires ongoing government support should consult an attorney experienced in special needs planning.

What happens if I leave money directly to a special needs dependent?

Depending on the program and the amount, a direct inheritance may affect the dependent’s eligibility for means-tested benefits such as Medicaid or SSI. The outcome depends on individual circumstances, the specific benefit programs involved, and applicable state rules. In some cases, the inheritance can temporarily or permanently disrupt coverage the dependent relies on for daily care and housing. A special needs trust is designed to prevent this outcome.

What is the stepped-up basis and why does it matter?

When you inherit an asset, the tax basis is generally reset to the fair market value at the date of the original owner’s death. This eliminates the capital gain that accumulated during the decedent’s lifetime. If you sell the asset shortly after inheriting it, you typically owe little or no capital gains tax. If you had received the same asset as a gift during the owner’s lifetime, you would have inherited the original low basis and owed tax on the full appreciation when you eventually sell.

Should I gift assets to my children now or leave them at death?

It depends on the asset, its current value and basis, your income, the recipient’s tax situation, and your goals. Highly appreciated assets such as real estate or long-held investments are often better candidates for inheritance than for lifetime gifts, because of the stepped-up basis benefit. Cash and low-appreciation assets are more straightforward candidates for lifetime gifting. A financial planner can model the scenarios before you make a transfer that cannot be undone.

Does the annual gift tax exclusion affect this decision?

The annual gift tax exclusion, $19,000 per recipient in 2026 and indexed for inflation, allows you to make gifts up to that amount per person per year without using any of your lifetime estate and gift tax exemption. But the gift tax exclusion does not change the basis rules. A gift of $19,000 of appreciated stock still carries over your original basis to the recipient. Tax-free for gift tax purposes does not mean tax-free for capital gains purposes when the recipient eventually sells.

How do I find an attorney experienced in special needs planning?

Start with a financial planner who works with families in similar situations. A planner who has built relationships with special needs planning attorneys, trust companies, and other specialists can help you identify the right team and ensure everyone is working from the same understanding of your family’s goals. Ask any attorney you interview how many special needs trusts they have drafted and whether they stay current on changes to benefits eligibility rules.

What is a letter of intent and why is it important for special needs planning?

A letter of intent is a non-legal document written by parents or family members that describes the special needs dependent’s daily routines, medical history, preferences, relationships, and wishes for their future care. It is not legally binding, but it provides essential guidance to a trustee, guardian, or caregiver who may not know the dependent personally. It is one of the most important documents a family can prepare, and it should be updated regularly as the dependent grows and circumstances change.

Bringing It All Together

Across all three parts of this series, the underlying message is the same. Estate planning is not a task you complete once and set aside. It is an ongoing process that should reflect your life, your family, and your values at every stage.

The four foundational documents protect you and the people you love in a crisis. A plan that is regularly reviewed protects against the changes that life inevitably brings. Thoughtful planning for adults without children, for out-of-state property, for special needs dependents, and for the gift vs. inherit decision protects against the gaps that most people never see coming.

The families who navigate life’s most difficult moments with the least disruption are rarely the ones who had the most assets. They are the ones who had the clearest plan.

If you would like to talk through where your plan stands and what a review might address, that conversation starts at theerskinegroup.net.

Protecting Your Legacy estate planning series

Part 1: Estate Planning for Every Stage of Life

Part 2: When to Update Your Plan and Who Gets Left Out of the Conversation

Part 3: Special Needs Planning and the Gift vs. Inherit Decision (this post)

Sources

  • Centers for Disease Control and Prevention, Autism Prevalence Report, ADDM Network, 2025
  • Social Security Administration, SI 01120.203, Special Needs Trusts
  • Internal Revenue Code Section 1014, Basis of Property Acquired from a Decedent
  • Internal Revenue Code Section 2503, Taxable Gifts
  • IRS Publication 559, Survivors, Executors, and Administrators
  • One Big Beautiful Bill Act, Public Law No. 119-21, signed July 4, 2025
  • Texas Estates Code, Chapter 1301, Management of Property of Minor or Incapacitated Person

LPL Financial representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Limited partnerships are subject to special risks, such as potential illiquidity, and may not be suitable for all investors. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal or tax advice. Please consult your estate planning attorney and tax advisor regarding your specific situation. The Erskine Group, LLC is a separate entity from LPL Financial.



Protecting Your Legacy series Part 2 cover, an open planner on a garden table along a stone path

Protecting Your Legacy: When to Update Your Plan and Who Gets Left Out of the Conversation

Written by Didine M. Erskine on . Posted in Estate Planning.

Part 2 of the Estate Planning Series  |  Published: August 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

Quick Facts

The federal estate tax exemption was permanently raised to $15 million per person in 2026. For most families, estate planning is not primarily a tax conversation.

Any major life event should trigger an immediate plan review. Most people wait years too long.

Adults without children face unique planning challenges around decision-makers, caregivers, and legacy.

Out-of-state property can create a separate probate proceeding in that state. This is one of the most commonly overlooked planning gaps.

What Changed in 2026 and Why Does Estate Planning Still Matter?

If you have been following tax news, you may have heard about a significant change. The One Big Beautiful Bill Act, signed in July 2025, permanently raised the federal estate and gift tax exemption to $15 million per person, or $30 million for married couples. This eliminated the scheduled reduction that many families had been racing to plan around.

For most families, the federal estate tax is not the primary concern at current exemption levels. But estate planning has never been only about taxes. A family with a meaningful home, a business interest, retirement accounts, and life insurance can have a complex estate that benefits significantly from clear planning, appropriate asset titling, and structures that protect beneficiaries rather than simply transfer assets. The tools changed. The need did not.

The estate tax exemption rising to $15 million does not mean planning is less important. It means fewer families owe estate tax. The questions of who inherits, who decides, who protects your children, and what happens to property in other states are entirely unaffected by that number.

When Should You Update Your Estate Plan?

An estate plan is not a document you create once and file away. Life changes, and your plan should reflect who you are now, not who you were when you last sat down with an attorney. Any of the following events should trigger an immediate review:

  • Marriage, divorce, the birth of a child, the birth of a grandchild.
  • The death of a named beneficiary, executor, or trustee.
  • The sale of a business or a significant financial windfall.
  • The sale or acquisition of real property, especially property in another state.
  • A significant change in the value of your estate.
  • The diagnosis of a serious illness in yourself or a dependent.
  • More than three years without a formal review.

I have sat across from clients who handed me a will last updated in 2001. Twenty-five years of life between that document and the conversation we were having. Marriages, children, grandchildren, businesses built and sold, property acquired, retirement accounts accumulated. None of it reflected in the plan they thought would guide their family.

A plan that does not reflect your life is not a plan. It is a snapshot of a moment that no longer exists.

What If You Do Not Have Children?

Estate planning conversations often assume that children will eventually step in as decision-makers, caregivers, executors, or beneficiaries. But many adults do not have children, whether by choice or circumstance. For them, planning is not less important. In many ways, it requires even greater intentionality.

The first question is not simply, “Who receives my assets?” It is, “Who will advocate for me if I cannot advocate for myself?” A trusted sibling, niece or nephew, close friend, or other member of your chosen family may be willing to serve as medical agent, financial agent, executor, or trustee. But those responsibilities should be discussed in advance, documented clearly, and supported by named backups.

The plan should also address the possibility of future care. Who will recognize when help is needed? Who will coordinate housing, medical care, transportation, or professional caregiving? Without children nearby, or without children at all, those decisions cannot be left to assumption.

For some people, the legacy conversation also becomes broader. Assets may pass to extended family, friends, charitable organizations, educational institutions, or causes that reflect a lifetime of values. Estate planning offers the opportunity to define family and legacy on your own terms.

Adults without children are not exempt from the need for a healthcare directive and a durable power of attorney. They may actually need these documents more urgently than parents, because there is no default person stepping forward in a crisis.

What Happens to Property You Own Outside of Texas?

If you own real estate outside of Texas, you own property subject to the laws of the state where it sits. A vacation home in Colorado, a rental property in Florida, land inherited in Tennessee. If it remains titled in your individual name at death, each of these may require an ancillary probate proceeding in that state, with separate legal fees, separate timelines, and rules that may differ significantly from Texas.

This is one of the most commonly overlooked items in estate planning for families with meaningful assets. Placing out-of-state property in a trust, structuring it with a transfer-on-death deed where the state allows it, or titling it carefully may avoid the need for ancillary probate entirely. Leaving it unaddressed is a gift of complication to the people handling your estate.

A vacation home that brought decades of family memories should not become a source of legal complexity, expense, and delay for the family after you are gone. A single planning conversation can prevent that outcome.

Frequently Asked Questions

Does the 2026 estate tax change mean I no longer need to plan?

No. The One Big Beautiful Bill Act raised the federal estate tax exemption to $15 million per person, which reduces estate tax exposure for most families. But estate planning covers far more than taxes. Who inherits your assets, who makes decisions if you are incapacitated, how out-of-state property is handled, and how a special needs dependent is provided for are questions the tax exemption does not address.

How do I know when my estate plan needs to be updated?

Any major life event should trigger a review: marriage, divorce, a new child or grandchild, a death among named parties, a business sale, a significant change in assets, or the acquisition of property outside Texas. Beyond specific events, a general review every three to five years keeps the plan current even when life appears stable.

I do not have children. Do I still need an estate plan?

Yes, and in many ways the planning is more critical without children in the picture. Without a named medical agent, financial agent, and executor, there is no clear default person with authority to step in during a crisis. Adults without children should be especially intentional about naming decision-makers, named backups, and long-term care arrangements.

What is an ancillary probate and why does it matter?

Ancillary probate is a probate proceeding required in a state other than your state of residence for property you own there. If you own a vacation home in another state and it is titled in your individual name at death, that state may require its own probate process, separate from Texas. This means separate legal fees, separate timelines, and potentially different rules. Proper titling or a trust can often eliminate this entirely.

Can a transfer-on-death deed help with out-of-state property?

Possibly, but only if the state where the property is located recognizes transfer-on-death deeds. Texas does. Many other states do as well. But the rules and requirements vary by state. A transfer-on-death deed is often the simplest and least expensive tool for a single property in a state that allows it, provided the named beneficiary is not a minor or a person with special needs. Coordination with the rest of the estate plan is essential.

Who should serve as my executor or trustee if I do not have family nearby?

A trusted friend, a professional fiduciary, a bank trust department, or an attorney who handles estate administration. The key is choosing someone who is willing, capable, organized, and likely to outlive you. Name at least one successor in case your primary choice is unable or unwilling to serve. A financial planner can help you think through the right fit and ensure the person you name understands what is expected of them.

What Comes Next

Part 3 of this series covers two of the most nuanced conversations in estate planning: planning for a dependent who requires lifetime care, and knowing when it makes more financial sense to gift assets during your lifetime versus allowing them to pass at death.

Both topics deserve careful attention, especially for families navigating complex asset structures, appreciated property, or a dependent with a disability. If either situation applies to you, Part 3 is worth reading before your next planning conversation.

For deeper planning insights on estate planning, retirement income, tax strategy, and more, visit theerskinegroup.net.

Protecting Your Legacy estate planning series

Part 1: Estate Planning for Every Stage of Life

Part 2: When to Update Your Plan and Who Gets Left Out of the Conversation (this post)

Part 3: Special Needs Planning and the Gift vs. Inherit Decision

Sources

  • One Big Beautiful Bill Act, Public Law No. 119-21, signed July 4, 2025
  • Internal Revenue Code Section 2010, Unified Credit Against Estate Tax
  • Texas Estates Code, Chapter 114, Transfer on Death Deeds
  • Texas Health and Safety Code, Chapter 166, Advance Directives Act
  • IRS Publication 559, Survivors, Executors, and Administrators

LPL Financial representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Limited partnerships are subject to special risks, such as potential illiquidity, and may not be suitable for all investors. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal or tax advice. Please consult your estate planning attorney and tax advisor regarding your specific situation. The Erskine Group, LLC is a separate entity from LPL Financial.



Protecting Your Legacy estate planning series Part 1 cover, an antique key and a family photo on a leather portfolio

Protecting Your Legacy: Estate Planning for Every Stage of Life

Written by Didine M. Erskine on . Posted in Estate Planning.

Published: August 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

Quick Facts

Estate planning is not only for the wealthy or elderly. Every adult needs foundational documents regardless of age or net worth.

The four documents every adult needs: a will, a durable power of attorney, a healthcare directive, and current beneficiary designations.

A plan that is not reviewed regularly is not a plan. Life changes, and your documents must reflect where you are now.

Estate planning is a team effort. A financial planner, estate attorney, and CPA working together produce better outcomes than any one professional working alone.

Why Does Estate Planning Matter at Every Stage of Life?

Imagine a couple in their thirties with young children, a home, and a life they have worked hard to build. After a serious car accident, both are hospitalized and unable to speak for themselves.

When both spouses are incapacitated at the same time, Texas law may look to other family members for decisions. But the person authorized by default may not be the person they would have chosen, and that person may have no idea what either spouse wanted. Decisions about surgery, life support, and artificial nutrition can fall to grieving relatives trying to interpret deeply personal wishes without a roadmap.

Estate planning is not a task for the wealthy or the elderly. It is a set of legal documents and coordinated financial decisions that protects the people you love at every stage of life. The families who need it most are often the ones who have thought about it least.

What Happens to the People We Leave Behind When There Is No Plan?

Estate planning is more than a financial exercise. It is a gift of clarity to the people who love you.

Without documented wishes, loved ones may face decisions they were never prepared to make. Do we continue life support? What would she have wanted? What would he have chosen? Those questions arise in hospital hallways and ICU waiting rooms, with grief, fear, and guilt layered onto every conversation.

Family members can carry the weight of those choices for years. Not because they made the wrong decision, but because they were never sure they made the right one. A healthcare directive cannot prevent grief, but it can reduce the lasting anguish of not knowing.

Putting your wishes on paper is one of the most loving things you can do for the people who will carry you forward.

What Are the Four Documents Every Adult Needs?

Advanced tools such as trusts, transfer-on-death deeds, family limited partnerships, charitable vehicles, and special needs trusts may serve important purposes. Before considering any of those, however, every adult should have four foundational elements in place regardless of age or net worth.

  • Last Will and Testament. Identifies who receives your assets, nominates a guardian for minor children, and appoints someone to administer your estate. Without one, the state of Texas decides.
  • Durable Power of Attorney. Authorizes someone to manage financial and legal affairs if you become unable to do so. This is the document that keeps your bills paid, your business operating, and your family’s financial life intact during a crisis.
  • Healthcare Directive and Medical Power of Attorney. Records your medical wishes and names someone to communicate with healthcare providers on your behalf. This is the document that answers the difficult end-of-life questions on your terms, not someone else’s.
  • Beneficiary Designations. Retirement accounts, life insurance, and certain other assets pass directly to the beneficiaries on file, completely outside of your will and outside of probate. Outdated or missing designations can produce outcomes you never intended.

These four are the baseline. They are not the ceiling. But a family that has all four in place, current, and coordinated with each other is significantly better protected than one that does not.

One gap people miss most often

All four elements work best when they are current and coordinated with one another. A beneficiary designation on a retirement account overrides whatever your will says. If they conflict, the designation wins.

Why Do So Many People Delay Estate Planning?

Estate planning is easy to postpone when we are young and healthy. Yet life changes quickly. A will created when your first child was born may not reflect your family today. Documents drafted before a second marriage may no longer match your intentions. Beneficiary designations can remain unchanged through marriages, divorces, births, and deaths.

A plan is not complete simply because documents exist. It must evolve with your life. Major family changes, a business transition, the acquisition of property in another state, or simply several years without a review should prompt another look.

I have sat across from clients who handed me a will last updated in 2001. Twenty-five years of life between that document and the conversation we were having. Marriages, children, grandchildren, businesses built and sold, property acquired, retirement accounts accumulated. None of it reflected in the plan they thought was protecting them.

Why Should a Financial Planner Be Part of Your Estate Planning Team?

Estate planning is a team effort. An estate planning attorney drafts legal documents. A CPA addresses tax implications. A financial planner coordinates the broader picture, including assets, beneficiaries, account titling, business interests, and family dynamics, so the legal documents and financial arrangements support the same goals.

Preparing this financial layer before meeting with an attorney can clarify what you own, what you want to accomplish, and which questions need answers. Clients who arrive at an attorney’s first meeting having already worked through the financial planning layer use their time more efficiently and produce a more complete plan.

Not every family needs a complex trust structure. Good planning includes knowing when simplicity serves the client better than sophistication. The goal is not the most elaborate plan. It is the right plan for your circumstances.

When selecting professionals to coordinate the work, ask what role each person will play, how they are compensated, and how information will be shared across the team. If you are interviewing a financial planner, ask whether they operate under a fiduciary standard for the type of accounts or services being discussed.

Frequently Asked Questions

Do I need an estate plan if I am young and healthy?

Yes. The healthcare directive and durable power of attorney are most important precisely when you are young and healthy, because those documents exist to protect you during an unexpected crisis, not a long anticipated one. Age and good health do not reduce the need. They reduce the urgency people feel, which is exactly when the planning is most valuable.

What happens if I die without a will in Texas?

Texas intestate succession laws determine who receives your assets. The distribution depends on whether you are married, whether you have children, and how your property is titled. The outcome may not match your intentions. Without a named guardian in a will, a court decides who raises your minor children.

Does a will avoid probate in Texas?

No. A will must go through the Texas probate process. However, Texas has a relatively streamlined probate system compared to many states. Assets with beneficiary designations, joint ownership, or transfer-on-death titling pass outside of probate entirely. Proper planning can minimize what goes through probate.

How often should I update my estate plan?

At minimum every three to five years, and immediately after any major life event, including marriage, divorce, the birth of a child or grandchild, a death among named parties, a business sale, a significant change in assets, or the acquisition of property in another state.

What is the difference between a will and a trust?

A will takes effect at death and passes through probate. A trust holds assets during your lifetime and can transfer them at death without probate. Trusts offer privacy, potentially faster distribution, and protections a will cannot provide. Not every family needs a trust. The right tool depends on the family’s situation, asset complexity, and goals.

Can a beneficiary designation override my will?

Yes. Beneficiary designations on retirement accounts, life insurance policies, and other financial accounts control who receives those assets regardless of what your will says. This is one of the most commonly overlooked gaps in estate planning. A will that names one beneficiary and a retirement account that names another will result in the retirement account following the designation, not the will.

What should I look for when selecting an estate planning attorney?

Look for an attorney whose practice focuses on estate planning, not one who handles it occasionally alongside other areas. Ask whether they have experience with your specific situation, such as blended families, business interests, or special needs dependents. A financial planner who has built relationships with estate planning attorneys can often help you find the right fit and ensure the team is communicating effectively.

What does a financial planner actually do in the estate planning process?

A financial planner reviews the full picture before you meet with an attorney, including all accounts, beneficiary designations, asset titling, and family dynamics. That preparation helps identify gaps, coordinates the financial and legal strategies, and ensures the documents the attorney drafts reflect the actual financial reality. It also makes attorney meetings more efficient and the resulting plan more complete.

Where Should You Start?

If you do not have the four foundational documents in place, begin there. If your documents have not been reviewed in several years, or life has changed significantly, schedule a review with your estate planning attorney and financial planner together.

Few people look forward to an estate planning conversation. Yet families often describe a sense of relief once a coordinated plan is in place. Estate planning is not about expecting the worst. It is about making difficult moments easier for the people you love and increasing the likelihood that your wishes will be honored.

If you would like to talk through where your plan stands and what a review might address, that conversation starts at theerskinegroup.net.

This is Part 1 of the Protecting Your Legacy estate planning series.

Part 2: When to Update Your Plan and Who Gets Left Out of the Conversation

Part 3: Special Needs Planning and the Gift vs. Inherit Decision

Sources

  • Texas Estates Code, Chapter 201, Intestate Succession
  • Texas Health and Safety Code, Chapter 166, Advance Directives Act
  • Texas Estates Code, Chapter 114, Transfer on Death Deeds
  • IRS Publication 559, Survivors, Executors, and Administrators
  • SECURE 2.0 Act of 2022, Division T of the Consolidated Appropriations Act, 2023

LPL Financial representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Limited partnerships are subject to special risks, such as potential illiquidity, and may not be suitable for all investors. Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal or tax advice. Please consult your estate planning attorney and tax advisor regarding your specific situation. The Erskine Group, LLC is a separate entity from LPL Financial.



The Section 121 Home Sale Exclusion: What Texas Homeowners Should Know About Capital Gains Taxes Before Selling

Written by Didine M. Erskine on . Posted in Tax Planning.

Published: July 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

Quick Facts

  • Section 121 allows homeowners to exclude up to $250,000 of capital gain from the sale of a primary residence from federal income tax. Married couples filing jointly may exclude up to $500,000.
  • These limits have not been adjusted since 1997. As home values have appreciated over the past three decades, more homeowners are finding that careful basis calculation and planning can materially affect the amount of gain subject to tax.
  • Texas has no state income tax. Capital gains from a home sale are subject to federal tax only.

Special rules apply in divorce, for surviving spouses, and for military service members. See below.

What Is the Section 121 Home Sale Exclusion and Who Qualifies?

Section 121 of the Internal Revenue Code is one of the most valuable provisions in the federal tax code for individual taxpayers. It allows a homeowner to exclude a significant portion of the profit from the sale of their primary residence from federal income tax entirely. Most people searching for this topic know it as the home sale tax exclusion or capital gains exclusion on a home sale.

The exclusion amounts for 2026 are $250,000 for single filers and $500,000 for married couples filing jointly. These limits have not changed since the Taxpayer Relief Act of 1997. As home values have appreciated over the past three decades, more homeowners are finding that careful basis calculation and planning can materially affect the amount of gain subject to tax.

To qualify, you must meet both of the following tests during the five-year period ending on the date of the sale:

  • Ownership test: You must have owned the home for at least two years out of the last five.
  • Use test: You must have used the home as your primary residence for at least two years out of the last five.

The two years do not need to be continuous, and you do not need to be living in the home on the date of the sale. There are no income limits for the Section 121 exclusion.

Practical note: If you receive a Form 1099-S from the title company or closing agent, you must report the sale on your tax return even if the gain is fully excluded. Confirm with your tax advisor.

Does Your Home Sale Qualify? A Step-by-Step Guide

Flowchart for determining whether a home sale qualifies for the Section 121 capital gains exclusion

How Is Capital Gain Calculated on a Home Sale?

Your gain is not simply the difference between what you paid and what you sold for. It is the difference between your amount realized and your adjusted tax basis. Getting this calculation right can significantly reduce your taxable gain, and many homeowners leave money on the table by underestimating their basis.

What Is Your Amount Realized?

The amount realized is your sale price minus your selling expenses. Selling expenses include real estate commissions, attorney fees, title fees, transfer taxes, and other costs directly related to the sale. These reduce your taxable gain dollar for dollar.

What Is Your Tax Basis?

Your tax basis starts with what you paid for the home at purchase, plus certain closing costs from that original transaction. It is then increased by the cost of capital improvements made during your ownership and decreased by any depreciation previously claimed for rental or business use.

Capital improvements are additions or upgrades that add value, extend the home’s useful life, or adapt it to a new use. Routine repairs and maintenance do not increase basis. One of the most commonly missed basis items is the purchase closing costs from the original settlement statement. If you no longer have your closing documents, your title company or county clerk’s office can provide a copy.

Commonly Missed Basis Items

Many homeowners underestimate their basis simply because they did not know these items qualify. Each one reduces your taxable gain dollar for dollar at sale.

  • Original title insurance (buyer’s portion paid at closing)
  • Recording fees paid at original closing
  • Transfer taxes paid by the buyer at closing
  • Legal fees for title search and contract preparation
  • Roof replacement
  • HVAC system replacement
  • Room additions
  • Major kitchen or bathroom remodel
  • Permanent landscaping (driveways, fences, retaining walls)
  • Electrical or plumbing system upgrades
  • Insulation installation or upgrades

What Counts Toward Your Tax Basis?

A quick reference: improvements vs. maintenance

Reference chart of capital improvements that raise home tax basis versus routine maintenance that does not

How Gain Is Calculated: An Illustration

Sale price$650,000
Selling expenses (commissions, fees)($26,000)
Amount realized$624,000
Original purchase price$280,000
Purchase closing costs added to basis$8,500
Capital improvements during ownership$42,000
Tax basis($330,500)
Total gain before exclusion$293,500
Section 121 exclusion (married filing jointly)($293,500)
Taxable gain$0

For illustrative purposes only. Individual results will vary. Consult your tax advisor for your specific situation.

For a detailed breakdown of how improvements, selling costs, and depreciation recapture interact when a property has been used as a rental before conversion to a primary residence, see the companion post: Should You Convert Your Rental Property to a Primary Residence Before Selling? [link coming soon]

What Special Situations Affect the Section 121 Exclusion?

Divorce

Divorce introduces Section 121 rules around ownership periods, use credit for time away, and sale timing that can be worth up to $250,000 in additional exclusion depending on when the home is sold relative to when the decree is final. These rules are covered in full in the companion post: When One Spouse Wants to Keep the House: What to Know Before the Divorce Is Final

Surviving Spouse

This is one of the most important and underknown provisions in Section 121. Under IRC Section 121(b)(4), a surviving spouse who has not remarried may claim the full $500,000 exclusion if the sale occurs within two years of the date of the spouse’s death, provided the married filing jointly requirements were met immediately before the death.

After the two-year window closes, or if the surviving spouse remarries before selling, the exclusion reverts to the individual $250,000 limit. For a widowed homeowner with significant appreciation, the difference between selling within that window and waiting can be substantial. This is a planning decision that deserves attention before the grief and logistics of settling an estate cause the window to quietly pass.

Surviving spouse rule: The full $500,000 exclusion is available if the home is sold within two years of the spouse’s death and the MFJ requirements were met immediately before death. After that window, the limit drops to $250,000. Source: IRC Section 121(b)(4).

Military Service, Foreign Service, and Peace Corps

Members of the uniformed services, the Foreign Service, and the intelligence community on qualified official extended duty may elect to suspend the five-year ownership and use test clock for up to 10 years. To qualify, the duty assignment must be at a station at least 50 miles from the home, or the member must be living in government quarters under orders, and the service must exceed 90 days or be for an indefinite period.

Together, the 10-year suspension and the five-year test period can span no more than 15 years in total. The suspension can only apply to one property at a time. Peace Corps volunteers serving outside the United States qualify for the same suspension. Military families in the Bryan-College Station area, particularly those with ties to Fort Cavazos, should verify eligibility with a tax advisor before assuming the exclusion is unavailable due to extended time away.

What If You Need to Sell Before Meeting the Two-Year Requirement?

If you have not yet met the full two-year ownership and use tests, you may still qualify for a partial exclusion if the sale is driven by one of three qualifying reasons:

  • A change in place of employment, where the new workplace is at least 50 miles farther from the home than the prior workplace.
  • A health-related move, supported by a physician’s recommendation to relocate for treatment or to care for a family member.
  • Unforeseen circumstances, which the IRS has defined to include divorce or legal separation, death of a co-owner, involuntary conversion such as destruction or condemnation, and certain other qualifying events.
Partial Exclusion Formula: Maximum Exclusion x (Qualifying Months / 24)

Example: Single filer, 18 months of qualifying use, qualifying reason applies

$250,000 x (18 / 24) = $187,500 partial exclusion

What Happens to Gain That Exceeds the Exclusion?

Gain above the exclusion limit is generally taxed at long-term capital gains rates if you have owned the home for more than one year. For 2026, the rates and thresholds confirmed by IRS Revenue Procedure 2025-32 are as follows.

 

Taxable Gain ScenarioTax Rate2026 Threshold Notes
Long-term gain, lower income bracket0%Up to $49,450 taxable income (single) / $98,900 (MFJ). Source: Rev. Proc. 2025-32
Long-term gain, middle income bracket15%Applies to most sellers. Up to $545,500 single / $613,700 MFJ
Long-term gain, higher income bracket20%Applies above the 15% threshold
Net Investment Income Tax (NIIT)3.8%Stacks on top above $200K single / $250K MFJ MAGI. Not inflation-adjusted since 2013.
Depreciation recapture (Section 1250)Up to 25%Taxed as ordinary income. Cannot be excluded. Applies to prior rental or home office depreciation.

Source: IRS Revenue Procedure 2025-32. Thresholds are based on taxable income after deductions. Consult your tax advisor for your specific situation.

For sellers with gain above the exclusion, spreading the sale proceeds over multiple years through an installment sale may keep annual taxable income below higher brackets and the NIIT threshold. Discuss this strategy with your CPA before closing.

What Do Texas Homeowners Specifically Need to Know?

Texas has no state income tax, which means capital gains from a home sale are subject only to federal tax. Texas is also a community property state, which means equity built up in the family home during a marriage is generally considered jointly owned regardless of whose name is on the deed.

A Note on Agricultural Valuation and Rollback Taxes

For Texas homeowners whose property has been receiving an agricultural use valuation, a sale or change of use can trigger a rollback tax reaching back five years, plus 7% annual interest per year. This is a county-level property tax obligation, entirely separate from the federal Section 121 treatment. A seller can qualify for the full Section 121 exclusion on the federal gain and still owe a significant rollback tax at the county level. Verify exposure with your county appraisal district and a Texas real estate attorney before listing.

What Should You Do Before Listing Your Home?

  • Have you owned and lived in the home for at least two of the last five years?
  • Do you know your tax basis, including capital improvements and original closing costs?
  • Has any portion of the home been used for rental or business purposes that may require depreciation recapture?
  • Is your estimated gain above the exclusion limit, and if so, by how much?
  • Does the timing of the sale affect which exclusion amount is available (married vs. single, or within the surviving spouse two-year window)?
  • If your property has an agricultural valuation, have you verified the rollback tax exposure with your county appraisal district?
  • If you or your spouse are on military service, have you verified whether the five-year test clock suspension applies?

Frequently Asked Questions

What is the Section 121 home sale exclusion?

Section 121 allows a homeowner to exclude up to $250,000 of capital gain from the sale of a primary residence from federal income tax. Married couples filing jointly may exclude up to $500,000. To qualify, you must have owned and used the home as your primary residence for at least two of the five years before the sale date. There are no income limits. These thresholds have not been adjusted since 1997.

Do the two years of ownership and use have to be continuous?

No. The two years of ownership and the two years of use do not need to be continuous, and they do not need to overlap with each other. Both must be met within the five-year window ending on the sale date.

How is tax basis calculated for a home sale?

Tax basis starts with your original purchase price plus qualifying closing costs from acquisition. It increases with the cost of capital improvements and decreases by any depreciation previously claimed for rental or business use. Selling expenses at closing also reduce your amount realized, which reduces your taxable gain.

What happens if my gain exceeds the Section 121 exclusion?

Gain above the exclusion is generally taxed at long-term capital gains rates of 0%, 15%, or 20% depending on your taxable income. The 0% rate applies up to $49,450 for single filers and $98,900 for married filing jointly in 2026. The Net Investment Income Tax of 3.8% may also apply. Previously claimed depreciation is taxed at up to 25% regardless of the exclusion.

Can I use the Section 121 exclusion more than once?

Yes, but generally not more than once every two years. If you used the exclusion on a prior home sale within the last 24 months, you may be limited unless a partial exclusion exception applies.

What is the Section 121 exclusion for a surviving spouse?

Under IRC Section 121(b)(4), a surviving spouse who has not remarried may claim the full $500,000 exclusion if the sale occurs within two years of the date of the spouse’s death, provided the married filing jointly requirements were met immediately before the death. After that window, or if the surviving spouse remarries before selling, the exclusion reverts to $250,000.

What if I need to sell before living in the home for two years?

A partial exclusion may be available if the early sale is driven by a job relocation of at least 50 miles, a qualifying health reason, or an unforeseen circumstance such as a divorce. The partial exclusion is prorated based on how many months you met the ownership and use tests out of the required 24.

Are there special rules for divorce or military service?

Yes. Divorce introduces rules around ownership period inheritance, use credit, and sale timing that can significantly affect the available exclusion. Military members on qualified extended duty may suspend the five-year test clock for up to 10 years. Both situations are covered in the companion posts linked below.

Does Texas have a state tax on home sale gains?

No. Texas has no state income tax, which means capital gains from a home sale are subject only to federal tax.

Do I need to report a home sale if all the gain is excluded?

Not always, but if you received a Form 1099-S from the title company or closing agent, you are required to report the sale on your return even if the gain is fully excluded. When in doubt, report it and show zero taxable gain on Form 8949. Confirm with your tax advisor.

These questions do not require an attorney to answer. They require a financial planner who can model the numbers before the listing goes live and ensure the after-tax outcome matches the intent of the transaction.

If you are considering a sale and want to understand what the after-tax picture actually looks like for your situation, that is exactly the kind of conversation I am here for.

Planning with Purpose. Growing with Grace.

This post is part of the Core Financial Planning series on theerskinegroup.net.

Related posts:

When One Spouse Wants to Keep the House: What to Know Before the Divorce Is Final

What Is a QDRO and Why Does It Matter in a Divorce?

Should You Use Retirement Assets to Get Out of Debt Before 59½?

Should You Convert Your Rental Property to a Primary Residence Before Selling? [link coming soon]

Sources

  • Internal Revenue Code Section 121, Exclusion of Gain from Sale of Principal Residence
  • IRS Publication 523, Selling Your Home (2025)
  • IRS Publication 3, Armed Forces Tax Guide (2025)
  • IRS Topic No. 701, Sale of Your Home
  • IRS Revenue Procedure 2025-32, 2026 Long-Term Capital Gains Tax Thresholds
  • 26 CFR Section 1.121-4, Special Rules (Ownership and Use Test, Divorce)
  • 26 CFR Section 1.121-5, Suspension of 5-Year Period for Uniformed Services and Foreign Service
  • Texas Property Tax Code Section 23.46, Rollback Tax on Change of Agricultural Use
  • Texas Family Code Chapter 7, Division of Marital Property

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. This information is not intended to be a substitute for individualized tax or legal advice. Please consult your tax advisor and attorney regarding your specific situation. Investing involves risk, including possible loss of principal.



When One Spouse Wants to Keep the House: What to Know Before the Divorce Is Final

Written by Didine M. Erskine on . Posted in Divorce Financial Planning.

Published: June 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

Quick Facts

This is a comprehensive guide. Feel free to bookmark it and return to the sections most relevant to your situation.

When the House Becomes the Hardest Asset

For most divorcing couples, the home is the largest asset on the table. It is also the one most likely to be decided on emotion rather than math. Whoever wants to keep it often does so before fully understanding what keeping it will cost, and whoever gives it up often does so without understanding what they may be leaving behind.

The financial picture involves at least four moving parts: how the equity will be divided, how the buying spouse will fund the buyout, what happens to the mortgage, and what the tax consequences of a future sale will look like.

Each of these decisions affects the others. Getting one wrong can quietly undo what the negotiation gave you.

This post works through each piece and explains why the conversation needs to happen before the divorce is finalized, not after.

When Children Are in the Picture

When children are part of the family, the question of what to do with the home carries weight that goes beyond dollars and square footage. Familiarity matters to children navigating a parent’s divorce. The bedroom, the neighborhood, the school, the backyard. Minimizing disruption to their daily life is a legitimate planning consideration, not a sentimental one.

That said, there are two reasonable paths, and both deserve honest examination before the settlement is signed.

The first is keeping the home for the sake of stability. If the finances support it and one parent can realistically carry the home on their income, this is often worth the effort to structure. The goodwill extended by the departing spouse, whether through favorable settlement terms, a QDRO trade, or flexibility on the mortgage transition timeline, is a meaningful gift to the children they share. You divorce your spouse. You do not divorce your children.

The second path is selling the home and starting fresh. If the memories associated with the home are painful, if the carrying costs are genuinely unsustainable, or if both parties need the equity to rebuild independently, selling is not a failure. It is a financial reset. This is exactly where Section 121 becomes relevant. A clean sale can shelter up to $500,000 in gain for a married couple filing jointly, or $250,000 each if timed correctly after the divorce. The proceeds fund two new starts rather than one strained continuation.

Either path can be the right one. What matters is that the decision is made deliberately, with full information, before the decree is signed.

How Is the Home’s Equity Divided in a Texas Divorce?

Texas is a community property state. That means property acquired during the marriage, including equity built up in the family home, is generally considered jointly owned and subject to equal division. This applies unless a different ownership structure was established at the time of purchase, such as tenants in common. The home itself does not need to be sold for the equity to be divided. What matters is how the value is allocated between the two spouses in the settlement.

The spouse keeping the home typically needs to buy out the departing spouse’s share of the equity. The calculation is straightforward.

How Home Equity Is Calculated in a Divorce Buyout

Home fair market value$500,000
Outstanding mortgage balance($300,000)
Total equity$200,000
Departing spouse’s share (50%)($100,000)
Amount keeping spouse must fund$100,000

For illustrative purposes only. Individual situations will vary.

Where that $100,000 comes from is one of the most consequential financial decisions in the entire divorce process, and it is often not given enough attention until it is too late to structure it well.

A Note on Property Titling: This Post Assumes Community Property or Joint Tenancy

How a home is titled determines how it is divided in a divorce. If you are unsure how your home is titled, the answer is on your closing documents from the title company, not just the tax assessor’s office. Check the deed itself. The language on that document controls which rules apply.

 

Titling StructureHow It WorksDivorce Consideration
Sole Ownership (Ownership in Severalty)One person owns entirelyMay be separate property if pre-marriage, gifted, or inherited
Joint Tenancy with Right of Survivorship (JTWROS)Equal ownership, survivor inherits automaticallyGenerally treated as community property in a Texas marriage context
Tenancy in Common (TIC)Individual, potentially unequal sharesEach share divided separately; either party may force a sale through partition
Community PropertyBoth spouses own 100% regardless of whose name is on the deedDefault for assets acquired during marriage in Texas; subject to equal division
Trust OwnershipProperty held by a trust entityDivision depends on trust terms and whether assets are community or separate property

 

Texas is one of nine states where community property rules apply automatically to married couples. The others are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin. Alaska, Florida, Kentucky, South Dakota, and Tennessee allow couples to opt into community property treatment for certain assets. If you or your spouse lived in any of these states during the marriage, consult your attorney about how that affects property division.

What Are the Options for Funding the Equity Buyout?

The keeping spouse generally has three sources to draw from when funding the equity buyout: liquid assets, retirement assets, or equity in the home itself through refinancing. Each carries a different financial profile.

Liquid assets. Cash, savings, taxable brokerage accounts, or other non-retirement assets. This is the cleanest option because it does not trigger taxes or penalties. However, most households do not have $50,000 to $150,000 sitting in liquid accounts outside of retirement plans.

Retirement assets via QDRO. If both spouses have retirement accounts, the settlement can be structured so the departing spouse receives a larger share of the retirement accounts in exchange for a smaller cash buyout. A QDRO executes the transfer without triggering the 10% early withdrawal penalty at the time of transfer. This requires negotiation before the settlement is signed. It cannot be structured after the fact. A financial planner or tax advisor can clearly illustrate the real future cost of leveraging this option, since not every retirement dollar is worth the same after taxes.

Cash-out refinance. The keeping spouse refinances the home into a larger loan, pulls out cash to fund the buyout, and removes the departing spouse from the mortgage at the same time. This option is available when the mortgage is current and in good standing. A mortgage that is behind on payments introduces additional complexity, and the lender’s requirements in that situation differ significantly. Consult your lender and a financial planner before assuming a cash-out refinance is available.

Early withdrawal from own retirement account. If the settlement is already signed and no other liquidity exists, some spouses resort to withdrawing from their own retirement account. This is the most expensive option. It triggers the 10% early withdrawal penalty plus ordinary income taxes, since no QDRO protection applies to withdrawals from your own account. See the companion post for a full breakdown: Should You Use Retirement Assets to Get Out of Debt Before 59½?

 

The order of preference is generally: liquid assets first, QDRO-structured retirement asset trade second, cash-out refinance third, and early withdrawal from own retirement account last. Each step down the list is more expensive than the one before it.

What Is the Difference Between Assuming the Mortgage and Refinancing?

Removing the departing spouse from the mortgage is not optional. Until their name is off the loan, they remain legally liable for the debt, which affects their credit, their ability to qualify for a new mortgage, and their financial exposure if the keeping spouse misses payments. There are two ways to accomplish this: a loan assumption or a refinance.

Loan Assumption Defined

Loan Assumption: The process by which one party takes over another party’s existing mortgage obligation, including the original interest rate, remaining principal balance, and repayment schedule. The assuming party becomes legally responsible for the debt, and the original borrower is typically released from liability upon lender approval. In a divorce context, a loan assumption allows the spouse keeping the home to retain the existing mortgage terms rather than refinancing into a new loan at current market rates. Source: Consumer Financial Protection Bureau, consumerfinance.gov

The right choice between assuming and refinancing depends on three variables: the existing mortgage rate, current market rates at the time of the settlement, and the keeping spouse’s ability to qualify for the loan on their own income.

 

ConsiderationLoan AssumptionRefinance
RateKeeps existing rateNew rate at closing
Closing costsLower, assumption fee onlyFull closing costs (2-5% of loan)
Best whenExisting rate is below marketExisting rate is at or above market
Income qualificationMust qualify on own incomeMust qualify on own income
Timeline60-120 days for lender approvalStandard refinance timeline
Cash out optionNoYes, if equity permits and loan is current

When Refinancing May Be the Better Choice and Why It Can Give You More Than You Think

In today’s environment, where many existing mortgages carry rates from 2020 to 2022 in the 3% to 4% range, assuming the existing loan is often the more financially sound option. However, if the existing mortgage rate is at or above current market rates, refinancing may actually be advantageous. A lower rate at closing could reduce the monthly payment, offset the cost of removing the other spouse’s name, and potentially improve long-term cash flow. In that scenario, a refinance is not a penalty. It is an opportunity.

There is another dimension to refinancing that does not get discussed enough in a divorce context: it gives you choices.

When you refinance, you can roll the closing costs and the equity buyout directly into the new loan rather than coming up with cash at closing. This assumes the mortgage is current and in good standing. A mortgage behind on payments introduces additional complexity that needs to be resolved with the lender before this option is available. When the loan is current, extending the term reduces the monthly payment. In a moment when your income is covering one household instead of two, a lower required monthly payment restores breathing room.

What happens after that is up to you. If your new single life allows you to pay more toward the principal in a given month, you can. A good financial planner can model a new amortization schedule that shows exactly how much additional principal payment it takes to offset the cost of the higher rate over time. If rates come down in the coming years, your financial planner should be encouraging you to refinance again at the right time. You are not locked in forever. You are buying time and preserving flexibility, and in the middle of a divorce, that may be worth more than the incremental interest cost.

Why Does the QDRO Conversation Need to Happen Before the Divorce Is Final?

This is the planning point that gets missed most often. Once the divorce decree is signed, the options for structuring the equity buyout through retirement assets narrow considerably. A QDRO can technically be filed after the divorce is finalized, but the negotiating leverage is gone.

Here is why timing matters. If the keeping spouse needs $100,000 to fund the equity buyout and the departing spouse has a $400,000 retirement account, one option is to structure the settlement so the departing spouse receives a smaller share of the retirement account and no cash buyout, or a reduced cash buyout. That trade is only possible while both parties are still at the table.

The QDRO then executes the transfer of the negotiated retirement asset share without triggering the early withdrawal penalty. The departing spouse receives their retirement account share and the keeping spouse retains enough liquidity to cover the mortgage transition. Neither party takes an unnecessary tax hit.

If the keeping spouse instead withdraws from their own retirement account to fund the buyout, the penalty and tax consequences are unavoidable. For a $100,000 withdrawal in the 22% federal bracket, the net proceeds after penalty and taxes may be closer to $68,000. The spouse paid roughly $32,000 in taxes and penalties to access money that could have been structured differently.

A QDRO must be negotiated during the divorce process, not after. If retirement assets are part of the settlement, the intent to use them toward the equity buyout needs to be in the calculations before the decree is signed.

What Does Section 121 Mean for the Spouse Keeping the Home?

Section 121 of the Internal Revenue Code allows a homeowner to exclude up to $250,000 of capital gain from the sale of a primary residence from federal income tax. Married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and lived in the home as your primary residence for at least two of the five years before the sale date.

In a divorce context, Section 121 has three specific rules that most people do not know about, and each one can materially affect the tax outcome of a future sale.

Rule 1: The Keeping Spouse Can Count the Departing Spouse’s Ownership Period

If the home is transferred to one spouse as part of the divorce settlement under Section 1041, the receiving spouse inherits the transferor’s entire ownership period for purposes of the ownership test. This means if the departing spouse owned the home for eight years and the keeping spouse only lived there for one year after the transfer, the keeping spouse may still qualify for the $250,000 exclusion based on the combined ownership history.

For a detailed breakdown of how home improvements, selling costs, and depreciation recapture affect the gain calculation under Section 121, see the companion post: Section 121 and the Home Sale Exclusion: What Texas Homeowners Should Know.

Rule 2: The Departing Spouse’s Time Away Can Still Count as Use

If the departing spouse continues to have an ownership interest in the home under a divorce decree or separation agreement, but the other spouse lives there, that time counts as the non-occupying spouse’s use of the property for Section 121 purposes. This prevents the departing spouse from losing the exclusion simply because a court awarded occupancy to the other spouse during the separation period.

Rule 3: Selling While Still Married May Be the Best Tax Outcome

If both spouses have lived in the home for at least two years and the home is sold before the divorce is finalized, the couple may qualify for the full $500,000 married filing jointly exclusion. Once the divorce is final and the home is sold as a single filer, each ex-spouse’s individual exclusion drops to $250,000. For a home with significant appreciation, this timing decision can be worth modeling before the settlement is structured.

Section 121 Impact: Selling Before vs. After Divorce

ScenarioExclusion AvailableTaxable Gain on $450,000 Total Gain
Sell while married (MFJ)$500,000$0
Sell after divorce, single filer, qualifies$250,000$200,000
Sell after divorce, does not meet use test$0 or partialFull gain taxable
Partial exclusion (qualifying reason, 18 mo.)$187,500 (18/24 x $250K)Some gain taxable

 

Based on $450,000 total capital gain on home sale. For illustrative purposes only. Individual results will vary. Consult your tax advisor.

How Should These Pieces Be Modeled Together Before the Settlement Is Signed?

The home, the mortgage, the retirement accounts, and the tax treatment of a future sale are not four separate decisions. They are one interconnected calculation. Here is how a financial planner approaches them before a settlement is finalized.

  • What is the home’s current fair market value, and what is the estimated capital gain if it were sold today or within the next five years?
  • Does the timing of the sale, before or after the divorce is final, affect which Section 121 exclusion applies?
  • What liquid assets does the keeping spouse have available, and how does drawing on them affect their post-divorce cash flow?
  • What retirement accounts exist, and can the settlement be structured to use a QDRO transfer as the primary funding mechanism for the equity buyout?
  • If a QDRO is used, what is the after-tax value of each account type being traded, and is the exchange actually equal after taxes?
  • Is the mortgage current? If not, what steps need to happen before refinancing or assumption is available?
  • What mortgage rate does the keeping spouse currently have, and does assumption or refinance produce the better long-term financial outcome?
  • What does the keeping spouse’s income look like on their own, and can they qualify for the mortgage independently?

None of these questions require a lawyer to answer. They require a financial planner. The attorney ensures the legal instrument is correct. The financial planner ensures the financial outcome is actually what the settlement intended.

Frequently Asked Questions

What happens to the mortgage when one spouse keeps the house?

The keeping spouse needs to either assume the existing mortgage or refinance it into a new loan in their name only. Until the departing spouse is removed from the mortgage, they remain legally liable for the debt. The method, assumption versus refinance, affects cost significantly and depends on the existing rate relative to current market rates, as well as whether the mortgage is current.

Can I use my spouse’s retirement account to fund the equity buyout?

Yes, but only if structured before the divorce is finalized. A QDRO can transfer a portion of the departing spouse’s retirement account to the keeping spouse as part of the overall settlement, effectively trading retirement assets for a reduced cash buyout. This avoids the early withdrawal penalty at the time of transfer and must be negotiated at the table before the decree is signed.

Do I have to pay capital gains tax when I keep the house in a divorce?

The transfer of the home between spouses as part of a divorce settlement is generally not a taxable event under Section 1041. No gain or loss is recognized at the time of transfer. The tax question arises when the keeping spouse eventually sells the home, at which point Section 121 rules apply.

What is the Section 121 exclusion and does it still apply after divorce?

Section 121 allows a homeowner to exclude up to $250,000 of capital gain from the sale of a primary residence. After divorce, each spouse qualifies individually for $250,000, down from $500,000 married filing jointly. Special rules allow the keeping spouse to count the departing spouse’s ownership period toward the two-year ownership test.

What if I cannot qualify for the mortgage on my own income?

This is a common challenge and worth resolving before the settlement is signed rather than after. Options include a deferred buyout structure with the departing spouse remaining on the mortgage temporarily, selling the home and dividing proceeds, or restructuring the settlement to reflect the realistic carrying capacity of the keeping spouse.

Should we sell the house before the divorce is final for tax reasons?

Potentially yes. If the couple qualifies for the $500,000 married filing jointly exclusion and the home has significant appreciation, selling before the divorce is final can be substantially more tax-efficient than selling afterward as two single filers each with a $250,000 limit. Whether this makes sense depends on the specific gain, both spouses’ plans, and the timing of the divorce proceedings.

Does Texas community property law affect how home equity is divided?

Yes. In Texas, equity built up in a home during the marriage is generally considered community property and subject to equal division. Separate property, such as equity from a home owned before the marriage or received as a gift or inheritance, may be treated differently. A family law attorney familiar with Texas property law is essential to determining what is and is not subject to division.

How do I find out how my home is titled?

Your closing documents from the title company will show the ownership structure. You do not need to visit the tax assessor’s office. The deed, which was signed at closing, contains the exact language that determines how the property is owned and how it must be divided. If you no longer have your closing documents, a title company or your county clerk’s office can provide a copy of the recorded deed.

Why Does This Conversation Belong Before the Settlement Is Signed?

The decisions made during divorce negotiations are some of the most financially consequential decisions of a person’s life. They are also made under significant emotional pressure, often without a full understanding of the tax treatment of the assets being divided.

A financial planner brings a forward-looking view that an attorney cannot. Not just what each asset is worth today, but what it will cost to access it, how it will be taxed over time, and whether the settlement leaves each person in a position to actually rebuild.

If you are navigating a divorce and the home, the mortgage, and retirement accounts are all on the table, bringing a financial planner into the conversation before the decree is signed may be one of the most valuable planning decisions you make.

Planning with Purpose. Growing with Grace.

This post is part of the Divorce Financial Planning series on theerskinegroup.net.

Related posts: What Is a QDRO and Why Does It Matter in a Divorce?

Should You Use Retirement Assets to Get Out of Debt Before 59½?

Section 121 and the Home Sale Exclusion: What Texas Homeowners Should Know

Sources

  • IRS Publication 523, Selling Your Home (2025)
  • IRS Publication 504, Divorced or Separated Individuals
  • Internal Revenue Code Section 121, Exclusion of Gain from Sale of Principal Residence
  • Internal Revenue Code Section 1041, Transfers of Property Between Spouses or Incident to Divorce
  • 26 CFR Section 1.121-4, Special Rules (Ownership and Use Test, Divorce)
  • ERISA Section 206(d)(3), QDRO requirements
  • Consumer Financial Protection Bureau, Assumable Mortgages, consumerfinance.gov
  • Texas Family Code Chapter 7, Division of Marital Property
  • Texas Law Help, Shared Ownership of Real Property in Texas, texaslawhelp.org

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized tax or legal advice. Please consult your tax advisor and attorney regarding your specific situation. Investing involves risk, including possible loss of principal.



What Is a QDRO and Why Does It Matter in a Divorce?

Written by Didine M. Erskine on . Posted in Divorce Financial Planning.

Published: May 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

QDRO Quick Facts

A QDRO or equivalent domestic relations order is required to divide most employer-sponsored retirement plans during divorce. A divorce decree alone is not enough. IRAs generally do not require a QDRO. A properly structured QDRO can avoid the 10% early withdrawal penalty for the receiving spouse, while a poorly drafted one can delay transfers, create tax consequences, or result in lost benefits.

The Direct Answer

A Qualified Domestic Relations Order, commonly called a QDRO, is a court order that directs a retirement plan to divide assets between a participant and their former spouse as part of a divorce settlement. Without a QDRO, a federal law called ERISA prevents a retirement plan from paying benefits to anyone except the plan participant. A divorce decree alone is not enough. Getting the structure right shields both parties from unexpected taxes and penalties. Getting it wrong can result in a tax bill that quietly erases what the negotiation gave you.

Why Isn’t a Divorce Decree Enough to Divide a Retirement Account?

When most people finalize a divorce, they assume that once the settlement agreement says who gets what, the accounts simply follow. That is not how employer-sponsored retirement plans work.

When dividing a 401(k) or pension, the plan participant legally relinquishes all or a portion of their account or benefit to the other spouse. A QDRO is the legal instrument that accomplishes this. It must be approved by both the plan administrator and a judge before it takes effect. A poorly written QDRO may be rejected by the court or plan administrator, leading to delays or loss of benefits. The drafting matters enormously, and using a generic template without plan-specific customization is a common and costly mistake.

Which Accounts Require a QDRO?

Not every retirement account requires a QDRO. Knowing the difference before the settlement is finalized can save significant time and money.

Accounts that require a QDRO: 401(k) plans and private-sector pension plans governed by ERISA. Governmental 403(b) and 457(b) plans are generally not subject to ERISA but still require a domestic relations order to divide in divorce. See note below. These plans are specifically designed to safeguard participant assets, which means they cannot be divided without a qualifying court order.

Accounts that do not require a QDRO: IRAs and Roth IRAs. Dividing an IRA during divorce does not require a QDRO. An IRA may be divided by the divorce decree itself through a transfer incident to divorce. If handled correctly, no tax is assessed on the IRA separation transaction.

Military pensions and federal or state government plans are governed by other laws and require a different kind of court order, not a QDRO. If your settlement includes both a 401(k) and an IRA, those two accounts follow completely different legal processes for division.

Account TypeRequires Court Order?Division Method
401(k)YesQDRO
403(b)/457(b)YesDomestic Relations Order
PensionYesQDRO
Traditional IRANoTransfer Incident to Divorce
Roth IRANoTransfer Incident to Divorce
Military PensionDifferent Court OrderPlan-Specific

While governmental 403(b) and 457(b) plans are generally not subject to ERISA, a domestic relations order is still required to divide these accounts in divorce. The order must meet the requirements of IRC Section 414(p) for 403(b) plans and the plan’s specific terms for 457(b) plans. The practical process is similar to a QDRO but should be reviewed with a family law attorney familiar with the specific plan.

What Does a QDRO Actually Do?

A properly drafted and approved QDRO accomplishes three things that a divorce decree alone cannot:

  • The transfer itself is tax-free. There is no income event for the participant.
  • The alternate payee can roll their share into their own IRA tax-deferred, with no 60-day rollover deadline.
  • The 10% early withdrawal penalty does not apply to the receiving spouse, even if they are under age 59.5.

That last point deserves attention. Normally, a distribution from a 401(k) or 403(b) before age 59.5 triggers the 10% early withdrawal penalty plus ordinary income taxes. A QDRO creates a specific exception to the penalty for the receiving spouse. The taxes are still owed if the funds are taken as cash rather than rolled over, but the penalty is waived. This is one of the few situations where someone under 59.5 can access retirement funds without the additional 10% cost.

What Are the Most Common QDRO Mistakes in Divorce?

Divorce is one of the most tax-sensitive events in personal finance, and retirement accounts are where the errors tend to concentrate.

Treating the divorce decree as sufficient. Many people finalize their divorce, assume the accounts will be divided, and move on. Months or years later, they discover the plan administrator never received a QDRO, and no transfer occurred. The settlement agreement captures the intent. The QDRO executes it.

Using an unreviewed template. Some retirement plans publish sample QDRO templates on their websites, but these still need to be customized and reviewed. Plan-specific requirements vary. A QDRO that works for one employer’s 401(k) may be rejected by another.

Taking a direct distribution instead of rolling over. If the receiving spouse takes the transferred funds as cash rather than rolling them into their own IRA or retirement account, the full amount becomes taxable income in that year. The 10% penalty is waived, but the tax bill is not.

Not accounting for the after-tax value of accounts. A $400,000 traditional 401(k) is worth less than a $400,000 Roth IRA. A traditional account will be taxed at ordinary income rates on every withdrawal. A Roth account has already been taxed and distributes tax-free. A taxable brokerage account carries embedded capital gains. Treating them as equivalent in a settlement means one spouse is getting more than the numbers suggest, and the other is getting less. This happens more often than it should, and it is entirely preventable with the right guidance at the table.

Account TypeStatement ValuePotential After-Tax Value
Traditional 401(k)$400,000Less after taxes
Roth IRA$400,000Potentially tax-free
Taxable Brokerage$400,000Depends on basis and gains

Dividing accounts after distributions have begun. For pension plans and accounts already in pay status, the timing and structure of a QDRO become more complex. The order must be in place before distributions occur to the alternate payee going forward. Payments due before the plan administrator receives the QDRO are generally not recoverable.

What Is the QDRO Process Step by Step?

The QDRO process generally follows this sequence:

  • The divorce settlement agreement identifies which retirement accounts are being divided and in what proportion.
  • A QDRO is drafted, typically by a family law attorney or a specialist, to meet the specific requirements of the plan.
  • The plan administrator reviews and pre-approves the draft order.
  • The court signs the order.
  • The signed order is submitted to the plan administrator, who executes the transfer.

The timeline varies. Some plans process QDROs within weeks. Others take several months. During the interim, the assets remain in the participant’s account, so market movements between the settlement date and the transfer date can affect the final balance received.

Some plans and states impose their own administrative deadlines for processing QDRO transfers, separate from the federal 18-month segregation period under ERISA. Confirm the specific timeline with your plan administrator and family law attorney as early in the process as possible.

How a QDRO Works

From divorce settlement to retirement account transfer

1Divorce Settlement Agreement
Identifies which retirement accounts will be divided and in what proportion
2QDRO Drafted
Prepared by a family law attorney or QDRO specialist to meet plan-specific requirements
3Plan Administrator Pre-Approval
Draft order submitted to the plan for review before court signature. Strongly recommended.
Pre-approval reduces the risk of rejection and allows corrections before the court signs.
4Court Signs the Order
Judge issues the signed QDRO as a formal court order
5Signed QDRO Submitted to Plan Administrator
Plan begins the qualification review and separately accounts for the alternate payee’s share
Federal ERISA law requires the plan to hold the alternate payee’s share for up to 18 months during review (the segregation period). Some plans and states impose additional administrative deadlines. Confirm timelines with your plan administrator and attorney.
6QDRO Approved — Transfer Executed
Plan administrator executes the transfer to the alternate payee’s designated account

Alternate Payee Chooses:

Roll Into Own IRA
Tax-deferred. No penalty. No immediate tax.		Take as Cash Distribution
Taxable as ordinary income. 10% penalty waived under QDRO.
Not every dollar is worth the same after taxes.
A traditional 401(k), Roth IRA, and taxable account may show equal balances on paper but carry very different after-tax values. Understand what you are negotiating.
If the settlement is already final and a cash withdrawal is the only option:
See: Should You Use Retirement Assets to Get Out of Debt Before 59½?

The key point is that these decisions rarely operate independently. They need to be modeled together before the settlement is signed. If a home is part of your divorce settlement, the question of whether to assume or refinance the mortgage and whether retirement assets factor into the buyout deserves its own planning conversation. We cover that in detail in the companion post: When One Spouse Wants to Keep the House.

Frequently Asked Questions

Do I need a QDRO to divide my spouse’s IRA?

No. IRAs are divided under a transfer incident to divorce, which requires the divorce decree but not a separate QDRO. The process is simpler, but it must still be handled correctly to avoid a taxable event.

Can I avoid the 10% early withdrawal penalty with a QDRO?

Yes, but only for the receiving spouse on funds transferred under the QDRO. If the receiving spouse rolls the funds into their own IRA rather than taking cash, the distribution is also not taxable until future withdrawals.

What happens if my employer’s plan rejects the QDRO?

The plan administrator will typically provide a written explanation. The order can be revised and resubmitted. This is why pre-approval review before the court signs is strongly recommended.

Can a QDRO divide a pension that has already started paying out?

Yes, but the structure is more complex. The order must specify how future payments are divided and what happens to the participant’s election choices. Pension QDROs are generally more complicated than 401(k) QDROs and require specialized drafting.

Does Texas have specific rules about dividing retirement accounts in divorce?

Texas is a community property state, which means retirement benefits earned during the marriage are generally considered marital property subject to division. The QDRO rules themselves are governed by federal law, but the underlying property rights are determined by Texas family law. Working with a Texas family law attorney is essential.

Can a QDRO be completed after a divorce?

Yes, a QDRO can be filed after the divorce is finalized. There is no strict federal deadline under ERISA for filing a QDRO, though delay creates real risk, including the possibility that the participant begins drawing benefits before the order is processed, or that account balances shift significantly in the interim. Some states impose their own administrative deadlines. The sooner a QDRO is submitted after divorce, the better.

Why Does a Financial Planner Matter in a Divorce Settlement?

A QDRO is one of the more complex pieces of a divorce settlement, and the financial stakes are higher than most people realize going in. Not every dollar is worth the same after taxes, and the difference between account types matters significantly when dividing assets. A spouse receiving a $400,000 traditional 401(k) may eventually owe taxes on every dollar withdrawn, whereas a spouse receiving a $400,000 Roth IRA may not. On paper, the balances are identical. In practice, the after-tax value may differ significantly.

A financial planner, particularly one with experience in divorce financial planning, brings a different perspective than an attorney: a forward-looking view of the whole picture. Not just what each asset is worth today, but what it will cost to access it, how it will be taxed as income in retirement, how it interacts with Social Security and Medicare planning, and whether the settlement leaves each person in a position to actually rebuild. The goal is not just a fair split on paper. It is a fair split in practice, after taxes, over time.

On paper, each account is worth $400,000. In practice, they may produce very different after-tax outcomes. A traditional 401(k) is generally taxable as income when withdrawn. A Roth IRA may provide tax-free distributions if requirements are met. A taxable brokerage account may carry embedded capital gains. Understanding those differences before a settlement is finalized can materially affect the fairness of the division.

If a home sale is also part of the picture, the companion posts The Section 121 Home Sale Exclusion and When One Spouse Wants to Keep the House cover what Texas homeowners should understand about the tax implications of selling during a divorce settlement.

Sources

  • ERISA Section 206(d)(3) — QDRO requirements
  • IRS Publication 504 — Divorced or Separated Individuals
  • IRS Topic No. 452 — Alimony and Separate Maintenance
  • Texas Family Code Chapter 7 — Division of Marital Property

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized tax or legal advice. Please consult your tax advisor and attorney regarding your specific situation. Investing involves risk, including potential loss of principal.



2026 CD Rates Explained: How to Choose the Right Term for Your Goals

Written by Didine M. Erskine on . Posted in Core Financial Planning.

Published: June 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

As we head into 2026, many savers are asking the same question: “What should I be doing with my cash?” After several years of rapid rate changes and economic uncertainty, it makes sense to pause and reassess. CD rates look appealing, high-yield savings accounts remain competitive, and U.S. Treasuries are getting more attention as the Federal Reserve shifts into a new phase of the rate cycle.

The good news is that you do not need to predict the future to make smart decisions. You need a clear understanding of how CDs, Brokerage CDs, and Treasuries work in today’s environment and how each one aligns with your goals. That is what this guide is designed to help you do.

1. Short-Term or Long-Term Cash Tools in 2026?

In 2026, short-term cash tools are likely to be more attractive than long-term ones for most savers. With the Federal Reserve projecting a long-run rate in the low 3 percent range and the yield curve relatively flat, there is not much reward right now for locking up cash for many years.

Short-term CDs, Brokerage CDs, and U.S. Treasuries each allow savers to earn competitive yields while keeping flexibility. This matters because the rate cycle is shifting into normalization, and the optimal tool depends on the saver’s tax situation, liquidity needs, and time horizon.

Long-term CDs may still make sense for deeply risk-averse households, but for most Americans, CDs and similar cash tools are best suited for short-term stability rather than long-term growth. A cash tool is designed to solve a short-term goal. We generally do not recommend using short-term vehicles to address long-term objectives.

2. Bank CDs vs. Brokerage CDs: What Most Savers Do Not Know

When most people hear the word “CD,” they picture walking into a bank, signing paperwork, and locking up their money for a set period of time. That is a Bank CD. But there is another type that many savers do not know exists until it is presented to them: the Brokerage CD.

According to the U.S. Securities and Exchange Commission and the FDIC, brokered CDs are certificates of deposit issued by FDIC-insured banks but purchased through a brokerage firm rather than directly from the bank. Because the deposits are obligations of the issuing bank, and not the brokerage firm itself, FDIC insurance generally applies up to applicable limits when the CD is properly titled.

Here is what makes Brokerage CDs different in practice:

  • One account, many banks. A Brokerage CD lives inside a brokerage account, alongside other investments, rather than at a single bank.
  • Broader FDIC coverage possible. Because brokerage firms can source CDs from many issuing banks, investors may be able to access broader aggregate FDIC coverage than they would by holding CDs at a single bank, subject to the $250,000 per depositor, per insured bank, per ownership category limit.
  • Liquidity through a secondary market. Brokerage CDs trade on a secondary market, which means they can be sold before maturity rather than incurring an early withdrawal penalty. However, the sale price may be higher or lower than the original purchase price depending on interest rates.
  • Wider range of maturities. Brokerage CDs typically offer a much wider range of maturities, from a few months to 20 years or more.

This distinction matters because the right cash tool for one household may not be the right one for another. A saver with a single bank relationship and a clear short-term goal may be perfectly served by a Bank CD. A saver with a larger cash position, a desire to compare rates across banks, or a need for some liquidity may be better served by a Brokerage CD.

3. The FDIC and the Full Faith and Credit of the U.S. Treasury

Here is a question worth asking out loud: If you trust the FDIC, what exactly are you trusting?

FDIC insurance is funded by the Deposit Insurance Fund, which is built from premiums paid by insured banks. The FDIC also has a line of credit with the U.S. Treasury, and the Deposit Insurance Fund ultimately stands behind the U.S. government’s ability and willingness to support it. In short, trust in the FDIC is, at its foundation, trust in the United States government.

U.S. Treasuries carry that same government’s direct guarantee. According to the U.S. Securities and Exchange Commission, Treasury securities, including Treasury bills, notes, and bonds, are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.

The point is not that one is universally better than the other. Both have a place.

The point is that savers who feel comfortable with CDs because of FDIC insurance may find that they are already comfortable with the entity that issues Treasuries. From there, the question shifts from “Which one is safer?” to a more useful question: “Which one is the best fit for my goals, my liquidity needs, and my tax situation?”

4. When Treasuries May Have an Edge Over CDs

There are several scenarios where a U.S. Treasury may be more attractive than a CD, even when the headline yields look similar:

  • State and local tax exemption. Interest earned on U.S. Treasuries is generally exempt from state and local income tax, while interest from both Bank CDs and Brokerage CDs is fully taxable at the federal, state, and local levels. For savers in higher-tax states, this can meaningfully improve the after-tax return.
  • Potential for price appreciation if rates fall. If interest rates decline, the market value of Treasuries can rise. Bank CDs, by contrast, are held at face value and do not appreciate when rates fall. Brokerage CDs can also appreciate, but the Treasury market is generally deeper and more liquid.
  • Deeper secondary market. The Treasury market is one of the deepest and most liquid markets in the world, which can make it easier to sell before maturity if needed.
  • No FDIC coverage limit applies. Because Treasuries are direct obligations of the U.S. government, the FDIC $250,000 per-bank coverage limit does not apply in the same way. This can be relevant for households with significant cash positions.

5. When CDs Still Make Sense

Even with the advantages above, there are situations where a Bank CD or Brokerage CD remains a strong fit:

  • Stable statement values. Bank CDs are held at face value and do not show market fluctuations. For savers who feel anxious watching prices move, this can be an emotional advantage that supports staying invested.
  • Simplicity. A Bank CD opened at a local institution can be as simple as one trip to the branch. No brokerage account is required.
  • Locking in a yield. If a saver expects rates to fall, locking in a longer-term CD at today’s rate may protect that yield.
  • FDIC insurance. Both Bank CDs and Brokerage CDs benefit from FDIC insurance up to applicable limits, which is a meaningful protection for many savers.

6. How Should Savers Think About Liquidity in 2026?

Liquidity is a foundational part of financial planning, and in 2026 it will matter more than usual. With a flatter yield curve and stabilizing rates, the first question savers should ask is:

“What is this money for?”

That answer determines whether liquidity or yield should take priority.

  • Short-term goals (0–24 months): Liquidity is essential. High-yield savings accounts, money market funds, short-term CDs, and short-term Treasuries can all work depending on risk tolerance.
  • Periods of uncertainty: Flexibility becomes more valuable than locking money away.
  • Flat yield curve: When high-yield savings accounts and short-term CDs offer similar yields, staying liquid may be the stronger choice.
  • Bucketing strategy: Use a bucketing strategy to match each pool of money to its purpose:
    • Short-term bucket → liquidity
    • Mid-term bucket → diversified fixed income and Treasuries
    • Long-term bucket → growth assets

A well-funded liquidity bucket protects the rest of the plan by reducing the need to sell long-term investments during market volatility and allowing clients to take advantage of opportunities when they arise.

7. What Else Should Savers Keep in Mind in 2026?

A few essential concepts to carry into the year:

Cash tools are not long-term strategies. CDs, Brokerage CDs, Treasuries, and high-yield savings accounts all preserve principal and provide predictable interest, but they have historically lagged inflation and long-term market returns. They should support the financial plan, not replace it.

A flat yield curve is not a static curve. Today’s flat curve is dynamic. As the Federal Reserve normalizes rates lower, the entire curve can shift, not just the short end. Historically, long-term rates have often fallen when short-term rates decline. CD yields remain fixed once purchased, but Treasuries and high-quality fixed income can gain market value when rates fall.

Match the tool to the time horizon.

  • Short-term (0–3 years): CDs, Brokerage CDs, high-yield savings accounts, money market funds, short-term Treasuries, short-term bond funds.
  • Mid-term (3–7 years): Mid-term Treasuries and diversified fixed income.
  • Long-term (7+ years): Growth assets.

Emotional comfort matters, but so does opportunity cost. Predictability is meaningful, but combining emotional comfort with financial efficiency tends to produce the best long-term outcomes. The most effective strategy is to match cash decisions to the time horizon, not to the headline rate.

Comparison at a Glance

The table below compares Bank CDs, Brokerage CDs, and short-term U.S. Treasuries across the features savers most often ask about:

FeatureBank CDBrokerage CDShort-Term U.S. Treasury
Time Horizon3 months – 5 years3 months – 20+ years4 weeks – 2 years
Liquidity Before MaturitySubject to early withdrawal penaltySellable on the secondary marketLiquid in a deep secondary market
Backed ByFDIC Deposit Insurance FundFDIC Deposit Insurance Fund (across multiple banks)Full faith and credit of the U.S. Government
Coverage Limits$250,000 per depositor, per insured bank, per ownership category$250,000 per depositor, per insured bank, per ownership category (multiple banks possible)Not applicable — direct U.S. Government obligation
Interest Rate TypeFixedFixedFixed
Price Sensitivity to RatesNone (held to maturity)Generally yesGenerally yes
Potential to Appreciate if Rates FallNoGenerally yes, if sold before maturityGenerally yes, if sold before maturity
State Income Tax Treatment of InterestTaxableTaxableGenerally exempt from state and local income tax
Access to Multiple IssuersNo (single bank)Yes (multiple banks)Not applicable (single issuer)
Risk Profile● Very Low● Very Low● Very Low
Best Suited ForPredictable short-term goals; savers who value simplicityRate shopping, flexibility, and broader FDIC coverage across multiple banksTax-sensitive savers and those seeking potential price upside if rates fall

Risk characteristics shown reflect general principal-preservation profiles and are not formal risk ratings. All investments involve some risk. FDIC and SIPC protections apply only to specific products and within applicable limits. Bonds and brokered CDs are subject to availability and change in price. Prior to maturity, sales may result in a gain or loss. Treasuries, if sold prior to maturity, may be worth more or less than their original cost.

Conclusion

Cash decisions feel complex right now, but they do not have to be. The most effective strategy is the one that respects your time horizon, preserves your flexibility, and keeps your long-term plan on track. Bank CDs, Brokerage CDs, and U.S. Treasuries can each play a valuable role, and the right mix depends on your goals, your tax situation, and how much liquidity you need along the way.

If you are unsure which approach makes sense for you, a conversation with a financial planner can help bring clarity to the decision.

Ready to Talk Through Your Cash Strategy?

If you would like to discuss how CDs, Brokerage CDs, or Treasuries fit into your broader financial plan, schedule a complimentary conversation with The Erskine Group.

Frequently Asked Questions

1. What is the difference between a Bank CD and a Brokerage CD?

A Bank CD is purchased directly from an FDIC-insured bank and is typically held to maturity, with an early withdrawal penalty if redeemed early. A Brokerage CD is issued by a bank but purchased through a brokerage firm. According to Investor.gov, brokered CDs are issued by banks for the customers of brokerage firms, and because the deposits are obligations of the issuing bank rather than the brokerage, FDIC insurance applies up to applicable limits. Brokerage CDs can also be sold on the secondary market before maturity, which means their value can fluctuate with interest rates.

2. Are Brokerage CDs FDIC-Insured?

Yes, when the brokered CD is issued by an FDIC-insured bank and is properly titled, FDIC insurance generally applies. FDIC coverage is $250,000 per depositor, per insured bank, per ownership category. Because brokerage firms can source CDs from many different issuing banks, investors may be able to access broader aggregate FDIC coverage compared to holding CDs at a single bank. Investors are responsible for monitoring all deposits at each issuing bank to ensure they remain within applicable FDIC limits.

3. If U.S. Treasuries Are Backed by the U.S. Government, Why Do Most Savers Still Choose CDs?

Familiarity is often the answer. Many savers grew up with bank CDs and may not be aware that Treasuries are available through a brokerage account or that interest from Treasuries is generally exempt from state and local income taxes. CDs also provide a steady statement value because they are held to maturity at face value, which can feel emotionally comforting. Treasuries, by contrast, are marked to market daily and their value can fluctuate before maturity. Both vehicles serve a purpose, but for many savers the choice is less about safety and more about familiarity, liquidity preference, and tax efficiency.

4. Can I Lose Money in a Brokerage CD or a U.S. Treasury?

If a Brokerage CD or U.S. Treasury is held to maturity, the holder generally receives the original principal back along with the stated interest, subject to the financial health of the issuer. However, if either is sold on the secondary market before maturity, the sale price can be higher or lower than the original purchase price depending on the direction of interest rates. This is why matching the maturity date to your time horizon matters.

5. Why Is Treasury Interest Exempt From State and Local Income Tax but CD Interest Is Not?

Under longstanding federal law, interest earned on U.S. Treasury securities is exempt from state and local income taxes, though it remains subject to federal income tax. Interest earned on bank CDs and brokerage CDs is fully taxable at federal, state, and local levels. For savers in higher-tax states, this distinction can make Treasuries more attractive on an after-tax basis, even when the headline yield on a CD looks slightly higher.

6. Should I Put My Emergency Fund in a CD?

Generally speaking, emergency funds are best held in fully liquid accounts such as a high-yield savings account or money market fund. CDs require holding to maturity to avoid early withdrawal penalties (for bank CDs) or potential principal loss (for brokerage CDs sold early). A small portion of long-term emergency reserves could potentially be held in a short-term CD or Treasury ladder, but the core of an emergency fund should remain accessible without conditions.

Sources and References

The following authoritative sources informed the educational content in this article:

  • U.S. Securities and Exchange Commission and FDIC, “Brokered CDs: Investor Bulletin,” Investor.gov.
  • Federal Deposit Insurance Corporation, “Shopping for a Certificate of Deposit?” FDIC.gov Consumer Resource Center.
  • U.S. Securities and Exchange Commission, “Treasury Securities,” Investor.gov.
  • U.S. Department of the Treasury, TreasuryDirect.gov, Tax Forms and Withholding.

Disclosure

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss. Information regarding CDs, Brokerage CDs, and U.S. Treasuries is general in nature; specific terms, features, and risks vary by issuer and security.

Certificates of Deposit are FDIC-insured up to applicable limits and offer a fixed rate of return if held to maturity. Brokered CDs are subject to availability and may be subject to interest rate, credit, and liquidity risk. Brokered CDs sold prior to maturity in the secondary market may result in loss of principal. Investors should consider all features and risks before investing.

U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Interest income from U.S. Treasury securities is generally subject to federal income tax but exempt from state and local taxes. Treasury bills, notes, and bonds sold prior to maturity may be worth more or less than their original cost.



Can Educators Contribute to Both a 403(b) and a 457(b)?

Written by Didine M. Erskine on . Posted in Educator Retirement Planning.

Published: June 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

Yes. And most educators who have access to both are only using one.

That gap is one of the most underutilized retirement savings opportunities available to teachers, professors, and public institution employees, and it is worth understanding before another year passes.

Two Plans. Two Separate Limits.

Educators at public schools and universities often have access to three retirement vehicles: a primary pension or defined contribution plan, a supplemental 403(b) tax-deferred account, and a governmental 457(b) deferred compensation plan. If you participate in a defined contribution plan through your employer, you are likely already in a 403(b)-structured account. The question is whether you are also utilizing the separate 457(b).

The 403(b) and 457(b) are governed by separate sections of the Internal Revenue Code with entirely separate annual ceilings. For 2026:

403(b) elective deferral limit: $24,500. Catch-up for age 50 and older: $8,000, for a total of $32,500. Enhanced catch-up for ages 60 to 63 under SECURE 2.0: $11,250, for a total of $35,750.

457(b) elective deferral limit: Also $24,500, with the same catch-up provisions.

An educator who maximizes both plans can contribute $49,000 in combined elective deferrals in 2026, before any catch-up contributions apply. For someone 50 or older, that number rises to $65,000. For someone between ages 60 and 63, it can reach $71,500. These numbers are additive on top of whatever is going into the primary pension or defined contribution plan.

2026 Contribution Limits by Age Group

Age Group403(b) Limit457(b) LimitCombined Total
Base Contributions — All Eligible Employees
Under Age 50
Standard deferral limit		$24,500$24,500$49,000
With Age-Based Catch-Up Contributions
Age 50-59
+$8,000 standard catch-up		$32,500$32,500$65,000
Age 64+
+$8,000 standard catch-up resumes		$32,500$32,500$65,000
SECURE 2.0 Enhanced Catch-Up Window
Age 60-63
+$11,250 enhanced catch-up		$35,750$35,750$71,500

Source: IRS Notice 2025-67 | 2026 contribution limits | SECURE 2.0 Act of 2022

Important Context

For many educators and public employees, these contribution limits are separate from any employer pension or primary defined contribution plan benefits already being earned through employment.

What the Gap Looks Like Over Time

The difference becomes more visible over longer time horizons. The visual below illustrates how the gap compounds over time when both plans are consistently utilized.

Line chart showing how maximizing both a 403(b) and a 457(b) compounds retirement savings over time compared with using only one plan

Hypothetical Illustration Only. Assumes 7% annual return, contributions made at beginning of each year, and that both plans are maximized throughout the period shown. Not a guarantee of future results. Individual results will vary. Actual outcomes will differ based on investment performance, fees, taxes, and other factors.

The 457(b) Specifically Deserves Attention

The 403(b) is the more familiar of the two. Most educators who are saving supplementally are doing it there. The 457(b) tends to get less attention, which is a missed opportunity for several reasons beyond just the contribution room.

No early withdrawal penalty. Unlike a 403(b) or traditional IRA, a governmental 457(b) does not impose the 10% early withdrawal penalty on distributions taken before age 59 1/2. Separation from service triggers access. For someone who retires early or leaves their employer before traditional retirement age, this is a meaningful distinction.

Roth option. Many governmental 457(b) plans now offer a Roth contribution option, allowing after-tax contributions that grow and distribute tax-free. Features and availability vary by employer plan. Under SECURE 2.0, Roth balances in governmental 457(b) plans are no longer subject to lifetime required minimum distributions, adding flexibility for those who do not need the funds immediately.

One additional note worth confirming with your plan administrator: some governmental 457(b) plans offer a special pre-retirement catch-up provision in the three years before your normal retirement age, which can allow contributions above the standard catch-up amount. Whether your specific plan activates this provision is worth a direct conversation with your HR or benefits office before relying on it in your planning.

Who Should Be Thinking About This

If you are an educator who has been contributing to the 403(b) and have not looked at the 457(b), this is worth a conversation. Particularly if any of the following apply:

  • You are in a higher income year and looking for additional pre-tax deduction room.
  • You are within a few years of retirement and want to accelerate savings.
  • You are interested in Roth diversification across multiple account types.
  • You have a spouse who is also employed by a public institution, and you want to understand how the combined picture looks.

A Final Thought

The plans exist. The limits are generous. The enrollment is the easy part.

The harder question, how these plans fit into your broader retirement picture alongside your pension, Social Security, and any outside assets, is where personalized planning adds the most value.

If you would like to talk through your current contribution structure and whether there is meaningful room to improve it, reviewing how those pieces fit together can provide useful context.

Contribution room is only one part of the educator retirement picture. For other blind spots worth reviewing, see the companion post: Five Retirement Planning Risks Educators Often Overlook.

Frequently Asked Questions

Can educators contribute to both a 403(b) and a 457(b) at the same time?

Yes. The 403(b) and 457(b) are governed by separate sections of the Internal Revenue Code and carry entirely separate annual contribution limits. An educator with access to both can contribute to each in the same year, and the two limits do not offset each other.

How much can an educator contribute to both plans combined in 2026?

In 2026, the elective deferral limit is $24,500 for each plan, so an educator who maximizes both can contribute $49,000 in combined elective deferrals before catch-up contributions. With the age 50 and older catch-up, the combined total rises to $65,000. For those ages 60 to 63, the SECURE 2.0 enhanced catch-up raises it to $71,500.

Does a governmental 457(b) have an early withdrawal penalty?

No. Unlike a 403(b) or traditional IRA, a governmental 457(b) does not impose the 10% early withdrawal penalty on distributions taken before age 59 1/2. Separation from service triggers access, which can be a meaningful distinction for someone who retires early or leaves their employer before traditional retirement age.

Can I make Roth contributions to a 457(b)?

Many governmental 457(b) plans now offer a Roth contribution option, allowing after-tax contributions that grow and distribute tax-free. Features and availability vary by employer plan. Under SECURE 2.0, Roth balances in governmental 457(b) plans are no longer subject to lifetime required minimum distributions.

Are the 403(b) and 457(b) limits separate from my pension?

Yes. For many educators and public employees, these contribution limits are separate from any employer pension or primary defined contribution plan benefits already being earned through employment. The 403(b) and 457(b) deferrals are additive on top of the primary plan.

Disclosure

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. This information is not intended to be a substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation. Investing involves risk including possible loss of principal.



Should You Use Retirement Assets to Get Out of Debt Before 59½?

Written by Didine M. Erskine on . Posted in Core Financial Planning.

Published: June 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

I ran into this headline from Forbes in the last couple of weeks:

“According to TransUnion, one of the three biggest credit reporting agencies in the U.S., the average credit card debt per American in December 2025 was $6,715. That’s up $135 from $6,580 in December 2024.

The average credit card interest rate on accounts with balances assessed interest was 21.52% in February 2026, according to the most recent data from the Federal Reserve. If you make payments of $150 a month on a balance of $6,715 with an APR of 21.52%, you’ll pay more than $7,000 over 93 billing cycles to pay the whole thing off.”

Headlines like these are much more common all over social media, where I have seen a spectrum of emotions, most of them polarizing. I want to give my perspective as a professional who has had this conversation on several occasions in many different forms. I hope this gives you a framework to be more informed when making this decision.

The Direct Answer

Whether you should use retirement assets to pay off debt before age 59½ depends on the type of debt, the true cost of the withdrawal, and whether you have genuinely exhausted other options. In some situations, particularly high-interest debt with no remaining alternatives, it may be the most practical path forward. In others, the cost of the withdrawal outweighs the benefit significantly. This post walks through both sides honestly, including the IRS exceptions that reduce or eliminate the penalty, the alternatives worth trying first, and the specific scenarios where it might still make sense.

This Is Not the Advice Most Financial Planners Give. Here Is Why I Am Writing It Anyway.

The standard answer to this question is almost always no. And in many cases, that answer is right.

But people are making this decision every day, often without understanding the full cost, the available exceptions, or the alternatives they have not yet explored. This post is for the household that is genuinely weighing this option and deserves a complete, honest picture rather than a reflexive no.

First, Understand the Full Cost of an Early Withdrawal

The 10% early withdrawal penalty. If you withdraw from a traditional 401(k), 403(b), 457(b), or IRA before age 59½, the IRS imposes a 10% penalty on the amount withdrawn. This is on top of income taxes, not instead of them.

Ordinary income taxes. The withdrawal is added to your taxable income for the year. Depending on your bracket, that could mean an additional 22%, 24%, or more in federal taxes. Texas has no state income tax, which is one meaningful advantage for residents here.

The combined hit is larger than people expect. If you are in the 22% federal bracket and withdraw $20,000, you may net somewhere around $13,600 after the penalty and taxes. You paid $20,000 worth of future retirement security to receive $13,600 today. That math deserves to be visible before any decision is made.

The compounding loss. Money withdrawn at 40 forfeits decades of compounding growth. Depending on your timeline and rate of return, $20,000 withdrawn today could represent $80,000 or more at retirement. That is the real price of the transaction.

The IRS Exceptions That Reduce or Eliminate the Penalty

Substantially Equal Periodic Payments (SEPP / Rule 72t). You can avoid the penalty by taking a series of substantially equal payments calculated over your life expectancy using an IRS-approved method, continuing for at least five years or until age 59½, whichever is longer. This is a structured commitment, not a one-time withdrawal. But for someone who needs ongoing income and is several years from 59½, it is worth understanding.

Total and permanent disability. If you become disabled, the 10% penalty is waived entirely.

Unreimbursed medical expenses. Withdrawals used to pay unreimbursed medical expenses exceeding 7.5% of your adjusted gross income qualify for the penalty exception.

Health insurance premiums while unemployed. If you have received unemployment compensation for at least 12 consecutive weeks, you may withdraw to cover health insurance premiums without penalty.

SECURE 2.0 emergency personal expense distributions. Beginning in 2024, the law allows one penalty-free withdrawal of up to $1,000 per year for emergency personal expenses, with the option to repay within three years.

Domestic abuse survivor distributions. Survivors of domestic abuse may withdraw up to $10,000 or 50% of the vested account balance, whichever is less, penalty-free within one year of the abuse occurring.

First home purchase (IRA only). A first-time homebuyer may withdraw up to $10,000 lifetime from an IRA penalty-free. This exception does not apply to 401(k) or 403(b) plans.

Important note on the 457(b). Governmental 457(b) plans do not carry the 10% early withdrawal penalty at all. Distributions after separation from service are taxable as ordinary income but are penalty-free regardless of age.

Alternatives Worth Exhausting First

Negotiate the debt directly. Medical debt in particular is often negotiable. Hospitals frequently settle for less, offer interest-free payment plans, or have financial assistance programs that go unused simply because patients do not ask. Often, the medical facility can set up a monthly payment plan with a minimum payment to avoid sending it to collections.

401(k) or 403(b) loan rather than withdrawal. Many employer plans allow you to borrow up to 50% of the vested balance or $50,000, whichever is less. A loan is not a distribution. It is not taxable, not penalized, and you repay yourself with interest back into your own account.

Roth IRA contributions are always accessible. Your contributions, not earnings, can be withdrawn at any time, at any age, without taxes or penalties. If you have been contributing for years, a meaningful portion of your balance may already be accessible without any tax consequence.

Retirement accounts may carry creditor protections. Another often-overlooked factor is that many retirement accounts receive varying levels of creditor protection under federal or state law. In some situations, withdrawing assets to pay unsecured debt may permanently remove funds from a structure that otherwise carries legal protections. That does not mean withdrawals are never appropriate, but it is another reason these decisions deserve a broader planning and legal conversation before assets are accessed.

Home equity, where appropriate. A HELOC or cash-out refinance may provide lower-cost access to funds than a retirement withdrawal for homeowners with equity.

Balance transfer or personal loan. A 0% promotional rate balance transfer or lower-interest personal loan may buy meaningful time without touching retirement assets.

Specific Scenarios Where This Comes Up

High-interest credit card debt. Credit card debt at 24% to 28% APR compounds fast. If the balance is large, minimum payments are consuming your cash flow, and you have no other path to elimination, the math sometimes shifts. Paying a combined 32% tax and penalty cost to eliminate debt growing at 28% may not always be unreasonable, depending on the broader household situation.

Medical debt. The IRS exception for unreimbursed medical expenses exceeding 7.5% of AGI may apply, eliminating the penalty. Before withdrawing, verify whether the expense qualifies and whether the provider offers a payment plan or financial assistance program.

Student loans. There is no specific IRS penalty exception for student loan debt. Federal student loans have income-driven repayment options, deferment, and forbearance programs that may be worth exploring before retirement assets are considered.

Divorce and mortgage loan assumptions. When one spouse is assuming the existing mortgage and needs to buy out the other’s equity, liquid assets are not always available to cover the gap. A qualified domestic relations order (QDRO) allows retirement assets to be divided in a divorce and transferred to a former spouse’s retirement account without triggering the early withdrawal penalty. The structure of the settlement matters enormously. Getting that structure right is worth a conversation with both a family law attorney and a financial planner before any distribution occurs. For the full picture on keeping the home in a divorce, see the companion post: When One Spouse Wants to Keep the House.

When It Might Still Make Sense

Having walked through the costs and the alternatives, here is an honest answer to the underlying question. There are situations where accessing retirement assets early, with full knowledge of the cost, is the right decision for a household.

  • If the interest rate on the debt is high enough that the compounding debt burden is growing faster than the retirement assets are likely to grow, the math can shift.
  • If the psychological burden of the debt is affecting your ability to work, save, or make clear financial decisions, that is a real cost even if it does not appear on a spreadsheet.
  • If you have genuinely exhausted the alternatives and the debt remains, the question becomes not whether to pay a cost, but which cost is more manageable.

The right answer is not the same for every household.

Frequently Asked Questions

Is it ever a good idea to withdraw from a 401(k) to pay off debt?

Yes, in specific circumstances. When the interest rate on the debt is very high, other options have been exhausted, and the household has enough retirement assets that a partial withdrawal does not jeopardize long-term security, it can be a reasonable decision made with full information.

How much do I actually lose if I take an early withdrawal?

In the 22% federal bracket, a $20,000 withdrawal nets approximately $13,600 after the 10% penalty and federal taxes. Texas residents pay no state income tax. The longer-term loss from forfeited compounding can be substantially larger over 20 to 30 years.

Can I withdraw from my retirement account for a divorce settlement without penalty?

A direct withdrawal is subject to the full penalty and taxes. However, a properly structured QDRO allows retirement assets to be divided and transferred to a former spouse’s retirement account without triggering the penalty at the time of transfer.

What happens if I cash out my 401(k) to pay off credit cards?

The withdrawal is added to your taxable income for the year, subject to the 10% early withdrawal penalty, and permanently removes those assets from tax-advantaged compounding. For high-interest credit card debt, it may still be worth considering, but the full cost should be calculated before proceeding.

Is there a penalty-free way to access retirement funds before 59½?

Yes. Governmental 457(b) plans carry no early withdrawal penalty after separation from service. Roth IRA contributions can be withdrawn anytime without penalty. Several IRS exceptions apply to specific circumstances. Rule 72t allows penalty-free systematic withdrawals under specific conditions.

What is the difference between a 401(k) withdrawal and a 401(k) loan for debt payoff?

A loan is not a taxable distribution. You borrow from your own balance and repay it with interest back to yourself. A withdrawal is permanent, taxable, and penalized. For debt payoff, a loan is almost always preferable to a withdrawal if your plan allows it and you intend to remain with your employer.

What This Decision Deserves

If you are genuinely weighing this, bring it to a planning conversation. Not to be talked out of it, but to make sure the number you are working with is the real number, the alternatives have actually been exhausted, and if you proceed, you do it in the most tax-efficient structure available. That is what this work is for.

Disclosure

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. This information is not intended to be a substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation. Investing involves risk including possible loss of principal.



Can I Still Contribute to An IRA for 2025?

Written by Didine M. Erskine on . Posted in Tax Planning.

Published: May 2026  |  theerskinegroup.net

Planning with Purpose. Growing with Grace.

Didine Erskine, CFP, Founder of The Erskine Group

By Didine Erskine, CFP®  |  Founder, The Erskine Group, LLC  |  Visiting Lecturer, Texas A&M University

The short answer is no. But read on before you close the tab.

If you are asking this question today, after April 16, the traditional and Roth IRA contribution deadline for tax year 2025 has passed. For most people, that window is closed.

That is the honest answer, and it is worth knowing clearly rather than discovering it buried in fine print after you have already tried to make a contribution.

But before you move on, there are two things worth understanding: one exception that may still apply to you, and one pivot that can make this year different.

The Exception: If You Have Self-Employment or Business Income

If you are self-employed, a sole proprietor, a consultant, or a small business owner, including TAMU faculty with outside consulting income, you may still have a window open.

A SEP-IRA (Simplified Employee Pension) operates on a different deadline than a traditional or Roth IRA. Rather than following the April 15 tax filing deadline, SEP-IRA contributions can be made up through your tax return’s extended due date, including extensions.

That means if you filed for an extension by April 15, 2026, your SEP-IRA contribution deadline extends with it, typically to October 15, 2026 for most filers.

A few things worth knowing:

The contribution limit is significant. For 2025, SEP-IRA contributions are capped at 25% of net self-employment income, up to $70,000. That is a meaningful number for anyone with a productive year of business or consulting income.

The plan does not need to have existed before yesterday. A SEP-IRA can be established and funded up through the extended deadline for the prior tax year. If you do not have one yet, that window is still open.

You do need to have filed or be filing an extension. If you already filed your 2025 return without an extension and without a SEP-IRA contribution, this window has closed for you as well.

If you are unsure whether you qualify, that is a conversation worth having with your CPA or financial planner before you assume the answer is no.

The Pivot: What to Do With the Rest of 2026

Missing a contribution deadline is not a financial crisis. It is information. The more useful question now is what you do with the next eight and a half months.

Here are the 2026 contribution limits worth knowing as you plan ahead:

Plan2026 Contribution LimitCatch-Up & Notes
Traditional & Roth IRA$7,500+$1,100 at age 50+ (total $8,600)
403(b) / 401(k)$24,500+$8,000 at age 50+; ages 60-63 enhanced +$11,250 (SECURE 2.0)
Governmental 457(b)$24,500+$8,000 at age 50+ (same provisions)
SEP-IRAUp to 25% of eligible compensationCapped at $72,000

For TAMU employees and others with access to both a 403(b) and a governmental 457(b), these are separate plans with separate limits. That means up to $49,000 in combined elective deferrals before catch-up contributions apply. Most people with access to both are only using one. For a full breakdown, see the companion post: Can Educators Contribute to Both a 403(b) and a 457(b)?

The limits went up this year. The calendar is still mostly ahead of you. The question is whether your contribution elections reflect that reality or whether they were set a few years ago and quietly stayed there.

This Post Is Part of a Series

If you found this post useful, last month’s post covers what your completed tax return may be telling you about the year ahead, including retirement gaps, investment account structure, charitable giving strategy, and what small business owners should be thinking about right now. Read the companion post here: Now That the Return Is Filed: What to Do with What You Found.

Frequently Asked Questions

Can I still contribute to a traditional or Roth IRA for 2025?

For most people, no. The traditional and Roth IRA contribution deadline for tax year 2025 was the April 15 tax filing deadline, which has passed. Once that date is behind you, the window to contribute for 2025 is generally closed.

Is there any way to still make a 2025 retirement contribution?

Possibly, through a SEP-IRA. If you have self-employment or business income and filed for an extension by April 15, 2026, your SEP-IRA contribution deadline extends with your return, typically to October 15, 2026 for most filers. A SEP-IRA can also be established and funded for the prior tax year up through that extended deadline.

What is the SEP-IRA contribution limit?

For 2025, SEP-IRA contributions are capped at 25% of net self-employment income, up to $70,000. For 2026, the cap rises to $72,000. This makes the SEP-IRA a meaningful option for anyone with a productive year of business or consulting income.

Can I contribute to both a 403(b) and a 457(b) in the same year?

Yes. For those with access to both a 403(b) and a governmental 457(b), these are separate plans with separate limits, allowing up to $49,000 in combined elective deferrals in 2026 before catch-up contributions apply. Most people with access to both are only using one.

A Final Thought

Missing the April 15th deadline does not mean missing the year. It means starting today.

If you would like to talk through what your 2025 return revealed and what a realistic 2026 contribution plan looks like for your situation, I am glad to connect.

Disclosure

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. The Erskine Group, LLC is a separate entity from LPL Financial.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risk including possible loss of principal.