Tax-advantaged accounts, like a 529 Plan, are a great way to keep more of your money by lowering the total you owe the government in taxes each year. 529 Plans are state sponsored savings accounts where invested funds can be used for qualified education expenses — think tuition, room and board, and books.
While the use of funds is limited to education expenses, there is flexibility in who can use them because you can change the beneficiary at any time. But what if there’s money leftover? Starting in 2024, long time plan holders will have a new option for keeping those dollars working without penalty.
529 Plans — What’s New?
First of all, the tax benefits associated with 529 Plans are not changing. Most are able use their contributions as a federal tax deduction. The earnings also grow tax free, much like an IRA. Currently, when funds are used for non-qualified education expenses, you’ll owe taxes on the gains and get hit with a 10% penalty.
This led some parents or grandparents to carefully monitor the amount they were contributing for fear of penalties. Others would simply leave the funds untouched and utilize them for their next child or even a grandchild down the road. Going into effect in 2024, as part of the Secure Act 2.0, unused funds in a 529 Plan are eligible for a rollover into a Roth IRA.
This makes complete sense as the 2 accounts functioned similarly when it comes to funding the accounts with already taxed dollars. Both also allow funds to grow tax free when you adhere to plan rules. But the new ruling isn’t a workaround for funding your own retirement, there are a few caveats:
You will need your 529 Plan open for a minimum of 15 years to qualify for the rollover.
This one is key: The rollover will be into the beneficiaries IRA, not the account holder.
Contributions and earnings made in the 5 years leading up to the rollover may not qualify for the rollover.
What do you think? Is helping fund a retirement account just as important as assisting with education costs? While you may not have previously considered helping a child or grandchild establish a retirement savings, we think this is a wonderful opportunity to help a young person in your life start out on the right foot.
If you fall into this scenario of rolling over funds into an IRA for a child or grandchild, consider including them in the transaction. Use the transaction as a learning opportunity to review how taxes work and the importance of starting young when it comes to saving for retirement. With a bit of tax knowledge and the basics of compounding, this youngster will be far ahead of many of their peers when it comes to financial literacy.
Are You Curious What College Costs These Days?
The cost of a college education can vary drastically. And contributing to a college savings plan does not obligate you to cover the entire expense. But at the same time, you surely want to understand the impact of your investment.
The current cost to attend the University of Delaware is just shy of $30,000 per year; this includes 12+ credits, fees, and room and board. Non-residents can expect to pay closer to $50,000 per year.
Guidance for Planning and Saving in a 529 Plan
Some begin planning well before their grandchild turns the tassel at high school graduation, where others decide to withdraw funds from an investment account when the hopeful student heads off to college.
If you’re someone who loves a well-thought-out plan, a 529 Plan may be for you. Budgeting for a small monthly contribution over the course of many years is a great way to make a respectable impact.
When it comes to determining how much to contribute, don’t simply compare a 529 contribution to a retirement plan contribution. The times are not the same; many will contribute to a retirement plan far longer than a 529 Plan. Because there is overall less time to recover from possible downturns in the economy, many will opt to invest more conservatively.
At the end of the day, you’re counting on fund availability on a specific maturity date. We shy away from age-based plans due to the lack of control. Age-based or target-date funds typically make changes based solely on a timeline without considering the current market trends.
It’s important to remember the variables associated with college. Your grandchild will be an adult at this point, and you simply can’t predict the path they will take with certainty. For this reason, many will not solely rely on a 529 Plan and may simultaneously save elsewhere. Funds used outside of the 529 Plan’s parameters may be subject to both income tax and a 10% penalty on the gains.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, Past performance is not a guarantee of future results.