If you have any desire to provide for the education of a child, grandchild, family member or even friend you should absolutely make yourself familiar with 529 Plans (here is a great place to start). For those of you that are already familiar, you know that they are one of the most popular, flexible, and tax-advantaged vehicles to save for secondary and even some primary education. We actually detailed a few of the lesser known advantages of the accounts in a prior blog (here).
To this point, one of the biggest questions I receive from clients when evaluating whether a 529 account is appropriate is: “What becomes of the money I’ve contributed if the beneficiary either chooses or does not need to exhaust those funds for their education?”. Up to this point, the answer has been (and, albeit a pretty good one) that any unused 529 funds can be easily and without penalty re-designated for nearly any relative of the original beneficiary. So, maybe a sibling needs the funds, or even an eventual grandchild can one day be added as beneficiary to the account. It’s not a bad option, but rightfully so, some people are not comfortable with the idea of putting their hard-earned savings into an account where the eventual beneficiary of the funds is uncertain.
With the passing of “The Secure Act 2.0” in 2022, Congress afforded 529 investors with another potential solution. Beginning in 2024, beneficiaries of 529 accounts may now roll up to $35,000 (over their lifetime) in unused funds into a Roth IRA (tax and penalty-free) for their retirement. There are limitations on how long funds must be in the 529 plan before rollover eligibility, but that should present no issue given the breadth of time between traditional secondary education age and retirement age.
There is one issue here which requires further clarification from the IRS. These new Roth IRA rollovers are subject to the annual Roth contribution limit, which means that the 529 beneficiary would have to make split transfers over a number of years to reach the $35,000 lifetime limit. That in itself should not present much issue, but the real question here is whether these beneficiaries are subject to the same income based contribution restrictions. At present, any individual making over $153,000/year ($228,000 for couples) is not eligible to make a standard Roth contribution of any kind. It remains to be seen whether those same limits will be applied for 529 related Roth rollovers.
If you are considering opening a 529 account for someone in your life, it is always best to consult with your financial advisor and discuss what other options may be available to you. Your accountant may be able to provide some salient guidance as well (regarding tax deductibility of contributions). But, on the whole, 529 Plans should always be a strongly considered candidate for those looking to provide for the education of a loved one. If you have any questions on whether a 529 account may be of benefit to you and your financial goals, please do not hesitate to reach out to us. We will be happy to discuss whether it is a good fit and which specific 529 plan may be best for you.
