5 minute read
Things don’t always go as planned. As I grow older, this statement has become more and more apparent to me. When it comes to your children planning their future, things rarely go to plan.
When I was six, I planned to be a marine biologist. I had watched one too many David Attenborough Ocean documentaries, and I was convinced that was what I wanted to do with the rest of my life. I was pretty serious about it and went so far as to spend my allowance on a National Geographic Marine Wildlife book. Even with all that passion for sea life, I grew older, I decided to go to business school.
As you can see, the process of a child growing up is the natural change of interests as life continues. Planning for the future as a kid is more of an abstract concept than a true endeavor in life organization. With great intentions in mind, your clients may have tried to plan for their children’s future with a 529 Plan.
As you know, a 529 Plan is an investment account used to pay for specific qualified educational programs. These qualified programs can range from payments for k-12 tuition, college, apprenticeship programs, and others. The 529 Plan also can provide tax benefits. Many of your clients may use their 529 Plan.
The 529 Plan Challenge
A challenge your clients may face is, like my fleeting marine biology passion as a child, their children may change their plans. Perhaps your client wanted their child to go to a four-year private school. However, when the time comes for college, the child may decide that the local community college has a better program for what they are looking for.
Because of their intentions, your client may have faithfully saved large amounts into a 529 Plan. Now that child has decided on a cheaper community college option, your client may have over saved and overfunded their 529 Plan.
There is a 529 tax penalty and a withdrawal penalty if the 529 Plan withdrawals are used on non-qualified or non-education-related expenses. This tax includes federal and state income tax and a 10% 529 withdrawal penalty. [i]
Because of their child’s change and plans, your client may face a tax penalty on the money they worked hard to save.
Rolling Over a 529 Plan
Thankfully, there is a remedy to the 529 Plan Challenge. On December 23, 2022, Congress passed a bill to “amend the Internal Revenue Code of 1986 to make permanent the individual tax provisions of the tax reform law, and for other purposes.”[ii] Amongst other things, this bill allowed the rollover of funds from a 529 Plan into a Roth IRA starting 2024.
This rollover of a 529 Plan to a Roth IRA is tax-free and penalty-free. This bill may be useful to help your clients equip for their children’s changing plans while still saving for college..
Why is This Change Significant
The change in legislation regarding the rollover of a 529 plan into a Roth IRA is significant because it may provide your client considerable peace of mind and tax efficiency for their beneficiary. Because your client may be able to roll over the extra funds in their child’s 529 plan, they can save for their child’s education without worrying about their child changing their mind about school.
While each client’s financial scenario is different, this concept may be great to bring up with clients with children. These clients can prepare for the future without worrying about over-saving.
FAQs for Rolling Over 529 Plan
1. How much can my client roll over from their 529 Plan?
Your client can roll over $35,000 tax and penalty free into their beneficiary’s Roth IRA.[iii]
2. When does it go into effect?
Your clients can experience penalty and tax-free 529 Plan rollovers to Roth IRAs starting January 1, 2024.
3. Who can roll over their 529 Plan into your client’s Roth IRA?
A 529 Plan can only be rolled over into a Roth IRA under the name of the beneficiary the plan is under. [v]
4. How much can my client roll over in one year?
Your client can roll over any amount, as long as the total contributions do not exceed the Roth IRA contributions limit. This limit is $6,500[iv] in 2023.
5. How long must my client have a 529 before they can roll it over?
Your client must have had their 529 Plan for at least 15 years[vi] before they can roll it over. Be aware, changing beneficiaries may restart this clock. In addition, account holders can’t roll over contributions, or earnings on those contributions, made within the past five years.
Just like six-year-old Joy changed her mind about being a marine biologist, your clients’ children may also change their minds about their futures. With this new rollover opportunity, your clients may be able to save for the future without worrying about things not going to plan because they might not.
Sources:
[i] https://www.savingforcollege.com/intro-to-529s/what-is-the-penalty-on-an-unused-529-plan
[ii] https://www.congress.gov/bill/117th-congress/senate-bill/126
[iii] https://www.nbcbayarea.com/news/business/money-report/tax-free-rollovers-from-529-plans-to-roth-individual-retirement-accounts-may-be-allowed-in-2024/3112975/#:~:text=(The%20limit%20is%20%246%2C500%20in,for%20at%20least%2015%20years.
[iv] https://www.camaplan.com/resource-center/contribution-limits/
[v] https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira
[vi] https://www.chrisreddickfp.com/blog/moving-money-529-college-saving-plans-roth-iras#:~:text=You%20can%20change%20the%20beneficiary,money%20into%20a%20Roth%20IRA.
Disclosures:
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice, an investment recommendation, or a substitute for legal or tax counsel. Any investment products, services, and examples named herein are hypothetical and for illustrative purposes only and should not be considered an offer to buy or sell or an investment recommendation for any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Dunham does not provide legal or tax advice. Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Dunham cannot guarantee that such information is accurate, complete or timely; and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. All financial decisions and investments involve risk, including possible loss of principal.
We encourage you to seek from qualified professionals regarding all, personal finance issues.
Dunham & Associates Investment Counsel, Inc. is a registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities are offered through Dunham & Associates Investment Counsel, Inc. Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company.