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ACM Journal - Investment Management
17 Jan

Chris’s Corner: New 529 Plan Rules

529 Plan 2024 Rules

Using 529 plans to save for college education can be low-cost and tax efficient. However, some people have shied away from using them because there is a lot of uncertainty about how they will be used.

Determining how much to save for college is always a bit of a guessing game. How do you really know how much to save when your child or grandchild is still in diapers? Will they be attending an expensive elite private university, a more reasonably priced state school, a vocational school, or maybe they are a young entrepreneur (or rebel) and skip the post-secondary education thing entirely? As silly as it sounds, the risks of saving too much for college can deter many from saving at all.

Now, there is some relief to that concern thanks to the SECURE Act 2.0 of 2022.

Starting in 2024, beneficiaries of 529 plans will be able to move unused assets from their 529 plan to a Roth IRA, allowing for tax-free growth and tax-free withdrawals in retirement. Historically, if you overfunded and wanted to disburse the funds back to yourself, you had to pay taxes on the earnings at ordinary income tax rates plus a 10% penalty. Though, as you would expect with any government benefit, there are some rules and strings attached, which include:

• The 529 plan account needs to have been in place for 15 years.
• There is a lifetime maximum conversion limit of $35,000.
• Conversions are subject to the beneficiary’s annual Roth contribution limit of $7,000 for 2024 ($8,000 if over 50), meaning it will take 5 years of conversions to reach the lifetime limit.
• Contributions, and the corresponding earnings on those contributions, within the last 5 years are ineligible to be converted.

You can now, in a tax advantaged way, take care of your child’s education and jump start their retirement savings (if giving them life wasn’t enough). But what if you were still too responsible and your 529 plan is overfunded by more than $35,000? Here are some other strategies to consider:

• Change the beneficiary. You can change the beneficiary to another family member, including yourself, other children, nieces, nephews, in-laws, step siblings, etc. Maybe you want to go back and obtain a graduate degree, or take a basket weaving class at trade school? It counts.
• Save for future grandchildren. There are no deadlines on when funds need to be disbursed, so you can let the money grow and when a new grandchild is born change the beneficiary at that time.
• Funding up to $10,000 per year for private elementary and secondary education. Unfortunately, this does not qualify in New York, California, Illinois, and a handful of other states that you would expect. These states don’t follow Federal tax law regarding 529 plans and will tax the distribution. They really want your children to attend their public schools.
• Penalty free non-qualified with- drawals. Although you will still be required to pay taxes on the earnings in the account, there are circumstances where you can distribute the funds but avoid paying the 10% penalty. These include the death or disability of your beneficiary, or if he/she attends a U.S. military academy. Also, if the beneficiary receives a scholarship, you can withdrawal up to the scholarship award amount penalty free.

Having a 529 plan continues to be a great way to save for education, but it’s always prudent to have a backup plan in case you have saved too much money.

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