Leftovers

This Week’s Blogger: Scott D. Heins, CFP^®, IAG Chief Investment Officer

 

Leftovers have been much more palatable since the widespread adoption of the microwave oven. There is nothing like a bunch of overstimulated water molecules to convert cold leftovers into a warm lunch or dinner the next day.

 

The SECURE 2.0 Act which passed Congress and was signed into law by the President late last year also makes leftovers more appealing.

 

Prior to SECURE 2.0, if a parent or grandparent had money leftover in a 529 college savings plan they had a number of options available to them:

1. Use the account to pay off up to $10,000 in student loans for the account beneficiary.
2. Switch the beneficiary on the account to another relative.
3. Close the account and pay income taxes plus a penalty on any earnings in the account.
4. Keep the account open for potential future education expenses.

 

These options are all nice, but maximizing the tax-free educational benefits of 529 plans requires time. Thus, most thoughtful parents or grandparents start a 529 plan when the beneficiary is an infant. Thanks to the miracle of compounding growth, a small lump sum or consistent small monthly contribution can grow into a meaningful college fund.

 

Infants are hard to predict. Some are likely college material, but others will thrive by taking a different path. Knowing the difference under (and sometimes over) age 16 is almost impossible, creating a risk for thoughtful parents that they may be pouring resources into a college account that may never be used.

 

Thanks to SECURE 2.0, starting in 2024 529 plan accounts that meet certain criteria have another option that almost every account beneficiary can use: rolling over the leftovers in a 529 plan to a Roth IRA for the account beneficiary.

 

While the IRS is still ironing out all of the regulatory and administrative details to take advantage of this new leftover option, Congress did provide the following requirements and restrictions within SECURE 2.0:

• The 529 plan account must be open for at least 15 years for the beneficiary.
• The rollover must go to the 529 plan beneficiary’s Roth IRA account.
• The maximum lifetime 529 plan to Roth IRA rollover amount is $35,000.
• 529 plan to Roth IRA rollovers are subject to normal annual contribution limits (currently the lesser of $6,500 per year or 100% of earned income).
• Contributions (and earnings on them) that have been made within the last 5 years are ineligible for rollover.

 

This new leftover provision significantly reduces the risk of opening a 529 plan account for a child or grandchild.

 

If the account beneficiary decides to attend college in 18 years, the account owner can help financially by taking tax-free 529 plan distributions for qualifying education expenses.

 

If the account beneficiary opts not to attend college, the account owner can rollover up to $35,000 to a Roth IRA for their future tax-free withdrawals for retirement, up to $10,000 for a qualifying home purchase, or even tax-free principal withdrawals before retirement.

 

Even better, if you are a Wisconsin resident, you may claim a state tax deduction of up to $3,860 per beneficiary per year if you make a contribution to one of Wisconsin’s 529 plan programs. If your contribution exceeds this amount in one year you are permitted to carry your deduction forward until it is completely used up.

 

As always, you should be sure to consult with your tax professional regarding the impact of specific tax rules on your unique circumstances.

 

If you are a parent or grandparent with young children or grandchildren, the tax-free growth potential of a 529 plan is now much more appealing due to this additional leftover option which becomes available in 2024. Celebrate like an overstimulated water molecule!

 

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

 

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

 

Prior to investing in a 529 plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

 

Quote of the week:

Michael Dell: “You don’t have to be a genius or a visionary or even go to college to be successful. You just need a framework and a dream.”

 

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