Howard Column: Education or Retirement—Four Unique Attributes of 529 Plans

Retirement


A popular method for parents and grandparents who expect their family to attend and have the ability to save for higher education is the 529 plan. New legislation recently passed gives this vehicle even more flexibility.

Summary of current attributes:



Tax – deferred growth

As assets grow with tax deferred within the plan, maximizing the opportunity for early financing can provide long-term benefits. A dollar cost averaging strategy of consistent monthly donations for 18 years helps overcome the inflation inherent in education costs.



In addition, 529 plans qualify for the annual gift tax deduction. In 2023, he can gift $17,000 without filing a gift tax return. 529 plans can be prepaid with gifts for up to 5 years. A Generation Skip Tax (GST) is considered in the same way, so grandparents can gift 529 with her $85,000 upfront donation. If you want to make additional donations, they will count toward your lifetime gift tax exemption limit.If you want to consider these aggressive strategies, please consult your financial her planner or tax advisor.

exempt from federal estate tax

Assets are usually contained in personal property and retain all sorts of custody. 529 plans are exempt from these rules. Instead, the 529 plan is considered a designated beneficiary property for estate tax purposes. A 529 plan is a creative way to remove assets from your grandparent’s estate. However, if someone front-loaded her five-year contribution and died before the fifth-year contribution was granted, the prorated amount would be “pulled back” into the donor’s estate.

Change of beneficiary

What if an account was set up for a beneficiary and they chose not to use the funds, didn’t need all the funds, or received a scholarship? One of the unique features is the ability to roll over accounts without being taxed to the family of the first beneficiary. This includes siblings or stepbrothers, parents, stepparents, parental siblings or beneficiary children, first cousins ​​or stepbrothers.

A 529 plan can also be set up and prepaid for non-family members, but if the original beneficiary does not use the funds, changes must be made on a family basis, not the account holder’s family Please note in particular. .

New Laws for Consideration:

One of the drawbacks of the 529 plan is if the beneficiary is not using the account and the owner has no one to name as the new beneficiary. When the account was liquidated, it was subject to a 10% penalty and income tax on growth. There is another option.

Rollover to ROTH IRA

Under the new law, 529 account holders will be able to carry forward up to $35,000 to their beneficiary ROTH IRAs beginning in 2024. Her annual ROTH contribution limit applies, so if the 2023 limit is $6,500, it will take him six years to carry forward the full amount. 529 accounts must have been in existence for at least 15 years before facilitating a rollover and funds to be converted must be included in the plan for at least 5 years.

This particular financial tool is complex, so it’s important to maintain the ability to not only plan, but pivot. The best investment you can make is your own or someone else’s education. Life happens, and like other financial tools, the 529 Plan can be a creative and strategic tool to help you reach your goals of education and wealth transfer, but over time those As the goal becomes a new shade, it must be managed and changed.

Danielle Howard is a CFP® and CKA®. Wealth By Her designs are in her circle of 76 Eagle Claws in Glenwood Springs and help you “optimize your financial potential and expand your life possibilities.” http://www.wealthbydesign4u.comAdvisory services provided through Cambridge Investment Research Advisors, Inc., a registered investment advisor. Securities offered through broker/dealer and FINRA/SIPC member Cambridge Investment Research Inc. Cambridge and his WBD are not affiliated.





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