By Steven M. Rogé, MBA, CFP®, AIF®
Chief Investment Officer
Within the 130 pages of the SECURE 2.0 Act, a small section can be found that outlines one’s ability to use a 529 plan for more than just educational expenses. This section strengthens the benefits of contributing to a 529 plan, but this time the benefits come from an unexpected direction. It paves the way to encourage opening a 529 plan not just for your children or grandchildren, but for your own benefit, too.
A 529 plan is a wonderful way to save for future education expenses. It can also be a wonderful wealth transfer account as we outlined in our previous article “The Secure 2.0 Act: What You Need to Know.” After-tax contributions go into a 529 account and grow tax-free and may be withdrawn tax-free for qualified education expenses. Many states allow your contributions to be tax-deductible.
If you would like a helpful resource to learn more about 529 plans, and whether or not distributions from your 529 plan are subject to federal income tax, click here.
A ROTH IRA is an after-tax retirement savings account. To contribute, you must have earned income for the year. Contributions grow tax-free, and distributions are tax-free too. ROTH accounts can be powerful retirement savings vehicles for high-net-worth individuals. They can also be great accounts to leave to your beneficiaries since they get to enjoy tax-free distributions.
If you would like to a helpful resource to learn more about ROTH IRAs and whether or not you can contribute to one, click here.
Previously many savers questioned the benefits of contributing to a 529 plan. Their main concern was the possibility of overfunding the plan, that is, putting in too much money to cover education expenses. The SECURE 2.0 Act gives flexibility to 529 plan accounts. 529 plan beneficiaries now can convert up to ROTH IRA contribution limits each year, and a total lifetime conversion amount of $35,000.
One scenario that we see this new rule benefiting is prudent savers with variable income. An inherited 529 plan, or the owner of a 529 plan for oneself, in years where earnings are low, may tap their 529 plan as an extra resource to fund a ROTH IRA contribution for that year. Make sure that you have made your contributions in your 529 plan at least 5 years ago to take advantage of this new 529 plan to ROTH conversion.
Keep in mind that this new rule doesn’t take effect until 2024. Until then, we expect to learn about many new ways that we can take advantage of this new rule to help save for retirement and build a tax-free investment account.
If you have any questions or would like to discuss this topic further, please reach out to us at 631-218-0077.
If you or someone you know would like to schedule a complimentary discovery call with our team of knowledgeable CERTIFIED FINANCIAL PLANNERS™ (CFP®), please contact us at 631.218.0077 or click here.
R.W. Rogé & Company, Inc. is an independent, fee-only financial planning and investment management firm serving clients locally and virtually across the country, with Long Island, New York, Beverly, Massachusetts, and Naples, Florida office locations. R.W. Rogé & Company, Inc. was founded on a “client first” culture and proudly commits to acting in your best interest as a fiduciary, since 1986. We help clients Plan, Achieve, and Live® the life they want since 1986. To learn more about how we do this, click here.
