%20-%20Transparent%20bkg%20.png)
This holiday season consider planting a gift that continues to bear new opportunities for beneficiaries to reap a diverse harvest. According to a study published by the National Center for Education Statistics (2023), the college enrollment rate decreased to only 38% for traditional students in 2021. This may leave families wondering whether saving for education expenses is a worthwhile endeavor. However, student debt remained second only to mortgage debt in terms of the greatest debt by dollar amount that families carried in 2022 (Aladangady, et.al., 2023). This is a clear indicator that educational expenses remain a heavy burden for families.
Thankfully, recent legislative acts have expanded how and when 529 plans may be used. These tax-advantaged savings accounts are tailored to assist families in saving for future educational expenses and their increased versatility warrants a reconsideration of how a 529 may fit into your household financial plan.
CHANGES UNDER THE TAX CUTS AND JOBS ACT OF 2017 (TCJA)
Expanded Usage for K-12 Education
529 funds can be used to pay for up to $10,000 in K-12 tuition each year per beneficiary. While the contributed funds may have a much shorter timeline for tax-free growth, some taxpayers may reap state benefits for participation. It is important to note that each 529 can only name one beneficiary at a time.
Rollovers to ABLE Accounts
ABLE accounts are tax-advantaged savings accounts for individuals with disabilities. Allowing rollovers from 529 plans to ABLE accounts lets families decide where their funds can be best used. Account owners are able to change the named beneficiary of a 529 to other eligible family members.
CHANGES UNDER THE SECURE ACT of 2019
Student Loan Repayment for Sallie (or her sister)
529 account holders are permitted to use funds to repay the beneficiary’s qualified student loans. By changing the beneficiary, unused funds can be used to help another eligible family member with repayment instead. While there is a lifetime limit of $10,000 per beneficiary, this provides welcome relief for graduates and their families grappling with the burden of student loan debt.
Apprenticeship Programs
The definition of qualified higher education expenses was expanded to include costs related to registered apprenticeship programs, enabling 529 plan funds to be used for eligible expenses associated with vocational and apprenticeship training.
CHANGES UNDER THE SECURE 2.0 ACT (signed into law December 29, 2022)
Conversion of 529 Funds into Roth IRAs
Perhaps one of the most groundbreaking changes is set to begin in January 2024. 529 account holders will have the option to rollover funds from a 529 plan into a Roth IRA, subject to certain conditions.
- The beneficiary of the 529 plan must be the owner of the Roth IRA.
- The account must have been open for at least 15 years.
- The funds being rolled over must be in the 529 for at least 5 years prior to conversion to qualify for tax benefits.
- The rollover must be completed within 60 days of the distribution from the 529 plan.
- The lifetime conversion limit is currently $35,000.
- Annual conversion amounts must fall within the Roth IRA annual contribution limit
It may require several years to reach the lifetime conversion limit and taxpayers will need to carefully consider all sources of contributions. Additional details are still under consideration. Since this can have substantial implications for both tax and retirement planning, click the link below to schedule a meeting with us if you are considering these strategies.
Exclusion of 529s Held by Other Parties from Assets AND Income
When the new FAFSA application for 2024-25 is released in December 2023, the Student Aid Index (SAI) will replace the Expected Family Contribution (EFC). A 529 owned by any contributor for the benefit of the applicant remains a reportable asset. Thankfully, contributors will no longer have to report a 529 held for a beneficiary other than the applicant, like siblings. Similarly, a 529 held by someone other than the FAFSA contributor(s) that names the applicant as a beneficiary is not a reportable asset. This means that an account held by a divorced parent (or anyone else) who is not required to contribute to the FAFSA would be entirely excluded from the aid calculation.
Applicants are also no longer asked to report money received or paid by individuals not contributing to the FAFSA, so qualified distributions from 529 plans held by others no longer count as untaxed income to the student. A possible benefit of grandparents, cousins, friends, or other individuals funding a 529, rather than planning to make tuition payments directly to an educational institution, is the potential for years of tax-advantaged growth.
WHAT HAPPENS IF MY BENEFICIARY EARNS SCHOLARSHIP MONEY?
Scholarships & 529s
Distributions equal to a beneficiary’s scholarship amount can be taken without incurring the standard penalty but the earnings portion will be taxable. It is important to keep written substantiation of the scholarship award and its application to educational expenses. Alternatively, the funds could remain in the 529 to be used by a different beneficiary or for any of the expanded options previously mentioned.
Recent legislation has shepherded in a series of substantial changes that make 529s ever more adaptable and valuable tools for education savings. Extending 529 usage to K-12 education, ABLE rollovers, student loan repayments, and apprenticeship programs fostered more choice in education planning. SECURE 2.0 further bolstered 529 flexibility by creating a new pathway to kickstart retirement savings and continue tax-free growth with unused funds. A financial advisor can help navigate the abundance of new opportunities and cultivate growth toward your family’s financial goals.
References:
Aladangady, Aditya, Jesse Bricker, Andrew C. Chang, Sarena Goodman, Jacob Krimmel, Kevin B. Moore, Sarah Reber, Alice Henriques Volz, and Richard A. Windle (2023). Changes in U.S. Family Finances from 2019 to 2022: Evidence from the Survey of Consumer Finances. Washington: Board of Governors of the Federal Reserve System, October, https:// doi.org/10.17016/8799.
Federal Student Aid (August 4, 2023). GEN-23-11: Fafsa simplification act changes for implementation in 2014-25. Department of Education. https://fsapartners.ed.gov/knowledge-center/library/dear-colleague-letters/2023-08-04/fafsa-simplification-act-changes-implementation-2024-25
National Center for Education Statistics (May 2023). College enrollment rates. U.S. Department of Education. Retrieved Nov. 11, 2023 from
This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.
LEGAL, INVESTMENT, AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Copyright 2023. Monotelo Advisors Inc. All Rights Reserved
コメント