Maximize Your Savings with the 529 to Roth IRA Rollover
Megan Williams • April 16, 2024
At Meritrust Wealth Management, we are constantly keeping an eye on legislative changes that can impact your financial planning. One of the notable changes introduced by the 2022 SECURE Act 2.0, which takes effect in 2024, is the ability to roll over funds from a 529 plan into a Roth IRA. This is a significant update for anyone involved in educational savings plans, including parents, grandparents, and other family members.
Understanding the New 529 to Roth IRA Transfer
The new legislation allows beneficiaries of 529 plans to transfer up to $35,000 to Roth IRAs during their lifetime. However, this rollover is bound by the Roth IRA’s annual contribution limits, which can affect how much can be transferred each year. Additionally, for a 529 account to be eligible for this rollover, it must be more than 15 years old. It's important to note that if the account's beneficiary is changed, the 15-year clock for eligibility resets.
This option provides a unique opportunity for those beneficiaries who do not utilize the full amount of their 529 for educational expenses. Instead of the funds sitting idle or being subjected to non-qualified withdrawal penalties, they can now potentially be used to kickstart a child’s retirement savings.
Strategic Considerations
For families with multiple children, the common practice of transferring leftover funds from one child’s 529 plan to another can still be a viable strategy to ensure the efficient use of college savings. However, with the new rollover option, it may be advantageous to consider allowing children who have surplus 529 funds to convert these into Roth IRA contributions instead.
This shift can help in fostering early financial independence and support other long-term financial goals. But, this strategy requires careful planning. For example, if a child has completed their education and there is a remaining balance in their 529 plan, instead of renaming the beneficiary to allow another child to use these funds, you might consider requesting a rollover to the other child's existing 529 account. This maneuver keeps the original account intact, preserving the 15-year requirement and enabling future transfers between siblings if needed—though this can only be done once every 12 months.
Navigating Complexity
We understand that these changes can be complex and may bring up several questions about the best strategies for your family’s financial planning. Each family’s situation is unique, and the right approach depends on numerous factors including the number of children, the amounts saved, and long-term financial goals.
Meritrust Wealth Management is here to help you navigate these new options. If you have any questions about how the new 529 to Roth IRA transfer might impact your financial planning, or if you need assistance with any other financial planning or investment strategies, do not hesitate to reach out. You can contact us for further information or to schedule a consultation. Your financial well-being and peace of mind are our top priorities.
The upcoming expiration of key provisions from the Tax Cuts and Jobs Act (TCJA) in 2026 could significantly impact your financial situation. With current tax rates still lower, there are key opportunities to consider today before these changes take effect. For those who prefer quick takeaways, here are some immediate recommendations: Key Recommendations: Consider Roth Conversions Now: Lower tax rates today, due to the TCJA, make Roth conversions attractive. However, your personal circumstances, such as age and whether you plan to move to a lower-tax state, should influence your decision. Plan for Changes to Mortgage Interest Deduction: The current $750,000 limit on mortgage interest deduction will revert to $1 million in 2026 when the TCJA provisions sunset, and home equity loan interest up to $100,000 will become deductible again. Take Advantage of SALT Deduction Expiration: The $10,000 cap on state and local tax (SALT) deductions will expire in 2026, potentially allowing individuals in high-tax states to deduct more of their taxes. Prepare for Miscellaneous Deductions: Deductions for unreimbursed employee expenses and tax prep fees, which the TCJA eliminated, will return in 2026 if they exceed 2% of your adjusted gross income. Review Estate Tax Planning: The estate tax exemption will revert to pre-TCJA levels in 2026. The exemption amount is expected to decrease from its current level of $12.92 million for individuals and $25.84 million for couples to approximately $5 million for individuals and $10 million for couples, adjusted for inflation. As we approach 2026, the expiration of certain provisions from the Tax Cuts and Jobs Act (TCJA) could bring significant tax changes. By acting early, you can take advantage of today’s lower tax rates while preparing for what’s ahead. One key area to consider is Roth conversions. Under the TCJA, tax rates are currently lower, making it an ideal time to convert traditional IRA funds into a Roth IRA. This strategy could be beneficial if you anticipate a higher tax bracket in the future. However, your personal circumstances matter. If you currently live in a high-tax state but plan to move to a lower-tax state in retirement, delaying the conversion might be a better option. Age also plays a role in deciding the best time to convert. Mortgage Interest Deduction Another major change tied to the TCJA is the mortgage interest deduction. At present, taxpayers who itemize deductions can deduct interest paid on the first $750,000 of mortgage debt, a limit set by the TCJA for debt incurred after December 15, 2017. However, when these provisions expire in 2026, the limit will revert to $1 million. Additionally, interest on home equity loans of up to $100,000—regardless of the loan’s purpose—will once again be deductible. If you have a large mortgage or home equity loan, these changes could increase your deductions, offering valuable tax savings. It’s important to review your mortgage situation and plan for these upcoming adjustments. SALT and Miscellaneous Deductions The state and local tax (SALT) deduction cap, which was a hallmark of the TCJA, is another significant change set to sunset in 2026. Currently, the deduction is capped at $10,000, limiting the benefits for individuals in high-tax states. Once the cap expires, you’ll be able to fully deduct state and local taxes if you itemize your deductions. Additionally, miscellaneous deductions, including unreimbursed employee expenses and tax preparation fees, were eliminated by the TCJA. These deductions will return in 2026, allowing those whose expenses exceed 2% of their adjusted gross income to claim these deductions once more. Estate Tax Changes Another significant change on the horizon is the estate tax exemption. Under the TCJA, the estate tax exemption was doubled, allowing individuals to pass on up to $12.92 million and couples up to $25.84 million without incurring federal estate taxes. However, when the TCJA sunsets in 2026, this exemption will revert to pre-TCJA levels, approximately $5 million for individuals and $10 million for couples, adjusted for inflation. This reduction in the exemption amount could affect your estate planning, especially for those with significant assets. Take Action Now With the expiration of the TCJA provisions on the horizon, now is the time to start planning. Whether you’re considering a Roth conversion or want to understand how these changes to deductions could impact you, it’s essential to consult with your financial advisor. Once November’s election is over and we have added clarity about potential tax policies, we will be prepared to execute a proper plan for you. If you’re already a client, reach out to your advisor today to discuss your options. If you’re not yet a client of Meritrust, don’t wait—call to speak with one of our advisors or schedule a meeting today. Together, we can review your current financial plan and ensure you’re maximizing the opportunities available before the TCJA sunsets in 2026. These potential tax changes could have a lasting impact on your financial future, and being prepared to take action quickly could help you secure greater financial stability for the years ahead.
Watch as your Meritrust Team discusses the basics of Social Security and Medicare while covering some of the ways in which financial planning can help you make the right choice for you and your goals.
Key Points: Impact on Business Valuation: Life insurance proceeds must be included in the business valuation for estate taxes. Potential for Higher Estate Taxes: This could push estates over the exemption limit, increasing tax liabilities. Liquidity Concerns: Without proper planning, businesses may face liquidity challenges when covering estate taxes. Alternatives Available: Different buy-sell structures can help avoid these issues. As a business owner, planning for the future involves many complex decisions, especially when it comes to protecting the value of your business and ensuring a smooth transition in the event of an owner’s death. The recent Supreme Court decision in Connelly v. United States has introduced significant changes that could affect your estate planning, particularly if your business relies on an entity-purchased buy-sell agreement. Understanding the Supreme Court's Decision The ruling centers on how life insurance proceeds are treated within entity-purchased buy-sell agreements for estate tax purposes. The Supreme Court has ruled that these proceeds must be included in the business’s valuation within the deceased owner’s estate. However, the repurchase obligation—essentially the cost the business incurs to buy back the shares—cannot be used as an offset against the fair market value (FMV) of the business. This change could result in a higher valuation of your business, potentially increasing the estate's value and leading to larger estate tax liabilities. What Does This Mean for You? As a business owner, you might now face a situation where your estate's value is inflated due to the inclusion of life insurance proceeds, pushing you over the current estate tax exemption limit. This could result in a significant increase in the taxes owed upon your passing, creating challenges for your heirs and possibly requiring them to sell business assets to cover these taxes. Liquidity Issues: This ruling could also introduce liquidity challenges. Without additional life insurance or proper planning, your estate might struggle to cover the increased tax liability, putting the future of your business at risk. How to Protect Your Business Thankfully, there are strategies available to mitigate these potential issues: Cross-Purchase Buy-Sell Agreements: In this structure, each business owner holds a life insurance policy on the other owners, allowing the proceeds to bypass the business entirely. This structure can help avoid inflating the business’s valuation. Cross-Endorsement Structures: This approach reduces complexity by allowing each business owner to endorse their life insurance policy’s death benefit to the other owners, simplifying administration while avoiding the estate tax impact. Insurance LLC: Forming an LLC to own the life insurance policies can centralize and streamline policy management, although this requires careful structuring to ensure it avoids the same tax implications as entity-purchase agreements. Trusteed Buy-Sell Agreements: By placing the life insurance policies under the control of a trustee, the proceeds can be used to facilitate the buyout without increasing the business's estate valuation. Next Steps If your business has a buy-sell agreement in place, now is the time to review it with your financial advisor and legal counsel. Ensuring that your planning is up-to-date and compliant with the latest legal developments is crucial to protecting your business’s future. We’re here to help you navigate these changes and find the best solutions for your unique situation.
