Under the Secure Act 2.0, generous grandparents have even more reasons to establish 529 educational savings plans for their grandchildren in 2024, when new rollover provisions take effect.
Traditionally, beneficiaries with balances remaining in their plans after completing their educational pursuits could transfer those amounts to 529 plans for eligible relatives, such as siblings, cousins, parents, aunts and uncles and even spouses, without incurring any tax or penalties. However, beginning in 2024, 529 plan beneficiaries can roll over up to $35,000 of unused balances into Roth IRAs in their own names over their lifetime and allow those savings to continue growing and yielding for them tax-free withdrawals in retirement. Moreover, because Roth IRAs do not have minimum distribution requirements when owners reach retirement age, account owners can continue a family’s legacy of gifting savings to future generations.
To qualify for a Roth IRA rollover, beneficiaries’ 529 plans must have been in place for at least 15 years. The maximum amount that can be rolled over annually is the IRA contribution limit in effect for that year, less any other IRA contributions they make that year. As a result, it may take several years for beneficiaries to roll over the entire $35,000 lifetime limit the law allows.
Also new for 2023, grandparents can put more money into their grandchildren’s 529 savings plans without threatening their loved one’s ability to qualify for federal financial aid. In prior years, the U.S. Department of Education’s Federal Student Aid office treated distributions from grandparent-owned accounts as student income that could reduce the federal aid those students could qualify to receive.
From a tax perspective, the IRS treats 529 plan contributions as completed annual gifts that do not count as a part of the donor’s taxable estate. Moreover, when these gifts do not exceed the annual federal gift tax exclusion, they also escape transfer taxes. For example, in 2023, single persons may contribute up to $17,000 gift tax-free to each grandchild’s 529 plan, or $34,000 for married couples filing joint tax returns. Donors such as grandparents may also superfund each grandchild’s 529 plan in 2023 with five years of gift tax exclusions, allowing that money to grow tax-free. Therefore, a single grandparent may make a lump-sum contribution of $85,000 this year to each grandchild’s 529 savings plan, or $170,000 for married couples filing jointly. Any gifts above these amounts will count toward grandparents’ lifetime gift tax exclusion, which for 2023 is $12.92 million for individuals or $25.84 million for married couples. Under these circumstances, grandparents must file gift tax returns each of the five following years.
About the Author: Lee F. Hediger is a co-founding director and chief compliance officer with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. He can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Lee F. Hediger is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.
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Posted August 10, 2023