By Vincent R. Birardi, CFP®, AIF®, Wealth Advisor at Halbert Hargrove

What is the SECURE ACT 2.0?

Did you know SECURE ACT 2.0 passed in December 2022 included a very important change for 529 education savings plans?

Since it became available in 1996, the 529 plan has served as an excellent way to save for future college education expenses. Specifically, earnings in a 529 plan grow free from federal taxes for the account owner and will not be taxed when the money is taken out to pay for college or other qualified expenses. In 2017, the program was expanded to include K-12 education; apprenticeship programs were included as a qualified expense in 2019. (Tax-free withdrawals for K-12 expenses are currently limited to $10,000 per year.)

Over 30 states and the District of Columbia currently offer a state income tax deduction or tax credit for 529 plan contributions as well. In most cases, the taxpayer must contribute to his or her home state’s 529 plan to qualify for a state income tax benefit. Curiously enough, California is one of the states that does not offer a state tax deduction.

529 Account Beneficiaries

Understandably, many assume that a 529 account can only be used to benefit a child or grandchild. However, a 529 plan account owner may change the beneficiary at any time without tax consequences when the new beneficiary is a family member.

The IRS provides a broad definition of “family member,” which includes the account holder’s blood relatives and relatives by marriage and adoption. This means you could potentially transfer the 529 plan to your:

  • Spouse
  • Son, daughter, stepchild, foster child, adopted child or a descendant
  • Son-in-law, daughter-in-law
  • Siblings or step-siblings
  • Brother-in-law, sister-in-law
  • Father-in-law, mother-in-law
  • Father or mother or ancestor of either; stepmother, stepfather
  • Aunt, uncle or their spouse
  • Niece, nephew or their spouse
  • First cousin or their spouse

The account owner can also name herself or himself as the 529 plan beneficiary. This can be beneficial if you own a 529 plan account and anticipate seeking additional career-related training in the future.

529 Accounts and Roth IRAs

SECURE ACT 2.0 included a very important 529 plan change.

Beginning in 2024, if your 529 has been open for at least 15 years, a 529 plan beneficiary will have the ability to transfer 529 plan funds into their own Roth IRA without paying taxes or penalties.   There are a few preconditions to be aware of:

    1. The Roth IRA accepting the funds must be in the same name as the 529 plan beneficiary
    2. The beneficiary must also have earned income up to the amount that will be converted to a Roth IRA.
    3. You may only convert annually an amount up to that year’s Roth IRA annual contribution limit; that amount 2023 is $6,500.
    4. Total lifetime conversions may not exceed $35,000.
    5. Contributions or earnings made within the 529 plan account during the past 5 years are not eligible to be converted to a Roth IRA.

Take Full Advantage of 529 Accounts

So, be sure to take full advantage of 529 accounts.  Any assets you contribute to a 529 plan account are removed from your taxable estate and pass into the plan free of federal gift taxes, up to an annual limit, which in 2023 is $17,000 ($34,000 per couple.) You can make five years’ worth of tax-free gifts in one year, but only once every five years.  Also, under federal law, contributions to a 529 plan cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000.

Disclaimer

Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant.