One of the best ways to save for your kids’ education is now even more attractive. For more than 20 years, 529 education savings plans have helped families pay for qualified school expenses while enjoying a tax benefit in the process. But there was also a major drawback. This is Faith and Finance Live - biblical wisdom for your financial decisions. <ul><li>If you’ve ever wondered how 529 plans got their name, it goes back to 1996 when Congress enacted Section 529 of the Internal Revenue Code, allowing states to establish and administer the plans. Each state has its own plan, and they have differing benefits and requirements, but the COMMON INGREDIENT is that money put into a 529 savings plan grows tax free and withdrawals for qualified education expenses are also tax-free. The money can be used for grades K through 12 as well as college.</li><li>So it’s similar to a ROTH IRA, in that contributions are not deductible on your federal tax return, however, more than 30 states offer some kind of tax break. So depending on where you live, you could be eligible for state tax deductions or credits if you invest in a 529.</li><li>These plans also offer you some flexibility in case things change. If one child doesn’t use all of the money in the account, the beneficiary can usually be changed later to a different direct relative. In theory, a single account could survive for generations.</li><li>Another nice feature - ANYONE can contribute but it’s usually better to have the account in a parent’s name.</li><li>There’s also a potential financial-aid advantage to a 529 plan. The FAFSFA form — Free Application for Federal Student Aid — counts money held in 529 plans at a lower rate than money in other accounts. That means money in a 529 plan won’t count against you as much as other assets when applying for aid.</li><li>You can invest in ANY state’s 529 plan and use the money to pay for an eligible college in any state. So 529 plans are flexible in many ways but they come with one major restriction: once you open a 529 account and put money into it, you’ve committed the money for education.</li><li>If you don't use it for eligible expenses, those withdrawals will incur a 10% penalty and will also be subject to federal income taxes on the investment gains. That’s why more families haven’t taken advantage of 529 savings plans. But all that is about to change as 529 account holders get a NEW way to rescue unused funds:</li><li>As part of the $1.7 trillion spending package passed last month, money leftover in a 529 savings plan can be rolled over into a Roth IRA WITHOUT incurring taxes or penalties starting in 2024. That’s a potentially huge development, as it removes a major drawback to 529 plans and will likely encourage more families to open the accounts. It’s unclear how much unused money might be transferred from 529 plans to Roths, but in 2021, there were nearly 15 million 529 accounts holding almost $500 billion in assets. That’s about $30,000 per account.</li><li>Critics of the new provision say it’s a handout to the rich because wealthier families are more likely to have 529 plans than lower income families and because the provision doesn't carry income limits. It does, however, have a number of other restrictions. For one, there’s a lifetime limit of $35,000 on transfers and rollovers are still subject to annual Roth contribution limits. In 2023 that limit is $6,500, or $7,500 if you’re over age 50.</li><li>Also, like any custodial account, once the funds go in, they become the property of the beneficiary. That means a 529 rollover can only be made to the BENEFICIARY’S Roth account, even though a parent or grandparent may be the owner.</li><li>Most graduates with leftover 529 money won’t be able to immediately roll it over to a Roth. To be eligible, the 529 account must have been open for at least 15 years and contributions and earnings must be in the account a minimum of 5 years before they can be transferred.</li><li>The Senate Finance Committee issued a statement about the new rollover provision, saying that the current rules that trap unused funds within 529 plans discourage people from using them. "Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education."</li><li>Bottom line - you want to save as much as possible for education so you can avoid borrowing. Remember Proverbs 22:7, “ … the borrower is slave to the lender.” And one of the best ways to avoid borrowing is with a 529 savings plan. So if the “unused funds” restriction was preventing you from opening a 529 account, now you have one less excuse. Get started saving today.</li></ul>On-Air Mention:<ul><li>We’re also featuring this topic of steady plodding in today’s Weekly Wisdom digest email from FaithFi. Each week, we send a special email message from me, plus the trending articles, videos, and podcasts on a variety of financial topics from a biblical worldview. Join the thousands of others who are receiving it by going to faithfi.com and click “Sign Up” to register.</li></ul>FaithFi App<ul><li>We’re continuing this month with our recommendation to download the FaithFi app in the new year. Not only can you manage money like other leading apps, but you will also get access to leading biblical financial resources and a community of like minded believers. No other finance app offers all these elements in one place specifically built for Christians. Go to faithfi.com and click <a href="https://www.faithfi.com/manage">App</a> at the top of the screen to get started.</li></ul>Next, Rob answers these questions at <a href="tel:8005257000">800-525-7000</a>
or via email at <a href="mailto:askrob@faithfi.com?subject=Faith%20and%20Finance%20Listener%20Question&amp;%20Finance%20Listener%20Question">askrob@FaithFi.com</a>:<ul><li>If you have $80,000 debt of personal loans with an interest rate of 10%, you owe $78,000 on your home that's worth about $250,000 and you currently have about $800 each month extra money, would it be a good idea to refinance your home mortgage at 6% and include the personal loan to reduce your costs?</li><li>If you have a credit card you've given someone access to who's charged $7,000 of purchases and you've received an offer for 0% for 18 months on a new card, should you close the first card and take advantage of this offer? <a href="https://www.christiancreditcounselors.org/">Christian Credit Counselors</a></li><li>If you have a son who won't use his 529 but have another who might need the funds, can you transfer from one son's account to the other?</li><li>How important is having mortgage insurance?</li><li>If you have 4 credit cards in debt consolidation and the Consolidation company has told you not to pay any of them but you're worried about falling behind on them, should you follow their advice? <a href="https://www.christiancreditcounselors.org/">Christian Credit Counselors</a></li><li>What considerations should you include in your decisions to buy a vacation home?</li><li>If you're helping your 80 year-old mother and she has an annuity that just matured and you've been advised to move it into a multi-year annuity, is this a good idea?</li><li>If you've been building your credit up but, because of health reasons, you've gotten behind again, you want to be responsible and pay what you owe, how can you regroup and get on track again?</li></ul>Be sure to check out the rest of <a href="https://www.faithfi.com/">FaithFi.com</a> to access our books and our many free helpful resources. You can also find us on <a href="https://www.facebook.com/faithfiofficial">Facebook Faith and Finance (Live)</a> and join the conversation. Thanks for your prayerful and financial support that helps keep Faith and Finance (Live) on the air. And if you'd like to help, just click the <a href="https://moneywise.netviewshop.com/nov22web">Give</a> button.

FaithFi

Listen to MoneyWise Live each weekday at 4pm EST on Moody Radio.

MoneyWise Live

One of the best ways to save for your kids’ education is now even more attractive. ﻿For more than 20 years, 529 plans have helped families pay for qualified school expenses with a tax benefit in the process. But there was also a major drawback...

529 Rollover To Roth

FaithFi | Jan 26, 2023

Show Notes

Where Faith Meets Finance

You May Also Like