Navigating the world of saving for education, the 529 plan stands out as a smart choice for many, thanks to its tax perks and flexibility. One strategy, called "super funding," is especially useful for those looking to get the most out of these plans for tax and estate reasons. Let's dive into what super funding a 529 plan means in 2024, and how it can make a big difference in managing taxes and planning for the future, including an insightful look into converting unused funds into a Roth IRA.
What's Super Funding?
In simple terms, super funding is when you put a big chunk of money into a 529 plan all at once, way more than the usual yearly gift limit. Thanks to a handy tax rule, you can give up to five years' worth of gifts in one go. As of 2024, you can give $17,000 per year for each person you're giving to, which means an individual can drop a cool $85,000 (or $170,000 for couples sharing gifts) into someone's 529 plan without worrying about gift tax, as long as they don't give more to that person in the next five years.
Why Super Fund?
Grow Money Faster
By super funding, your money gets to work harder and longer in a tax-free way, growing more over time. This is super helpful as education costs keep going up, giving you a bigger pot of tax-free money for school fees down the line.
Get the Most Out of Gift Taxes
This approach lets you make the most of your gift tax exclusion right away, reducing your taxable estate without triggering any gift taxes. Just remember to tell the IRS what you're doing by filling out Form 709. It's a smart move if you're looking to support a loved one's education while also keeping your estate in check.
Estate Planning Perks
Shrink Your Estate
For those thinking about estate taxes, super funding a 529 can help lower your estate's value. Once you put money into a 529 plan for someone, it's no longer part of your estate, which could save you a bunch in estate taxes, especially if your estate is on the larger side.
Keep Control
Unlike other ways of giving, with a 529 plan, you still call the shots. You can change who gets the money or take it back if you really need to (though you'd face some taxes and penalties). This flexibility is a big plus for anyone who wants to reduce their estate size but still keep their options open.
A Real-World Look
Imagine Alex and Jordan, who want to help their grandson, Lucas, with college funds in 2024. They decide to super fund his 529 with $170,000, using up their five-year gift tax option. This move doesn't just help them use their gift exclusions wisely; it also gives Lucas's college fund a hefty start.
With a 7% return each year, that initial investment could grow to over $570,000 in 18 years, all tax-free for school costs. Besides helping Lucas big time with college fees, this strategy also helps Alex and Jordan keep their estate size down. Plus, they've still got the flexibility to change their plans if needed, making it a win-win for generosity and financial planning.
Converting Unused 529 Funds to a Roth IRA
A recent development offers even more flexibility for 529 plan contributors and beneficiaries. Unused funds in a 529 plan can now be converted into a Roth IRA for the beneficiary, under certain conditions. This option can be particularly appealing if the beneficiary decides not to pursue further education, or if there are remaining funds after graduation.
How Does It Work?
Eligibility:Â The 529 plan must have been open for at least 15 years.
Contribution Limits:Â The rollover amount to the Roth IRA cannot exceed the annual Roth IRA contribution limit, and the total rollover amount is capped at $35,000 over the beneficiary's lifetime.
Tax Implications:Â The rollover is tax-free and penalty-free, offering a seamless way to transition from education saving to retirement saving.
Strategic Benefits
This conversion option adds a layer of strategic planning to 529 contributions. Not only does it provide a tax-advantaged way to save for education, but it also opens up a pathway to retirement savings for the beneficiary. It ensures that the funds will benefit the beneficiary one way or another, either through educational support or as a kickstart to their retirement savings.
Conclusion
Super funding a 529 plan in 2024 stands as a powerful strategy for boosting educational savings while achieving notable tax and estate planning goals. The added possibility of converting unused 529 funds into a Roth IRA further enhances the flexibility and long-term value of 529 plans. As always, it's wise to consult with a financial advisor or tax professional to tailor these strategies to your specific financial situation, ensuring that you maximize the benefits for your loved ones' education and future financial security.
Disclosures
Bloomwood does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Bloomwood, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. Â
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.  Â
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Bloomwood is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Bloomwood and its representatives are properly licensed or exempt from licensure. 730 Starlight Lane, Atlanta, GA 30342.
Kommentare