New rules on how surplus 529 Education Savings funds can be used

If you or your child, grandchild or other person was fortunate enough to pay for their education without using all your 529 education savings funds, Congress recently passed legislation to help avoid penalties for using the money for other purposes. But first, consider whether the funds might be used for another family member or for graduate or professional school sometime in the future. 

Account withdrawals that aren’t used for qualified education expenses mean you will owe income taxes and a 10% penalty. Until now, if a student earns a scholarship, parents would be permitted to take a penalty-free 529 withdrawal, although income taxes would still be owed on the earnings portion of the withdrawal. Excess funds can be transferred to a sibling or other close relation such as a cousin.

Beginning in 2024, parents can now transfer part of that surplus to a Roth IRA for the beneficiary ro continue to grow tax-free.  The following details are quoted directly from the author, Adam M. Grossman founder of Mayport, a fixed-fee wealth management firm.

• There’s a lifetime limit of $35,000 per beneficiary that can be transferred from a 529 to a Roth.
• The amount that can be transferred each year is limited to the amount that could otherwise be contributed directly to an IRA. In 2024, that will be $7,000, meaning that it would take five years to move the entire $35,000.
• In years when funds are moved from a 529 to a Roth, those funds will count toward the beneficiary’s IRA contribution limit. Suppose that parents transfer $4,000 from a 529 account to their child’s Roth IRA. Since the child’s overall IRA contributions are capped at $7,000, he or she could only contribute an additional $3,000 directly to an IRA that year.
• The beneficiary would need to have earned income that’s at least equal to the 529-to-Roth transfer amount, just like the requirement for a regular IRA contribution. The child doesn’t have any earned income? No transfer is allowed.
• The usual income caps for direct Roth IRA contributions don’t apply. That’s a nice benefit of this new rule, allowing a high-income beneficiary to complete a 529-to-Roth transfer.
• To be sure parents use the new provision in the way it was intended—that is, truly for surplus funds—there are two additional restrictions. First, the 529 account must be at least 15 years old. Second, any funds contributed to the 529 within the most recent five years aren’t eligible to be transferred. Neither of these restrictions is a permanent obstacle, but they can slow transfers.
• The 529 account must be at least 15 years old. 
• Any funds contributed to the 529 within the most recent five years aren’t eligible to be transferred. 
  

This strategy is a great way to use 529 funds for a child (grandchild) who chooses not to pursue higher education.

Grossman provides more details and perspective in his article Strings Attached published in the Humble Dollar newsletter (which I highly recommend): https://humbledollar.com/2023/12/strings-attached-2/?utm_source=mailpoet&utm_medium=email&utm_campaign=another-ses-test_7

What if my child doesn't go to college or doesn't use all of their 529 plan funds?

529 college savings plans are a great tax-advantaged way to save for post-secondary education for your child or yourself. They aren't limited to paying for traditional universities but also many other post-secondary education programs. Search for "529 college savings" in this blog for the basics. 

Sometimes people are reluctant to commit funds for fear their child won't pursue college or perhaps, might get a full-ride scholarship and not need the funds. Lucky you! But 529 funds can be used for post-graduate education and can be transferred to a sibling or other close relative.

Now there is a new twist on how excess 529 funds can be used. Congress recently passed the Secure 2.0 Act which offers another option. 

"Starting in 2024, funds leftover in a 529 plan can be transferred to a Roth IRA for the beneficiary. There are some caveats, of course. There’s a lifetime limit of $35,000. The beneficiary has to have earned income, and the annual Roth IRA contribution limit also applies. The plan also must have been open for at least 15 years"according to financial expert Michelle Singletary, writing for The Washington Post. Singletary knows what she's writing about: she sent all 3 of her children to college without having to borrow money!

Roth IRA conversion calculator

Bankrate provides a calculator to help you make decisions on converting traditional IRA funds to a Roth IRA (individual retirement account). 

"A conversion has advantages and disadvantages that should be carefully considered before a decision is made. This convert IRA to Roth calculator estimates the change in total net worth, at retirement, if you convert a traditional IRA into a Roth IRA."

https://www.bankrate.com/retirement/calculators/convert-ira-roth-calculator/

Now may be ideal time to convert a trditional IRA to a Roth

Investment losses in this unprecedented market decline have been brutal. But keep in mind that if you've been invested during the almost 11 year long bull market you may still be ahead.
To survive this coronavirus bear market consider converting part or all of a traditional IRA to a Roth IRA. Any amount that you convert will increase your taxable income for 2020 but the market decline and possible job loss or income decline may have reduced what you expected to earn this year. The benefit is that you will pay taxes now on a much reduced value of your traditional IRA and the Roth IRA will NOT be taxable when you withdraw funds in retirement.

Due to the 2017 income tax cuts many people will pay lower taxes this year than in the future after they retire.
Asset values are greatly reduced from the peak in mid-February 2020.
Income tax rates are scheduled to increase in 2026 when the 2017 tax cuts expire. Remember? A sunset provision was written into the 2017 tax law.
So now is a good time to consider a Roth conversion.
A few reminders: once you hit age 59 1/2 and have held the Roth for at least 5 years, future withdrawals are tax-free and penalty-free. Plus you won't have to take required minimum distributions (RMDs) from a Roth IRA account in retirement.
Roth withdrawals in retirement can be used to reduce the portion of Social Security payments that are subject to income taxes and avoid Medicare premium surcharges (on individual incomes above $87,000 and joint incomes above $174,000).

Ideally you should have money from outside the IRA to pay the additional tax on the conversion. Ideally you should convert only enough from a traditional IRA to make full use of your current income tax bracket. You don't want to convert so much that you are pushed into the next highest tax bracket at the margin.

For retirees, the best time to convert to a Roth is before claiming Social Security and taking RMDs (which start at age 72 for taxpayers born July 1, 1949 and later).
You may want to do the conversions over a period of years to avoid a higher tax break.
By reducing RMDs from traditional IRAs, retirees with after-tax incomes of $40-$90k may also eliminate or reduce taxes on their Social Security benefits. Up to 85% of Social Security may be subject to income tax.

Consult your tax adviser to help minimize taxes while converting a traditional to a Roth IRA.

Retirement Preparation 101 video

Check out this 17 minute video, courtesy of the Squared Away Blog:

https://squaredawayblog.bc.edu/squared-away/video-retirement-prep-101/

Kevin Bracker, a finance professor at Pittsburg State University in Kansas, presents a solid retirement strategy to workers who need to get smart about saving and investing.
Bracker explains the most important concepts clearly – why starting to save early is important, why index funds are often better than actively managed investments, the difference between Roth and traditional IRAs, etc.

Retirement plan limits for 2019-2020

 401(k) contributions
The annual contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the Thrift Savings Plan used by federal government employees increased in 2019 to $19,000 (and those limits will be going up another $500 in 2020). If you’re 50 or older, you also can take advantage of a catch-up provision of $6,000 (a figure that is also rising by $500 in 2020). That means all together you could put away $25,000 in your employer-sponsored plan in 2019 — and that total rises to $26,000 in 2020. And in case you were wondering, your employer’s matching contribution, if there is one, doesn’t count toward your limit

IRAs
The contribution limits for traditional and Roth IRAs went up in 2019 — to $6,000, or $7,000 for those who are 50 and older. So if you’re a 50-plus individual focused on growing your savings account, you could put away as much as $32,000 between your 401(k) and your Roth in 2019.

Contribution limits for Roth IRAs and traditional IRAs will remain the same in 2020.

Thanks to:  Dina Siracusa, Investment Adviser Representative | Provident Wealth Advisors
Source: https://www.kiplinger.com/article/retirement/T047-C032-S014-401-k-and-ira-advice-especially-for-women.html

Mom doesn't need flowers or a new kitchen gadget for Mother's Day!

Mom needs an Individual Retirement Account (IRA)!
Whether employed or not, as long as a spouse is earning income, Mom can open an IRA to help provide financial security/financial freedom in later life. Typically one must have earned income to fund an IRA but not if a spouse has earnings.
Typically dad is accumulating credits toward Social Security retirement benefits and may have access to an employer sponsored retirement account through his work but many moms, whether employed or not, are building very little in the way of financial security for later life. Sure they may be eligible for Social Security retirement equal to half of their spouse's benefit but that's not much.
So show mom you are financially savvy and get dad to help open and contribute to a Roth IRA for mom.
Lot of info on IRAs on this blog; use the search function for details.

Individual Retirement Account Update

The amount you can invest in an IRA is increased for 2019. You can still contribute for 2018 before you file your income tax return. 
Quoted from the IRS website: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than:

• $6,000 ($7,000 if you’re age 50 or older), or
• your taxable compensation for the year, if your compensation was less than this dollar limit.

For 2015, 2016, 2017 and 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than:

• $5,500 ($6,500 if you’re age 50 or older), or
• your taxable compensation for the year, if your compensation was less than this dollar limit.

The IRA contribution limit does not apply to:

• Rollover contributions
• Qualified reservist repayments

IRS raises caps on contributions to 401(k)s, IRAs

On November 1, 2018 the IRS announced cost-of-living adjustments to contribution limits for several types of retirement plans for 2019. The cap on contributions to 401(k), 403(b), many 457 plans and the Thrift Savings Plan rose to $19,000 from $18,500, while the limit for IRA contributions is $6,000, up from $5,500. This is the first increase since 2013. 

Other inflation adjustments were announced for retirement accounts. 

Start planning now to increase you retirement account contributions for next year. 

Reported by Richard Rubin for The Wall Street Journal, 11/2/18.

Roth IRA conversions can no longer be reversed

"As a result of the Tax Cuts and Jobs Act signed into law late last year, investors who convert a traditional IRA or other tax-deferred retirement account to a Roth IRA after December 31, 2017, can no longer recharacterize (in other words, reverse) the conversion."

Q.	What types of IRA recharacterizations have been eliminated?
A.	The law eliminated the option to recharacterize conversions made after December 31, 2017, from a traditional, SEP, or SIMPLE IRA, or from a 401(k) or 403(b) retirement plan account, to a Roth IRA.
Q.	Can IRA contributions still be recharacterized?
A.	Yes. The law didn't impact the ability to recharacterize IRA contributions. Contributions to a traditional IRA can still be recharacterized to a Roth IRA, and Roth IRA contributions can be recharacterized to a traditional IRA, if they're completed prior to the applicable IRS deadline.

Quoted from Vanguard.  For more details see: https://investornews.vanguard/the-new-tax-bill-and-ira-conversions-how-should-investors-respond/

Now may be a good time to convert a traditional IRA to a Roth

One upside of the current stock market slump is that now may be a good time to convert part or all of a traditional IRA to  Roth IRA.
Check out Bankrate.com's "Convert IRA to Roth calculator"

"In 1997, the Roth IRA was introduced. Since then, many people have converted all or a portion of their existing traditional IRAs to a Roth IRAs, where interest earned may be completely tax-free. Is this a good option? A conversion has advantages and disadvantages that should be carefully considered before a decision is made. This convert IRA to Roth calculator estimates the change in total net worth, at retirement, if you convert a traditional IRA into a Roth IRA."

http://www.bankrate.com/calculators/retirement/convert-ira-roth-calculator.aspx

Give mom an IRA for Mother's Day

Most moms don't need another kitchen gadget and most restaurants are overcrowded on Mother's Day. What hard-working, full-time, un-paid mothers need is an Individual Retirement Account (IRA). Although one generally needs earned income to fund an IRA, both spouses are eligible to fund IRAs as long as one spouse has sufficient earned income. Because unpaid homemakers don't pay Social Security taxes they do not earn Social Security credits. Although they are eligible to collect benefits based on their spouse's (or ex-spouses if married at least 10 years) earnings record, women need more financial security for later life. Roth IRAs can be started with as little as $100 Schwab. Check out the other IRA posts for more info and give your wife or mother a present of lasting value this year.

Why Your Kids Need a Roth IRA

"Working at a tender age is an American tradition. I'm sure lots of kids did just that over the summer, and some are still be doing it after school and over the weekends. What isn't so traditional is the notion of kids contributing to their own Roth IRAs. It should be a tradition, because it's such a good idea. Here's the scoop." "Encouraging your working kid to make Roth IRA contributions is a great way to introduce the ideas of saving and investing for the future. Plus there are tax advantages. It's never too soon for your child to learn about taxes and how to legally minimize them. After all, it's basically a game, and kids love games." by Bill Bischoff in Smart Money. http://www.smartmoney.com/taxes/income/why-your-kids-need-a-roth-ira-1350410924321/?link=SM_taxes_ls4e