Allworth Advice: How 529 plans just got more powerful
Question: Ronnie and Meredith in Milford: We have a 529 plan set-up for our son with about $75,000 in it. However, he might not end up going to college. Is there anything we can do with that money? Or has it essentially been wasted?
Answer: It’s definitely not been wasted! You should be commended on your forethought, as well as the ability to set aside a nice chunk of money.
First and foremost, it’s important to note that 529 plans funds can be used for educational expenses at institutions other than four-year colleges. This includes two-year community colleges, trade schools, technical and vocational schools, certificate programs, and apprenticeships. So just because your son might not be going to "college" in the traditional sense doesn’t mean he can’t use the money. Just be sure the institution or program is federally accredited.
But let’s say he’s not pursuing any sort of post-high school education. If you have other children, you could switch the beneficiary’s name on the 529 plan to help pay for their college expenses; you could even change the beneficiary to a niece, nephew, or grandchild. In fact, you could even make one of yourselves the beneficiary if you’re thinking about going back to school or taking classes (either now or in retirement). Alternatively, the money could be withdrawn and spent on non-educational expenses, though taxes would be owed and a 10% penalty would kick-in.
With all that said, there’s now an additional option on the table thanks to the SECURE Act 2.0 that was signed into law at the end of last year. Starting in 2024, leftover or unused money in a 529 plan can be rolled over to a Roth IRA. And while tax professionals are still waiting on IRS guidance about many of the rules and the law’s language, we do know a few things for sure: To take advantage, the 529 plan must have been open for at least 15 years; rollovers are subject to annual Roth IRA contribution limits; and there’s a $35,000 lifetime cap on transfers. Plus, the money must be rolled over into the beneficiary’s Roth IRA.
Here's the Allworth Advice: A 529 plan is a powerful tool for saving for educational expenses, and it’s now gained even more flexibility. If you’re struggling with how best to move forward, we recommend speaking with a fiduciary financial advisor. He or she can help you determine the course of action that’s best for both of you and your son.
Q: G.R. in Wyoming: My brother lives out of state and we have the same Medigap plan. But his costs a lot less than mine. How can this be?
A: Even though Medigap plans are federally standardized, as you’ve discovered, there can be variations in price across the country. This is due to a number of different factors. For instance, policies are sold and regulated on the state level, meaning pricing will vary by state. There are also three different ways a Medigap policy can be rated: Community rated (not based on age), issue-age rated (based on the age when you buy the policy), and attained-age rated (based on your current age). Insurance companies can pick whichever of these pricing models they want, which also impacts your premium. Plus there are other factors like plan availability, the general cost of healthcare in your area, and the fact that different insurance companies can ask different sets of health questions. It's not surprising that you and your brother are paying different amounts for the same plan; it’s a very personalized amount. Moving forward, the Allworth Advice is to always make sure you’re comparing apples to apples when reviewing Medigap plans.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to yourmoney@enquirer.com.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com or call 513-469-7500.
This article originally appeared on Cincinnati Enquirer: Allworth Advice: How 529 plans just got more powerful
