529 or Roth IRA | Business Briefing & Lego’s Helping to Save Lives

529? Roth IRA? What Changed?: Compass Ion Advisor Matthew McDaniel wanted to share a bit about a law the President signed into act on December 29, 2022. We’ve talked about the Secure Act 2.0 before, but we wanted Matthew to give insight into one aspect of it:

Beginning in 2024, section 126 of the Secure Act 2.0 allows an individual to move money from a 529 plan directly into a Roth IRA.

On the surface, this change comes with excitement. However, we consistently encounter the following concerns during our financial planning process.

• “What occurs when there is a surplus at the end of the 529 account(s) after all education expenses are paid?”
• “We are planning for a 16- or 17-year time horizon. However, based on all that has changed in the last two decades, we are unsure if the traditional college model will remain unchanged when my child or grandchild attends university.” 

Both points are valid.

This provision intends to alleviate those concerns with the ability to convert unused 529 contributions to a Roth IRA. The beneficiary could now use the funds for retirement.

You might be saying. Yes, Matthew. Sounds great. However, what’s the catch?

Well, there are a few.

Below are the following conditions for rolling the funds from a 529 plan to a Roth IRA.

• The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan;
• The 529 plan must have been maintained for 15 years or longer;
• Any contributions to the 529 plan within the last five years (and the earnings on those contributions) are ineligible to be moved to a Roth IRA;
• The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any ‘regular’ traditional IRA or Roth IRA contributions that are made for the year (in other words, no doubling up with funds from outside the 529 plan); and
• The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.

This new transfer provision has an excellent “long-term” opportunity even with the strict conditions.

First, you can contribute to a 529 with less concern that the funds will be used inefficiently. Second, starting a young person’s financial life with a $35k Roth IRA may sound minimal. However, when we apply compounding to the situation, the results change substantially.

At a compounding rate of 7%, a $35,000 Roth IRA will grow into $525,000 over a 40-year working career. Those are real dollars.

As with any new legislation, we await guidance and continue learning how this could fit into your financial picture.

• If you change beneficiaries, “Does the 15-year clock start over?” 
• Suppose a parent contributes to a 529 plan and maintains account ownership. Could the parent change the beneficiary to themselves, then transfer the 529 proceeds to the parent’s Roth IRA? Is it reasonable to open a 529 account now to start the 15-year clock? Even if my contribution is minimal. 
• My children or grandchildren may be unable to contribute to a Roth IRA due to income limitations. Should I, the parent or grandparent, fund the 529 for both educational purposes and to allow access to after-tax Roth retirement dollars? 

If this article creates additional curiosity, please do not hesitate to contact us. We’re eager to shed more light on how this may or may not apply directly to your situation.

Business Briefing

• Retail Sales: One strong indicator of how the economy is doing is how retail sales look. After a disappointing holiday shopping season, retail sales rebounded, jumping 3%. That is the fastest pace in two years after falling two straight months. It was the most significant monthly increase since March 2021, when coronavirus-related stimulus checks gave American households more money to spend. An increase in auto sales contributed to the gains. (The Associated Press)
• Inflation Slows: According to the consumer price index released last week, inflation slowed in January but less than expected. Prices were up 6.4 percent in January compared with a year earlier, down slightly from 6.5 percent in December. It was the seventh straight month with a slower year-over-year inflation rate since a peak of 9.1 percent in June. Every month, prices jumped 0.5 percent from December to January, faster than the 0.1 percent increase the month before. (The Associated Press, The New York Times)
• Ban on Gas and Diesel Cars: The European Union has approved a law banning the sale of new gas and diesel cars in the EU starting in 2035. The deal, agreed upon in October, received the official stamp of approval on Tuesday. The law will cut 100 percent of carbon emissions from new automobiles starting in 2035 and 55 percent by 2030. “We will no longer, or almost no longer, have petrol or diesel cars on our roads in 2050,” said Karima Delli, president of the EU transport committee. (Reuters)

Legos and Heart Disease: Dr. Paul Janssen has developed one of the most unique fundraising techniques we’ve ever seen. About 15 years ago, the surgeon who moonlights as an artist built a 200-pound “miniature” replica of the Ohio State Stadium using about 700,000 Legos (valued at approximately $100,000). As he continued work in his field of cardiology and found the need for more funds for continued research, he decided to sell the seats in the lego stadium. As a result, the doctor has raised about $90,000 so far to invest in research and medical advancements. To read more about this project, click here.