Estate Planning | Education Cost Planning continued...
would be included in your federal gross estate. For example, assume you made a $50,000 contribution to a 529 savings plan in Year 1 and elected to treat the gift as if made evenly over five years. You die in Year 2. Your Year 1 and Year 2 contributions of $10,000 each ($50,000 divided by 5 years) are not part of your federal gross estate. The remaining $30,000 would be included in your gross estate. Some states have an estate tax like the federal estate tax; other states calculate estate taxes differently. Review the rules in your state so you know how your 529 account will be taxed at your death. When the account owner dies, the terms of the 529 plan will control who becomes the new account owner. Some states permit the account owner to name a contingent account owner, who would assume all rights if the original account owner dies. In other states, account ownership may pass to the designated beneficiary. Alternatively, the account may be considered part of the account owner’s probate estate and may pass according to a will (or through the state’s intestacy laws if there is no will). What if the beneficiary of a 529 account dies? If the designated beneficiary of your 529 account dies, look to the rules of your plan for control issues. Generally, the account owner retains control of the account. The account owner may be able to name a new beneficiary or else make a withdrawal from the account. The earnings portion of the withdrawal would be taxable, but you will not be charged a penalty for terminating an account upon the death of the beneficiary. Keep in mind that if the beneficiary dies with a 529 balance, the balance may be included in the beneficiary’s taxable estate. 529 Plan Changes Effective in 2024 Ordinarily, money withdrawn from a 529 plan must be used for qualified educational expenses, and if not, you will pay state and federal income taxes (at the beneficiary’s tax rate) on the money, as well as a 10% penalty. The penalty can be waived in some qualifying circumstances; however, you will still need to pay the tax bill.
Starting in 2024, a rollover allowance will begin with several limits. First, the amount rolled over cannot be more than the Roth contribution limit, which is $6,500 for 2023. Another condition is that the 529 plan must have been open for at least 15 years. After 15 years, 529 plan assets can be rolled over to a Roth IRA for the beneficiary, subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. Rollovers cannot exceed the aggregate before the 5-year period ending on the date of the distribution. The rollover is treated as a contribution towards the annual Roth IRA contribution limit. It is unknown at this time if changing the account beneficiary requires a new 15-year waiting period. Until the IRS issues rules, it is also unclear whether withdrawals of earnings from 529 plans transferred to a Roth account will be subject to the rule that requires earnings to remain in the Roth account for at least five years. Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/ or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.
We hope you enjoyed this issue of Perspective . For more updates and insights, visit our blog and follow us on social media!
SpectrumMgmtGrp SpectrumMgmt Smgindy
Spectrum-mgmt.com
24 PERSPECTIVE Summer 2023
Made with FlippingBook Online newsletter maker