At the end of 2022, Congress passed the Securing A Strong Retirement Act, referred to as SECURE 2.0. This act has many changes affecting retirement savings and financial planning for college expenses, including the 529 Plan. The majority of the changes will come into force in 2024. In this article, we will explore the benefits of the SECURE Act 2.0 529 Plan changes in New York and provide guidance on navigating them effectively. Read to learn more, if you have any questions feel free to give us a call at (631) 506-8440 to schedule a consultation with a Long Island estate planning attorney.
Overview of the SECURE Act 2.0 and 529 Plan Changes
The first SECURE Act (Setting Every Community Up for Retirement Enhancement) became law in 2020 and modified several retirement account rules. SECURE Act 2.0 picks up where the original law left off. This latest version includes education expenses.
The 529 Plan, created in 1996, is a tax-advantaged investment tool allowing families to put money aside for college, vocational/technical schools, or other designated beneficiaries. Contributions to a 529 Plan are made from after-tax dollars, and qualified distributions are tax-free. As part of their estate planning, many families find the 529 Plan to be a valuable instrument.
For families whose students do not use the entire amount saved, the 529 Plan can be cashed out – but the amount is taxed, and there is a 10% penalty. This rule has discouraged some families from investing in a 529 Plan, fearing they would overfund it.
Coming in 2024: Ability to Convert 529 Plan Into a Roth IRA
However, starting January 2024, the SECURE Act 2.0 529 Plan changes will allow a tax-free rollover of up to $35,000 from a 529 Plan to a Roth IRA for the beneficiary. A Roth IRA (individual retirement account) enables investors to deposit after-tax contributions that grow tax-free and can be withdrawn tax-free after the age of 59½.
Through this new regulation, families can simultaneously save for their children’s education and retirement. Stipulations to the SECURE Act 2.0 529 Plan changes include:
- The 529 Plan must have been established for at least 15 years before rollover contributions begin.
- Converted funds from the 529 Plan must have been in the account for at least five years.
- Annual contribution limits to Roth IRAs apply. For 2023, the maximum amount is $6,500. Based on this amount, it would take six years to reach the $35,000 limit for the Roth IRA.
The New York 529 Plan
Nearly every state offers a 529 Plan. While federal tax rules govern each plan, states can set their rules. In New York, the maximum balance is $520,000 per beneficiary. The state tax deduction for individuals is $5,000, and $10,000 for married couples filing jointly. These limits have been increased over the years and will likely be increased in the future. Anyone can contribute to a beneficiary’s 529 Plan, which makes it an attractive option for relatives and friends to support college expenses for the youngsters in their lives.
Residents of other states can participate in New York’s 529 Plan. Families from out of state should seek the advice of a New York estate planning attorney on whether New York’s 529 Plan is appropriate for their family’s financial situation.
Benefits of a New York 529 Plan
In addition to state tax benefits, the New York 529 Plan offers the following advantages:
- You can use the account to pay qualified higher education expenses at any eligible school in the United States or abroad. Eligible institutions include 2- and 4-year colleges, postgraduate programs, apprenticeship programs, and trade and vocational schools.
- Qualified expenses include tuition, fees, books, supplies, room and board, and required equipment, including certain computer equipment and related services.
- There are no fees to open an account and no minimum contribution amount.
- There are no age or income restrictions. Beneficiaries must be U.S. citizens or resident aliens.
- Fees are $1.20 per year for every $1,000 invested (0.12% total annual asset-based fee).
Unlike some states, New York does not consider K-12 tuition eligible. State taxes will apply if a beneficiary withdraws funds from the New York 529 Plan to pay for K-12 tuition. However, regulations to the New York 529 Plan can and do change. A Long Island estate planning attorney can guide families on how to stay updated on new rules and adjust financial strategies accordingly.
Sheryll Law: Helping Families Plan Wisely for Children’s College and Retirement Expenses
Saving now for college is a wise decision, but choosing how to save requires a strategy. Families should look into the advantages of state tax deductions, tax-free growth and withdrawals, and other options in the New York 529 Plan.
The new SECURE Act 2.0 529 changes provide several benefits to families who want to prepare now for their children’s future education expenses and retirement costs. Given the numerous laws involved, seeking guidance from an experienced estate planning attorney on setting contribution goals and maximizing tax benefits makes sense. Contact us today at (631) 506-8440 or complete our online form to schedule a consultation.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.