529 Plan: Owner & Beneficiary Strategies

Recently we have seen notable changes involving 529 Plans. Those changes relate to naming or changing the account owner and the beneficiary. But now, a 529 plan can help fund Roth IRAs! This means it is more important than ever to understand the impact of titling a 529 Plan.

Why would I change the owner?

The Department of Education is working to implement several changes to the FAFSA, with the majority beginning the 2024-2025 school year.

One of the more significant changes relates to grandparent-owned 529 plans. Previously, qualified distributions from these accounts counted as income to the student on the FAFSA, which is significant, as student income can reduce aid eligibility by up to half of the distribution amount. With the new changes, this will no longer be the case. This makes grandparent-owned 529 Plans more attractive since the asset is not reported on the FAFSA either.

On the flip side, we have parent-owned 529 Plans. While distributions from these accounts don’t count as income on the FAFSA, up to 5.64% of the asset is reported.

You may be wondering, why wouldn’t a grandparent own the 529 Plan then? For many people, it will come down to personal preference. Maybe the parent wants the peace of mind of controlling the asset. Or maybe the grandparent doesn’t want to deal with the hassle of managing the account and coordinating tuition payments. Regardless, if you have the potential to qualify for federal financial aid, you may want to consider your options.

Why would I change the beneficiary?

The SECURE Act 2.0 was signed into law on December 29, 2022. While this bill has many provisions, one that has gained a lot of attention is the 529 Plan to Roth IRA Transfer starting in 2024.

Keep in mind that a few conditions must be met for this transfer to occur. To name a few:

• The 529 Plan must have been in existence for at least 15 years
  
  
• The funds must go to a Roth IRA in the name of the beneficiary of the 529 Plan
  
  
• The annual amount that can be transferred from the 529 Plan to the Roth IRA is the IRA contribution limit for the year, minus any contributions already made
  
  
• The maximum lifetime amount that can be transferred is $35,000 per beneficiary

What if your child didn’t go to college, and you’d like to direct some of those funds toward your retirement savings? While experts seem to think that changing the beneficiary to yourself will not reset the 15-year clock, we still need to wait on more guidance from Congress.

How would I change the owner?

The vast majority of 529 Plans allow for changes in ownership to be made easily. In addition, the change in ownership should not trigger income or transfer taxes. However, you must double-check with your plan provider to confirm.

How would I change the beneficiary?

Changing the beneficiary is more complex as there are a few more rules to consider.

The first question is, who will be the new beneficiary? If the beneficiary is changed to a family member (spouse, child, sibling, niece, nephew, first cousin, etc.), there will be no income tax consequences. However, suppose the beneficiary is changed to someone that is not a family member. In that case, the change will be treated as a distribution subject to income tax and a 10% penalty on the earnings.

If you are changing the beneficiary to a family member, there is another layer to consider: the particular generation of the new beneficiary. The answer to this question will determine whether or not the change will trigger transfer taxes, specifically gift and generation-skipping transfer taxes. If the family member is of the same generation as the current beneficiary, there will be no transfer taxes. If the family member is one or more generations below the current beneficiary, transfer taxes will come into play.

Similar to changing the owner, it is important to discuss with your plan provider the ramifications of changing the beneficiary.

Changing Regulatory Environment

The strategies addressed above are based on provisions that are subject to adjustments. Please talk to your financial advisor to determine if changing the owner or beneficiary of your 529 Plan is an appropriate strategy for you.

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