One Airport Place,
Want to uncover the hidden potential of 529 plans and the new twists introduced by the Secure Act 2.0? Wondering how this could be the game changer in your child's college fund or even your first-time home purchase? Then this episode is a goldmine waiting to be discovered. We unpack the quirks and benefits of 529 plans, investment plans that not only allow you to save for a beneficiary but also let you withdraw tax-free.
Welcome to Financial Matters with Richard Oring and Josh Levitus with New Century Financial Group.
Welcome back to season two, episode two of Financial Matters with Rich Oring. I'm your co-host, Josh Levitus. In today's episode, we want to get into the Secure Act 2.0 and its effect on 529 plans. So Rich, you really wanted to get into this topic, why?
The Secure Act 2.0 came into law on December 29th, 2022. There has been a lot of news about it, it's been in the Wall Street Journal, the news, on the TV, financial publications, but the Secure Act 2.0 is actually the sequel from Secure Act of 2019, and what's interesting is, when they came out with the Secure Act in 2019, it was the most expansive retirement legislation in a decade, and what's crazy is that the Secure Act 2.0 is even more expansive, which this leads to confusion and requires a lot of education, not just for the public, but also for financial advisors, CPAs, estate planners and so forth. There's a lot of confusion, a lot of it has to do with retirement planning and beneficiary distributions, but there's little rules in there which a lot of people aren't aware of, in IRAs you have the 10% penalty, but there are some exceptions. Some of the new exceptions is for domestic abuse victims, you could take out penalty for distributions, for terminal illness or even for paying your long-term care premiums, you could take up to $2,500 per year to go toward that.
Right. I think that's some great changes to allow people access their retirement funds without having to take a loan against them, which is a little bit higher risk. As you were saying, a lot of the more reported changes to the Secure Act 2.0 is how they affect IRAs, right? So you got the access early, if you're in need, and then also they changed the required minimum distribution ages, also known as RMDs, they pushed them back a little bit, but that's not really what we wanted to get into today, we wanted to talk about something that's a little bit less reported, which is its changes to 529 plans. So Rich, I'm new to the industry, you're a bit more experienced, what is a 529 plan?
I know that you're new in the business and I know you know what a 529 plan is, but it's a great question because a lot of the people who are listening to this podcast may not know. First off, a 529 plan is a code in the IRS, it's called the section 529 and what they are, they're state sponsored investment plans that enables you to save money for a beneficiary, it could be for yourself, your children, niece, nephew, for education expenses, and you notice I said education and not college education, which is what most people think of for a 529 plan. You can withdraw these funds tax-free, not tax deferred, but tax-free to cover nearly most of the type of college expenses you might occur. 529 plans are only beneficial for the federal tax code, but you need to check for your state tax.
Look, I know in Pennsylvania there's a deduction for contributions, so I would definitely check for your own state rules to see if there's any benefits within a 529 plan, but more in detail, not to go into great detail about but a little bit more, but 529 plans are great for taxes, they're a great way to save money for college, but you can also now use these withdrawals for private schools, K through 12, trade schools, you can also use it for private, religious or elementary schools and so forth, things like that. A lot of people don't realize that you can use it for the religious schools also.
Yeah, that's interesting. And something you touched on there is that this is different in every single state. So that goes into how the 529 plans are coded. So they're technically coded as a qualified tuition plan and they're sponsored by individual states and individual educational institutions. So really makes them all unique depending on where you're located.
And Josh, there's a lot more about 529 plans, different ways you can use the money, if you have a scholarship and things like that. So maybe for a future podcast we can go more into detail about the 529 plans.
Sure. Yeah. Comment below if you're really interested in 529 plans and we'll go more in-depth in that.
I will say this, one thing I always tell clients is that grandparents sometimes are the best contributors to 529 plans.
And getting them to do a monthly automatic contribution is a great way to start funding it. I always say, even if it's $25 a month, that pays for the school books and plus some, if you have that growing for many years at a newborn, when the child starts at college, 18, $25 a month may not sound a lot, but over all that time period it might pay for the books, it might pay for a semester and upon the parents contribution and the grandparents, it can almost all be paid for or saved up at least for the college.
Yeah, I think that's an awesome idea. A little bit off script there, but that made me think about how, for parents, college can really be a major burden, because you tend to be paying for that right as you're approaching that retirement end zone, as I like to call it, whereas for a grandparent, if you're already retired, it might be a little bit easier, from a cashflow perspective, to help your grandchild pay for their college. So that's a great call.
Just like a 401k, we save money and we understand the power of compounding, that the earlier you start, the less you need to put away per month to get to your goal.
Compounding, what's compound interest?
We'll do that on another podcast, but I think a lot of people know what that is.
Okay. Not everyone is all well versed like we are.
All right Josh, go ahead. You can explain it.
Okay. Yeah. So compound interest is essentially your interest earning interest on itself. So let's say you put a $100 in the bank, in the first year that earns $5. Instead of earning interest on that $100 next year, you're going to earn interest on the $105 and essentially your interest starts earning interest and grows much quicker than simple interest.
And I'll fill in what simple interest is, you have the $100, you earn $5, you have 105. Next year, you're still only going to earn the $5 off the hundred. So compounding allows your assets to grow at a greater rate of return than simple interest.
Exactly. And that's why we got to invest at a young age, right?
Awesome. So getting more into how the Secure Act 2.0 changed 529 plans. So the big change is, what happens if you don't use this money for college or any kind of educational expenses?
Well Josh, I know what I'm going to do. I'm going to transfer the beneficiary to myself and I understand that there's some PGA schools down in Florida where I could take up golf and use that money as a qualified distribution. Is that what you wanted to talk about?
You said [inaudible 00:06:56] good at golf even though you never play with me.
I'm not good at golf, that's why I need the lessons. So if my kids don't use it, that's my... That's what we're talking about today, how we can use it for ourselves.
I think you have this mistaken, Rich. So let's say you contribute to a 529 plan for your kid and they don't end up going to college and need this money
Or you overfunded
Right. Let's say you overfund it and you don't need all the money. So the new option that we have is you can roll $6,500 a year into a Roth IRA for the benefit of the child. So Rich, what's a Roth IRA?
Roth IRA is a qualified investment account, which money grows tax-free compared to tax deferred like a traditional IRA. There's no tax deduction on the year of the contribution, but it grows tax-free, which is really nice.
So let's say your 18 year [inaudible 00:07:51] college, they graduate when they're 22, there's $10,000 left in their 529 plan. So what you can do is, in that first year move 6,500 into a Roth IRA for the child's benefit, then when they're 59 and a half in 30 years or so, they'll have that money tax-free and it'll grow, it'll compound until then and really give them a good start to their retirement plan so they're not starting from zero like most young folks.
It's interesting, we always tell clients when that happens and there's extra money at the 529 plan, their current choices were this, you could change the beneficiary to another child or another relative within the same bloodline or you could take the withdrawal and pay the taxes on the gains and a 10% penalty. So this is now giving a lot more leeway for something else you can do with that money. Are there any rules with that?
Yeah. So like I was saying, $6,500 a year maximum and then in the child's entire lifetime or the beneficiary's entire lifetime, because they're not really a child once they're 18, $35,000 maximum. So you can't use this to put millions of dollars into a Roth IRA, government doesn't love you having too much money in there, they really restrict access, but again, $35,000 maximum per beneficiary.
And that counts as a qualified contribution, meaning they have to have earnings to make that contribution, I assume?
Exactly. So when the money goes into the 529 plan originally it has to be from taxable earnings, however, once it's in the 529 plan, if you don't use it for college expenses, goes right into a Roth IRA, no problem.
So let me understand this. I have a newborn child, I start funding my 529 plan, grandparents start funding the 529 plan, my kids must be geniuses because they got a full scholarship. Is that true? But in this scenario it is.
In this situation it is. So now I have all this extra money at the end of this time period, they're done college and before that they had some earnings and maybe they contributed to our Roth IRA earlier because there's that five year rule before you can take withdrawals from the Roth IRA, if you pull money out of a Roth IRA, it has to have been invested for at least five years, your initial Roth IRA contribution. So what you're saying is, they graduated college, I have all this extra money, they're working, they make the Roth contribution again and again, and again till that $35,000 is up, you told me it has to sit there, I believe, for 15 years.
So getting into more of the restrictions with the 529 plan to Roth IRA transfer.
Okay, I might've jumped the gun, but I'll let you explain that in a sec. So what you are saying is, they can graduate college, have $35,000 in a Roth after six years about, and they can use that Roth for a first time buying of a home up to $10,000 for a deposit. That's an unbelievable strategy right there for some planning.
Yeah. So that gets a little bit more into some of the corks and features of a Roth IRA, you can borrow from it to buy your first primary residence.
Not borrowing, you could take a tax-free distribution.
Oh, even better. See I said you're the experienced one and you're like, "oh no, you know this stuff." Anyways, so more about the restrictions about going from 529 plan to Roth IRA. So the plan has to be established for 15 years. So let's say your child's 15 and you just start the 529 plan, you're not able to make this transfer from 529 to Roth until that child, now adult, is 30. The other restriction is the contributions have to be in there for five years before they can get transferred to a Roth. So if you contribute for the last time when the child's 18, that contribution can only be moved into a Roth when they're 23. So Rich, you are really excited about this change, can you talk a little bit more about why it's so important to have new access to a Roth IRA?
I just love the options. You have your first child, you don't know if you're going to have a second or third child. So the more you can start saving it gives you funds but gives you choices on how to use those funds later in life. So now that you can use it for private school, one of my children had to go to a private school for a learning disability, if this rule was there then, I could have used some of that money. Again, a lot of this was before the Secure Act 2.0, but not when my kids were first born, but I could have used some of my Roth IRA to pay for that K through 12 private education for him, which I was starting out, I wasn't making that much money, that would've helped me back then. So anytime I'm able to save, it gives me opportunities for planning in the future.
Again, I just mentioned a strategy, putting $10,000 for your first time home. A lot of times I tell parents, if your child's working as a minor, you could still open a Roth IRA and the strategy would be to help them put money away for a first time buying of a house or allow that money to grow tax-free until they retire, and as you'd mentioned earlier, if that's compounding for 40, 50 years, that's humongous, just take out a calculator, go to the website, look for a compounding calculator and see what that $3,500 or $6,500 contribution, whatever you can afford, will be worth when they're turning 65, 68, 70, whenever they plan on retiring.
Yeah, exactly. And just to touch on the compounding effect there, something we talk about in the industry a lot is this rule of 72, let's say you're getting a 7.2% return on your investment, the rule of 72 says 72 divided by 7.2 is 10. That money's going to double every 10 years. So in 40 years your money's going to double four times, just touches on how important it is to start investing at a young age. [inaudible 00:13:45] additionally...
Well think about this.... Josh, if you have a hundred thousand dollars in your 401k and you have a hundred thousand dollars in a Roth IRA, and let's just say your combined tax rates is 30%, you take out a hundred thousand, you are only netting 70,000 from your traditional 401k, you take a hundred thousand out of your Roth IRA, you're getting a hundred thousand dollars. In retirement, it's not taxable income, so less of your social security might be taxed and other benefits, you might still qualify for deductions or credits and so forth. So, again, the more you can put away, especially tax-free, it gives you a lot of choices for planning later on in life.
Exactly. And then additionally, something else I've heard in the industry, with folks not being super interested in the 529 plan, as people saying like, "oh, what if I overfund it? My kid doesn't need the money. I don't want to pay that penalty." This really gets rid of that excuse. Let's say you have two kids, fund it for the older one, if they don't need it, give it to the younger kid, if they still don't need it, it can go to a Roth. So no matter what, you're not going to be wasting that money. So I think it just makes 529 plans even more powerful.
That question's asked a lot when we talk about 529 plans with clients, they say, "what happens if my child doesn't go to college?" And I go, "all right, let's say your child graduates school and they want to go to Seattle and join a rock band and travel the world, and it's not something you approve of."
Shout out Pearl Jam.
Not many kids are going to grow up to be Pearl Jam, but you have options. Let's just say they're not joining a rock band and they're going to become an electrician, you can use that money to help them start their business, their tools, their education and things like that. If you have to pay a 10% penalty and it's been growing tax defer for 20 plus years, it's not the end of the world, it really isn't, but the biggest advantage of a 529 plan is, the owner, not the beneficiary, controls the money. So even if that child goes to college and the owner and that child aren't on the great terms right now, the owner doesn't have to give it to the child or the beneficiary of that 529 plan, they're always in control of that money, and if they fund the 529 plan for each contribution five years later, it's out of their estate, which is big.
Yeah, that's a great point that I was not aware of. So I'm glad you mentioned that. Rich, any other final thoughts you want to touch on before I wrap this one up?
I always recommend people go into savings for college.com. You can go on different websites like Fidelity and Vanguard to learn more about 529 plans. You can always call our office and we could tell you the advantages of buying a 529 plan through an advisor like us or going directly to a no-load company where you wouldn't have to pay commissions, it's something we always refer.
Our office, usually you and I usually refer clients to buy at a no-load company. We make our money through the planning or managing other assets, I'm not a big fan of managing 529 plans, but I talk about the benefits all the time. If you want to talk more about it with a no sales pressure pitch, call our office, we'll tell you about it, let us earn your business on other products you might be interested in, like financial planning, you might have an IRA, an inheritance you need to manage, tax efficiency investing, that's what we're really good at, that's the value we add. On the 529 plans, a lot of times you're buying an age-based portfolio and it re-allocates for you, there's not much... I believe, that we're adding value to, other advisors might disagree with me, but I usually will refer them to a no load company, and Josh, you know that, you've seen that firsthand, me talking to people.
Right. We're never going to charge if we're not adding value. So not charging people for 529 plans, that wouldn't really make sense.
We want to earn your business.
Exactly. Yeah, very well said, Rich. I think we touched it all. So thank you everybody for listening to season two, episode two of Financial Matters with Richard Oring. I'm your co-host, Josh Levitus. I recommend you subscribe if you have not done so already, because even though we said we're going to make them every other week and didn't, now I'm going to make Rich do that. So additionally, if you want more info about 529 plans, see the show notes below, we'll have links to resources that we use to put this together. Additionally, I encourage you to comment below about topics you're interested in and we'll use that for future episodes. Additionally, if you want to contact us, like Rich mentioned, info at ncfg.com or you can email me directly, email@example.com, our office number is 609-924-2049, I'm extension 105, and going forward, you could also just check out our website, www.ncfg.com, you can schedule a time with Rich and I directly.
And Josh, I'm always going to say I always enjoy talking to people. Feel free to call our office, schedule some time to talk to either Josh or I, we can set up a Zoom meeting so we can see each other, you can come to my office, we're pretty much licensed in most states, and if we're not, we'd be more than happy to get licensed if we're able to offer services for you. So please reach out, talk to us. If you're looking for financial advice, a financial plan, some investment management, we would love the opportunity to talk to you, to tell you about how we manage funds and how we do financial planning through a subscription base, which is a lot less money upfront than your traditional financial planning. Our goal is always to make financial planning affordable for everybody.
Exactly. Just give us a call. We're looking to expand our reach, talk to some new folks. So additionally, if you like the podcast, we'd really appreciate if you leave a review, a five star review of course, and then also send [inaudible 00:19:33]
And if you don't like it send us an email, call us, let us know what we could do different, we'd love your feedback.
Exactly. We took a recommendation from one of our viewers that said it'd be better if it was more face-to-face instead of us being both in the same room. So let us know if you thought that was better, and then also if you have a friend that you think will like the show, send it to them and then have them let you know what they think.
And last thing I'm going to give you a comment on is, if you like the idea about grandparents funding a 529 plan, forward the podcast to them.
Yeah, get some grandparents on the podcast, that's big. All right, anything else, Rich?
Nope. Thank you, Josh.
Yep. Now onto the disclosures.
Richard Oring and Josh Levitus's branch office is One Airport Place, Princeton, New Jersey, 08540. The branch phone number is 609-924-2049. Securities are offered through Osaic Wealth Incorporated, member FINRA, SIPC. Advisory services are offered through New Century Financial Group, LLC, a registered investment advisor, not affiliated with Osaic Wealth Incorporated. New Century Financial Group, LLC, and Osaic Wealth Incorporated do not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.