#29 | 529 Plan Update for 2023

In this episode of “Protecting and Preserving Wealth,” Bruce and Jon dive into a comprehensive discussion about the intricacies and nuances of 529 plans. These plans, designed to aid in saving for educational expenses, offer a range of benefits that extend beyond traditional college savings.

We highlight the potential tax advantages of 529 plans, one of which is an appealing opportunity for grandparents and parents to contribute and receive a tax deduction.

Additionally, distributions are tax and penalty-free for qualified educational expenses. The discussion delves into the array of expenses that qualify for these distributions, including college-related costs such as tuition, books, and fees and additional expenses such as computers, internet access, and even K-12 education.

They clarify that the earnings on 529 plans used for non-qualified expenses are subject to income tax and a 10% penalty, but the original contributions are not. However, due to the flexibility of these plans, you should rarely have to pay these penalties.

Expanding also on the rules and regulations surrounding 529 plans, such as rollover limitations, investment changes, and beneficiary changes. And examining the recent Secure Act 2.0 reveals new opportunities for 529 plans, for example, the potential to rollover to a Roth IRA for beneficiaries.

Listen in and join Bruce and Jon in this conversation, where Bruce underscores the versatility and advantages of 529 plans catering to various educational and financial scenarios.

The episode offers a comprehensive exploration of 529 plans, revealing their potential to shape a secure educational future.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.

Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.

To listen to more Protecting & Preserving Wealth podcast episodes, click here.

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Podcast Host

Bruce Hosler Image

Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.

*2018-2024 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2024 based on data gathered from June 2022 to June 2023. 23,876 were considered, 8,507 advisors were recognized. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit.

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Jon “Jag” Gay: Welcome to Protecting and Preserving Wealth. I am Jon Jag Gay. I’m joined as always by Bruce Hosler of Hosler Wealth Management. Bruce, always a pleasure to spend some time with you.

Bruce Hosler: Jon, it’s great to be with you today. Thanks for taking the time. I’m really excited about what we’re talking about today with the new rules on 529 plans.

Jon: Let’s jump right in. 529 plans are an incredibly valuable tool when it comes to planning for your financial future, the financial future of your children, their education expenses. We’re going to give you an update of where we stand with 2023 rules. Where do you want to start?

Bruce: Well, the first thing is I’m a resident of Arizona, a lot of our clients and listeners are in Arizona, but other states also offer this. The first thing I want to remind people about is that if you contribute to a 529 plan in Arizona, if you’re single, you can take a tax deduction on your Arizona state taxes of $2,000, and if you’re married, filing joint, you can take a tax deduction of up to $4,000 a year. Here’s a great way, fund the college plans for your grandkids and get a tax deduction while you’re at it. It doesn’t get any better.

Jon: Absolutely. Those 529 plans to save for somebody’s future education. What about the other tax implications on 529 accounts, Bruce?

Bruce: People love 529 plans because the distributions are tax and penalty-free if they’re used for qualified educational expenses. It’s amazing what some of the flexibility is that’s available for qualified education expenses nowadays.

Jon: Right. We’ll hit that list here in just a second. What happens if we don’t use that money for education or any of those qualified expenses?

Bruce: That’s interesting to clients too. What if they open a 529 plan and the grandkids don’t go to college or something like that? Guess what? I’ve even heard, believe it or not, I’m a golfer, you know that, you could name yourself as the beneficiary on that plan and go to golf school and use the 529 for golf school. it’s very cool, but the earnings on those are subject to income tax, and the earnings are also subject to a 10% penalty. Now, the original contributions, not subject to tax or 10% penalty, only the earnings if they’re not used for education.

Jon: That’s important, a point of differentiation, the earnings, not the principle that you put into it.

Bruce: One other thing that I want to add in there, nobody should ever pay a penalty on this because you can change the beneficiary. You can always find somebody that can use the benefits of this. Now the flexibility that we’ll talk about later on the rules of the ages and everything like that, you should never pay tax or penalty on a 529 plan. A golf school or OLLI for senior citizens that want to go to college classes or that, there’s always a place we can find someone to avoid those penalties.

Jon: That’s a really great point, Bruce. Okay, let’s get into these qualified education expenses. What can these funds be used for?

Bruce: Clearly, if it’s college, tuition, books, fees, materials. What’s cool, though, is you can use it for like your grandchild’s laptop, computer equipment, printer, internet access. What if they’re away at college? Room and board, but they have to be at least halftime as a, not a full-time student, but at least halftime or more toward full-time student to qualify the room and board. You can also use it for apprenticeship programs, so not regular college. If you have someone that is really in a non-traditional, maybe a journeyman school or that, it can be used for that as well.

Then there’s all the new exceptions that we have. Tuition for these private and public schools and religious schools, up to $10,000 a year can go toward K through 12 for these type of schools. Your grandkids, while they’re in elementary school, you can use it for that as well. There’s different principal and interest on qualified education loans. If someone has debt, student debt, we hear a lot of that in the news nowadays, up to $10,000 during the lifetime can be used for the beneficiaries on that. Arizona honors all of these rules. Different states may have different treatments, so you got to be aware of the state where you’re at.

Then finally, I just want to close on, if there’s somebody that has special needs for cost of enrollment, if you have a child or grandchild that has special needs, those costs can be used for that as well.

Jon: I just want to clarify one thing here, Bruce, this cannot be used for beer money, correct?

Bruce: It is not available for beer money. That is exactly right.

Jon: Just wanted to make sure of that one point. Okay. What other items are not qualified for these expenses?

Bruce: If your child is– We just talked to somebody the other day. They went to college in Hawaii. The travel costs to and from campus, that airline flight, that will not be covered. The health insurance. A lot of schools, when your kid goes to college, they have health insurance while the child’s at school. That health insurance cannot be included. The extracurricular activities besides beer money, but like if they’re in special activities or that, or fraternity or sorority parties, that is not a qualified expense.

Jon: Fraternity, sorority dues I’d imagine too as well. Okay. What are some other basic rules around these 529 plans, Bruce?

Bruce: Some of the other basic rules that we have to look at is if we’re going to roll over from one 529 to a new one, you can only do one rollover per year. It’s like the IRA rules, one for 365 days. Don’t forget about that. You can only do one per year. There’s no requirement to distribute the funds, so you can leave the funds growing in there tax deferred, and the beneficiary may be changed to an eligible family member without any income tax consequences. From one sibling to another, from a sibling to a mom and dad, from a grandparent down to whoever, those are some cool rules that you should be available and know about.

Jon: I think that is a fantastic piece of advice because with the growing cost of higher education, some students, some 18-year-olds, are choosing not to further their education after high school. For that reason, to your earlier point, Bruce, you shouldn’t have to pay taxes on the gains in these accounts. You can just transfer it so you’re benefiting somebody who is going to go to school or have one of these uses of these funds.

Bruce: Well, and that’s the next thing I want to talk about, Jon, is changing the beneficiary of a 529 plan. If you make a change in the beneficiary to a family member or a family trust, this doesn’t result in a distribution. It’s not a taxable event. It is okay to do that.

Jon: Okay. Who counts as far as an eligible family member?

Bruce: Oh my goodness, Jon, this is a long list. Certainly between a husband or wife, the spouse or the children, or the spouse to one of your children. You can do to your siblings, brother, sister, stepbrother, stepsister, or the spouse of any of those. You can do a mother, father, or an ancestor of either. Now think of that. You might open up a 529 and transfer it up to your grandparent. That’s an interesting thought.

Jon: It could happen.

Bruce: It could happen. A stepfather, a stepmother, or the spouse of either of those, nieces and nephews and the spouses of them, aunts and uncles or their spouses, son-in-law, daughter-in-law, brother-in-law, sister-in-law, or the spouses of any of those. Then finally, last of all, your first cousin. It’s okay to include them and to name them a beneficiary.

Jon: You ever see the movie Spaceballs?

Bruce: I didn’t because it looked a little crazy to me.

Jon: It was a Mel Brooks spoof of Star Wars, and instead of “Luke, I am your father,” it was, “I am your mother’s father’s sister’s cousin’s roommate.” That would not apply.

Bruce: [laughs] Okay. That would not apply.

Jon: What about the account owner and successor owner in the event of someone’s passing?

Bruce: Those are very interesting rules to me. The first thing is as grandparents, and Laura and I are grandparents, I love this. You can open up a 529 plan as an owner, and then usually you can name your spouse as the successor owner. This is an individually owned, generally not joint owned, and 529 contributions are considered a completed gift for tax purposes. Think about this. They’re removed from your estate for taxable purposes, and yet you can remain the owner of the account. That is very interesting to me.

Then additionally, the 529 contributions are eligible for an annual gift tax exclusion amount. That amount in 2023 is 17,000. If you contribute that for the benefit of one of your family members, that 17,000 is removed from your estate, and there’s no gift tax return, there’s no gift taxes, and your family member doesn’t have to recognize it as income either.

Jon: Okay. Let’s come back to before we wrap up, Bruce, the rules around changing those 529 plan beneficiaries.

Bruce: There is only one beneficiary that’s allowed per account. You can make investment changes as many times as twice per year. There’s different sub-accounts that they have available, similar to mutual funds, inside of the 529. You can reallocate those twice a year. There’s no limit on the number of times that the beneficiary may be changed. Now, think about that. No limit. Somebody could come into favor or come out of favor, or maybe a new grandbaby’s born, so we want to add them and change them as a beneficiary.

Then finally, changing the beneficiary to a family member one generation more or lower than the original beneficiary is considered a taxable gift. We have to be careful that we’re only going one generation below us. It’s like the gift tax rules on a skip generation. We don’t want to do that. You just want to generally go one generation or more lower.

Jon: Thinking of all those soap operas, you’re out of the will. Now you’re out of the 529 plan too.

Bruce: That’s right. Exactly. Exactly.

Jon: Okay. I know you mentioned the Secure Act 2.0, Bruce, and some of the changes that have gone into effect recently. How do they affect 529 plans beginning in 2024?

Bruce: Jon, this is a big topic right now. This garnered a lot of attention in the news media when this new Secure Act 2.0 came out. Beginning for 2024, your 529 could potentially be rolled over to a Roth IRA up to $35,000 for the benefit of the beneficiary.

Jon: Wow.

Bruce: Here’s some limitations. It’s a per-beneficiary lifetime maximum, that 35,000. If your grandparents on your side have a 529 for the grandchild and the ones on the other side, they can only do one lifetime rollover. The 529 must have been open for 15 years, and we’re still getting regulations on this, so it’s unclear if a new waiting period begins when there’s a change in beneficiaries. You want to pay attention, folks. You want to keep clued into these changes.

Rollovers cannot include contributions within the last five years. The account has to be sitting, just growing over the last five years without contributions. Rollovers are going to be subject to the annual IRA contribution limit. That means if you have a 529, and it’s around 30,000, you can’t convert the whole thing or roll it over in one year. You can only roll over the annual contribution amount, which is like 6,500 this year, so you have to roll it over over a number of years. Then the beneficiary needs to have earned income. It’s like an IRA, if you think of it that way. They have to have earned income to be able to roll it into this Roth IRA.

Jon: I’m really glad we covered these 529 plans today, Bruce, because they really are more versatile than I think most people understand because of all these different details that we’ve talked about today. To my point earlier, a lot of people are choosing new different things after high school, whether it’s a trade school, they want to do more of a traditional blue-collar work as opposed to a four-year college, things like that. These are so versatile and can be used in so many different ways and moved around in so many ways as we’ve been talking about.

If one of our listeners has questions for you or your team at Hosler Wealth Management about 529s or really anything related to their financial future, how do they best contact you? Bruce: They can reach out to us at the website, Jon, at https://hoslerwm.com. They can reach us on the phone in Scottsdale at 480-994-7342 or in Prescott at 928-778-7666. These 529s are great vehicles. If you have questions about them, we have a lot of information to share with you on those. I hope you’ll reach out to us.

Jon: Today was just the tip of the iceberg. Great stuff as always, Bruce. We’ll talk again soon.

Bruce: Thanks, Jon.

Jon:  Securities and advisory services offered through Commonwealth Financial Network® member FINRA/SIPC, a registered investment advisor. Forward looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

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