Trying to save for retirement and college is a challenge.  There have been some changes in 2024 that make your life easier and give you and your adult children or grandchildren more beneficial options.

  • 529 plan balances can be rolled into Roth IRAs for the beneficiary, which means account holders don’t have to worry as much about dollars being left on the table if unused.
  • A parent’s retirement contributions will no longer be considered income on the federal form used to determine financial aid for their children.
  • An employer 401(k), 403(b) or Simple IRA plan can offer a match for an employee’s student loan payments.

Before you get too excited, the infrastructure of retirement plan providers is not available yet. Some recordkeepers have put pilot programs into their systems, but in reality, most employers are not going to be able to offer this until 2025 or later. They need time to set this up.

Those wanting to roll 529 plans over to Roth IRAs will also have to deal with some quirks. The 529 account has to been open for 15 years, and the assets in the account for at least five years. In addition, the rollovers must be in line with regular Roth contribution limits, and there is a $35,000 lifetime max. In this case, the Roth owner does not have to show income, and if the account owner – usually a parent or grandparent – has other 529 plans for other children, so there is even more flexibility. There is less concern for overfunding your 529 plans.

If overfunding does happen, parents can shift their 529 plan savings from one beneficiary to another, as long as the beneficiaries are within the same generational bloodline. A grandparent with several grandchildren can shift those dollars within the plans without any tax impact.

On the FAFSA form, a parent’s retirement contributions are not counted as income when they are applying for financial aid. This change allows parents to max out their retirement contributions and lower their income at the same time, potentially allowing their child to quality for a more favorable financial aid package. The catch here is that this only applies to FAFSA; some colleges have their own CSS Profile and do not use FAFSA.

All of this give us more flexibility in planning retirement and college for our clients, but we still need to keep a holistic approach. A parent should start saving money for their child when they are born. You should start planning before your child reaches 8th grade. We look at the grandparents’ 529 plan contributions, gifting and estate planning strategies, parents’ 529 contributions, and retirement savings.  We want to position the child for the best financial aid package and not compromise the parent’s retirement.

These are some big changes; however, keep in mind that we encourage our clients to save for retirement first. Their kids do not want their parents to live with them when they retire!

 

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors.. Before investing in any state’s 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.