Attention financial enthusiasts: The Secure 2.0 Act

[Dr. Anonymouss]

The SECURE 2.0 Act was passed into law in 2022, but takes effect as of 2024. This act allows funds from a 529 account to be transferred TAX-FREE to a Roth IRA for the beneficiary of the 529 account. This essentially allows you to kickstart a beneficiary’s Roth IRA savings in addition to the educational spending benefits that you get from a 529 plan.

Important to know for those who aren't familiar with 529 plans is that the money contributed is post-tax, so for many of us this will incur a high tax rate. I think you can essentially compare this to a Roth IRA, but on steroids.... The reason I say this is because with a normal Roth IRA you are contributing your post tax dollars with the plan to use them during retirement where you hope your marginal tax rate will be higher than the marginal tax rate you had during your working years. For the majority of us this just won't happen. In regards to the 529 plan, the intention is to use this plan DURING your working years while you still have a high marginal tax rate. The benefit though is that any capital gains made from investments within the 529 plan will be tax-free if used for educational expenses or for Roth IRA conversions.

There is still a lot that is unknown about the specific regulations regarding this process because the IRS has yet to release clarifications, but here is what is currently known:

• The 529 account must have been open for at least 15 years.
• The beneficiary of the 529 account and the owner of the Roth IRA must be the same person.
• The amount of the rollover is limited:
  • Annual rollovers are subject to applicable Roth IRA contribution limits.
  • Rollover amounts from all 529 plan accounts may not exceed $35,000.
  • Rollovers may not exceed the amount contributed to the 529 account (and related earnings) before the five-year period prior to the rollover.

To be honest, the biggest clarifications that are needed is:
1.) Does the 529 account need to be in the beneficiary's name for 15 year or does the account only need to be open for 15 years?
2.) Does the 35,000 Roth conversion limit apply for multiple beneficiaries? I.e. Can you roll over 35,000 into multiple children's accounts using the same 529 plan or will you need multiple 529 plans to do this.

It's impossible to go through all the different scenarios of how to best approach this and benefit from this, but needless to say there is a lot of benefit that can come from this. If the worst case scenario happened where you needed a 529 account in the beneficiary's name for 15 years then you would be able to kickstart your child's Roth IRA account at age when they turn 15 years old while ultimately maxing out the lifetime 529 to Roth IRA conversion when they turn 20. You have just set them up to retire with 2-3 million dollars TAX-FREE when they turn 60 due to the fact that the 35,000 dollars you invested for them has the ability to compound in the market for 45 years. We won't go into details about how much spending power that money will actually have in 60 years due to inflation, but needless to say it will provide them with a comfortable retirement all because you were financially savvy and planned ahead.

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[chessknt]

35k is a game changer huh? I'm pretty sure this board thinks you need 10 million minimum to retire....

What returns are you figuring to 85x that 35k exactly?

 

[Dr. Anonymouss]

35k is a game changer huh? I'm pretty sure this board thinks you need 10 million minimum to retire....

What returns are you figuring to 85x that 35k exactly?

35k turning into millions of dollars is a game changer? This is a kick starter for your children’s retirement, but it also benefits you via savings. Hopefully they will have additional retirement funds of their own, but you've given them a pretty great head start over the rest of Americans I promise you that. And it would be awesome if everyone had 10 million dollars to retire, but that’s just not factual. Even when referring to physicians there are only a minority that retire with 10 million in retirement funds.

And to answer your second question, it’s 10%. This is the average return for the S&P500 over the last 67 years, obviously not adjusted for inflation. It’s really not that crazy to understand that time and compounding growth lead to astronomical returns. Find yourself a low cost index fund that tracks the S&P and forget the rest.

 

[chessknt]

35k turning into millions of dollars is a game changer? This also isn’t for the benefit of yourself it is a kick starter for your children’s retirement. Hopefully they will have additional retirement funds of their own.

And to answer your second question, it’s 10%. This is the average return for the S&P500 over the last 67 years, obviously not adjusted for inflation. It’s really not that crazy to understand that time and compounding results in astronomical returns.

It's a one time 35k contribution seems pretty weak sauce to me. Game changer seems pretty clickbait--its a nice bone to throw high income people who have 529s but this is not some major paradigm changing premise for retirement savings.

 

[UscGhost]

The SECURE 2.0 Act was passed into law in 2022, but takes effect as of 2024. This act allows funds from a 529 account to be transferred TAX-FREE to a Roth IRA for the beneficiary of the 529 account. This essentially allows you to kickstart a beneficiary’s Roth IRA savings in addition to the educational spending benefits that you get from a 529 plan.

Important to know for those who aren't familiar with 529 plans is that the money contributed is post-tax, so for many of us this will incur a high tax rate. I think you can essentially compare this to a Roth IRA, but on steroids.... The reason I say this is because with a normal Roth IRA you are contributing your post tax dollars with the plan to use them during retirement where you hope your marginal tax rate will be higher than the marginal tax rate you had during your working years. For the majority of us this just won't happen. In regards to the 529 plan, the intention is to use this plan DURING your working years while you still have a high marginal tax rate. The benefit though is that any capital gains made from investments within the 529 plan will be tax-free if used for educational expenses or for Roth IRA conversions.

There is still a lot that is unknown about the specific regulations regarding this process because the IRS has yet to release clarifications, but here is what is currently known:

• The 529 account must have been open for at least 15 years.
• The beneficiary of the 529 account and the owner of the Roth IRA must be the same person.
• The amount of the rollover is limited:
  • Annual rollovers are subject to applicable Roth IRA contribution limits.
  • Rollover amounts from all 529 plan accounts may not exceed $35,000.
  • Rollovers may not exceed the amount contributed to the 529 account (and related earnings) before the five-year period prior to the rollover.

To be honest, the biggest clarifications that are needed is:
1.) Does the 529 account need to be in the beneficiary's name for 15 year or does the account only need to be open for 15 years?
2.) Does the 35,000 Roth conversion limit apply for multiple beneficiaries? I.e. Can you roll over 35,000 into multiple children's accounts using the same 529 plan or will you need multiple 529 plans to do this.

It's impossible to go through all the different scenarios of how to best approach this and benefit from this, but needless to say there is a lot of benefit that can come from this. If the worst case scenario happened where you needed a 529 account in the beneficiary's name for 15 years then you would be able to kickstart your child's Roth IRA account at age when they turn 15 years old while ultimately maxing out the lifetime 529 to Roth IRA conversion when they turn 20. You have just set them up to retire with 2-3 million dollars TAX-FREE when they turn 60 due to the fact that the 35,000 dollars you invested for them has the ability to compound in the market for 45 years. We won't go into details about how much spending power that money will actually have in 60 years due to inflation, but needless to say it will provide them with a comfortable retirement all because you were financially savvy and planned ahead.

Not a game changer.

But a nice useful change if you have unused 529 plan funds

 

[Dr. Anonymouss]

It's a one time 35k contribution seems pretty weak sauce to me. Game changer seems pretty clickbait--its a nice bone to throw high income people who have 529s but this is not some major paradigm changing premise for retirement savings.

It’s a game changer for 529 plans, which aren’t designed for you they are designed for your children. And it is a game changer because it adds another massive advantage to tax sheltering.

Okay let’s go through some math here.

You are in residency and you open two 529 accounts. Your salary is 60k a year. Let’s assume you’re single just to make it more simple. The tax rate would be 22%. You’re thrifty and save 4,000 a year splitting it up in both of your 529 accounts. You do anesthesia and at the end of your residency you have contributed 8,000 dollars to each of your accounts, but your current balance in both accounts should be about 9,750 if you are smart and chose a low cost index fund that tracks the S&P500. You have twins right after residency (once again, to make all of this more simple). You name each of them as the beneficiary of the 529 plan. You decide you’ve contributed enough to the 529 plan and no longer want to put any more money into it. You’ll just let time and compounding growth take over from here. When both of these children turn 15 then each account would have 42,409 dollars, enough for you to fully fund their Roth IRAs over the next 5 years maxing out the 35k contribution.

During residency you paid a total of 3,520 dollars in taxes to invest the 16,000 dollars. Now 15 years later you have about 85,000 dollars (42,400) in each of your 529 account's.

So you’ve essentially spent 19,520 on this investment.

If you decided not to do any of this and just fund your children’s Roth IRA accounts yourself when they turn 15 then you’re paying your physician salary tax rate to fund it. Let’s say you are in the 35% marginal tax rate bracket. At 7,000 contribution limit a year this equates to 2,450 in taxes. In other words, this investment costs you 9,450 a year per child. After 5 years, when you hit the 35,000 investment (assuming contribution limits don’t change to make things simple) then you would have invested a total of 94,500 to do the same thing that cost you 19,520.

Everyone has different concepts of money. Maybe to you 75k is something you won’t bat an eye to, or maybe you just enjoy paying the government taxes, but on the other hand I want to keep the money I earn and I can think of lot of things I can do with 75,000 dollars

 

[Dr. Anonymouss]

Okay guys, I’ll redact the game changer if that makes you all happy. Just realize that this has a very useful benefit. Although as I’ve pointed out, it could be a game changer in the sense that funding a 529 durring residency equates to massive savings down the road.

 

[abolt18]

The SECURE 2.0 Act was passed into law in 2022, but takes effect as of 2024. This act allows funds from a 529 account to be transferred TAX-FREE to a Roth IRA for the beneficiary of the 529 account. This essentially allows you to kickstart a beneficiary’s Roth IRA savings in addition to the educational spending benefits that you get from a 529 plan.

Important to know for those who aren't familiar with 529 plans is that the money contributed is post-tax, so for many of us this will incur a high tax rate. I think you can essentially compare this to a Roth IRA, but on steroids.... The reason I say this is because with a normal Roth IRA you are contributing your post tax dollars with the plan to use them during retirement where you hope your marginal tax rate will be higher than the marginal tax rate you had during your working years. For the majority of us this just won't happen. In regards to the 529 plan, the intention is to use this plan DURING your working years while you still have a high marginal tax rate. The benefit though is that any capital gains made from investments within the 529 plan will be tax-free if used for educational expenses or for Roth IRA conversions.

There is still a lot that is unknown about the specific regulations regarding this process because the IRS has yet to release clarifications, but here is what is currently known:

• The 529 account must have been open for at least 15 years.
• The beneficiary of the 529 account and the owner of the Roth IRA must be the same person.
• The amount of the rollover is limited:
  • Annual rollovers are subject to applicable Roth IRA contribution limits.
  • Rollover amounts from all 529 plan accounts may not exceed $35,000.
  • Rollovers may not exceed the amount contributed to the 529 account (and related earnings) before the five-year period prior to the rollover.

To be honest, the biggest clarifications that are needed is:
1.) Does the 529 account need to be in the beneficiary's name for 15 year or does the account only need to be open for 15 years?
2.) Does the 35,000 Roth conversion limit apply for multiple beneficiaries? I.e. Can you roll over 35,000 into multiple children's accounts using the same 529 plan or will you need multiple 529 plans to do this.

It's impossible to go through all the different scenarios of how to best approach this and benefit from this, but needless to say there is a lot of benefit that can come from this. If the worst case scenario happened where you needed a 529 account in the beneficiary's name for 15 years then you would be able to kickstart your child's Roth IRA account at age when they turn 15 years old while ultimately maxing out the lifetime 529 to Roth IRA conversion when they turn 20. You have just set them up to retire with 2-3 million dollars TAX-FREE when they turn 60 due to the fact that the 35,000 dollars you invested for them has the ability to compound in the market for 45 years. We won't go into details about how much spending power that money will actually have in 60 years due to inflation, but needless to say it will provide them with a comfortable retirement all because you were financially savvy and planned ahead.

White coat investor podcast today talked about this.

Also, I believe the $35K is divided up into several years.

 

[Dr. Anonymouss]

White coat investor podcast today talked about this.

Also, I believe the $35K is divided up into several years.

It is. The contribution limit follows standard IRA contribution limits. This is why I used the example of funding your child’s Roth from age 15-20, essentially 7,000 dollars a year.

 

[Timeoutofmind]

I believe the child needs earned income in the amount that you are converting to a Roth IRA from the 529 each year.

In which case, once they start making some income with their first high school or college job, rather than converting their 529 into a Roth IRA, I would probably just take my own money and put it in a Roth IRA in their name (they can keep the actual money they made, and spend or save it) to match their amount of earned income for that year…And continue to use the 529 for educational expenses.

So really the main benefit of this is if you have extra unused 529 funds, it seems to me…

 

[Dr. Anonymouss]

I believe the child needs earned income in the amount that you are converting to a Roth IRA from the 529 each year.

In which case, once they start making some income with their first high school or college job, rather than converting their 529 into a Roth IRA, I would probably just take my own money and put it in a Roth IRA in their name (they can keep the actual money they made, and spend or save it) to match their amount of earned income for that year…And continue to use the 529 for educational expenses.

So really the main benefit of this is if you have extra unused 529 funds, it seems to me…

You’re correct they do need earned income. That’s why I used age 15 as the example. And what you said is correct, they don’t need to spend their own money to fund the account. anyone can fund it, it just can’t be more than the income they earned for the year.


I don’t know your situation so it’s hard for me to comment on the specifics, wether you already have kids and their ages or if you are just planning ahead. Using the example I made earlier, why would you fund the account with 7,000 a year + 2,450 in taxes (47,250 over 5 years) when you could spend 9,760 to do the exact same thing.

Yes, you are using funds from the 529 to fund the Roth, but as you can see there are substantial savings if you choose to do this. If you want to use the 529 to pay for educational costs then all you have to do is factor that in when deciding on how much you plan to contribute to the 529. You don’t only need to save money with educational costs via a 529, you can also save money by helping your children invest for retirement. What I’m trying to say is that there are now more ways you can use this 529 to help you save money.

 

[CubsDynasty]

Another change with SECURE 2.0 is that 1099s can now have your employer contribution go into a Roth 401k. Whether this is the right choice financially is another discussion and you need to do the math to see whether this makes sense in your situation but you can now put in 69k into a Roth 401k annually.

 

[aneftp]

I was excited when I first heard about the leftover 529 money can be rolled into Roth. But it’s way too limiting.

In a way. It’s just as bad as the Roth (backdoor) $6500 a year? People super excited about that. Meh is what I tell them. That barely adds up to 200k over ur lifetime. Plus growth. Maybe lucky to get to 1.5 million? That 1.5 million will be so devalued like airline miles in 30 years

The 1980s/early 1990s 100k salary was a big thing.

Fast forward 30 years. 100k salary really means nothing. It’s 300-400k salary equivalent in todays money.

 

[aneftp]

Not a game changer.

But a nice useful change if you have unused 529 plan funds

The 529 has changed a lot over the years but most of the people I know with leftover money just pass it to their nephews or nieces etc when their kids done with school.

My sibling still has a 600k war chest in 529 accounts combined for both adult college/med school kids. One is currently in med school. And the other may go to grad school. So my sibling probably will still have 200-300k leftover over in 529 funds.

But it’s also about timing. Those who sent kids to college around 2008-2010 didn’t have time to recover from financial losses in 529 and used the 529 money to pay for college.

 

[Timeoutofmind]

You’re correct they do need earned income. That’s why I used age 15 as the example. And what you said is correct, they don’t need to spend their own money to fund the account. anyone can fund it, it just can’t be more than the income they earned for the year.


I don’t know your situation so it’s hard for me to comment on the specifics, wether you already have kids and their ages or if you are just planning ahead. Using the example I made earlier, why would you fund the account with 7,000 a year + 2,450 in taxes (47,250 over 5 years) when you could spend 9,760 to do the exact same thing.

Yes, you are using funds from the 529 to fund the Roth, but as you can see there are substantial savings if you choose to do this. If you want to use the 529 to pay for educational costs then all you have to do is factor that in when deciding on how much you plan to contribute to the 529. You don’t only need to save money with educational costs via a 529, you can also save money by helping your children invest for retirement. What I’m trying to say is that there are now more ways you can use this 529 to help you save money.

I am currently funding a 529, so either way, the money is going to be there when my daughter gets to college.

So the real decision point is at that time whether I match her earned income with a 529 to Roth conversion… or whether I directly match her earned income in a Roth retirement account.

If you put it directly in a retirement account, the 35K will double three or four times before she retires. So, you will come out ahead with the later option

(This all assumes you don’t need the 35K to be able to afford her school)

 

[Dr. Anonymouss]

“If you put it directly in a retirement account, the 35K will double three or four times before she retires. So, you will come out ahead with the later option”

I did not understand what you meant by this. I think there is some confusion somewhere. You’re putting money into her Roth retirement account with both options. The question is where do you want to get the money to fund it. In one option you have the 529 plan. In the second option you have a simple ol’ direct deposit. In both cases you’re using post tax dollars, but the 529 plan will still provide greater benefit than a direct deposit because of tax-free growth. If you invest into the 529 plan early then you have time to let that money grow in the stock market. You can then use not only your initial contributions, but also all of the capital gains you have made tax free to fund the Roth IRA. Thats why I was saying it really is a no brainer to “overfund” her 529 plan now and then use the gains to pay for the Roth in the future. And there is absolutely no reason why it has to be a “school” or “Roth” type of situation, you can do both! It will take some estimation on your part to determine how much you expect the final cost to be, but then you can plan accordingly when determining your contributions and the expected returns you will get when it’s time to finally use that money.

 

[Timeoutofmind]

I did not understand what you meant by this. I think there is some confusion somewhere. You’re putting money into her Roth retirement account with both options. The question is where do you want to get the money to fund it. In one option you have the 529 plan. In the second option you have a simple ol’ direct deposit. In both cases you’re using post tax dollars, but the 529 plan will still provide greater benefit than a direct deposit because of tax-free growth. If you invest into the 529 plan early then you have time to let that money grow in the stock market. You can then use not only your initial contributions, but also all of the capital gains you have made tax free to fund the Roth IRA. Thats why I was saying it really is a no brainer to “overfund” her 529 plan now and then use the gains to pay for the Roth in the future. And there is absolutely no reason why it has to be a “school” or “Roth” type of situation, you can do both! It will take some estimation on your part to determine how much you expect the final cost to be, but then you can plan accordingly when determining your contributions and the expected returns you will get when it’s time to finally use that money.

Good point. Thanks for clearing that up for me!

Agree that the best scenario is to overfunded the 529 by 35K and do the Roth conversion

(But if you have not managed to over fund the 529 going into the college years… Then the best scenario is to use all the 529 funds for college expenses, and “direct deposit” into their Roth IRA to match their earned income.)

 

[Dr. Anonymouss]

Good point. Thanks for clearing that up for me!

Agree that the best scenario is to overfunded the 529 by 35K and do the Roth conversion

(But if you have not managed to over fund the 529 going into the college years… Then the best scenario is to use all the 529 funds for college expenses, and “direct deposit” into their Roth IRA to match their earned income.)

Yes correct! If your child is already going into college then overfunding your 529 now would really be of no benefit. Sadly that ship has sailed and you’ll just need to contribute directly to her Roth.

And just to clarify when I said overfund your 529, it’s all dependent on time. If you started early enough you would not need to overfund the 529 by 35k. If you’re in the process of planning a child then you would only need about 8,000 to fully fund their 35k Roth at age 15. The longer you wait the more you will ultimately have to contribute because the growth of your funds won’t be as much.

 

[anonperson]

I was excited when I first heard about the leftover 529 money can be rolled into Roth. But it’s way too limiting.

In a way. It’s just as bad as the Roth (backdoor) $6500 a year? People super excited about that. Meh is what I tell them. That barely adds up to 200k over ur lifetime. Plus growth. Maybe lucky to get to 1.5 million? That 1.5 million will be so devalued like airline miles in 30 years

The 1980s/early 1990s 100k salary was a big thing.

Fast forward 30 years. 100k salary really means nothing. It’s 300-400k salary equivalent in todays money.

I wish I was rich enough where $1.5 million was no big deal

 

[Dr. Anonymouss]

I was excited when I first heard about the leftover 529 money can be rolled into Roth. But it’s way too limiting.

In a way. It’s just as bad as the Roth (backdoor) $6500 a year? People super excited about that. Meh is what I tell them. That barely adds up to 200k over ur lifetime. Plus growth. Maybe lucky to get to 1.5 million? That 1.5 million will be so devalued like airline miles in 30 years

The 1980s/early 1990s 100k salary was a big thing.

Fast forward 30 years. 100k salary really means nothing. It’s 300-400k salary equivalent in todays money.

I somehow missed this response. Im not quite sure how you can say that the Roth isn’t amazing. Do I wish the cap was higher? Sure, of course…. But with strategic planning you can develop a massive retirement savings with it. As I’ve said time and time again through this post the key factor is TIME. If your parents started you a Roth at age 15, maxing it out every year, and investing those funds in a low cost index fund that tracks the S&P500 then you’d have about 5 million dollars tax free at age 60. This also assumes the contribution limit of 7,000 doesn’t change (which we all know it does and it will with inflation). So in reality, the return would be greater than 5 million. If you start maxing out the Roth at age 30 then it would only be about 1.2 million. So as you can see, the key here is time. We may not be able to reap the same benefit as our children with the Roth, but we can put them in a far greater financial situation than we are in by following this simple financial plan. This doesnt take anything fancy to do. Make your young kids get a summer job for the sole purpose of being able to fund their Roth.

 

[aneftp]

I somehow missed this response. Im not quite sure how you can say that the Roth isn’t amazing. Do I wish the cap was higher? Sure, of course…. But with strategic planning you can develop a massive retirement savings with it. As I’ve said time and time again through this post the key factor is TIME. If your parents started you a Roth at age 15, maxing it out every year, and investing those funds in a low cost index fund that tracks the S&P500 then you’d have about 5 million dollars tax free at age 60. This also assumes the contribution limit of 7,000 doesn’t change (which we all know it does and it will with inflation). So in reality, the return would be greater than 5 million. If you start maxing out the Roth at age 30 then it would only be about 1.2 million. So as you can see, the key here is time. We may not be able to reap the same benefit as our children with the Roth, but we can put them in a far greater financial situation than we are in by following this simple financial plan. This doesnt take anything fancy to do. Make your young kids get a summer job for the sole purpose of being able to fund their Roth.

I love roths! I’m just playing antagonistic character with my responses. It’s a back handed response to other posts in related matters with pretax retirement vs Roth 403b/401k/457b options.

As in life. A little of everything is the answer. Mix in some pretax , some post tax, some taxable accounts in your life so not to have too much restrictions on accessing the money you need in your life. As well as figuring how much to live your love ones when you die

 

[aneftp]

I wish I was rich enough where $1.5 million was no big deal

It’s inflation. 1.5 million is a big deal now. But it won’t be in 20 years. (For us anesthesiologists /similar income range). Remember 25 years ago. Partnership money was around 500-600k for the 90% of the most lucrative anesthesia private practices and those docs were working 60 plus hours each week with maybe 5-6 weeks off total a 4/5 calls in house.

Now the young grads won’t take a job for less than 450k with 8 weeks off and that assumes they only work 40 hours with no calls and no weekends

That number keeps shifting due to the cost of living standards.

 

[triggermaster]

I love roths! I’m just playing antagonistic character with my responses. It’s a back handed response to other posts in related matters with pretax retirement vs Roth 403b/401k/457b options.

As in life. A little of everything is the answer. Mix in some pretax , some post tax, some taxable accounts in your life so not to have too much restrictions on accessing the money you need in your life. As well as figuring how much to live your love ones when you die

Roth’s are great. All this talk is mostly just saying that giving your kids more money is better, giving it earlier is better, and giving it for longer ( aka giving more) is better.

Hopefully they’ll change this program to allow a one-time conversion of 35k separate from the yearly contribution maximum. As is, once your kid makes more than the maximum income to qualify for a Roth, you won’t be able to use this option.

Where do they say ‘antagonistic character’ instead of ‘devil’s advocate’? Is that google translate? That would be funny.

 

[pgg]

Side note -

Funding your kids' Roths, even into adulthood, is a great tax efficient mechanism for intergenerational wealth transfer. A lot of you guys targeting wacky eight figure sums you "need" to retire also mention wanting to leave money to your kids. If that's a goal it's probably not best to wait until you die.

 

[Dr. Anonymouss]

Side note -

Funding your kids' Roths, even into adulthood, is a great tax efficient mechanism for intergenerational wealth transfer. A lot of you guys targeting wacky eight figure sums you "need" to retire also mention wanting to leave money to your kids. If that's a goal it's probably not best to wait until you die.

Very true. I plan to fund my children's Roth from the earliest ages possible until they are able to take over the payments themselves. This will likely be age 15 when I make them get a job, but if I can think of a way to get them earned income before 15 then I’ll be pursuing that. We all need a dentist friend with a private practice who is looking for “models” lol.