Benefits of a Roth IRA
- Roth IRAs are NOT included as an asset on the FAFSA (Free Application for Student Aid) form. Most other assets, including the amount in 529 plans, are included when calculating your EFC (expected financial contribution).
- Roth IRAs are more flexible. You can earmark as much or little as you want for higher education expenses, but those funds DON’T NEED to be used for qualifying education expenses. With a 529 plan, if you don’t use those funds for higher education, you will owe income taxes on the gains and the 10% penalty on distributions.
- Roth IRAs may provide the same tax-free treatment for distributions. If you are over age 591/2at the time you take distributions from your Roth IRA and you’ve had any Roth IRA for five years or longer, then anything you take out of your Roth IRA will be tax and penalty free. Even if you aren’t age 591/2at the time education-related expenses must be paid, you can still utilize Roth IRA contributions tax and penalty free.
Benefits of a 529 Plan
- 529 plans benefit from special tax breaks. As long as 529plan distributions are used to pay qualified education expenses, distributions are 100% tax free (in some states, you may also be entitled to a state income tax deduction). Note that with the 2018 changes to the tax law, 529 distributions can now also be used for private K-12 educational expenses.
- A 529 plan comes without income restrictions on who can contribute (unlike a Roth IRA’s earned income requirement). There are no federal contribution dollar limits and while individual state limits vary, those limits are much higher than the tax-year Roth IRA contribution limits.
- Unused funds in a 529 plan can be rolled over to a Roth IRA for the beneficiary of the 529 plan. Restrictions do apply. You are limited to $35,000 total. Other restrictions include contributions being limited to the annual Roth IRA contribution limit and taxable compensation being required.
1. IRA-to-IRA Rollovers and Roth IRA-to-Roth IRA Rollovers
Who is a spouse beneficiary? A spouse beneficiary must be married to the account owner at the time of the account owner's death, and he or she must be named on the beneficiary form (or inherit directly through the document default provisions). A spouse beneficiary has a number of unique options.
What does the basic process entail? An income tax refund can be directly deposited to an IRA up to the annual contribution limit. The contribution limit is $7,000 ($8,000 if age 50 or over) for 2025 and $7,500 ($8,600 if age 50 or over) for 2026. It can also be split among multiple accounts.
Avoiding Mistakes in a Divorce Retirement accounts and divorce. When a divorce occurs, the financial assets of a couple, including their retirement accounts, are often split. If mistakes are made during this process, the stress of a divorce can be compounded when one or both spouses find that they are subject to unnecessary taxes or penalties.
Choosing the Right Financial Advisor Why do you need a financial advisor? Today’s financial landscape is as complicated as ever. A good financial advisor can help you navigate this complexity so that you can make educated, informed decisions on what is best for you and your family.
Why do you need a tax professional? Managing taxes during retirement will be the single most important factor in determining your ultimate lifestyle. In addition to a financial planner and estate planning attorney, a qualified tax professional is an integral part of any planning team.
New Rules Are Here. On July 18, 2024, the IRS issued both final regulations under the 2020 SECURE Act and proposed regulations under the SECURE 2.0 Act of 2022. These long-awaited new regulations impact many parts of the required minimum distribution (RMD) rules for retirement accounts. The final regulations are effective for 2026, and the proposed regulations can be used immediately as guidance. Here are the highlights:
What is considered investment income? Investment Income: Interest, dividends, capital gains (long and short), annuities (not those in IRAs or company plans), royalty income, passive rental income, other passive activity income. NOT Investment Income: Wages and self-employment income, active trade/business income, distributions from IRAs, Roth IRAs and employer plans, excluded gain from the sale of a principal residence, municipal bond interest, proceeds of life insurance policies, veterans’ benefits, Social Security benefits, gains on the sale of an active interest in a partnership or S corporation.
What is a 60-day rollover? What is a 60-day rollover? A 60-day rollover is the distribution of funds from a qualifying retirement account payable to the account owner who then has 60 days to redeposit the funds into another qualifying retirement account.
You’ve probably heard the saying, “There’s no such thing as a bad question.” But in retirement planning, the way you frame your question often determines the quality of your answer. In this episode, we’ll share some common retirement questions, and how a simple reframing might lead to a more useful answer.
