Ownership and Beneficiary Strategies – Inside Indiana Business

Recently we have seen notable changes related to 529 plans. These changes relate to the designation or change of account holder and beneficiary. But now a 529 plan can help fund Roth IRAs! This means it’s more important than ever to understand the implications of naming a 529 plan.

Why should I change hands?

The Department of Education is working to implement several changes to the FAFSA, most of which will begin with the 2024-2025 school year.

One of the more significant changes relates to 529 plans owned by grandparents. Previously, qualifying distributions from these accounts counted as income for the student with the FAFSA, which is significant as student income can reduce eligibility by up to half of the distribution amount. With the new changes, this will no longer be the case. This makes grandparent-owned 529 plans more attractive as the asset is also not reported to the FAFSA.

On the other hand, we have 529 plans owned by parents. While distributions from these accounts do not count as income with the FAFSA, up to 5.64% of assets are reported.

You may be wondering, then why shouldn’t a grandparent own the 529 plan? For many people it will come down to personal preference. The parent may want reassurance that they control the asset. Or the grandparents don’t want to deal with the hassle of managing accounts and coordinating tuition fees. Regardless, consider your options if you have the potential to qualify for federal financial assistance.

Why should I change the beneficiary?

The SECURE Act 2.0 came into effect on December 29, 2022. Although there are many provisions in this bill, the 529 Plan to Roth IRA Transfer from 2024 has attracted a lot of attention.

Note that some conditions must be met for this transfer to occur. To name a few:

  • The 529 plan must have been in existence for at least 15 years
  • Funds must go to a Roth IRA on behalf of the 529 plan beneficiary
  • The annual amount that can be transferred to the Roth IRA from the 529 Plan is the IRA contribution limit for the year less contributions already made
  • The maximum lifetime amount that can be transferred is $35,000 per beneficiary

What if your child didn’t go to college and you want to use some of those funds for your retirement? While experts seem to think that changing the beneficiary to yourself won’t reset the 15-year clock, we still have to await further guidance from Congress.

How would I change ownership?

The vast majority of 529 plans allow for a simple change of ownership. Also, the change of ownership should not trigger any income or transfer taxes. However, you’ll need to double-check with your plan provider to confirm this.

How would I change the beneficiary?

Changing the beneficiary is more complex as there are a few more rules to follow.

The first question is who will be the new beneficiary? If the beneficiary changes to a family member (spouse, child, siblings, niece, nephew, first cousin, etc.), there are no income tax consequences. Suppose the beneficiary is changed to someone who is not a family member. In this case the change will be treated as a distribution subject to income tax and subject to a penalty of 10% on the income.

If you change the beneficiary to a family member, there is another level to consider: the specific generation of the new beneficiary. The answer to this question will determine whether or not the change will trigger transfer taxes, particularly gift taxes and generational skipping transfer taxes. If the family member is of the same generation as the current beneficiary, no transfer taxes apply. If the family member is one or more generations below the current beneficiary, transfer taxes come into play.

Similar to changing ownership, it’s important to discuss the implications of changing beneficiaries with your plan provider.

Changed regulatory environment

The strategies discussed above are based on provisions that are subject to adjustment. Please speak with your financial advisor to determine if changing the owner or beneficiary of your 529 plan is an appropriate strategy for you.

Olivia Maynes, CFP, is the financial planning coordinator at Bedel Financial Consulting, Inc., an Indianapolis-based wealth management firm. For more information, visit their website at www.bedelfinancial.com or email Olivia [email protected].