How a 529 Plan Can Become Retirement Income Thanks to Secure 2.0

A 529 plan, traditionally known as a tax-advantaged savings plan for education expenses, can now serve as an additional source of retirement income thanks to the Secure 2.0 updates that went into effect this year.

If you’ve read any of my articles, you know I am all about buffer assets. I think of buffer assets as tax-free sources of income that people use when their nest egg (retirement accounts, market holdings, etc) are in flux and, therefore, shouldn’t be touched. A 529 never fell into this category, but now it does.?

Now, that’s not to say I am suggesting opening a 529 for any reason other than to pay for education. Rather, this investment vehicle now allows unused funds to be rolled into a ROTH account, making it a safe and tax-efficient buffer asset.

What is a Buffer Asset?

When it’s unwise to sell a stock or take a taxed distribution of some other sort, people go to their buffer asset for cash. These can be any number of things. Lately, people have taken advantage of the rising interest rates with high-yield savings accounts, for example.?

Another type of buffer asset is the HSA - many people know they can max out their HSAs and invest what they save rather than spend it. The compounding interest in that account keeps growing, and you can withdraw from it tax-free down the road so long as you keep your medical invoices and pharmacy receipts.

Overfunding your life insurance also serves as a buffer asset. This is one of my areas of expertise, and I’m always happy to answer questions about how life insurance is used a retirement savings vehicle , so please don’t hesitate to reach out: [email protected]

How Can a 529 Provide Retirement Income?

While most people associate 529 plans with funding college tuition and expenses, many parents opt out of funding 529s because - well - what if your kid doesn’t go to college??

As of 2024, much has changed. 529s are now more enticing for a few main reasons:

• First and foremost, people can roll up to $35,000 (lifetime) over from a 529 into a ROTH retirement account.?
• Unused 529 assets can be assigned to a new beneficiary (another child or even yourself), making them a safe investment no matter what your child’s future holds.
• If your child earns a tax-free scholarship, you can take an equivalent out of the 529 without penalty.

If you aren’t familiar with the long-standing benefits of a 529 plan, here is more information about how 529s can be used as a buffer asset:

Tax-Deferred Growth & Tax-Free? Withdrawals

Like retirement accounts such as IRAs and 401(k)s, 529 plans offer tax-deferred growth on earnings. The tax-free withdrawals are a huge key to their value; these withdrawals can only be made tax-free if they are for qualified expenses. Now, there are more qualified expenses beyond educational uses and may include costs related to starting a business, purchasing a first home, and paying for medical expenses. By strategically using 529 plan funds for these retirement expenses, investors can avoid paying taxes on their withdrawals.

Flexibility in Beneficiary Designation

One key advantage of 529 plans is their flexibility in beneficiary designation. If the original beneficiary of the plan does not use all of the funds for education expenses, the account owner can change the beneficiary to another family member, including themselves. This means that investors can use 529 plan funds to cover their retirement expenses if needed, providing an additional source of tax-free income.

Estate Planning Benefits

Contributions to a 529 plan are considered gifts for tax purposes and may qualify for the annual gift tax exclusion. Additionally, 529 plans offer estate planning benefits, allowing account owners to reduce their taxable estate by contributing to the plan. By leveraging the estate planning benefits of a 529 plan, investors can pass on their wealth to future generations while minimizing tax liabilities.

Investment Options and Control

Most 529 plans offer a range of investment options, allowing investors to choose the investment strategy that best suits their financial goals and risk tolerance. With control over how funds are invested, investors can tailor their 529 plan portfolio to generate income during retirement while managing risk.

Conclusion

The 529 now offers even more unique tax advantages and flexibility, making it a valuable tool for retirement planning.?

By maximizing the tax benefits of a 529 plan and strategically incorporating it into their retirement strategy, investors can create another reliable source of tax-free income to support their retirement lifestyle when their primary sources of income should not be touched.?

As always, I recommend speaking directly with your CPAs and financial advisors when considering any additions or changes to your investment strategies.