Transcript:

[00:00:00] Voiceover: Welcome to the Life Unlimited Podcast with Larry Heller. You deserve complete financial advice so you can confidently live your life your way for life. Now let’s get into this week’s podcast episode.

[00:00:18] Matt Halloran: Hello and welcome to another Life Unlimited podcast with your host Larry Heller. Now, I’ve done a lot of shows and Larry and I were just talking about this and we’re gonna talk about something today.

[00:00:27] Matt Halloran: I really don’t know that much about. There have been some rule changes with 529 plans, so we’re gonna dive into 529 plans to a Roth IRA rollover. Larry, I didn’t even know you could do this.

[00:00:39] Larry Heller: Yeah, well this is pretty new and it’s secure 2.0 act. it’s kind of interesting ’cause it’s, it’s meant for one purpose, but there’s a couple other purposes and a couple other ways that you can use this if you, want to.

[00:00:50] Larry Heller: so just to refresh everyone’s memories. And I’m sure people that are tuning in know that a 529 plan is a way to save for, education. Either college or some, uh, uh, at this point, they’re also allowed from other secondary degrees. and you can put money away. The money can grow for you. Tax free and if used for qualified purposes.

[00:01:13] Larry Heller: When you withdraw it, there’s no taxes and there’s no penalties as well. So it’s a great way of saving traditionally for children’s educations. But sometimes people have come, you know, have asked us or we’ve seen, well I don’t wanna [00:01:30] overfund this 529 and be, be stuck with money in this plan. and yes, that is part of the risk that you have, that maybe the count is grown more than what it ends up costing your child to go.

[00:01:46] Larry Heller: To school or maybe they got a partial or a full-time scholarship. Um, and yes, you can keep the 529s, you can transfer it to a certain family member. Or a lot of times we’ve actually had clients that have just said, well just keep it and eventually I’ll transfer this account to my kids and they’ll use it.

[00:02:04] Larry Heller: For their grandkids, which is perfectly, you’re able to do that. however, the government has now addressed that if you do have some money left over, they’ve introduced through Secure 2.0 Act that you’re able to now have the beneficiary roll this money into their. Into a Roth account for them. it comes with a lot of limitations, so we’ll go through some of the limitations and some of the impli implications of them.

[00:02:35] Larry Heller: So, uh, but I think everyone should be aware of this and whether they’re left over with a 529 or if they wanna proactively. Plan for this. So that’s the interesting part, which we’ll get to at the end. That they can actually do some great things for their kids if they want, by actually planning for the actual overfunding to be [00:03:00] used as a rollover for a Roth.

[00:03:02] Larry Heller: So let’s go through the limitations. So key limitations. The 529 plan must be opened and maintained for 15 years. So you can’t just say, oh, I’m gonna put this plan in place and be able to, to do some of this. So, so that’s, you know, key limitation number one. key limitation number two, any funds that are gonna be.

[00:03:24] Larry Heller: Moved into a rollover into a Roth, an IRA Roth rollover had to have been put into the 529. For at least five years ago. So you can’t just put money in the 529 and year one and then a year two, use that as a rollover for a Roth IRA. and then also the rollovers cannot exceed the IRA contribution limit for the year.

[00:03:49] Larry Heller: So for most people that are under. 50 that limit right now is $7,000. So you can’t roll over more than $7,000 in one year. If you are over it 50, you can do 8,000 and the lifetime rollover limit is $35,000. So nothing more than 35,000. But this is per account, per individual child. So if you have multiple children, each one has their own limits.

[00:04:15] Matt Halloran: Alright, I need to pause you, Larry, ’cause because I’m sorry. I just have The question just not get around in my brain. What’s up with these numbers? W why? Why 15 years? Why 35,000? Do you, do you know, I mean, this seems, they seem arbitrary, don’t they? [00:04:30]

[00:04:30] Larry Heller: Well, they’re a little arbitrary, but when we talk through some of the planning rules in here, the reason why they were like this, they didn’t wanna say.

[00:04:38] Larry Heller: Okay. ’cause you can do this for anybody. So if, let’s say somebody for, you’re 25 and somebody wants to just put in $35,000 and the next year roll over 35,000 into a, into a Roth. So they wanted to prevent people from being able to do that and using this. Really as a loophole to fund a Roth IRA for somebody.

[00:05:03] Larry Heller: Got it. So that’s why they put this in place, that they really want it to be geared for people that have done the right planning for college for 15 years and have excess funds. they didn’t want, they did the five year look because they didn’t want people putting it if they had it for 15 years and said, oh, I’m done with college, but you know what, I’ll throw 15, I’ll throw 35,000 in here, and then I’ll use this to help my kids the next, year and just do a Roth.

[00:05:30] Larry Heller: So those are the reasons why they have some of these, time limits in here.

[00:05:35] Matt Halloran: Got it. Alright, so let’s, let’s dive into these, the implications and the limits of these rules, right?

[00:05:40] Larry Heller: Yep. So that’s kind of where we going with the question you just asked. It’s not really, it’s not supposed to be used as a loophole for a large tax free gift.

[00:05:49] Larry Heller: so they’ve limited the usefulness as a planning tool by putting in these rollover conditions. so, and then obviously. Any 529, any excess funds that [00:06:00] are not used for qualified expenses are still subject for taxes and, penalties. Got it. What you can do here is use some of these rules here as a strategic use to do a Roth rollover within the rules.

[00:06:15] Larry Heller: So if you’re okay, you know, if you wanna get some more money outta your name for estate purposes, or you wanna help you beneficiaries, you know, boost their retirement accounts. So not. Just doing this education, but you can also do this to helping them in retirement. And a lot of, and a lot of parents I understand are not going to wanna do this.

[00:06:37] Larry Heller: They’re gonna say, you know what, I’ll help with their college. But you know, the retirement is on their own. But there are plenty of people that may want to do this, or even grandparents that may wanna do this and help fund and help them get off to a start and we’ll. Talk about this later on. I have a kind of interesting little number game here to show you.

[00:06:57] Larry Heller: ’cause saying, eh, why bother? The numbers are so small, but the numbers could actually end up being very large. Okay, so just to go through the key benefits. it provides a solution for OVERFUNDING five 20 nines. it does give you a little bit of a symbolic value to help in both helping you with your children’s education and, a little maybe boost to start for their retirement.

[00:07:23] Larry Heller: there’s, you know, flexibility. For the beneficiaries, and you can do any type of, you know, funding and [00:07:30] any type of in investments within the 529 plan, similar to what you’re doing now. But

[00:07:35] Matt Halloran: before we get into this math thing, okay, hold, hold on. You said something at the top of this section, which is the key benefits, you know, provides, you said it provides a solution for own overfunded five 20 nines.

[00:07:45] Matt Halloran: So when you’re saying overfunded, five 20 nines, you’re saying the, that the money was not. Entirely used for educational purposes. Is that what you’re referring to? For an old funded? Correct. Okay.

[00:07:55] Larry Heller: Correct. So if you have leftover money, got it. That, the 529 grew a lot more than what they ended up using for colleges.

[00:08:04] Larry Heller: So, I mean, that’s kind of one of the reasons why they, they did 35,000, I guess they figured that. You know, it’s a large enough money that’ll make sense, but not too much that if you’re over, you timed it a little bit better. So that’s why it’s lifetime of 35. 35,000. so, but again, you know, if you have multiple children and you went over for one, you can always move this to another 529 and use that for theirs.

[00:08:29] Larry Heller: Of course, there’s. There are some of these limits we talked about. There’s five year limits or some other limits, so, we’ll talk about, that if anybody has any specific questions. Okay.

[00:08:38] Matt Halloran: Alright. Are you ready to do the math?

[00:08:40] Larry Heller: Yeah. So let’s, let’s look at the, cool, let’s look at a cool part about this.

[00:08:44] Larry Heller: So let’s say you were, when we can look at it, two ways we can look at it, where you just funded it. Early and you have money left over, and we’ll talk about, let’s say you’ve just about run out of the money and you’ve timed it perfectly, but you know what, [00:09:00] you can still use this vehicle as a Roth contribution.

[00:09:04] Larry Heller: So, but let’s just start with with fact one. While the kids were young, and I’m saying kids, it can be anybody, but while the kids were one, you funded, you opened up this account 15 years, in the first few years you funded it. And, and, and now the kids have gone to college and they’re outta school and they’re done.

[00:09:25] Larry Heller: And let’s say for whatever. example here, they’re now 25 years old, and any of the money that you put into the 529 was done more than five years ago. And so now they have $35,000 left and they’re 25 years old. And so the next five years, okay, remember we we’re limited by $7,000 each year, unless they up that they’ll now convert over to a Roth.

[00:09:52] Larry Heller: So for the next five years, you’re converting $7,000 over. So now they’re 30 years old. And forget about any of the gains that they might have made over those five years. So let’s just say now the account is worth $35,000. The new Roth account is now worth 35,000 because you’ve rolled over seven at age 26, 27 each year, and now it’s worth 35,000.

[00:10:15] Larry Heller: And now let’s talk about, I love talking about the rule of 72. So for those, that are out there, that if you make 7.2% on your money, it doubles every 10 years. The rule of 72. So let’s say now you’ve, invested in the Roth and they’re [00:10:30] 30 years old. So you can invest it kind of aggressively and you earn 7.2% for the next.

[00:10:37] Larry Heller: 10 years and the 10 years after that. So let’s see what happens to that. So that 35,000, they’re now 30 years old. At 40, it would’ve grown to 70,000. At 50 we got another double. The rule of 72, it’s grown to 140,000. At 60, now it’s 280,000. Again, 7.2% if it’s invested. Historically, the stock market has done better than that, but I realize we’re using 7.2%, so now it’s 60.

[00:11:08] Larry Heller: This 35,000 has grown to almost 300,000, but let’s say they wait until there are 70 for some reason now it’s gone to $560,000. So even if they waited a little bit before 70, it’s gonna be a half a million dollars that this can grow to. And now you, I start to open up a little bit because you can provide your children with a very nice retirement pot of money by doing this, this rollover.

[00:11:38] Larry Heller: So, and there’s one other way of doing this. So Matt, before I get to item two, what do you think about this?

[00:11:46] Matt Halloran: Wow. I mean, those, those, those numbers are, are, you know, the rule of 72 is something that I just don’t think enough people really, truly know about. But, but, and I apologize for my ignorance here, Larry.

[00:11:56] Matt Halloran: I should, I should probably know this, but and I miss, I, maybe I even missed you say [00:12:00] this. So if, when I convert a 529 plan, which if taken off for educational purposes, there aren’t any taxes on the growth. Am I still paying a Roth conversion tax from moving the money from a, from a 529?

[00:12:17] Larry Heller: No, and I should, that’s a great point.

[00:12:18] Larry Heller: I should have sweat right up the top. And when you do the Roth conversion over there, it’s a tax free conversion. There’s no taxes. There’s no penalty. It goes in tax free. So now you’re changing this from a 529 plan where maybe the parent has, is the owner. Mm-Hmm. And now you’re converting this over. So now the.

[00:12:35] Larry Heller: the child is the owner, so by 30, this money is all in their Roth account, so it’s holy, their Roth account, subject to their own, the own Roth rules, but it’s their own Roth account.

[00:12:48] Matt Halloran: It just almost doesn’t make sense. The government always wants their piece, brother, what am I missing?

[00:12:54] Larry Heller: they, well, they’re, they’re, you’re not missing anything.

[00:12:57] Larry Heller: That’s why they have these limits. Oh, okay. Okay. These limits in here, but let’s, you know, so, but let’s look at it. One o Let’s take it even one step further, because let’s say this person actually. I don’t wanna say played by the rules, but put it all for, for college. But let’s say now the child, we can pick, you know, you can pick any age.

[00:13:15] Larry Heller: So let’s say the child is, and New York State, you get a $10,000. Annual deduction. We’ll talk about some of the state issues ’cause there is one little piece on here from a negative standpoint, depending upon what state you live in. So actually [00:13:30] let me address that now and then we’ll go, we can kind of comb back.

[00:13:33] Larry Heller: So this is great for federal purposes. But not all the states have agreed to this. And where we’re located in New York State, New York State says, Uhuh, you wanna convert this over? You have, you gotta pay, pay me, um, taxes on that. So New York State, you still have to pay taxes. I still may be worthwhile to do that.

[00:13:53] Larry Heller: So there are, there are 11 states which will treat this rollover into a, into a Roth as a taxable event. The rest of the states. Some states have no tax income, income tax, and the other, there are other states that have said, you know what? We’re gonna abide by the federal rule on this. So you really wanna see which state you’re in, and if you’re in a state where you have to pay taxes on it, you want to take a look.

[00:14:17] Larry Heller: Does this still make sense for you to do? so that’s the, the one caveat from a, from a state standpoint, but let’s get back to some of the planning items. Mm-Hmm. So let’s say now you are, you kind of know that you have enough money for college, but you’re in a nice position and you’re able to provide something else for your child or your grandchild.

[00:14:38] Larry Heller: So now remember, you gotta wait, you gotta plan this five years in advance. You could start putting away $7,000. Five years before you’re gonna do the first Roth conversion and then 7,000 the year afters. So you can actually put money in here, not for college, but [00:15:00] for the Roth specifically, knowing that.

[00:15:04] Larry Heller: you’re gonna convert this over five years down the road, or you may convert this over five years down the road. So, there’s nothing that says that you can’t, you, you can’t do this as long as you abide by the 15 year rule and the five year rule. was I clear with that?

[00:15:20] Matt Halloran: That was super clear.

[00:15:20] Matt Halloran: Yeah, no, that was, that was super, super clear. Yep.

[00:15:23] Larry Heller: it’s a nice little planning tool and if you have. multiple children and you can do this where for multiple accounts, and again, a lot of people may say, you know what? I just paid for that college. I don’t wanna. Or I can’t afford, or I don’t wanna give them another $35,000 mm-Hmm.

[00:15:39] Larry Heller: To put into a Roth. And of course they may be working and they may be able to qualify for their own Roth at, at that time. So they don’t want you, you’re not gonna wanna do this earlier, but there may be ways of doing this and then there may be ways, especially for grandparents who wanna do this. It’s a great way of doing it.

[00:15:54] Larry Heller: So it’s something that everyone should think about if they have young children or children in their, in their teens or even their twenties, see if this makes, makes sense. so again, I. Purpose is really for college and for leftover money. And see if there are ways of taking advantage of these w well within the rules to be able to provide a great benefit and provide a great retirement account for your kids or your grandkids, when they’re about to retire.

[00:16:25] Matt Halloran: This is one of the things I love about this show, right? For so many years. [00:16:30] In financial services, all of this information was really gate kept, right? you, you, not you, but a lot of financial services professionals weren’t talking about these. These tips and these tricks and these strategies publicly, to make it so that, you know, everybody could really learn about this, which is just, the reason I’m saying that is because this is the sort of stuff that you come to this podcast for.

[00:16:54] Matt Halloran: This is the reason why you use Heller Wealth Management, because this is who he is. This is what his team does. Is they’re consistently finding great planning techniques to help you get even more ahead. And if you’re not working with a financial planner who keeps all of these different moving parts in mind when they’re sitting down with you, you could miss huge opportunities.

[00:17:16] Matt Halloran: A half a million dollar opportunity for you and your grandkids. Alright, Larry. Somebody wants to reach out, where should they go? My friend?

[00:17:24] Larry Heller: Yeah, so just a little caveat. So again, they can reach out to us, ’cause there are some of the limits that apply. So if you are thinking about this, please reach out to us at 6 3 1 2 4 8 3600 or go to my website hellerwealthmanagement.com and click on schedule a time to meet with myself and one of our advisors and we’ll gladly talk about this and what, whatever other planning you’d like to talk about.

[00:17:49] Matt Halloran: If you are planning to have children, if you have children, if you have grandchildren, what an amazing financial planning strategy to truly help you. And of course, there’s all sorts [00:18:00] of other moving parts. This is not meant to be ubiquitous amongst everybody who’s listening. You do need to sit down with a certified financial planner and somebody who truly understands this.

[00:18:09] Matt Halloran: But when you have somebody like Larry and his team in your corner, it can really, truly make a life. Changing difference in not just you, but all of your family and your legacy to come. So with that, please go to heller wealth management.com and for Larry and all of us here at Heller Wealth Management, we’ll see you on the other side of the mic very soon.