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Ralph's. Fresh for everyone. Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less. My name is Joshua Sheets. I'm your host today.

We're going to take a medium dive into 529 plans. We're going to engage in some careful financial planning. I'm going to share with you how you can use 529 plans very effectively to lower your overall taxes for educational benefits for you, your family members, etc. In today's podcast, I'm also going to update you on the recent legislation that has changed in the United States that now allows 529 plans to be rolled into a Roth IRA.

I'm going to share with you a few planning ideas of how you can put this into practice for your children, especially if you have young children. I'll share with you how to kind of exploit these ideas. And then I'll also continue and share with you where this may not be such a big impact.

It has been a while since I've talked about the details of 529 plans. Lately, I've been talking about investing in your children in ways other than saving money. Long series on that. But this is nothing new to Radical Personal Finance. If you're interested in a fairly good and deep level introduction to 529 plans, go back and listen to episodes 138, 154, and 158 of Radical Personal Finance.

I will link those episodes in the notes for you. But 138, 154, and 158 were a three-part masterclass on 529 plans, also known as qualified tuition programs. That's what the IRS technically refers to them as, is qualified tuition programs. And in those episodes, I shared with you all of the details of how you can use 529 plans and exploit them.

Here in this episode, let me give you a quick overview of what a 529 plan is so that you get an idea of its advantages and its drawbacks. Basically, a 529 plan works basically like an account that you can put money into and then use the money for educational purposes on a tax-favorable basis.

Now, there are ordinarily two kinds of qualified tuition programs. By the way, I'm going to use these terms interchangeably. I usually, however, will refer to 529 plan to refer to the kind of accumulation account rather than a prepaid tuition program. But there are two kinds. There are what's called a prepaid tuition program, which is an arrangement that you make with a specific school or university to prepay tuition to that institution.

And then there's the type that you just simply have an account, an account that has investments in it, can frequently hold mutual funds. And that account allows you to accumulate money for your children's educational expenses. Or they can be yours as well. I'll usually refer to this as being for your children, but it can be for you or for your children.

So let's discuss the taxation. How does the tax work? Well, if you put money into the account, you use after-tax dollars to fund the account. So you earn a dollar, you pay tax on it. Let's say you pay 20 cents of tax. Then you take 80 cents and you put 80 cents into the investment account.

There is no upfront tax break on the money that gets contributed into the account. You invest the money, hopefully for gain over time. And when you take the money out, as long as the money is distributed from the account for qualified educational expenses, then you are not required to pay the income tax on the gain from the asset.

So let's say that you earned a dollar, you paid 20 cents of income tax, you put 80 cents into the account. You invested that 80 cents wisely. Over time, the 80 cents grew to be worth $1.20. And now you take the $1.20 out and use it for qualified educational expenses.

Well, because you invested through a qualified tuition program, through a 529 account, you are not required to pay tax on the gain, on that 40 cents of gain. So you save whatever your effective tax rate would otherwise be on your 40 cents of gain. Let's say that you're about that 20, 25 cent tax rate.

That means that you save about 10 cents worth of tax. Good thing to do. It's nice to save money on tax. Now, when I use those numbers, you will probably see, however, one of the first things that I like to point to, which is that in many cases, the actual tax benefits on these types of accounts are more modest than people otherwise believe.

We should lower taxes whenever possible because that lowers our overall expenses and increases our effective investment gains. But when you are just eliminating the tax on the gain of an asset, unless there's a very significant amount of gain, the actual savings that we get may be fairly modest. And this is the thing that I frequently have pointed out to people who invest through 529 accounts.

In many cases, people fund these accounts far too lightly. They invest for too short of a time, and the actual tax benefits, while real, are not spectacular. And so I demote these accounts in priority from other types of accounts or other types of financial priorities and areas of focus because of this fairly modest overall savings opportunity.

It's just often not that much money. But that doesn't mean it can't be a lot of money, and it doesn't mean that tax savings are the only reason why we would use these types of accounts. So where I have frequently recommended these accounts the most heavily has to do with them being used at an early stage of life, with the money being invested for a long period of time, and as much money invested up front as is possible.

Let's begin with the amount of money that you can contribute to these accounts. They are limited to a reasonable amount of money as is necessary for somebody's college expenses. Some states have certain numbers. But the only real limit on them is that you can't contribute more on an annual basis than the annual exclusion amount, which is a number that changes by the IRS every year.

It basically has to do with the amount of money that any one individual can give to another individual. In 2023, the annual exclusion amount is $17,000. Now, a 529 account is also interesting because it allows you to front load five years of your annual exclusion amount into the plan if you want to.

So if you take $17,000 and you multiply it times five, that's $85,000 that you could put into an account for your beneficiary. The other interesting thing about a 529 account is that you can split this amount over two members of a married couple. So if you have a husband that can contribute $85,000 and a wife that can contribute $85,000, well now, of course, we can put $170,000 into the account right up front in the very first year of a beneficiary's life even if we want to do that.

And you'll notice I'm referring to beneficiaries here. So if you have, like I do, five children and you want to make large contributions to their educational accounts, you could put in $170,000 between husband and wife for child number one, $170,000 for child number two, $170,000 for child number three, et cetera.

And it's not limited to parents being the only ones who could contribute to the accounts. So grandparents can also contribute to the accounts. And that's some of my favorite ways to use these accounts because what happens is these accounts allow a family member to make a gift to another family member, to the beneficiary, but they are not a taxable gift.

And when the money is used for the purposes of education, then now it comes out on a tax favorable basis. Because the amounts of money can get very large so quickly when we're doing it this way, these are one of my favorite tools for the very wealthy. And let me add a couple of benefits that you may not immediately perceive.

So there are the benefits, obviously, of the tax deferral and the tax savings when the money is used for education. That is a benefit. And if you can front load these accounts and have quite a lot of time for the money to grow, now the tax savings can be really substantial.

Just imagine that a wealthy grandmother and grandfather set aside $170,000 for each of their grandchildren on the day the child is born. Well, that $170,000 can have a decade to grow before it's being used for secondary school expenses, can have 18 years to grow before it's being used for college expenses, may have 25 years to grow before it's being used for medical school or other professional law school expenses, etc.

And so that $170,000 has quite a lot of time where it can generate gain, and thus the savings on the tax from that gain can be really, really significant. Another attribute of this from a technical perspective, though, is that from a technical perspective, this is assumed to be a completed gift.

So thus it's a transfer out of the wealthy grandparent's estate into the estate of the beneficiary. However, unlike most other transfers out of a wealthy person's estate, the donor does not give up control of the money. So unlike what is ordinarily required of making a transfer to something like an irrevocable trust in order to move assets out of someone's estate, the donor in this case can still control the assets.

If the donor wants to change the beneficiary from child one to child two because child one is acting like a bozo, and we want to disinherit child one and we move it to child two, we can do that. The grandparent can still control the money and can even claw the money back.

And so that's a really powerful thing from an estate planning perspective. Because in many cases, when someone's worried about things like estate taxes or other aspects of estate planning, a wealthy person often wants to fund education for family members. Education seems like one of the least damaging things that a wealthy person can fund within his family.

And so it's nice to be able to do that in a very efficient and effective way and yet still have full control, and yet move the assets out of the estate. That's really useful. Another thing that I particularly like about these accounts is the fact that generally 529 accounts are protected from the claims of the creditors of the donor, of the person who actually establishes the account.

So let's say that I'm looking for accounts that are going to be exempt from the claims of creditors, and I need to get a lot of money into those accounts, 529 accounts can be really useful for that. And so if I know that, you know what, five years from now I might be in quite a difficult scenario where I could face significant legal jeopardy over my money, I may be sued by a business partner or face some kind of heightened risk.

If I go ahead and establish 529 accounts for my family members now, and I fully fund those, I can move significant amounts of assets out of way from my control over to the benefit of my children or other family members. That's a really powerful use of the money as well.

Some other rules that I think you need to always think about with these accounts have to do with simply how long can the money stay in the account. And the answer is the money can stay in the account as long as you want. The trick is not how long the money is in the account, but rather what is the money used for when it comes out of the account.

And it has to be used, in order to have the most favorable tax treatment, it has to be used for qualified educational expenses. What is a qualified educational expense? Before we state the specific expenses, we have to begin with the institutions. Because these accounts are designed to pay for certain expenses to institutions.

And those institutions include either post-secondary schools, meaning in the US system after high school, and you've got various kinds of colleges, as well as eligible elementary or secondary schools. So let me read from the IRS publication on this topic. For purposes of a QTP, Qualified Tuition Program, an eligible educational institution can be either an eligible post-secondary school or an eligible elementary or secondary school.

Eligible post-secondary school, so think college here. An eligible post-secondary school is generally any accredited public, non-profit, or proprietary, privately owned, profit-making, college, university, vocational school, or other post-secondary educational institution. Also, the institution must be eligible to participate in a student aid program administered by the US Department of Education.

Virtually, I'll come back to that in a moment, pay careful attention to that. The institution must be eligible to participate in a student aid program administered by the US Department of Education. Virtually all accredited post-secondary institutions meet this definition. An eligible educational institution should be able to tell you if it's an eligible educational institution.

An eligible educational institution also includes certain educational institutions located outside the United States that are eligible to participate in a student aid program administered by the US Department of Education. So, for post-secondary schools, it's basically any school as long as it is eligible to participate in US Department of Education aid programs.

And I point to the example of being outside the United States simply because one of the questions that people have always had with these accounts is, "What if I have too much money in it?" And my answer has generally been, "Well, sign up for a school in France and go and use the 529 account to pay for your tuition and your room and board expenses while you're studying French in France and enjoy using the money for that." So, it's important to note that it's not limited to the United States, although of course you are limited to an institution that is eligible to participate in a student aid program administered by the US Department of Education.

Moving on, what about pre-college, prior to college stuff? Well, eligible elementary or secondary school. An eligible elementary or secondary school is any public, private, or religious school that provides elementary or secondary education, kindergarten through grade 12, as determined under state law. So, basically, any school, these funds can also be used for any school that is elementary or secondary.

And you'll notice here, again, why I focused first on talking about how much money you can get into the account up front. Some people are surprised when I use big numbers. If I say, "Well, look, you can put $85,000 for a husband and $85,000 for a wife into an account, and you can do that right when your child is brand new and just born, seems like too much money for college." But, in many wealthy families, where these types of contributions are likely to be made, it's not just college expenses that need to be planned for.

Rather, it's very common that we're going to plan for expenses for tuition every single year of various private school options. And so now, it doesn't seem so strange to put aside large amounts of money into these accounts long in advance of the actual need for it. If we put in $170,000 for grandma and grandpa and $170,000 for mom and dad, we'd have $340,000 there.

That'd be a pretty good start on having significant amounts of money available for elementary school, secondary school, college, post-college, etc. Now, what are those expenses that are eligible? So, the expenses have to be due to enrollment with one of these institutions, and they have to be these expenses. These are expenses related to enrollment or attendance at an eligible post-secondary school.

So, here we're talking about college. Pay attention. First, college. As shown in the following list, to be qualified, some of the expenses must be required by the school, and some must be incurred by students who are enrolled at least half-time, defined later. One, the following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible post-secondary school.

A, tuition and fees; B, books, supplies, and equipment. So, here we're dealing with college. College tuition and fees, books, supplies, and equipment, if required for enrollment, then they are eligible expenses. Two, expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible post-secondary school.

So, if you have a special needs family member who is enrolled at an eligible post-secondary school, then you can cover expenses specifically for special needs services. Three, expenses for room and board must be incurred by students who are enrolled at least half-time, defined later. The expense for room and board qualifies only to the extent that it isn't more than the greater of the following two amounts.

A, the allowance for room and board as determined by the school that was included in the cost of attendance, for federal financial aid purposes, for a particular academic period and living arrangement of the student. Or B, the actual amount charged if the student is residing in housing owned or operated by the school.

You may need to contact the eligible educational institution for qualified room and board costs. Here, what it is saying is that it can be whichever one of these is higher. It can either be the actual amount charged to the student if living in housing and paying room and board that's operated by the school.

Or, you can take out relevant room and board charges, even if they're paid to a private person for private rent, private food, etc. As long as it is not more than the allowance for room and board that was determined by the school that was included in the cost of attendance for federal financial aid purposes.

So you can use these funds with private expenses, such as rental payments, etc. But it is limited based upon the amount that the school includes in this calculations. Four, the purchase of computer or peripheral equipment, computer software, or internet access and related services. If it's to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible post-secondary school.

This doesn't include expenses for computer software for sports, games, or hobbies, unless the software is predominantly educational in nature. So anything related to computer or computer equipment, software, internet access, etc. is eligible for college students as expenses. Five, the expenses for fees, books, supplies, and equipment required for the designated beneficiary's participation in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.

So that's useful. Number six, no more than $10,000 paid as principal or interest on qualified student loans of the designated beneficiary or the designated beneficiary's sibling. A sibling includes a brother, sister, stepbrother, or stepsister. For the purposes of the $10,000 limitation, amounts treated as a qualified higher education expense for the loans of a sibling are taken into account for the sibling and not for the designated beneficiary.

You can't deduct as interest on a student loan any amount paid from a distribution of earnings from a QTP after 2018 to the extent the earnings are treated as tax-free because they were used to pay student loan interest. When using these funds for a student who is enrolled in a qualified higher education institution, eligible post-secondary school, you can use these funds for just about anything related to tuition, fees, book supplies, room and board, etc.

What about if the student is enrolled as more than a half-time student? If the student is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Now what about elementary and secondary education expenses?

These are expenses for no more than $10,000 of tuition incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. So you may have $50,000 a year of private school tuition for one of your students, but if that's elementary or secondary school, no more than $10,000 of that can be paid for on a tax-favored basis by distributions from a 529 account.

That's what you need to keep in mind. So, again, about normal 12-year enrollment, $120,000 of tuition expenses that can be paid used for then, and then the tuition cap completely goes away when we get to post-secondary institutions. So there is no cap on tuition amounts for college, for graduate degree programs, etc.

So if we use the money for that, we get the tax-free distribution amounts, which is great. If we don't use the money for one of those eligible expenses, then we start to incur tax on the gains and a penalty tax, an extra penalty tax. So if at all possible, we really want to use the money for educational expenses.

But what if we don't? What are the options? And that's where we're getting to the Roth IRA option. Well, the first option that we've always discussed has been the value of a rollover, because there are some fairly loose rollover permissions that you can have where you can just simply keep the money in an educational account, but roll it over to an account for either the same beneficiary or for another beneficiary.

Remember, there's no limitation as to how long the money can be in the account. You may be planning to go back and get a doctorate degree when you retire at 65. That'd be fine. So you can keep the money in the account until then, or you can roll it over.

So let's review the rollover rules here. Again, reading from the IRS Publication on Qualified Tuition Programs. Any amount distributed from a QTP isn't taxable if it's rolled over to either another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family, including the beneficiary's spouse, or an ABLE account for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family, including the beneficiary's spouse.

But this doesn't apply to the extent the amount distributed when added to other amounts contributed to the ABLE account exceeds the annual contribution limit. For more information about ABLE accounts, see Publication 907, Tax Highlights for Persons with Disabilities. So let's ignore the ABLE account for persons with disability at the moment, and let's talk about who would be a qualified member of the beneficiary's family.

Here is who is considered to be members of the beneficiary's family. For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. 1. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. 2. Brother, sister, stepbrother, or stepsister.

3. Father or mother or ancestor of either. Pause for a moment. Basically what this is saying is that you can roll this over from one beneficiary to another, up and down the bloodline, up to any ancestor or down to any descendant. Continuing. 4. Stepfather or stepmother. 5. Son or daughter of a brother or sister.

6. Brother or sister of father or mother. 7. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 8. The spouse of any individual listed above. 9. First cousin. There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. And so those are the rules.

Now you'll understand for a moment why I spent such an amount of time talking about those funding rules. We'll get to the Roth IRA in just a moment. But where these accounts really shine is when you can make substantial contributions early to them. And the false belief that many people have always had is that you have to wait until you have a child, for example.

This has always been false. Your father could open a 529 account for his own purposes in, say, the year 2000 for his own education. And he can front load his contributions to that account. He can later change the beneficiary of that account to be you. But if you don't need the full amount, he can change the beneficiary account to be your children or your grandchildren.

And this can continue on forever. And so when we can fund these under current laws, right, because it clearly says brother, son, daughter, or a descendant of any of them, and father or mother or ancestor of either. So we can go up or down the blood chain without limit.

When we go outside of the chain of blood, either through marriage or adoption, etc., then we don't have the same unlimited limits, unlimited limits, unlimited nature is a better, slightly better words to use. And so this is where these accounts with all those benefits I said previously are really powerful.

Now let's talk about but. They are limited for education. And so this has to be money that we have to use for education. And for so it has been up until the passing of the Secure Act 2.0 at the end of last year. So now let's pivot to the Secure Act 2.0.

The basic 529 account change that was made to this account was that it allows some limited transfers from a 529 account to a Roth IRA for a certain beneficiary. Now there are a number of significantly restrictive rules. And so this is not the all-in, you know, thing that you wanted.

The people who ever writes legislation, I have no idea who actually does it, the staffers and whatnot who writes legislation, they understand about the mega backdoor Roth IRA and things like that, and they want to limit these things. And so these limitations are significant, but the benefits are real.

So let's pivot for a moment. Before I tell you how to move it into a Roth IRA, let's talk about what a Roth IRA is and why it has been generally such a useful tool. And yet why we've wanted to use it, especially with children, but we have had a hard time doing so.

A Roth IRA allows you to earn a dollar, pay tax on the dollar, let's say you pay 20 cents of tax on the dollar, take your 80 cents and invest it into the Roth IRA. The money can grow for a very long period of time. As long as you take the money out when you're older, at retirement age, the money comes to you tax-free.

So if you earn a dollar, pay 20 cents of tax, put in 80 cents, and then over time the money grows from 80 cents to be $2 or maybe $3 at retirement age, and you take the money out for retirement, then you can spend the $2 or $3 for retirement on anything that you want with no income taxes on the gain.

So again, you save all of that tax on the gain as long as you reach a certain age. This has obvious benefits because if we could get these accounts started for people at a very young age, we could put a little bit of money in and that little bit of money can grow for a very long period of time.

And your principal amount is tiny, but you would ordinarily have a huge tax burden. But as long as the money is taken out after retirement age, then we now have the ability to completely eliminate the tax. So this is fantastic. Now for a limited time at Del Amo Motorsports.

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Visit Del Amo Motorsports in Redondo Beach and get yours. Offer ends soon. See dealer for details. The problem has been how do we get money into the account from an early age? And so, you know, fathers and mothers and grandparents, etc., who have seen the value of this, have wanted to put money into the account.

But the account is limited in terms of how much money you can put into it by two basic numbers. Number, the first most important number has to do with the annual contribution amount. For 2023, that number is $6,500 for someone who is under the age of 50. If someone's older than 50, it's $7,500.

And so, we can contribute up to $6,500 per year. The second number, and forgive me, I should have said more important for the second number in this conversation, is that you're limited to the maximum amount of earned income. So, you might have a one-year-old, but if the one-year-old doesn't have any earned income, then you can't make a contribution to the one-year-old's Roth IRA account.

So, the one-year-old has to earn income. And notice my emphasis on earned income. This has to be wages. It's not investment gains. That's unearned income. It has to be wages. And so, we've always been limited by what kind of work, how can our children earn wages? Now, the normal way to do this is to wait until a child starts to earn money.

And then, what many wealthy parents will do is they'll basically make a matching gift to the child, which is used to fund a Roth IRA. Let's say that your child earns $6,500 from summer work at a simple, normal job, working down as a lifeguard at the local pool. So, the father might say, "Here, congratulations on making $6,500.

We're going to file a tax return for you, reporting your $6,500 of earned income of your wages. And then, I'm going to gift you $6,500." And that $6,500 is going directly into a Roth IRA for the child. And so, this is the way that we get Roth IRA contributions in.

And because any individual can give any other individual up to $17,000 per year with no reporting, no requirements, no taxes, etc. By the way, don't think that just because you give more that there's automatically gift taxes. But there are reporting requirements. But anyone can give up to $17,000, anyone else, for any reason whatsoever.

And so, this is fine to give $6,500 to your child for contribution to a Roth IRA. Some people who have wanted to be more aggressive about this have said, "Well, how can I get earned income for my child who's much younger? So, could my five-year-old clean my office for my privately held business?" The answer is maybe.

"Could my three-year-old do modeling work?" The answer is maybe. But those things all come with challenges. I've not pursued those things myself, even though I'm certainly aware that we could put the money in there. But I don't want my child to be modeled, be a model, and his image is out there on some diaper cover, whatever.

I don't care how much money it makes. I don't want that. That's a major breach of privacy, and it exposes him to a toxic, horrible world. I'm happy for my child to work at the office and things like that. The challenge becomes, "Do I really want to emphasize this as compared to other things?" I would rather he be focusing on academics or physical activities, et cetera, versus doing relatively menial labor.

The other challenge with those ideas of employing your child just has to do with how realistic is it and how much can you actually earn? So, for example, if you're going to hire your child to work in your business, and you're going to go through all of these hoops to hire him so that he can generate wages, then one of the most important things is that your work has to pass all of the relevant tests.

You can't pay your child a sweetheart deal to pay him $50 an hour to come in and empty the waste baskets for five minutes. If you get audited, then all of the payments made to your child, your own tax deductions, et cetera, will clearly fail, and you have to have the relevant proof.

The way that you do this is you figure out what the job is that your child is going to do. You call something like an employment staffing agency. A temp agency is ideal, and you get a quote, and you say, "Hey, how much would you charge to come and clean my office once a week?" Let's say they say $50, and of course, you have a big office.

It could be much more, but they'll give you the quote, and then you use that as the amount of money, and then you track the child's hours and track and make sure the work is being done, et cetera. But my frustration is it's a whole lot of hassle to go through for a tiny little bit of money.

I appreciate the elegant nature of saving every dollar, but it's a lot of hassle to go through for relatively small dollar savings and taxes. My life is happier without spending too much time on taxes. We've been limited, is the point, limited on making the Roth IRA contributions until now, and here are the rules.

After the passage of the SECURE Act 2.0, then you can make a distribution from a 529 plan directly into the Roth IRA. First, the Roth IRA that's receiving the funds must be in the name of the beneficiary of the 529 plan. So if the 529 plan is in the name, the named beneficiary of 529 plan is child A, then it must go into child A's Roth IRA.

Second, the 529 plan must have been maintained for 15 years or longer. So this can't be something that you just start right away. It has to have been in existence for 15 years or longer. Next, any contributions to the 529 plan within the last five years and the earnings on those contributions are ineligible to be moved to a Roth IRA.

So it can't be within the last five years, has to be old contributions. The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any regular traditional IRA or Roth IRA contributions that are made for the year.

So the idea here is there's no doubling up. You can't put six that you can't do the wage match thing for your child to put $6,500 into the Roth IRA when he's 16 and then also move money from his 529 plan into a Roth IRA. That doesn't work. But what you can do is if he's not making a Roth IRA contribution from other funds, then in that year you can go ahead and put the move the money from a 529 account into the Roth IRA.

And then there is a lifetime maximum. The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual's lifetime is $35,000. Astute listeners of Radical Personal Finance will have noticed a little bit of ambiguity in what I have just stated. So, for example, I mentioned that one of the rules is that the 529 plan must have been maintained for 15 years or longer.

But then you may have been asking yourself, "Well, I understand that the 529 plan must have been maintained, but does it have to have the same beneficiary the whole time?" And my answer is, as best I can tell, we do not yet know. We do not know because the language in the law is imprecise.

And so in the fullness of time, there will be some guidance given by the IRS or additional clarification rules made to that effect. But to my knowledge, that has not yet been done. The rule is that the 529 plan has to have been maintained for at least 15 years and that the Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.

Also, that the contributions to the 529 plan, you can't make transfers of the contributions to the 529 plan within the last five years to a Roth IRA. And so those of you who have old 529 plans are probably the best people to start this process of benefiting from this law.

So let's begin with the planning opportunities here. So let's assume that today you have a child and that child is zero years old today. Well, you can go ahead and make a contribution to the 529 plan for that child. As stated, you can make a very significant contribution up front.

Totally fine. So let's say you put $100,000 into the account today. Fast forward 15 years from now, you can now begin the process because the account has been in existence for over 15 years, you can now begin the process of making annual transfers from the 529 to a Roth IRA in the name of your child.

So again, those numbers change every year, but today that would mean $6,500. And you can do this up to $35,000. This would take you about five, maybe six years, depending on future contribution limits, to accomplish. So from the time the child is 15 to the time the child is 20, regardless of whether or not the child is earning wages, at least those Roth IRA contributions can go in.

By the way, of course, you can do this on an annual basis. So if a child has wages in a certain year and you fill up the Roth IRA contributions from wages, that's fine. If the child doesn't have wages, then you can fill them up with 529 accounts. And these numbers can be pretty significant.

I mean, let's just do a couple of quick estimates and calculations. Let's say that you start with a simple amount of the minimum amount. Let's say that you make a $15,000 contribution today to your zero-year-old's 529 account, $15,000. And let's assume that the account earns 7%, about a 7% rate of return of annual interest.

Well, in 15 years with annual calculations, we'll wind up with about $41,000 in the account. That $41,000 could be available to then fund Roth IRA contributions. If this continued from age zero to age, say, 65, then you could wind up with an excess of a million dollars with just that one simple $15,000 contribution that you began when your child was zero.

And so it would be more than a million dollars in your mid-60s. So pretty powerful stuff here. And of course, under current law, that would all be completely tax-free. Now let me point out a couple of other things that are implied by these rules. So the first thing is I do not know, and we won't know, because by the way, January 1, 2024 is the first time that we can make these conversions.

And so we'll see what happens in the coming months. I have looked for the answer to this question. I have not yet found it. Again, as best as I can tell, the rule is that an account has to have been in existence for 15 years before we can make a distribution to a Roth IRA.

But an account can be a single account that has been in existence for 15 years, and yet we can change the beneficiaries on that account. And as long as it's an eligible beneficiary following that family line, then there's no problem with changing the beneficiaries in various directions. And so my question is, what about my 529 account, you know, the one that I've had for 20 years?

It's been in existence for more than 15 years, 20 years. Can I change the beneficiary to my new baby, my zero-day-old baby, and then go ahead and -- the account has been in existence for more than 20 years. No money into it in the last five years -- excuse me, for more than 15 years.

No money in the last five years. Can I go ahead now and change the beneficiary to my baby, my zero-day-old baby, and immediately start making that distribution into my baby's Roth IRA when my baby is zero years old? I have not yet found the answer to that question. I think it's worth trying, but I haven't yet found the answer to that question.

My philosophy with most of this stuff is try it and do it until or unless you're told that no, this is not allowed. But I think that's a pretty good, pretty sweet move. And so if somebody has a 529 account that has been in existence for quite a while, then it would be good to go ahead and start that process.

And by the way, even if you have just an old account that just had a little bit of money, you're potentially no more than five years away from Roth IRA contributions for yourself or for your child using this strategy. And so I think that is a great solution. The other thing that is implied by this is this means that from now going forward, we can basically ignore the modified adjusted gross income limits necessary for someone to make Roth IRA contributions.

Under the current legislation, there is no modified adjusted gross income cap, no income cap as to who can do this. There is simply those rules that I said has to have been in the account for 15 years. The money that's going into a Roth IRA, excuse me, the account has to have been established for at least 15 years.

The money that's going into a Roth IRA has to have been left alone for five years. It can't be contributions within the last five years, but there's no limitation on who can make the contribution. And so while at the moment we have generally been able to do what's called the backdoor Roth IRA strategy, which is where you create a non-deductible IRA and then after time convert it from a non-deductible IRA to a Roth IRA.

So anybody who wants to make Roth IRA contributions has had this workaround for some time. And by the way, that remains as far as I can know, that remains completely unaffected. Many people were worried that the SECURE Act would affect that. It's unaffected. But more importantly, that now we have this additional option, this additional workaround that is probably a little bit simpler.

So if you have a 529 account for yourself, and if your income is over the, what is it, about $170,000 something, $180,000 of income limits to where you're ordinarily not qualified to make Roth IRA contributions, at least this allows you to make up to $35,000 total of Roth IRA contributions to a Roth IRA for yourself.

One additional point. There is no reason why you yourself cannot be the beneficiary of the 529 account. Remember, the idea of the 529 account is that it's a flexible account that can allow you to set aside money and have it be there for educational purposes. So you can fund the money for your children.

But let's say your children die, tragically of course, and now you have no children. Well, you can turn around and put the money and change the beneficiary to be yourself. And as now the beneficiary of it, as long as the other rules are followed, you can now transfer $35,000 from the 529 account into your own personal Roth IRA.

And so there's a lot of flexibility. And again, we can do this across the family. So let's say that you had $70,000 in the account. You can change the beneficiary to yourself. You can change then the beneficiary to your wife. And then you can move the full $70,000 out of the 529 account into your Roth IRAs.

All of these things together make the 529 account an even more valuable account. I have tried on Radical Personal Finance to point out things as accurately as possible. But what happens is I always come across as having a strong opinion in one direction or the other. My annoyance with 529 accounts has been two things.

And I believe I've fully cleared this and given you ideas. The only two reasons not to fund 529 accounts, in my opinion, generally have been these. Number one, if you are saving money for your child's college instead of investing money into your child when he or she is young, I believe that is a mistake.

As I have tried to persuade in exhaustive detail, every dollar of money that somebody might save for college expenses, if you have to choose, that dollar is better spent at an earlier age. College is easy to pay for. College is cheap and getting cheaper. College is not a problem.

What is a problem is making sure that your child has every advantage when he's five or when he's five months old or five. Again, it's better for you to take the money and spend it on a very high-quality private school when your child is young rather than letting him be ground up by the government school meat grinder and never want to go to college in the future.

For the academically capable, the academically competent, who are the only people who should be going to college in the first place, paying for college is simple and easy. So don't prioritize college savings over and above investing into your child at a young age. That's been my argument number one.

So the counterbalance to that is, "Well, Joshua, I can do both." And my answer has always been and remains today, "If you can do both, do both." It's great. Argument number two has been the way that people fund 529 accounts is not the most effective way. When I review financial plans for people, I would frequently find--and I'm talking about ordinary middle-class folks-- I would frequently find, "Hey, look, we're saving $200 a month for our child's college." And my argument again is, "What's the point?

What's the benefit of the $200 a month?" You're only getting a tiny little tax savings on the money in a very uncertain set of constrained circumstances. And your actual taxation cost, if you didn't fund the 529 account, would be fairly modest, just not a ton of money that you're paying when you're starting late, funding it with a little bit of money, etc.

You're not going to have that much taxable gain. So what I've tried to point out to people is the alternative ways of using a 529 account. And now this just adds more and more to that argument. 529 accounts are powerful when they are funded up front, when they're preloaded as heavily as possible.

529 accounts are powerful when you have multiple beneficiaries and you can move around beneficiaries in your family. 529 accounts are powerful when you have other funds that are available as well. So you can just view these as part of the family bank. In order to get the most value out of them, that's how you should be thinking.

You should not be thinking about them just in a very constrained way, but rather thinking about them in a broad way. Because it's so much, you get the vast majority of the benefits that people want with, say, a family educational trust at a fraction of the cost with a 529 account.

You get great creditor protection, you get good control of the money, and now this just adds even more to that argument. So 529 accounts are really great as long as they're handled properly. Which brings me now to the final piece of advice. This is only going to increase the pressure on providers of 529 accounts.

So if you have a 529 account that you're happy with and that has low expenses, etc., great. That's a good place to start. These accounts, by the way, I didn't talk about earlier, I should have mentioned. In some states, specifically some states that impose state income taxes, in those states, the contributions to that state's 529 account can be given a dollar-for-dollar credit on the state's income taxes.

And so if you are in a state that imposes state income taxes and that has a program like that, then the 529 account for you is even more of a no-brainer. That one's always hard for me to remember because having been a Florida resident my whole life, we don't have state income taxes.

But there are many states for which the state income tax credit is a big deal. If you want to go and find a 529 account or open one, I would commend that you start with your own, start with the state that you, sorry, start with the provider that you work with.

Remember that in many cases, you're going to need to choose a state. And so I would refer you to Clark Howard, the financial commentator and his team, clarkhoward@clark.com. They keep an updated list of 529 accounts where they go through and discuss what they think are the best 529 accounts.

I would refer you to his list as a really good option for you to look at with low, that offer 529 plans with low costs, etc. And avoid the high-tax, excuse me, the high-cost 529 plans. You have options there, so make sure you prioritize the best ones. I'd refer you to Clark Howard's 529 plan guide.

That concludes my comments on this particular topic. I hope it's useful to you. Exciting times out there. Tell you what, there's so many great options in the United States to save on taxes, etc. It's a very, very tax-efficient place to be. Don't let people, don't let anybody convince you of the alternative.

These are great programs. These are good investments. These are great options. And they're only getting better. I don't know what future congressional generations will do, if they'll change some of these laws. Of course they will, because they always do. But at the moment, work hard, set up excess money, and have it available to you.

By the way, this is a good time to mention that during the month of August here, I'm running a sale on personal consulting. All the details of that are, of course, in a separate audio. But if you'd like to book me for a personal consulting appointment, you'd like to talk to a certified financial planner who knows the ins and outs of all this stuff.

And maybe you're sitting on a pile of cash and you're saying, "How do I use all these programs to maximum effect?" Go to RadicalPersonalFinance.com/consult. Huge savings for you right now during the month of August. RadicalPersonalFinance.com/consult. Be back with you soon. The holidays start here at Ralph's, with a variety of options to celebrate traditions old and new.

You could do a classic herb roasted turkey, or spice it up and make turkey tacos. Serve up a go-to shrimp cocktail, or use Simple Truth wild-caught shrimp for your first Cajun risotto. Make creamy mac and cheese, or a spinach artichoke fondue from our selection of Murray's cheese. No matter how you shop, Ralph's has all the freshest ingredients to embrace all your holiday traditions.

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