Estate planning is not always coordinated among the generations and across family lines. This is especially true when it comes to funding a college education. A lucky child may find themselves the beneficiary of one or more of the following: (i) a generational education trust established for their benefit by a remote ancestor; (ii) a Uniform Transfer to Minor’s Account established by parents to hold birthday money for future college expenses; (iii) direct payments of tuition made to the college by an auntie who knows such payments are not taxable gifts under section 2503(e) of the Internal Revenue Code; (iv) a 529 education saving plan that, if started early and fully funded, can hold hundreds of thousands of dollars; and (v) scholarship money.
Beginning in 2024, there is now some relief for the lucky child with excess funds in a 529 plan that will not be used for education expenses. The 529 plan beneficiary can roll over into a Roth IRA a portion of the 529 plan not to exceed the annual Roth IRA contribution limit (currently $7,000). There are two limitations to keep in mind. First, the beneficiary must have earned income equal to or in excess of the amount that will be rolled over. Second, the maximum amount rolled over in the lifetime of the beneficiary is $35,000. A limitation you can simply forget about is that there is no income limit imposed on high earners. The beneficiary can be earning $70,000 a year or $700,000 a year and the rollover option is still available.
Remember, the wealth will grow income tax-free within the Roth IRA and will be distributed to the Roth IRA owner income tax-free when the time comes. If the full $35,000 goes into the Roth IRA and grows at 5% a year, the wealth increases to over $280,000 in 40 years. A great jumpstart to retirement planning.
Melissa Langa is a member of the Boston law firm of Bove Langa Witherell & Soiffer PC. She has built her practice guiding domestic and international individuals, families, businesses and charitable organizations in designing and implementing customized tax-efficient structures to meet their particular estate planning, business and charitable needs. She also assists clients in the administration of the estate of a deceased family member and advises fiduciaries in the administration of estates and trusts. In addition to being an adjunct professor teaching estate planning in the Graduate Tax Program at Boston University School of Law, Langa is a Fellow of the American College of Trust and Estates Council (ACTEC) and co-founder of the local chapter of the London-based international Society of Trust and Estate Practitioners (STEP Boston). She is a member of the Estate Planning Curriculum Advisory Committee for Massachusetts Continuing Legal Education (MCLE) and a member of the International Practice Committee of Trusts & Estates Magazine. Langa is a member of the Massachusetts Bar Association’s Probate Law Section Council. She is also a past president of the Boston Estate Planning Council. Langa’s books include International Estate Planning (with Barbara Hauser) and The Complete Book of Wills, Estates, and Trusts (with Alexander A. Bove Jr.). In addition to her professional activities, Langa is a member of the Board of Trustees of the Massachusetts Bar Foundation and serves on its Executive Committee as vice president.