Hey guys, Mike Frontera here from Retirement Theory. I’ve been getting a lot of questions lately about 529 plans as kids are graduating high school and getting into college where we are going to be using this money and having to liquidate the savings that are in there. With the market being in such a nasty place last year, a lot of people are saying, “Well jeez I’ve taking these big hits. I’m going to be forced to sell the stuff while it’s down Just so I can pay tuition. And is there any other way that something I can do to avoid that?” So, I’ve got 4 different ideas of things you can do to not have to just, you know, lock in that loss, and instead, preserve what’s there for your child.
The first one is a lot of these 529 accounts have what are called age-based portfolios. And what those are is they are a single fund that has all the different asset classes to make up that portfolio. So, there’s stocks in there and there’s bonds and there’s cash and whatever else. All right, so when you need $5,000, let’s say, to pay for tuition, you’re selling out of all those different asset classes. Some of which are down quite a bit. So instead, you might want to look at your 529 menu of investment options and try to match as close as you can to what that age-based portfolio’s allocation is, but using different funds to match each one of those asset classes. What happens there, the benefit of doing that, is that it’ll allow you to choose what portion or what asset class you want to sell right now to pay for tuition. And leave the others hopefully to recover.
So, the second thing is what’s called an allocation swap. So, you can basically take the value of the 529. Let’s say it’s $50,000. And within your retirement account, this is assuming you have $50,000 or so of assets that have held up really well. Ok, like, short-term bonds, cash, and take that portion within your retirement and allocate it like just your 529 is. Ok, that mix of stocks, bonds, whatever it is, put that $50,000 in your retirement just like that. And then on the flip side, you take the 529 account and you allocate it like that portion of your retirement account was. Which is going to mostly be cash and short-term bonds. So, you basically swap the allocation between the two accounts and so what that does is, it doesn’t force you to sell out those areas of the market that are down. You still own them. It’s just now you own them within your retirement and hopefully, as long as you’re willing to take that risk on in your retirement account, you’ve given yourself a lot more time for those to recover. And now you’ve got your 529 it’s in those safer assets that you can liquidate.
So, the third thing is that as a result of the Secure Act a couple of years ago, you can use up to $10,000 of 529 money to pay down student loans. So rather than being forced to liquidate assets that are currently down, maybe it makes sense to take a student loan, give that money time to recover knowing that you can use up to $10,000 of that money down the road to pay off student loan debt. So, it may be a better alternative than selling out of it as a loss.
And finally, there’s a new provision from the Secure Act 2.0 that allows for tax-free rollovers of the 529 account to a Roth IRA for your child’s benefit. The major provision of this is that you have a lifetime maximum that you can do, a lifetime limit of $35,000. Each year, you are limited to rolling over the maximum annual contribution limit for a Roth IRA. And the 529 has to have been in existence for 15 years or more. But what is very interesting about this is it allows you take those assets, especially I’m thinking of those stock assets, that maybe down a lot, and rather than use them for education, you say, “Ok,well I’m going to sort of jump start their retirement savings instead with that money.”
And rather than sell them out while they are low, push them over into the Roth and now you’ve got a lot more time to allow for the market to recover because now these are retirement assets instead of educational assets.
So, there you go, there’s 4 different ideas of how you can make lemonade out of lemons from what’s happened in the stock market and bond market in 2022 as it relates to 529s.