SECURE Act 2.0
On December 29th, President Biden signed the “SECURE Act 2.0” into law. This act builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which was signed into law by President Trump.
There are many aspects of this new bill and you can learn more about it here.
Changes to 529 Plans
For many of us, the most important aspect of the bill was that it created new rules around 529 college savings plans.
The biggest benefit of a 529 plan is that it is a tax-free investment account, as long as the money is used for qualified education expenses. However, if the money is not used for qualified education expenses, withdrawals from this account are fully taxable and carry an additional penalty of 10%.
This is a pretty big hit. And it’s hard to predict exactly how much your children will need in college savings in 10, 15, 18 years. I’ve seen many times in the past where parents end up overfunding this account. In fact, I once saw a situation where the kids graduated college, while Mom and Dad still had nearly $60,000 sitting in 529 accounts. With no way to avoid the taxes and penalty on these funds. Ouch!
Thankfully, the SECURE Act 2.0 provides some relief in this scenario. The funds can now be rolled into a Roth IRA without any taxes or penalties.
The Future of College Costs
In my opinion, this is especially great news because I believe the cost of college will start to come down over the next 10-15 years. Which will make it even more likely for parents to overfund their 529 accounts.
Why do I think the cost of college will fall? Because a college degree isn’t as valuable as it once was. And this reality should only accelerate in the future, as we continue moving into the digital economy.
For example, I use social media platforms as the primary way to grow my business. And not once has anyone asked – or even cared about – where I went to college. What do they care about? They care about what I value. They care about how authentic I am. They care about how transparent I am.
Of course, none of these things matter if I don’t know what I’m talking about. So expertise is a requirement. But today, expertise can be acquired very inexpensively online. You can now take courses from some of the most prestigious universities in the world for less than a thousand bucks.
I believe over the next 10-15 years, this will create less demand for traditional college degrees. And lower demand means lower prices.
How much should I save in a 529 Account?
Personally, I still want to have a good amount saved in a 529 account. There is still a lot of value in the traditional college experience: social development, school spirit, and becoming an adult. I want to be sure my kids can enjoy the experience like I did, if that’s what they want.
But I’m hedging myself. In fact – despite the ability to roll unused funds to a Roth IRA – I would still rather underfund the 529 account than overfund it.
The Roth IRA cannot be accessed until age 59 ½. I would rather have excess funds saved into a non-retirement investment account that could be gifted to my kids sooner, perhaps as a safety net while they get their career started. This will give them the freedom to explore and learn, which will help ensure they choose a fulfilling and successful career path.
If my kids were going to attend private school before college, I would contribute more to a 529 plan. Because you can use up to $10,000 per year to fund K-12 education. But my kids will be going to public schools, so this isn’t an issue for me.
As with anything, the right advice for each person can be very different. I’m happy to help you navigate this or any other decisions you may be faced with. I’m just an email away!