The Balancing Act Between Saving for Retirement and Paying for College Just Got Easier

Managing the balance between saving for retirement and paying for college is like walking a tightrope. While saving for retirement provides financial security for the future, paying off student loans relieves the burden of debt (and accompanying stress) and increases financial flexibility in the present.

According to Stacy Francis, founder and owner of Francis Financial, “Navigating the balance between saving for retirement and paying for college requires strategic planning and informed decision-making.” Due to new changes in 529 rules in 2024, accomplishing both has never been easier.

As a Certified Financial Planner® and a parent of a high school senior, Francis said she is all too familiar with the stress and excitement of college planning and is optimistic about the additional savings opportunities: “The recent changes in 529 plans provide relief, given that there are more options for managing college expenses and saving for the future.”

Here are a few of the highlights.


Employer Matching for Student Loan Payments

Student loan debt is one of the most potentially burdensome forms of debt, given how fast it can accrue interest. In many cases, balances grow to be larger than the original loan as the years go by.

Before 2024, paying off student loans using a 529 plan was not considered an allowable expense. However, rules taking effect beginning January 1, 2024, under the SECURE 2.0 Act, which was first enacted in 2022, employers may now match an employee’s student loan payments in the same way as if the employee was contributing to their 401(k), 403(b), or Simple IRA plans.

For employers offering matching, which not all do, the new provision allows borrowers to pay off their student loans more quickly.

“The new employer matching provision for student loan payments represents a significant shift in how we think about education funding and retirement planning. It’s a win-win for employees seeking to reduce their debt while building their nest egg,” said Francis.


Excess 529 Funds Can Be Allocated to Retirement

Calculating how much you will need to contribute to meet college expenses is an ongoing challenge for 529 plan owners who invest in them so that any growth will not be subject to income tax upon withdrawal. Due to the variables involved, such as fluctuations in interest rates, embedded fees, plan performance, and the rise in tuition costs, it can be hard to get the number right. For some plan owners, this results in excess money being left in the 529 account after they finish making all of their payments.

Though plan owners can transfer excess funds to another child in the family, there is now another option. Under another provision of the SECURE 2.0 Act, beginning in 2024, 529 plan owners will be able to transfer up to $35,000 of any account balance into a Roth IRA for that specific 529 account beneficiary.

“The ability to transfer excess 529 funds to a Roth IRA is a game-changer. It offers families unprecedented flexibility in managing their long-term financial planning and ensuring that no dollar saved goes to waste,” said Francis.

Any rollover must adhere to the annual Roth IRA contribution limits, meaning a beneficiary cannot roll over the entire $35,000 sum in a single transaction. In 2024, the yearly Roth IRA contribution limit is $7,000, with an additional $1,000 allowance for investors aged 50 and above. This would mean that if there were a $37,000 balance left in a single 529 account, it would take a minimum of five years to transfer the money, with $2,000 left over that would be ineligible for transfer to an IRA.

Before SECURE 2.0, if a 529 plan account owner or beneficiary withdrew excess funds, the withdrawal would be categorized as non-qualified. Non-qualified withdrawals are considered taxable income, subject to a 10% federal tax penalty on earnings. The new rule eliminates this for amounts up to $35,000.

For a 529 account to qualify for the rollover option, it must have been open for at least 15 years with the same beneficiary designation (changing the beneficiary will reset the clock) and have assets held within the account for at least five years. Note that only contributions to a 529 plan made beyond the five-year window preceding the rollover date are eligible for transfer to the Roth IRA; contributions made within five years of the rollover are ineligible.

Moreover, income verification is not required for the Roth owner, so while there are contribution limits, the typical income limits do not exist. This flexibility can ease some of the concerns about what will happen to unutilized funds, affording 529 plan owners more control and choice over their financial future.


Retirement Contributions Will Be Excluded From Income Amount

Anyone who has ever filled out the Free Application for Federal Student Aid (FAFSA) knows how confusing it can be. What counts as income? What doesn’t? How will income levels affect the student’s eligibility for financial aid?

Under the FAFSA Simplification Act, parents’ retirement contributions will no longer factor into their income assessment for their children’s financial aid eligibility. This recent change will allow parents to maximize their retirement savings while reducing their income level, potentially leading to more favorable financial aid packages for their children.

“The FAFSA Simplification Act is a pivotal development that allows parents to focus on their retirement without compromising their child’s eligibility for financial aid,” said Francis.


Cautious Optimism for the Future

Striking the right balance between saving for retirement and saving for college and when to do each requires careful thought, planning, discipline, and taking a long-term perspective on financial well-being. These recent changes help make that possible.

That said, implementing change is never easy or without its hiccups. Companies will need some time to get up to speed as they integrate the changes into their existing benefits frameworks. So don’t expect to see them available to you from your employer right away.

Complicating matters further, given how new the changes are, there are still gray areas around how to handle transfers. Since not every state follows the federal definition of what qualified expenses are, it is unclear whether a specific state will consider IRA rollovers as qualified expenses for income tax purposes.

In states that will not, rolling over funds from a 529 plan into an IRA could result in tax penalties. In the meantime, the hope is that the kinks are being worked out and future savings opportunities are on their way.

“These new legislative changes empower individuals to optimize their financial resources across generations,” said Francis.

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