529 funds

justme said:
My understanding... the 529 funds would be taxable if you take them out "for a SA". So, you would be re-investing that money in the Roth after paying tax on gains. If you convert the money directly from the 529 to the Roth, (the new rule starting next year) those gains go in tax free before and after. Both do the same thing, other than that one tax difference, and subject to same annual limits, etc.

I would love a tax expert to confirm/deny. That is how I read the articles about this. This is our current plan with DS' small 529. Converting in 10 years or so, once he gets to a point where he isnt maxing his own contribution to his roth.
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At the very least the part that you put straight into a Roth isn't. Since I already had a Roth before my 529 I had excess funds that I couldn't deposit into my Roth. That's taxable income.
 
Are 529 Plans able to be used to cover the remaining costs at Northwestern Prep? (FFS Recipient)
 
nomad556 said:
At the very least the part that you put straight into a Roth isn't. Since I already had a Roth before my 529 I had excess funds that I couldn't deposit into my Roth. That's taxable income.
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Again, I think people really get caught up in the “taxable” part of the equation. If we are talking about a Cadet/Midshipmen their taxable income is minimal. Any tax incurred is far outweighed by the long term benefit of having that money in a retirement account at an early age.
 
UHBlackhawk said:
Again, I think people really get caught up in the “taxable” part of the equation. If we are talking about a Cadet/Midshipmen their taxable income is minimal. Any tax incurred is far outweighed by the long term benefit of having that money in a retirement account at an early age.
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10% fed tax on $35K is still a pretty significant sum. I agree with you on the long-term benefit of fully funding a retirement account at an early age. One approach to both avoid federal taxes and keep the youth's capital gains potential intact is to ratchet up the equity part of the 529 account. Just wish 529 plans could offer a bit of crypto exposure because DS often reminds me about crypto's gains/excitement/portfolio diversification potential vs drab/steady index funds ;-)
 
I think definitely the best financial play with the new law is yearly starting in 2024, start converting the 529 at the maximum yearly limit $6500? until you have reached the maximum 529 to Roth lifetime rollover limit of $35,000.

Then for anything over that, hold in the 529 until you are sure that they will not need it for Grad School or other family members education.

Then after that, disburse yearly while watching the tax brackets to the level where you don't trigger a higher tax bracket. You'll want to try to stay in the 12% tax bracket and just barely touch or avoid the 22% tax bracket triggered currently at $44,725 of taxable income . They will pay taxes on the gains that occurred in the 529 plan. Which if it is like our fairly conservative 529 over 18 years, only about 33% of the account is gains. So you get ~67% free and clear on the 529 withdrawal since they were 529 contributions, and you'll pay federal and state taxes on ~33% of the 529 withdrawal.
 
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