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Kick-Start Your Child’s Retirement Savings by Rolling Over Unused NYS 529 Plan Assets

With college costs increasing at a rate greater than inflation, investing within a 529 plan offers participants the opportunity to keep up with rising education expenses with some immediate tax savings upon funding. Since there are many unknown factors as to how much your child’s future education expenses will cost, it can be difficult to pinpoint exactly how much to save. As a result, some of these plans are overfunded and subject to tax penalties if withdrawn for non-qualified education expenses.

New York State has recently adopted the Federal Secure 2.0 Act ruling that allows unused 529 plan balances up to $35,000/beneficiary to be rolled into a Roth IRA for the original beneficiary. This transfer will be income tax and penalty free if participants meet the following requirements:

  • The 529 account must have been open for 15 years prior to the conversion.
  • The amount being rolled over must have been in the 529 account for at least 5 years prior to being rolled over.
  • The amount being rolled over cannot exceed the annual Roth IRA contribution limit each year ($7,000 for 2025).
  • The 529 plan beneficiary must also be the owner of the Roth IRA and have earned income at least equal to the amount being rolled over each year.

The chart below shows the result of rolling over $35,000 of unused funds assuming a 6% annual rate of return over the course of 40 years. This projection assumes the $35,000 will be rolled over in $7,000/year increments for the first five years with no additional subsequent contributions.

As you can see, rolling over your child’s unused NYS 529 plan funds can provide them with a substantial head start on their retirement savings. It is worth noting that any unused funds above the $35,000 limit will be subject to the following penalties upon distribution:

  1. The portion of nonqualified distributions attributable to earnings will be subject to federal income tax and a 10% penalty.
  2. The individual who originally contributed to the NYS 529 plan will have to recapture any previously deducted contributions attributable to the non-qualified distributions on their NYS tax return.
  3. The beneficiary will have to pay tax on the earnings portion of the distribution at their NYS ordinary income tax rate.

Overall, this strategy provides a unique opportunity for individuals to rollover a portion, or all, of their overfunded 529 plan balances invested to a tax-advantaged Roth IRA without facing penalties. New York State has authorized participants to implement this strategy, however the tax treatment will vary depending on which state you live in. We suggest contacting your Rockbridge financial advisor if you are interested in learning more about how these rules may apply to your situation.

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Leveraging Investments for Charitable Donations

Utilizing investment assets to fund charitable contributions allows investors to maximize their donations while simultaneously receiving a greater tax benefit. Consider implementing the following strategies prior to the end of the year to elevate your charitable giving for 2024:

Qualified Charitable Distributions(QCDs):

  • A Qualified Charitable Distribution (QCD) is a direct transfer of funds from an IRA to a qualified charity. This strategy is limited to those ages 70 ½ and older with a $105,000/year distribution limit per taxpayer. QCDs are a great strategy for those who are of RMD age since they are excluded from taxable income and satisfy the RMD requirement.
  • Since QCDs are excluded from income, taxpayers are not required to itemize their deductions to receive a charitable tax benefit.

Donor Advised Funds (DAFs):

  • A Donor Advised Fund (DAF) is a charitable investment account. Account holders can make tax deductible contributions that appreciate over time and are subsequently distributed to charities of their choice. This potential investment appreciation gives donors the opportunity to maximize the amount of donations given on their behalf while receiving an upfront tax benefit at the time of funding.

Contribute Appreciated Investments:

  • When appreciated investments are directly transferred to a qualified charity, the donor avoids paying capital gains tax that would have otherwise been due upon sale of the investment. Additionally, if the investment owner has held the asset for more than a year, they can claim an itemized charitable deduction for the full fair market value of the asset up to a limit of 30% of their adjusted gross income (AGI) in the year of the donation to public charities.
  • Donating appreciated assets gives donors the ability to contribute more than they may have otherwise been able to. The charity will receive the full market value of the donated appreciated asset and will not be subject to capital gains upon sale. The charity may also choose to keep the donated assets invested, providing them with a potentially larger benefit than a cash donation of the same amount would have.

By leveraging investment accounts for charitable giving, investors can enhance both the financial and philanthropic outcomes of their donations, while potentially reducing their tax burden and creating a lasting legacy. Given the complexity of tax laws, if any of these strategies appeal to you please consult with your Rockbridge financial advisor when considering.

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Corporate Transparency Act – Filing Requirement

The Corporate Transparency Act requires small and medium sized businesses created by filing paperwork with a Secretary of State (Corporations, LLCs, LLPs etc) to report identifying information by 12/31/2024 to the Financial Crimes Enforcement Network (FinCEN).

  • Some exceptions include charities or companies with 20 or more employees, and $5M in annual revenue.

New Filing Obligations for the Corporate Transparency Act

  • Purpose: to create a national database of companies in the U.S. that identifies the individuals behind those companies.
  • Intended to combat money laundering, terrorism, tax evasion, and other financial crimes
  • Closely held businesses will more than likely be required to file with FinCEN, there are several exceptions however (32 types of business are exempt in total).
  • Estimated that 32 million entities will have to file with FinCEN.

What must be included in filings:

  • Company Legal name and any DBA
  • Tax Identification Number
  • Image of identifying document from an issuing jurisdiction

Any companies required to file with FinCEN must report who their “Beneficial Owners” are

    • Beneficial Owner
      • Own at least 25% of an entity, or “exercise substantial control over a reporting company”. Ex. a managerial position.
      • Need to give the reporting entity their full legal name, DOB, home address, copy of US passport or state driver’s license.

Filing Timeline:

  • All entities that existed before 2024, unless specifically exempt will have to file by 12/31/2024. 
  • Any new entities will have to file within 30 days of the formation.
  • Any changes in ownership (address, took a new last name, new owner, owner leaving etc.) will have to be filed within 30 days.

Penalties for non-compliance are punitive (~$600/day per infraction, potential jail time)

If you believe you may be impacted by this legislation, please contact your attorney or CPA to discuss your filing requirements.

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Year-End Tax Planning

While tax season is still several months away, year-end will be here before we know it. With that in mind, it’s important to make sure you’re taking advantage of the tax-planning strategies that make sense for your unique situation. Here’s a short list of topics we’ll be discussing with our clients over the next few months:

 

  • Retirement Account Contributions – Have you maximized contributions to employer plans or IRAs yet for 2024? If you haven’t and plan to, you’ll need to make sure elective deferrals to employer plan are maximized before 12/31. However, you have until the filing deadline for IRA contributions.

 

  • Required Minimum Distributions (RMDs) – There have been significant changes to the rules around Required Minimum Distributions over the last few years, and even more specifically, RMDs for inherited accounts. Depending on your age and when you might have inherited an account, there could be planning opportunities regarding how much you take before year-end.

 

  • Roth Conversions – If 2024 is likely to be a lower income year for you compared to future years, Roth conversions might make sense. Ideally, this strategy would allow you to convert pre-tax assets at a favorable income tax rate now to allow tax-exempt growth and distributions in the future when your income tax rate might be higher.

 

  • 529 Plan Contributions – If you are planning to help your children with future educational expenses, the best place to save for that goal is a 529 plan. Contributions up to $10,000/year (joint tax return) are tax deductible on your New York State tax return. These contributions are due by 12/31.

 

  • Annual Gifting – Each year, individuals can gift up to $18,000 to another person without needing to file a gift tax return. This can be an effective way to reduce your eventual estate tax liability. For example, an older couple could give their child and child’s spouse a combined $72,000 in 2024 without generating a taxable event for either couple.

 

These are just a few of the many tax planning strategies we help our clients consider on an annual basis. To optimize your tax picture for 2024 and beyond, contact a Rockbridge advisor today.

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Inherited IRAs – IRS Issues Final Regulations

Prior to 2019, most beneficiaries of Inherited IRAs could stretch out Required Minimum Distributions (RMDs) over their lifetime. However, the first SECURE Act eliminated this benefit and required that most non-spouse beneficiaries empty inherited accounts within 10 years. This change led to considerable confusion, most notably, whether annual RMDs were necessary during this 10-year period. As a result of the confusion, the IRS waived RMDs from Inherited IRAs for the past three years.  However, earlier this month the IRS issued final regulations for anyone that inherited an IRA in 2020 and thereafter.

IRS Final Regulations, required for any non-spousal IRA inherited in 2020 and later:

  1. If Deceased IRA Owner Had Started RMDs:
    • Most beneficiaries must withdraw funds within 10 years beginning the year after death.
    • Annual RMDs for each of the 10 years beginning the year after death.
    • Caution: Small annual withdrawals could lead to a large, taxable distribution in the final year to draw down the balance to $0.
  1. If Deceased IRA Owner Had Not Started RMDs:
    • No annual RMDs, but the account must be empty by the end of year 10.
    • Most beneficiaries can withdraw any amount, or $0, a year over 10 years.
    • Caution: Waiting until the 10th year could lead to a large, taxable distribution in the final year to draw down the balance to $0.

For inherited IRAs requiring distributions since 2020, the 10-year clock has already started, however the IRS waived all penalties for failure to take RMDs through 2024 due to previous regulatory uncertainty.

For beneficiaries that inherited multiple IRAs:

  • Different rules may apply to different inherited accounts.
  • Careful management of each account is important.

For beneficiaries that inherited an IRA prior to 2020:

  • These accounts remain subject to the old “stretch” IRA rules, allowing withdrawals over the beneficiary’s lifetime.

Important Takeaways:

  • Tax Planning: Work closely with your tax preparer and Rockbridge Financial Advisor to develop a withdrawal strategy that minimizes your tax burden. Taking only the minimum distribution each year could result in a significant tax hit in the final (10th) year. In certain situations, it may make sense to delay significant withdrawals; for example, if you are nearing retirement and income will decrease significantly in the future.
  • Account Inventory: If you’ve inherited multiple IRAs, carefully review the rules applicable to each account. Different inheritance dates may mean different withdrawal requirements.
  • Spousal Exemption: These new regulations generally do not affect spouses who inherit IRAs, as they have special rules allowing them to treat the inherited IRA as their own.

Whether you’ve recently inherited an IRA or inherited an IRA prior to 2020, it’s important to understand your obligations and strategize accordingly.

Note that a separate set of rules applies to beneficiaries of Inherited IRAs who are a surviving spouse, minor child, person not less than 10 years younger than the decedent, or persons that are disabled or chronically ill.

Given the potential tax implications and the complexity of these rules, consulting with your Rockbridge Financial Advisor and tax professionals is highly recommended to minimize your tax burden and ensure compliance with IRS regulations to avoid penalties up to 25%.

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Retirees and Part-Time Work: Navigating the Tax Complexities

Businesses everywhere face the challenge of finding and retaining valuable employees. To fill these gaps, many employers are turning to retirees. With years of experience, institutional knowledge, and for many a desire to stay busy while earning income, they are an excellent candidate to help bridge the employment gap. Confronted with the offer of highly compensated part-time work, it’s no mystery why many retirees are lured back into the workforce.

Those weighing their options must first understand if they are being offered the ability to continue as a W-2 employee, or if they will be categorized as an “Independent Contractor” commonly referred to as a “1099 employee”. As a 1099 employee, you are technically self-employed, and there are a number of tax implications that come with the status:

  1. Self-Employment Taxes. As traditional W-2 employees, both the employer and the employee split the responsibility for paying Social Security and Medicare taxes, with the employer covering half of the total 15.3% tax burden. However, as self-employed individuals or contractors, you are responsible for the entire 15.3% self-employment tax, which consists of a 12.4% Social Security tax and a 2.9% Medicare tax.

This significant increase in payroll taxes can be a rude awakening for those used to having their employers pay a portion of these costs. These additional taxes must be taken into consideration, as failing to do so could result in a large tax bill come April.

  1. Increased complexity when it comes to tax preparation and filing. As W-2 employees, employers would typically handle tax withholdings and provide them with a straightforward W-2 form at the end of the year. As an independent contractor you are responsible for tracking income and expenses, making quarterly estimated tax payments, and filing a more complex tax return that includes Schedule C (Profit or Loss from Business) and potentially other forms related to self-employment income.

Failing to properly account for and pay estimated taxes throughout the year can result in underpayment penalties and interest charges potentially further diminishing net income from part-time work.

  1. Additional challenges when it comes to deducting business expenses. While employees can typically only deduct a limited number of unreimbursed job-related expenses, independent contractors can deduct a wide range of business expenses which may include home office expenses, transportation costs, and other operational expenses related to their contracting work.

Documentation for these deductions can be strict, requiring detailed records and information. The New York State Department of Taxation and Finance has placed an extra emphasis on auditing itemized deductions and business deductions as of late, so it is critical to understand the rules for deducting these expenses.

  1. Lack of access to employer-sponsored retirement plans, such as 401(k)s or pensions. As independent contractors, retirees are solely responsible if they would like to continue saving into a retirement plan and must explore alternative options, like individual retirement accounts (IRAs) or self-employed retirement plans like SEP-IRAs or i401(k) plans.

While these options provide tax-advantaged ways to continue to build the retirement nest egg, the administrative responsibilities now fall on the self-employed individual. This can be challenging for an individual who has never had to navigate the process of establishing and funding this type of retirement account.

Despite these potential obstacles, returning to work as a contractor can still be a viable and rewarding option for many retirees. However, individuals should educate themselves on the tax implications and seek guidance from qualified tax professionals or a trusted advisor. If this is something you are considering and have questions as to how it might impact your retirement plan, contact a Rockbridge advisor today.

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Qualified Charitable Distributions

Qualified Charitable Distributions (QCDs) allow taxpayers age 70 ½ or older with traditional IRAs (not including active SEP or SIMPLE IRAs) to make charitable contributions directly from their IRA to a qualified charity (not a donor advised fund or private foundation) that will be excluded from their taxable income. This is especially beneficial for those who have to take required minimum distributions (RMDs) since Qualified Charitable Distributions from an IRA will count towards a taxpayer’s RMD. Therefore, utilizing QCDs gives those at RMD age the opportunity to satisfy their RMD requirement without incurring a tax liability.

 

For individuals age 70 ½ and older, QCDs can provide greater tax savings than typical charitable contributions reported on Schedule A of their 1040 since the distributions are guaranteed to be excluded from income even if the taxpayer cannot itemize their deductions. Traditional charitable contributions, including contributions to donor advised funds, are only useful to taxpayers who itemize their deductions. Even then, deductions are limited to 30% to 60% of AGI depending on the type of contribution (cash vs. non-cash).

 

In order for QCDs to be eligible they must be contributed directly from the taxpayer’s IRA to the qualified charity. They are only excluded from a taxpayer’s income up to $100,000 for single taxpayers ($200,000 for MFJ) per year.

 

Important to note, QCDs are not indicated as such on a taxpayer’s 1099-R, so it is imperative that any Qualified Charitable Distributions made throughout the year are properly documented by the taxpayer and communicated to their tax preparer.

 

To summarize, the steps for making a Qualified Charitable Distribution are as follows:

 

  1. Request a QCD withdrawal form from your financial advisor.
  2. The custodian will then process and transfer the distribution to the charity indicated.
  3. You will receive your 1099-R in the mail after year end.
  4. Specify to your tax preparer the amount of distributions on your 1099-R that are attributable to QCDs.

 

Please be sure to reach out to your Rockbridge financial advisor if this is something you would like to pursue.

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Bonus Depreciation Phase Out

When businesses purchase eligible property such as equipment, there are two options available to allow them to accelerate book depreciation, rather than write the asset off over the useful life. Under Section 179 of the Internal Revenue Code (IRC), the business may expense the entire cost of that piece of property in the year of acquisition, up to $1,220,000 in 2024, thus lowering the business’ taxable income. However, Section 179 depreciation cannot be applied in a year the business incurs a taxable loss, and would require a carry-forward.

 

As an alternative, a business may elect what is known as “bonus depreciation.” Bonus depreciation is a product of the Tax Cuts and Jobs Act of 2017 and allows businesses to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017 and before January 1, 2023. This is known as 100% bonus depreciation, it differs from the 179 deduction since the business is still eligible if they are operating at a loss. In addition, there is no limit on the amount of bonus depreciation a business may take in a given year. While the 100% write-off expired at the end of 2022, the bonus depreciation incentive still exists in some capacity as scheduled below:

 

  • Property placed in service in 2023 is eligible for 80% bonus depreciation.
  • Property placed in service in 2024 is eligible for 60% bonus depreciation.
  • Property placed in service in 2025 is eligible for 40% bonus depreciation.
  • Property placed in service in 2026 is eligible for 20% bonus depreciation.

 

This is a great tax planning opportunity for individuals who are partners/shareholders in a business that typically operates at a loss and are planning significant fixed asset acquisitions over the next few years. These individuals should try to accelerate any major asset purchases in order to be able to receive the maximum amount of bonus depreciation as it continues to wind down each subsequent year. Business owners who typically take advantage of bonus depreciation should be aware of this phase-out in order to avoid oversight on projected loss calculations for the next few years. Examples of common industries that may be affected by these changes include the manufacturing, rental real estate, and the agricultural industry. In addition, be sure to verify with your tax professional in regards to your State’s conformity with the Tax Cuts and Jobs Act as it relates to bonus depreciation.

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