dsmWealth: September 5, 2024

New law enables parents to redirect college savings accounts
BY STEVE DINNEN

You just shuttled your youngest off to college, where a free ride — tuition, room and board — awaits her because she is so smart. But now you have a problem, because the money you tucked away in a college savings plan is no longer needed.

Until recently, taking that unspent money out of a tax-favored investment account and not spending it on education expenses triggered both income taxes and a federal 10% tax penalty. But the law has changed, so now you can divert unused dollars from these so-called 529 plans to a Roth IRA in the name of the beneficiary. No taxes, no penalties.

“This can be a real winner,” said Bob Petix, senior wealth strategist at Wells Fargo Wealth and Investment Management. “This is just a terrific expansion.”

Petix explained several conditions to successfully make the switch. For starters, the 529 plan has to have been in place for at least 15 years. Funds cannot be rolled into a Roth until five years after the funds were contributed or earned. Beneficiaries are allowed to roll over up to $35,000 over their lifetime into a Roth in their name. The limit is subject to an annual Roth contribution limit, currently $7,000, but you can make the switch over multiple years.

An added bonus is that the beneficiary, presumably in their 20s, gets a head start on a Roth, which is meant to generate retirement dollars decades in the future.

All 529 plans are run by individual states. Here, the 529 plan is called ISave 529 (formerly College Savings Iowa) and is administered by the state treasurer. The money is invested in mutual funds managed by the Vanguard Group. There is a small fee for this, just .17%, and the Investment Company Institute estimates that mutual funds in general charge a .44% management fee.

In addition to relatively low fees, returns for the 17 investment options in ISave 529 have been significant. The best performance has come from the domestic stock index portfolio, up a solid 26% during the past 12 months.

Iowa has increased the tax break on contributions to 529 plans to $5,500. Foster Group crunched some numbers and figured out that if each parent opens an account for their three children, they can get a $33,000 deduction on their state income taxes for their contributions. That’s a lot of money.

But so is putting three children through school. So study hard, kids. Win scholarships and ease that burden on Mom and Dad.

Retirement accounts keep yielding more, for more people
BY STEVE DINNEN

Yes, you can get rich at a 9-5 job, and we now have a record high number of 401(k) millionaires to prove it.

Reviewing 24 million 401(k) plans across the nation, Fidelity Investments estimates that as of the second quarter 2024, there are now 497,000 accounts with values exceeding $1 million. Individual retirement account (IRA) participants have also reached a record with 399,000 of them now carrying balances of $1 million or more.

The average retirement account balance grew for the third consecutive quarter, with 401(k) and IRA balances up 1% to $127,100 and $129,200, respectively. Those numbers fall well short of that $1 million mark, but remember that both 401(k)s and IRAs include a lot of bonds that haven’t performed as well as stocks. Plus, these numbers look at participants of all ages; some have been in the programs for five years, while others have been contributing for 45 years. The 401(k) debuted in 1978.

The average 401(k) account balance is up 13% from a year ago, and the average IRA account balance is up 14%. That looks good, but consider that over the same period, the Dow Jones Industrial Average was up 18%, and the S&P 500 climbed about 24%.

So, you’re doing well, but with just a little more effort, you may be able to catch up.

Sharon Brovelli, president of workplace investing at Fidelity Investments, said in the study that contribution levels have reached record highs. There’s that extra effort.

How to write a fraud-proof check
BY ELLA VINCENT FOR KIPLINGER

It may seem as though check writing is becoming a lost art, but it remains a popular way to send money. A recent study from Abrigo, which makes fraud-prevention software, found that 61% of Americans still write checks.

If you’re among them, there are a few simple precautions you can take to avoid fraud and theft.

Check washing and ID theft

Check washing scams involve changing the payee names or the dollar amounts on checks and fraudulently depositing them. Criminals may also steal checks from mailboxes and use chemicals to remove — or "wash" off — the ink before rewriting it to themselves.

To avoid falling victim, make sure to fill out all the required fields on a check. If possible, use indelible ink or a gel pen; gel ink is more difficult for criminals to “wash” off than ink from a ballpoint pen.

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Younger retirees can face a ‘phantom tax’ on Marketplace health insurance. Here’s how to avoid it.
BY KATE DORE FOR CNBC

Because most Americans aren’t eligible for Medicare before age 65, many younger retirees rely on Marketplace health insurance, which offers lower monthly premiums through the end of 2025 thanks to boosted tax breaks. But retirees can face a costly tax surprise without proper planning, experts say.

As of open enrollment 2024, more than 5.1 million Americans aged 55 to 64 had Marketplace coverage, up from roughly 3.4 million in 2021, according to data from the Kaiser Family Foundation.

In 2021, Congress temporarily enhanced the premium tax credit, which allows Marketplace enrollees to lower monthly premiums upfront or claim the tax break when filing their return. The legislation covered 2021 and 2022, but lawmakers extended that benefit through 2025.

With Marketplace benefits tied to earnings, younger retirees can leverage lower premiums after leaving the workforce. But some are subject to a “phantom tax” when income rises, according to Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida. “These are very valuable credits,” and several financial moves in retirement could affect them, Lucas warned. “You have to be extremely careful.”

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