As the year draws to a close, many people feel inspired to give back, whether to the causes they care about or to the people who mean the most to them.

Whether you’re considering charitable donations or financial gifts for family members, understanding the financial implications of these gifts can make your generosity go further.

Here’s a financial planning guide to charitable and family gifting to make this season even more impactful.

Giving to Charity

Charitable giving allows you to support the causes you’re passionate about, often with the added benefit of tax savings. Understanding specific strategies for charitable contributions can maximize your impact, ensuring more of your gift reaches the charity and less goes to taxes.

Tax Benefits: Understanding the Basics

Tax benefits for charitable donations are only available when donations are made to qualified organizations, such as 501(c)(3) nonprofits. Additionally, these benefits apply only if you itemize deductions rather than taking the standard deduction. Some people maximize tax savings through a “bunching” strategy, where they combine donations in one tax year to surpass the standard deduction threshold.

Qualified Charitable Distributions (QCDs)

Qualified Charitable Distributions (QCDs) offer an effective way for individuals 70½ or older to make charitable donations directly from their IRAs, potentially reducing taxable income. Here are the main considerations:

Eligibility: You don’t have to be taking required minimum distributions (RMDs) to use a QCD. As long as you’re 70½, you can make QCDs.
Limit for 2024: The QCD limit is $105,000 per individual, adjusted annually for inflation.
Reporting Requirements: The forms used to report IRA distributions don’t indicate if a QCD was made. To ensure this distribution is not taxed, communicate with your tax preparer and inform them of your QCD and the amount.

Donating Appreciated Stock

If you have stocks or other assets that have appreciated in value, donating them to charity can provide substantial tax savings:

Comparison: If you sell appreciated stock, you’ll owe capital gains tax before donating the proceeds, reducing the overall impact of your gift. Donating the stock itself avoids capital gains tax and provides a deduction based on the stock’s full market value.
Additional Benefit for Charities: Charities can sell the stock without any tax obligation, keeping the full value. This effectively removes taxes from the equation, maximizing funds for both you and the charity.
Use with Donor-Advised Funds (DAFs): Appreciated stock can also be contributed to a DAF, offering an immediate tax deduction while allowing you to decide which charities to support over time.

Donor-Advised Funds (DAFs)

DAFs allow you to contribute assets, claim an immediate tax deduction, and choose when and how to distribute funds to charities. This flexibility can be especially useful in years of unusually high income:

Tax Savings in High-Income Years: By contributing more to a DAF during high-income years, you can reduce the amount taxed in the highest bracket, often resulting in significant savings.

Giving to Family

In addition to supporting charities, many people choose to share financial gifts with family members. By planning these gifts carefully, you can help loved ones while minimizing tax implications.

Annual Gift Exclusion

The annual gift exclusion is a straightforward way to transfer wealth to family members without incurring gift tax. For 2024, you can give up to $18,000 per recipient, per year. Here’s how it works:

Gift Limit: Each individual can gift up to $18,000 per recipient annually without affecting their lifetime estate exemption. For instance, a couple could gift a combined $36,000 to each child without using any of their lifetime exemption.

Advanced Strategy: Annual Gifting through Irrevocable Trusts

For high-net-worth families, annual gifting can be elevated by establishing irrevocable trusts for grandchildren or other heirs. This strategy allows assets to grow over time on behalf of the beneficiaries while still taking advantage of the annual gift exclusion:

How It Works: By contributing the annual exclusion amount into an irrevocable trust each year, you can gift money that grows tax-free within the trust for the grandchild’s future needs, ensuring that the funds remain in the family’s financial plan.
Legal Considerations: To qualify the gift for the annual exclusion, specific rules must be followed to show that it’s a “present interest” gift. This often involves Crummey Powers, which give beneficiaries a temporary right to withdraw the funds, ensuring eligibility under IRS guidelines.
Importance of Expert Guidance: This strategy is complex and requires precision. An estate attorney can guide you through the rules, explain Crummey Powers, and ensure the trust meets legal standards for tax purposes.

Lifetime Exemption and Gift Tax Considerations

For gifts that exceed the annual exclusion, the excess amount counts toward the lifetime estate and gift tax exemption, which is $13.61 million per individual ($27.22 million per couple) in 2024. However, this amount is set to change:

Upcoming Reduction: Under the Tax Cuts and Jobs Act (TCJA), the lifetime exemption is scheduled to revert to around $6 million per individual when (or if) the act sunsets in 2026. Staying informed of these changes can help guide your long-term estate and gifting strategies.

Direct Payments for Medical or Education Expenses

There is an exception to gift tax rules for direct payments made to healthcare providers or educational institutions:

How It Works: Payments made directly to cover medical or educational expenses don’t count toward your annual gift exclusion or lifetime exemption.
Important Caveat: To qualify for this exemption, payments must be made directly to the provider or institution. If you give the money to a family member to pay the expenses, it will count toward the annual exclusion.

Gifting to 529 Plans

Helping a family member with future education costs is a meaningful way to support their goals. 529 college savings plans grow tax-free when used for qualified educational expenses.

Gift Acceleration: You can front-load 529 plan contributions by making five years’ worth of gifts at once—up to $180,000 for a couple—without using your lifetime exemption. However, only the account owner is eligible for any state tax benefits associated with contributions, so it may make sense to let the primary contributor (often a parent or grandparent) own the account.

The Importance of Planning Your Giving

Whether you’re supporting a meaningful cause, helping family members, or both, strategic planning can enhance your impact and ensure your gifts align with your financial objectives. The holiday season provides a perfect opportunity to reflect on these goals, making the most of your giving today and for future generations.

Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.

Executive Summary:

Overfunded 529 Plans can be rolled into a Roth IRA to jumpstart retirement savings.

This can be a great strategy in certain situations, avoiding the 10% penalty on non-qualified distributions and receiving tax-free growth and withdrawals in retirement.

However, there are complex rules to consider, like the 15-year account age requirement and the $35,000 lifetime rollover cap.

In addition, the beneficiary must have earned income, and the rollover amount must stay within annual contribution limits.

Lastly, changing the beneficiary may restart the 15-year clock, though the IRS has not released official guidance at the time of writing.

While 529 plans are often the best way to save for college expenses, many worry about over funding these accounts.

And it makes sense, because while a 529 plan is great for qualified education expenses (benefitting from tax-free growth and tax-free distributions), when used for other purposes, 529 distributions can incur unwanted taxes and penalties.

Of course, in a perfect world, savers would end up with the exact amount they need to fund their education expenses, but the reality is not so simple. Instead, many wind up with extra funds, opting for overfunding rather than underfunding their college needs.

Which raises the question: what should you do with the extra 529 funds?

Fortunately, you’ve got options: from simply withdrawing the funds and incurring taxes and penalties, to changing the beneficiary of the account to an eligible family member and funding their college needs.

And now, with the passage of SECURE 2.0 you’ve got another powerful option: Roll the funds into a Roth IRA for the beneficiary, helping them jumpstart their retirement savings.

In this article, we will explore the pros and cons of this approach and highlight the key rules and regulations to consider.

First, let’s look at the pros and cons of rolling unused 529 money into a Roth IRA.

Pros of Funding a Roth IRA with Unused 529 Money:

Jumpstart retirement savings: Rolling unused 529 money into a Roth IRA can help the beneficiary get an early start on retirement savings.

Avoid Penalties: By rolling funds into a Roth IRA, you can avoid the 10% penalty on non-qualified distributions.

Tax benefits: Roth IRAs benefit from tax-free growth and tax-free distributions in retirement, making them a powerful investment account.

Ultimately, rolling unused 529 money into a Roth IRA can jumpstart retirement savings for the beneficiary, avoid the 10% penalty on non-qualified distributions, and offer tax benefits with tax-free growth and distributions in retirement.

Cons of Funding a Roth IRA with Unused 529 Money:

Withdrawal Rules: While Roth IRAs are great for retirement savings, they do have certain withdrawal rules that can limit your ability to access funds penalty-free.

Loss of control: With a 529 plan, you own the funds, no matter who the beneficiary is. Alternatively, if you contribute to a Roth IRA for your child or grandchild, they have full control over the account, assuming they have reached the age of majority.

Complex rules: Lastly, there are several rules that you need to be aware of when rolling unused 529 money into a Roth IRA, which we will cover in detail below.

Ultimately, this can be a great strategy, but be aware of the cons: Roth IRAs have withdrawal rules that may limit penalty-free access to funds, you lose control of the funds once they are in the beneficiary’s account, and the process involves navigating complex rules and regulations.

Next, Here Are The Key Rules and Regulations When Rolling 529 Funds into a Roth IRA

Next, let’s explore the key rules and regulations for rolling 529 money into a Roth IRA. These guidelines are essential to ensure compliance and to maximize the benefits of this strategy.

The 529 plan must have been open for a minimum of 15 years. (Important note: Changing the designated beneficiary of the 529 plan may restart the 15-year waiting period*.)

The Roth IRA must be in the same name as the beneficiary of the 529 plan.

The beneficiary must have earned income during the year the rollover is conducted.

The beneficiary’s income must be below the annual limit for Roth IRA contributions.

The rollover amount cannot exceed the annual contribution limit for IRAs.

The amount rolled over cannot be more than the contributions made to the 529 plan, plus any earnings, within the last five years before the rollover.

The total amount that can be transferred from 529 plans to Roth IRAs is capped at $35,000 per beneficiary.

Contributions made to the 529 plan within the last five years are not eligible for rollover.

*The 529 industry submitted a letter to the IRS in September of 2023 to determine whether a change in beneficiary would reset the 15-year clock. That said, at the time of writing, the IRS hasn’t released official guidance on this issue, and it is unclear if or when they will.

The Bottom Line

In the end, rolling unused 529 money into a Roth IRA can be a powerful way to give your kids or grandkids a jumpstart on their retirement savings. But, like many complex strategies, it’s essential to be aware of the different rules and regulations to avoid running into issues. Consulting with a financial advisor can ensure you’re making the most of this opportunity while staying compliant. By strategically executing this strategy, you can provide a solid foundation for your loved ones’ financial future.