Millions of Americans face a conundrum—trying to save for retirement while also saving for a child’s college education. For those people, it would be hard to find a year as exciting as 2024, when new rules have emerged designed to make their lives easier and ask “either/or” less often.
This is the year when retirement savings and college funding intersect in three significant ways—and give clients and their adult children or grandchildren more beneficial options than they’ve ever had.
The big changes: This year, 529 plan balances can be rolled into Roth IRAs for the beneficiary, which means account holders don’t have to worry as much about dollars being left on the table if unused. Also, a parent’s retirement contributions will no longer be considered income on the federal form used to determine financial aid for their children. Another biggie is that an employer 401(k), 403(b) or Simple IRA plan can offer a match for an employee’s student loan payments.
While these new developments won’t remake the retirement landscape completely, collectively they amount to a huge step in the right direction, sources say.
“The data is dire, the crisis clear. The terrible retirement preparedness of America is unquestionable,” says Laurel Taylor, founder of Candidly, a digital platform whose mission is to eliminate student debt so people can contribute to their retirement savings. “Half of all households have zero in retirement savings. The average boomer has $106,000 in savings. But this is not an awareness problem, and it’s not an education problem. It’s a cash flow problem.”
Taylor says she founded her company because she herself was in the position of having to choose between paying off her student loans and making 401(k) contributions. So was her mother, who was paying down a Parent PLUS loan. “Mom and the millennial,” she says, were $200,000 in debt.
“The projection is that the average American worker who receives a 50% retirement match just on the student loan payment, not putting a dime into retirement savings, would have $450,000 of retirement savings at the time of retirement. Four times what boomers have today,” Taylor says. “That’s the magic of compound interest. The student loan payment match has a transformative impact. It can break the cycle of intergenerational borrowing and indebtedness.”
Accessibility Is On Hold For Most
As transformative as advisors believe the employer match will be, especially for employees who are not contributing to a 401(k) while they pay off their student loans, it still may be a while before most employees have access to the provision.
“With each one of these benefits that have been enacted, there’s always a catch, or at least a hurdle to overcome,” says Sarah Mouser, director of financial planning at McLean, Va.-based Cassaday & Co., which has roughly 3,000 clients and $5 billion in assets under management.
“As we look at it, a lot of employers aren’t able to offer that yet because the plan providers don’t have the infrastructure in place to be able to manage it,” she says. “Some recordkeepers have put pilot programs into their systems, but in all reality, for this to be widely available, most employers are not going to be able to offer it to employees until 2025 or 2026.”
To Kelli Smith, director of financial planning at Edelman Financial Engines, which manages $119 billion for advisory clients and $121 billion in 401(k) plan assets, plan providers’ ability to simultaneously help participants with both saving for retirement and paying off student debt is going to be a game changer for many Americans. “It could be a little slow to adopt, but what I would expect is maybe ‘go slow to go fast,’” Smith says. “We’ll figure out what that foundation looks like and then maybe there’s a blueprint for that.”
But the process is no different from when companies started to offer 401(k) benefits and health spending accounts, she adds. “It took a little while for companies to figure out what that looks like, but then there’s a lot of adoption along the way, after a little ramp-up period.”
Catch-529
Those wanting to roll 529 plans over to Roth IRAs will also have to deal with some quirks. The 529 account has to have been open for 15 years, and the assets in the account for at least five years. In addition, the rollovers have to be in line with regular Roth contribution limits, and there’s a $35,000 lifetime max. However, in this case, the Roth owner does not have to show income, and if the account owner—usually a parent or grandparent—has other 529 plans for other children, there is even more flexibility.
“I’m a guy that loves multitools, and this is a multitool you can use for college for your kid or you can start a Roth IRA for them,” says Timothy Parros, founder of Parros Financial Group in Ann Arbor, Mich., which has roughly $100 million in assets under management. “The one thing clients have been most fearful about with 529 plans is overfunding. So having that as another option for them, where they now can put the balance to a Roth IRA, is huge.”
And if overfunding still happens, clients with multiple children or granchildren can shift their 529 plan savings from one beneficiary to another—as long as the beneficiaries are within the same generational bloodline. “If grandparents have maybe six or seven grandchildren, they can, without any tax impact, shift those dollars between those plans,” Mouser says.
And finally, with the Free Application for Federal Student Aid (FAFSA) Simplification Act, a parent’s retirement contributions are excluded from their income when they are applying for financial aid on the FAFSA form. The change allows parents to max out their retirement contributions and lower their income at the same time, potentially allowing their child to qualify for a more favorable aid package.
“The catch here is it only applies to FAFSA. Not every school in the country uses FAFSA to determine financial aid,” Mouser says. For instance, some schools, private schools in particular, use the College Board’s CSS Profile. “Now with the CSS Profile, this is a school awarding their own aid and their own grants and scholarships. They still have you report retirement account contributions,” she says.
These changes, sources say, are hopefully just the beginning of national recognition—and amelioration of pain—for parents squeezed by the dueling needs of their own retirement savings and their kids’ college funding.
Clients Still Need An Overview
According to AmyJo Young McElfresh, a CFP and college planning specialist at Amphora Wealth Management in Chapel Hill, N.C., these changes won’t add up to the sum of their parts if advisors don’t look at college and retirement planning in a multigenerational continuum. She says that such planning requires a truly holistic approach to get right.
“The issue is a much bigger consideration than just what you see at the moment,” says McElfresh. “Yes, the FAFSA is changing and, yes, these other changes are happening. But with holistic planning it’s about options on saving for college expenses, finding tax efficiencies, planning for potential merit aid and negotiating the best financial aid package.”
That holistic approach includes grandparents’ 529 plan contributions, gifting and estate planning strategies, parents’ 529 plan contributions and retirement savings strategies, and the positioning of the child for the best financial aid package possible.
To help her own clients see the full picture, McElfresh says she likes to start the process when their eldest child hits the eighth grade. “It’s really about having the parents understand how the financial aid formula applies to their family. And if you’re going to do that, you need to back up to eighth grade,” she says. “It’s like tax planning. You need time to figure out what changes you can make, and you need time to implement those changes.”