Cardinal Point Wealth Management

Your Cross-Border Financial Advisor

Contact Us | Client Login
  • About Us
    • Our Story
    • Our Team
    • Our Clients
    • Legal and Compliance
    • Part 3 Form CRS
    • Relationship Disclosure Information
  • What We Do
    • Investment Management
    • Wealth Planning
    • Tax Planning and Preparation
    • Private Wealth Services-U.S.
    • Private Wealth Services-Canada
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • Business Management for Athletes
    • Indigenous Wealth Services
  • Cross-Border Services
    • Cross-Border Wealth Management, Financial and Tax Planning Advisor
    • Cross-Border Financial Planning
    • Cross-Border Tax Planning
    • Cross-Border Estate Planning
    • U.S. citizens living in Canada
    • Moving to Canada from the U.S.
    • Canadians Living in the U.S.
    • Moving to the U.S. from Canada
    • Expatriates Living Abroad
  • Blog
  • About Us
    • Our Story
    • Our Team
    • Our Clients
    • Legal and Compliance
    • Part 3 Form CRS
    • Relationship Disclosure Information
  • What We Do
    • Investment Management
    • Wealth Planning
    • Tax Planning and Preparation
    • Private Wealth Services-U.S.
    • Private Wealth Services-Canada
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • Business Management for Athletes
    • Indigenous Wealth Services
  • Cross-Border Services
    • Cross-Border Wealth Management, Financial and Tax Planning Advisor
    • Cross-Border Financial Planning
    • Cross-Border Tax Planning
    • Cross-Border Estate Planning
    • U.S. citizens living in Canada
    • Moving to Canada from the U.S.
    • Canadians Living in the U.S.
    • Moving to the U.S. from Canada
    • Expatriates Living Abroad
  • Blog

Search Results for: 529

Cross-Border Wealth Management: Overcoming the Downside of Over-Funding Your Child’s 529 Plan

November 22, 2023 By Cardinal Point Wealth

Are you concerned about over-funding your child’s 529 plan?

There are many potential scenarios that raise important questions. One of the most compelling is, “What if you over-contribute to a 529 plan?”

The good news is that there is new legislation that can help to alleviate concerns about that, and help you preserve more tax-free wealth. That’s the focus of this insightful blog.

Overfunding a 529

Options for 529 Plan Residuals

Although funds in a 529 plan utilized for qualified expenses are withdrawn tax-free, non-qualified expenses do not offer that same luxury. This situation occurs when a child completes their higher education, but funds remain in the 529 plan. In this scenario there have traditionally been two main options:

  1. Change the beneficiary of the 529 plan to an eligible relative – a spouse, in-laws, children, siblings, nieces/nephews, aunts/uncles, or first cousins. .
  2. Remove the remaining assets in the 529 plan and pay ordinary income tax plus a 10% penalty on the earnings within the account – taxable to the beneficiary of the 529 plan.

New laws going into effect in 2024 provide a third option:

  1. Unused funds within a 529 plan can now be rolled over to a Roth IRA in the name of the beneficiary, if certain criteria are met.

The New Legislation

In December of 2022, the SECURE Act 2.0 was signed into law, allowing U.S. taxpayers additional methods of enhancing their retirement planning endeavors. One option in the SECURE Act 2.0, effective in 2024, provides the latitude to transfer unused 529 funds directly into the beneficiary’s Roth IRA, tax-free. 

Eligibility & Boundaries 

To do so, specific criteria must be met, and the most common are:

  • Funds must be moved from the 529 to a Roth IRA for the 529 beneficiary, not the parent or account holder.
  • The 529 beneficiary must have available Roth IRA contribution room – the limit is $6,500 (2023) for a beneficiary younger than 50 years of age. For example, if $26,000 remained in the 529 account, it would take 4 years (at current contribution limits of $6,500) to transfer all of those remaining 529 funds.
  • There is also a lifetime maximum transfer of $35,000 from a 529 plan account to a Roth IRA.
  • Roth IRA income limits will not apply. However, the 529 beneficiary can only contribute as much as their earned income,  or the maximum annual Roth IRA contributory maximum, whichever amount is less.
  • The 529 plan must have been created and maintained for a minimum of 15 years in order to be eligible for the transfer.

Benefits

Whether the child remains in the U.S., relocates to Canada, or lives a cross-border lifestyle, there are many benefits in leveraging this new legislation. 

  • Assuming that certain basic requirements are met, Roth IRAs are highly advantageous, given their tax-free growth and tax-free distribution status. When your child is able to maximize their Roth IRA contributions right after graduation, that essentially turbocharges their retirement planning.
  • It allows the 529 beneficiary to avoid income taxes and the 10% penalty on otherwise non-qualified 529 distributions.
  • Per the Canada/U.S. Tax Treaty, the tax-free status of the Roth IRA is recognized not only in the U.S. but also in Canada – as long as certain elections are made on the Canadian entry return and no Roth IRA contributions are made after establishing Canadian tax residency. With higher tax rates in Canada, the Roth IRA can be a powerful tax management tool.
    • Note that if the 529 beneficiary is a Canadian tax resident, this new opportunity to transfer unused 529 funds directly into the beneficiary’s Roth IRA should not be undertaken. Tread carefully, and speak to a cross-border financial advisor.

From the account owner’s (parent, grandparent, etc.) perspective, there is leeway when estimating how much will be needed to fund tuition. They are reassured that even if they budget more than necessary, they now have a way to avoid taxes and penalties on their 529 earnings. 

Tax Implications

There are still some unknowns to be aware of, since the SECURE Act 2.0 is still relatively new and changes to the 529 plan have not yet been enacted. For example, many states allow for a tax deduction (within limits) of 529 contributions on the state tax return. But the IRS does not allow a federal tax deduction on contributions. (See further details in our publication Cross-Border Implications of Holding a 529 Plan.) At this time, we also don’t know whether or not states will follow the IRS and allow for tax-free transfer of 529 residuals into the beneficiary’s Roth IRA. Given this uncertainty, it may be unclear how custodians of 529 plans will report the transfer. In a typical non-qualified withdrawal scenario, the 1099-Q reports the total distribution in Box 1, earnings in Box 2, and original contributions (basis) in Box 3. But if the state rules don’t align with the Federal laws, that may result in tax reporting issues or complications. 

Conclusion

This new tax law legislation, as it relates to 529 plans, is welcomed and helps to alleviate concerns related to the “what-if” question introduced at the beginning of this article. The legislation further enhances the tax-efficient accumulation of wealth for those young adults starting their careers at a time in life when their cash flow is likely tight. From a cross-border perspective, Canadian taxes are higher than in the U.S., so the strategic use of a 529 transfer into a Roth IRA provides an additional benefit. As a Canadian or a U.S. resident, 529 plans are a great tax-efficient tool to accumulate funds for higher education. 

The contents of this article are high-level in nature and your individual circumstances will vary. Feel free to speak with Cardinal Point, a cross-border investment and wealth advisor, regarding your unique scenario. Also bear in mind that within the cross-border wealth management sphere, strategies for college funding via a Section 529 plan are in constant flux. A breakdown surrounding the mechanics and logistics of a 529 Plan can be found in our e-book: Cross-Border Implications of Holding a 529 Plan. 

Filed Under: Articles

Cross-Border Implications of Holding a 529 Plan Version Ebook

Cross-Border Implications
of Holding a 529 Plan

Many Canadians move for career opportunities to the U.S., work and raise families, and then plan to relocate back to Canada.

Download Our Ebook: Cross-Border Implications of Holding a 529 Plan

[activecampaign form=1 css=0]

How 529 Plans are Treated in the U.S.
A qualified tuition and educational savings plan for children (a 529 plan) is, in most cases, exempt from taxation in the U.S., even when a child attends a Canadian university. In Canada, these plans are taxable. If you are a Canadian citizen who resides in the U.S. and may one day return to Canada or a U.S. citizen moving to Canada, determining whether a 529 plan makes sense for your family is an important decision that should be discussed with a cross-border financial advisor.

Understand the Issues
Families moving to Canada from the U.S. must consider the tax implications, potential increased tax filings, and eligibility requirements of using 529 funds for Canadian colleges and universities. Download our e-book to learn more about the steps you should consider when holding a 529 as a resident of Canada.

Cross Border Implications of Holding a 529 Plan

The Cost for a College Education is Rising

On the conservative side, analysts are projecting 6% growth per year, and using this cost function to model the average tuition price 10 years from now, you will see above that the expected price of a 4-year public college tuition in 2024 is nearly $150,000.

Cost of College Education Rising

About Cardinal Point

We specialize in assisting affluent Canadian expats, Canada-U.S. dual citizens, green card and visal holders, and snowbirds with their cross-border investment, tax, estate retirement and financial planning needs.

  • Fiduciary Standard: Our professionals operate under the highest standard of care in the financial services industry.

  • Independence: Clients benefit from access to a non-proprietary, conflict-free platform.

  • Transparency: Our fee-based compensation structure is openly disclosed.

  • Collaborative Approach: Our team of multidisciplinary professionals includes Certified Financial Planners® (CFP® Canada & US), Canadian and U.S. Chartered Accountants (CPA), Chartered Financial Analysts (CFA), and tax attorneys (Esq).

  • Investment Expertise: We subscribe to a disciplined, tax-efficient and cost-effective investment approach.

  • Holistic Financial Planning: Clients are profiled to learn about their values, goals, income, balance sheet, investments, insurance, and employee benefits, as well as all retirement, tax, education, and estate planning requirements.

  • Integrated Cross-Border Financial Planning: We have a suite of personalized Canada-U.S. cross-border investment, financial and tax planning solutions.

  • Client Service and Professionalism: Our practitioners are committed to service excellence.

Range of College Tuition & Fees

Type of College
Average Published Yearly Tuition and Fees, 2017-18
Public Two-Year College (in-district students) $3,570
Public Four-Year College (in-state students) $9,970
Public Four-Year College (out-of-state students) $25,620
Private Four-Year College $34,740

Source: collegeboard.org

Cross-Border Implications of Holding a 529 Plan

Cross-Border Implications
of Holding a 529 Plan

Many Canadians move for career opportunities to the U.S., work and raise families, and then plan to relocate back to Canada.

How 529 Plans are Treated in the U.S.
A qualified tuition and educational savings plan for children (a 529 plan) is, in most cases, exempt from taxation in the U.S., even when a child attends a Canadian university. In Canada, these plans are taxable. If you are a Canadian citizen who resides in the U.S. and may one day return to Canada or a U.S. citizen moving to Canada, determining whether a 529 plan makes sense for your family is an important decision that should be discussed with a cross-border financial advisor.

Understand the Issues
Families moving to Canada from the U.S. must consider the tax implications, potential increased tax filings, and eligibility requirements of using 529 funds for Canadian colleges and universities. Download our e-book to learn more about the steps you should consider when holding a 529 as a resident of Canada.

Cross Border Implications of Holding a 529 Plan

The Cost for a College Education is Rising

On the conservative side, analysts are projecting 6% growth per year, and using this cost function to model the average tuition price 10 years from now, you will see above that the expected price of a 4-year public college tuition in 2024 is nearly $150,000.

Cost of College Education Rising

Download Our Ebook: Cross-Border Implications of Holding a 529 Plan

[activecampaign form=1 css=0]

About Cardinal Point

We specialize in assisting affluent Canadian expats, Canada-U.S. dual citizens, green card and visal holders, and snowbirds with their cross-border investment, tax, estate retirement and financial planning needs.

  • Fiduciary Standard: Our professionals operate under the highest standard of care in the financial services industry.

  • Independence: Clients benefit from access to a non-proprietary, conflict-free platform.

  • Transparency: Our fee-based compensation structure is openly disclosed.

  • Collaborative Approach: Our team of multidisciplinary professionals includes Certified Financial Planners® (CFP® Canada & US), Canadian and U.S. Chartered Accountants (CPA), Chartered Financial Analysts (CFA), and tax attorneys (Esq).

  • Investment Expertise: We subscribe to a disciplined, tax-efficient and cost-effective investment approach.

  • Holistic Financial Planning: Clients are profiled to learn about their values, goals, income, balance sheet, investments, insurance, and employee benefits, as well as all retirement, tax, education, and estate planning requirements.

  • Integrated Cross-Border Financial Planning: We have a suite of personalized Canada-U.S. cross-border investment, financial and tax planning solutions.

  • Client Service and Professionalism: Our practitioners are committed to service excellence.

Range of College Tuition & Fees

Type of College
Average Published Yearly Tuition and Fees, 2017-18
Public Two-Year College (in-district students) $3,570
Public Four-Year College (in-state students) $9,970
Public Four-Year College (out-of-state students) $25,620
Private Four-Year College $34,740

Source: collegeboard.org

Download the Cross Border Implications of Holding 529 Plan Ebook

If you are a Canadian who is considering a 529 plan, and especially for anyone with investment in a 529 plan who is moving back to Canada, clear expert advice from a cross-border financial specialist is a very prudent step. Below is an infographic that illustrates the cross-border considerations and implications of holding a 529 plan.

By downloading our eBook, you’ll get insight, perspective and advice from cross-border advisors that have personally navigated this journey and have decades of experience from advising and helping clients with the implications of holding a 529 plan. Complete the form below to access the eBook.

Cross Border Implications of Holding a 529 Plan

Infographic: Cross-Border Implications of Holding a 529 Plan Infographic

May 10, 2022 By Cardinal Point Wealth

Cross Border Implications of Holding a 529 Plan

Canadian families returning to Canada from the US must consider significant tax implications associated with any existing 529 Plans, including whether a Canadian higher education institution is eligible under the Plan. Also, there is the likelihood of new Canadian tax liability as well as the possibility the 529 may be deemed a resident trust. Transferring ownership of the 529 may avoid triggering new taxes.

View our related E-book by clicking on the button below.

Read More

Filed Under: Articles

  • 1
  • 2
  • 3
  • 4
  • Next Page »
Discuss your goals with us today
Canada US Investment Management Goals
We can handle all of your Canada-U.S. investment management, tax, estate and financial planning complications
Wealth management strategies fit for you
Cross-Border Financial Management assessment
Our cross-border financial planning team can provide an assessment of your needs based on your unique circumstances
Contact Us | Client Login
  • About Us
    • Our Story
    • Our Team
    • Our Clients
    • Legal and Compliance
    • Part 3 Form CRS
    • Relationship Disclosure Information
  • What We Do
    • Investment Management
    • Wealth Planning
    • Tax Planning and Preparation
    • Private Wealth Services-U.S.
    • Private Wealth Services-Canada
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • Business Management for Athletes
    • Indigenous Wealth Services
  • Cross-Border Services
    • Cross-Border Wealth Management, Financial and Tax Planning Advisor
    • Cross-Border Financial Planning
    • Cross-Border Tax Planning
    • Cross-Border Estate Planning
    • U.S. citizens living in Canada
    • Moving to Canada from the U.S.
    • Canadians Living in the U.S.
    • Moving to the U.S. from Canada
    • Expatriates Living Abroad
  • Blog
 
Our Offices

Boca Raton Office

561-894-8337

Irvine Office

949-910-8354

Toronto Office

416-849-4842

Calgary Office

403-257-4488

Vancouver Office

604-630-8701

Free White Paper

Manage Your Canadian and U.S. Cross-Border Lifestyle



download your copy of Enrich Your Canadian and U.S. Cross-Border Lifestyle
  • Risk Tolerance & Capacity
  • Asset Allocation
  • Investment Implementation

How We Help

  • Cross-Border Financial Planning
  • Cross-Border Transition Planning
  • Cross-Border Tax Planning
  • Cross-Border Estate Planning
  • Cross-Border Investment Management
  • Americans Living in Canada
  • Canadians Living in the U.S.
  • Moving to Canada from the U.S.
  • Moving to the U.S. from Canada
  • Expatriates Living Abroad

What We Do

  • Investment Management
  • Wealth Planning
  • Tax Planning & Preparation
  • Private Wealth Services for U.S. Residents
  • Private Wealth Services for Canadian Residents
  • Cross-Border Financial & Tax Planning
  • Business Management for Athletes

Resources

  • Canadians in California
  • Canadians in Texas
  • Canadians in Florida
  • Canadians in Arizona
  • Canadian and U.S. Expat Tax Planning
  • Wealth Management for U.S. Citizens in Canada
  • Calgary Financial Planner
  • Custodian Closed Your Cross-Border Investment Account?
  • Part 3 Form CRS

Videos & Social Media

  • Americans in Canada: Investment Basics
  • Americans Selling Canadian Homes Face Tax Issues
  • Does it make financial sense to renounce your U.S. citizenship?
    BrightScope Cardinal Point Twitter Cardinal Point Google Plus Cardinal Point Facebook Cardinal Point LinkedIn Cardinal Point
Copyright © 2023 Cardinal Point Capital Management, ULC. All Rights Reserved.

“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.