Daily Herald opinion: Another savings option for parents
Since the dawn of time, it seems, parents and grandparents have been regularly socking away spare money for their grandchildren to help with the cost of a college education.
Illinois, like most states, came up with IRS-approved investment accounts that made such efforts much more lucrative, providing opportunities to grow money with the stock market with the advantage of not having to pay state income tax when drawing on those funds. Illinois' programs are called Bright Start and Bright Directions. Anyone can open a Bright Start account; only licensed financial advisers can open Bright Directions accounts.
As with the ebbs and flows of the stock market, there is risk involved. What happens if little Timmy or Suzy decides that college or accredited trades programs are not for them? Or if the student gets a full-ride scholarship or doesn't need all of the money? Yes, we know the latter situation is rather ridiculous these days.
It's long been the case that the parent or grandparent who opened the account is stuck in a way: The money could be given to another young person headed to college or it could be withdrawn from the account with a substantial tax penalty. Another option is to roll the money over into an Illinois ABLE (Achieving a Better Life Experience) account, which gives people with disabilities and their families greater financial independence.
We can't write our children's futures. We can only give them the nudge and financial support to follow their dreams.
Placing restrictions on the people who faithfully contributed financially to their kids' or grandkids' education seem unfair.
That could be changing soon.
State Treasurer Michael Frerichs this week urged the General Assembly to approve a bill that would allow those who've invested in these programs to be able to roll over the funds into a Roth IRA.
“This will give parents another option when deciding what to do with the money they’ve saved for their children if they don’t use all of it,” he said in a news release.
Congress at the end of 2022 changed the IRS code dealing with such programs to allow account holders to roll over most account balances into Roth IRAs without having to worry about paying penalties.
It's now up to the General Assembly to approve that measure for Illinois.
“Saving for your child’s future education is responsible, and allowing leftover money to be used to help your child’s retirement is a welcome change,” said Democratic Rep. Diane Blair-Sherlock of Villa Park, a sponsor of the bill, in the news release.
The federal law calls for a $35,000 lifetime limit on transfers, as well as Roth limits (now $7,000 a year for people younger than 50.)
The thing that prevents this from become a tax avoidance scheme for account holders is that the Roth rollover must go to the beneficiary of the college savings account and not the parents or grandparents who've been saving the money.
The end result is that the money you've been socking away for your child or grandchild would still go to them, whether they continue their schooling or not. It'll just come to them much later, when they're considering whether they can retire.
According to a survey from Axios and research firm Ipsos, 20% of working adults in the U.S. don't think they'll ever retire — 70% saying they'll never be able to afford it.
So keep on making those contributions to those you love. If it doesn't help them now, it'll help them later.
Changing Illinois law to allow for this is a common-sense approach to the issue, and we recommend its passage.