Q: We’ve been putting away a lot each month into a 529 plan for our young son, but now I’m wondering if we’re saving too much. What happens if our child decides to skip college? Are we making a mistake?
A: Depending on how much you’re adding to the 529, I think you’ll be OK if your child doesn’t end up going to college. But, it’s smart to think things through, because the rules can be confusing.
If 529 plan money is used for something other than “qualified” education expenses, the earnings portion is going to get taxed and it will be subject to a 10% penalty. Not the whole balance, just the investment growth.
There are some ways to avoid the tax and penalty. You can always change the 529 plan’s beneficiary to another family member. The list of eligible family members is quite long. Changing the beneficiary will keep the 529 balance fully available without tax or penalty implications.
Another option is relatively new. Once your 529 account has been open at least 15 years, any leftover money can be rolled over to a Roth IRA for your child. The rollover rules are a bit restrictive, though. For example, a rollover is limited to annual Roth contribution caps at that time. And, there is a $35,000 lifetime limit for these rollovers. Regardless, this feature might be a really powerful way to shift the unused 529 balance toward your child’s future retirement.
Q: We sold our house this year and we’ll have a big capital gain to report. I’m now worried this means our Medicare premiums will jump. Someone told me we could file a form with Social Security to avoid an increase. How does that actually work?
A: Yes, there is a way to do this. But, the SSA-44 form can only be used for certain allowable reasons. Examples are your retirement, a divorce, or the death of your spouse. There are officially eight approved reasons listed on the form. The basic idea is to capture events that have a longer-term effect on your finances. Selling your home at a big gain isn’t on the list. So, filing an SSA-44 in your case won’t reduce your premiums.
It’s good for you to understand the timing of all of this. Your Medicare premiums are based on your income from two years before. Your capital gain on your home will show up on your 2025 tax return, but that gain won’t impact your Medicare premiums until 2027.
To be specific, in late 2026 when Social Security prepares your benefits letter for the upcoming year, they will look back at your 2025 tax return, see that capital gain, and adjust your Medicare premiums higher for 2027.
Then, since your income in 2026 will have presumably dropped back down again, your Medicare premiums should reset to the lower amount starting in 2028. In other words, it all works on a two-year lag.