roth – Baker Asset Management, LLC

The Best Way to Fund College….and Beyond

For years, one of the biggest hesitations I’ve heard from parents and grandparents about funding a 529 college savings plan was the fear of overfunding it. “What if they get a scholarship?” or “What if they don’t go to college? We’ll get hit with taxes and a 10% penalty if we pull the money out.”

Thanks to the SECURE 2.0 Act, that fear is largely gone.

We now have a powerful new financial planning tool: the ability to roll over unused 529 plan funds directly into a Roth IRA for the beneficiary. This effectively turns an education savings account into a tax-free retirement springboard.

Here’s how it works and what you need to know.

The Mechanics of the 529-to-Roth Rollover

If your child or grandchild finishes their education and still has money left in their 529 plan, you can transfer those funds into a Roth IRA in their name. The money moves from a tax-free education account to a tax-free retirement account without incurring taxes or penalties.

This is massive. A young adult starting their career with a jump-started Roth IRA has decades of tax-free compounding ahead of them.

The Rules of the Game (And There Are Several)

As with anything tax-related, the IRS has strict rules you must follow to execute this strategy cleanly:

The $35,000 Lifetime Limit: You can only transfer a maximum of $35,000 during the beneficiary’s lifetime. This isn’t an unlimited backdoor.
Annual IRA Contribution Limits Apply: You cannot move the entire $35,000 at once. The transfers are subject to the annual IRA contribution limits. For 2026, that limit is $7,500. It will take nearly five years to transfer the full $35,000.
Earned Income Requirement: The beneficiary must have earned income (W-2 wages or self-employment income) in the year of the transfer, and the transfer amount cannot exceed their earned income for that year.
The 15-Year Rule: The 529 plan must have been open for at least 15 years.
The 5-Year Rule: Contributions (and the earnings on those contributions) made to the 529 plan in the five years prior to the rollover cannot be transferred.
Direct Transfer: The rollover must be moved directly from the 529 plan to the Roth IRA (a trustee-to-trustee transfer). Do not cash out the 529 and try to deposit it into the Roth yourself.

Why This is a Game Changer

This legislation effectively removes the risk of “over-saving” for college.

Bypassing High-Income Limits: Even if your young adult child earns too much to contribute directly to a Roth IRA, they can still receive these 529-to-Roth transfers.
Decades of Tax-Free Growth: If you fund a Roth IRA with $7,500 a year from ages 22 to 26 (using leftover 529 funds) and never add another dime, that $35,000 could grow to several hundred thousand dollars of tax-free money by the time they reach retirement age.

What You Should Do Now

If you have an existing 529 plan, track its age. If you’ve been putting off opening a 529 because of overfunding fears, start one now to get the 15-year clock ticking.

Before executing a transfer, you should run the numbers and ensure all IRS criteria are met to avoid unexpected tax hits or state-level recapture rules (some states may treat the rollover as a non-qualified withdrawal).

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

Maximizing Your Gap Years: How Pre-RMD Roth Conversions Protect Your Wealth

The Bottom Line: Waiting until age 73 or 75 to let the government dictate your retirement withdrawals is a costly tax mistake. By executing strategic Roth IRA conversions during your early retirement “gap years,” you can systematically minimize your Traditional IRA balance, shrink future Required Minimum Distributions (RMDs), and lock in historically low tax rates.

The Hidden Tax Trap of Retirement

Many retirees believe that once they stop working, their tax planning is finished. Unfortunately, a major tax trap awaits in your 70s: Required Minimum Distributions (RMDs). If you have spent decades building a substantial nest egg in a tax-deferred Traditional IRA or 401(k), the IRS will eventually force you to withdraw specific percentages annually, regardless of whether you need the cash. These forced distributions are taxed as ordinary income and can easily push you into a significantly higher marginal tax bracket, trigger higher Medicare premiums (IRMAA), and increase the taxation of your Social Security benefits.

The Window of Opportunity: Your “Gap Years”

The optimal time to defuse this tax bomb is during your “gap years”, the golden window after you retire but before your forced RMDs begin. During this period, your earned income drops off, frequently dropping you into the lowest tax brackets you will see for the rest of your life.

The core strategy is simple: Bracket Filling. You intentionally withdraw money from your Traditional IRA, convert it into a Roth IRA, and pay ordinary income tax on that amount today. The goal is to maximize the amount converted at the lowest current marginal rates (the 10% and 12% brackets, or up to the 22% bracket depending on your wealth targets), ensuring that the converted funds grow tax-free and can be withdrawn completely tax-free later in life.

2026 Federal Income Tax Brackets (Marginal Rates)

To implement this effectively, we must evaluate the current federal tax structure. Below are the key ordinary income brackets for the 2026 tax year:

10% Bracket: Single: $0 to $12,400 | Married Filing Jointly: $0 to $24,800
12% Bracket: Single: $12,401 to $50,400 | Married Filing Jointly: $24,801 to $100,800
22% Bracket: Single: $50,401 to $105,700 | Married Filing Jointly: $100,801 to $211,400
24% Bracket: Single: $105,701 to $201,775 | Married Filing Jointly: $211,401 to $403,550

Here’s a few examples to illustrate this strategy.

Scenario A: The Single Filer

Consider a retired single filer with a guaranteed taxable income of $35,000 from a pension and dividends. This lands them squarely within the 12% bracket ($12,401 to $50,400).

The Opportunity: The top of the 12% bracket is $50,400.
The Calculation: $50,400 − $35,000 = $15,400 of available “headroom.”
The Action: Convert exactly $15,400 from their Traditional IRA to a Roth IRA.
The Result: The entire $15,400 is taxed at a modest 12%. This fund is now insulated from future tax increases, and the Traditional IRA balance is reduced by $15,400, shrinking future RMD exposure.

Scenario B: Married Filing Jointly

Consider a retired couple filing jointly with a combined base taxable income of $70,000 from investments and social security. They are currently in the 12% bracket ($24,801 to $100,800).

The Opportunity: The top of the 12% bracket is $100,800.
The Calculation: $100,800 − $70,000 = $30,800 of available headroom.
The Action: Convert exactly $30,800 from their Traditional IRA to their Roth IRA.
The Result: They lock in a 12% federal tax rate on $30,800. If they waited until RMDs kicked in alongside Social Security, their forced distributions could easily push their taxable income past $100,800, forcing those same dollars to be taxed at 22% or higher.

Critical Guardrails

While the numbers are highly compelling, Roth conversions require precise execution. To ensure compliance and optimize the financial impact, keep these rules in mind:

Pay Taxes from Cash, Not the IRA: To maximize the mathematics of a conversion, the income tax generated by the conversion should be paid using cash from non-retirement checking or brokerage accounts. Using IRA assets to pay the tax reduces the compounding power of your tax-free bucket.
Watch the IRMAA Thresholds: Roth conversions increase your Adjusted Gross Income (AGI). If your AGI crosses specific thresholds, it can trigger Medicare Part B and Part D premium surcharges (IRMAA) two years later. Always analyze this boundary before converting assets.
The 5-Year Rule: Converted earnings and principal must remain in the Roth IRA for at least five years (or until you reach age 59½) to be withdrawn tax-free. Because this strategy targets pre-RMD retirees, the time horizon aligns perfectly, but meticulous record-keeping is vital.

Summary & Next Steps

Roth conversions are not a one-time event; they are a multi-year, proactive tactical strategy. By intentionally paying tax at a known, lower rate today, you seize control of your lifetime tax liability and build a flexible, tax-free financial legacy. Every individual situation requires custom financial projection modeling to guarantee that a conversion does not inadvertently push you into an unfavorable tax cliff.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com

A High Earner’s Guide to the 2026 $150k Threshold and Super Catch-Ups

For years, high-earning professionals aged 50 and older have relied on pre-tax catch-up contributions to shave thousands off their annual tax bills while fortifying their retirement nests. However, a major change recently occurred, as the SECURE 2.0 Act officially mandated that “high earners”—defined as those with prior-year (2025) wages exceeding $150,000—must transition their catch-up contributions exclusively to a Roth (after-tax) basis. While this removes the immediate tax deduction you may be accustomed to, it also unlocks a powerful opportunity for entirely tax-free growth and withdrawals in your later years. Understanding these new rules is no longer optional; it is a critical step in preserving your retirement strategy’s efficiency.

How Compensation Affects Your Company Match

When it comes to employer matching, the most important thing to know is that your company matches dollars, not tax types. Here is how your compensation and contribution choices interact with that match:

Match Calculation is Based on Gross Pay: Your employer typically matches a percentage of your eligible compensation (e.g., 50% of the first 6% you contribute). This calculation uses your gross, pre-tax pay, even if your own contributions are made on a Roth (after-tax) basis.
The $360,000 Salary Cap: For 2026, the IRS has set the compensation limit at $360,000. This means any income you earn above this amount cannot be used by your employer to calculate matching contributions.
Roth vs. Traditional Match Placement: Traditionally, employer matches are deposited into a pre-tax account, regardless of whether your contribution was Roth or traditional. However, under newer rules, some employers may now allow you to receive the match directly into your Roth account. If you choose this “Roth match” option, those matching dollars will be treated as taxable income in the year they are received.
Catch-Up Contributions and Matching: Most companies only match your “regular” contributions (up to the standard $24,500 limit for 2026) and do not provide additional matching on catch-up amounts. It is vital to check your specific plan document to see if your catch-up dollars trigger any extra employer funds.

Also in 2026, the “super catch-up” provision offers a significant boost for older savers.

Higher Limit: Participants aged 60, 61, 62, or 63 (by the end of the calendar year) can contribute up to $11,250 in catch-up contributions for 2026.
Total Potential Savings: When combined with the standard elective deferral limit of $24,500, these individuals can save a total of $35,750.
Comparison to Standard Catch-up: This is an increase over the standard $8,000 catch-up limit available to other participants aged 50 and older.
Age Cliff: Once a participant turns 64, their eligible catch-up amount reverts to the standard limit (e.g., $8,000 for 2026).
Roth Requirement for High Earners: Just like the standard catch-up, if your prior-year FICA wages exceeded $150,000, these super catch-up contributions must be made on a Roth basis.
Plan Optionality: It is important to note that employers are not required to offer the super catch-up; it is an optional plan feature.

Here is a table that compares different 2026 contribution limits based on age and income levels.

2026 401(k) Contribution Limits Comparison

Age Group	Standard Limit	Catch-up Amount	Total Limit	Roth Requirement (if 2025 Wages >$150k)
Under 50	$24,500	$0	$24,500	N/A
50 – 59	$24,500	$8,000	$32,500	Yes (Catch-up portion only)
60 – 63 (Super Catch-up)	$24,500	$11,250	$35,750	Yes (Catch-up portion only)
64 and Older	$24,500	$8,000	$32,500	Yes (Catch-up portion only)

Standard Limit: The base elective deferral for all participants increases to $24,500 in 2026.
Catch-up Eligibility: Participants aged 50 or older can contribute an additional $8,000.
Super Catch-up Enhancement: Under the SECURE 2.0 Act, those aged 60–63 receive a higher catch-up limit of $11,250.
Combined Annual Limit: The total limit for all contributions (employee plus employer match/profit sharing) is capped at $72,000 (plus any applicable catch-up).
High Earner Definition: The $150,000 threshold is based on FICA wages (Box 3 of your W-2) from the same employer in the preceding year.

2026 Total Possible Savings by Age

If you maximize both the combined (employee plus employer contributions) annual limit and your age-based catch-up, your total account additions can reach:

Age 50–59: $80,000 ($72,000 limit + $8,000 catch-up).
Age 60–63: $83,250 ($72,000 limit + $11,250 super catch-up).
Age 64+: $80,000 ($72,000 limit + $8,000 catch-up).

The 2026 mandatory Roth catch-up rule represents a significant pivot in how high earners must approach their peak saving years. While losing the upfront tax break on those extra contributions might sting today, the trade-off is a growing pool of assets that the IRS can never touch again. Whether you are hitting the $150k wage threshold or entering the “Super Catch-Up” age bracket, the key to 2026 is early coordination with your payroll department and financial advisor to ensure your contributions are coded correctly and your retirement trajectory remains on track.

Please comment or send an email if you have any questions.

Joe Baker, CFP®

Baker Asset Management, LLC

joebaker@bakerassetmanagement.com