What better holiday present to offer future generations than the gift of higher education?
With the holidays approaching, and as financial advisers begin working on end-of-year planning with their clients, now is the absolute best time for them to be talking to their clients about 529 plans. Flows into these plans see their peak during this time of year; it's known in the industry as “the season of giving.”
Right now in the U.S., half of the country's families aren't saving for college at all. Of those that are, the bulk — some 45%, in fact — are using general savings accounts to fund college expenses. But by using 529 plans, American families can invest for college rather than save, using the power of tax-deferred compounding to accumulate more for education.
Over the past 30+ years, tuition costs have risen dramatically faster than the consumer price index and the 30-year U.S. Treasury. The S&P 500 index has risen even more in that time. What exactly does that indicate? In short, it illustrates that the college investing model will vastly outstrip the college savings model. Families need to harness the return potential of long-term investments to maximize their ability to keep up with future college costs.
Now is the perfect time for financial advisers to discuss these investment vehicles with clients and prospects. For the adviser, the conversation around college investing is a great way to build rapport and trust with a new client. Outside of a home, college tuition is likely the largest expense a family will face and it is certainly the most emotionally charged.
Additionally, if 45% of American families are using a basic savings account as their college funding vehicle, that's a mountain of assets held away. This is a prime opportunity for advisers to bring those dollars under their management and also deepen their personal relationships with clients.
For investors, the benefits of 529 plans are myriad. Not only can they gain potentially higher returns compared with a savings account, but 529s offer tax savings, greater diversification, and also enable family members to contribute larger gifts without tapping into their unified credit or lifetime giving exclusion. As affluent families are reviewing estate planning and wealth transfer plans with their advisers at year-end, they should know the benefits of helping their children and grandchildren invest for college.
529 plans allow contributors to front-load five years' worth of their annual gift tax exclusion (i.e., $14,000) in a lump sum. This allows individuals to gift up to $70,000 and married couples up to $140,000, per beneficiary. For families with multiple children or grandchildren, that becomes a massive tax savings for the estate — no other college savings vehicle offers that. Furthermore, 529s allow for greater flexibility with beneficiaries, so the funds are never blindly passed onto the next generation. Account owners always retain control over how the assets are dispersed, and, unlike other tax-advantaged vehicles, there are no income limits or age restrictions.
The combination of tax-deferred savings with the compounding nature of the investment portfolios make 529s mutually beneficial to both the future student and the owner of the account — be it a parent, grandparent or any other contributor. With the holidays approaching, now is the perfect time for financial advisers to discuss clients' most emotional assets.
If education is indeed the best gift we can give our children, then college investing is truly the best present advisers can offer their clients.
Michael Conrath is 529 program director for J.P. Morgan Asset Management.