529 benefits go beyond college savings

Advisers should discuss additional advantages, including estate planning, to help clients make good decisions and build the relationship

Mar 4, 2015 @ 1:06 pm

By Liz Skinner

Advisers who help clients recognize the advantages of Section 529 plans — beyond saving for college — stand to gain business benefits.

The tax incentives of 529 college savings plans are the most obvious reason to suggest clients with children they expect to put through school consider the plans. Most states offer benefits beyond tax-free earnings to citizens in their own plans, and certain states offer benefits for investing in any state's plan.

"The 529 plans are the most generous tax provision ever passed by the U.S. Congress," said Peter Mazareas, a member and former chairman of the College Savings Foundation, which is hosting its annual conference this week in Austin, Texas.

About $248 billion is invested in about 12 million 529 accounts, including those in prepaid tuition plans, according to figures released Monday by the College Savings Plans Network.

Another big-ticket item most financial advisers don't discuss with clients is the boon to estate planning, Mr. Mazareas said.

A couple can give $140,000 to a student's 529 without the recipient's owing any tax on that sum, and it takes that amount out of the estate. The benefit is equal to five years of the couple's tax-free gifting allotment of $28,000 per year.

The accelerated gifting benefit is especially attractive to parents and grandparents because clients still control those assets, Mr. Mazareas said.

The money can always be pulled out of the 529, he said, with the clients owing tax only on the earnings.

(More: House approves bill easing 529 plan rules)

Another benefit is new this year.

The U.S. Congress approved a new type of 529 plan late in 2014 that will help individuals or couples save money to cover the costs of caring for a disabled child. Up to $14,000 a year can be saved in these accounts, and earnings will not be taxed as long as the proceeds are used for the beneficiary's qualified disability expenses.

To date, most states are still determining how to offer these accounts, according to Andrea Feirstein, managing director of AKF Consulting Group.

State Medicaid clawbacks also will factor into the value of these plans, Ms. Feirstein said.

In addition, advisers can position the 529 as a way to invest not only in children's education but in their broader progress through life.

Studies have shown the more than $1 trillion in student loans coincides with young Americans' postponement of marriage, home ownership and having children. The debt burden also suggests a less prosperous future.

Research shows that young adults who have graduated from college without incurring student debt have an average net worth of $64,700, seven times the $8,700 of the average household headed by a college-educated young adult with student debt, according to Chris Lynch, senior director of TIAA-CREF and a panelist at the conference. He cited Pew Research Center data from last May.

Advisers should discourage student loan debt by encouraging saving for college, Mr. Lynch added.

In addition to helping clients, college planning discussions can have specific business benefits for financial advisers.

Helping clients solve the question of covering such a significant expense endears them to the adviser, according Mr. Mazareas.

"It creates a better relationship with clients and engages the whole family," he said.

In fact, advisers of couples can use college planning to increase interest in a spouse who is less inclined to be involved in investment planning.

Additionally, advisers who interact with the students have a better chance of holding onto assets when they are passed down, Mr. Mazareas said.

Of course, boosting assets is always a good reason to bring up college planning.

The nation's adviser-sold 529 plans pay advisers a fee on assets, but half a dozen of those plans offer an adviser share class without the fee. Advisers who aren't compensated by commission can use those plans or recommend clients invest in a direct-sold 529 plan without the fee, and include those assets within the client's total wealth they help manage.


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