A college degree is a societal norm today; without one, our children are at a significant disadvantage in their adult lives. As financial advisors, it is your job to arm your clients who are parents with the tools to properly save for their children’s education. Currently, four years at a public university costs about $40,000, and at a private institution about $100,000. The College Board estimates the cost of one four-year degree for today’s newborns will be approximately $120,000 at a public university and north of $330,000 at a private university.
These plans offer parents flexibility, control and tax advantages most other college-funding vehicles do not.
But, have no fear, 529 plans are here! These plans get their name from Section 529 of the Internal Revenue Code in the same way a 401(k) plan gets its name. So, you can think of a 529 plan as a 401(k) for college funding. While the tax law requires a state sponsor, most plans today are available to residents of any state and the funds can be used at any post secondary institution across the country. And, they offer many benefits other college-savings vehicles don’t have. Here are some that you might want to share with your prospects.
- Tax deferral. After tax monies are deposited into a 529 plan, they grow tax deferred. No capital gains or income taxes would be owed on the investment in each year your client holds an account. Some plans do allow a portion of the contribution to be deducted from state taxes, if your client lives in a state that offers a plan with a state tax deduction.
- High contribution limits. Unlike the Coverdell plans, which limit participants to contributing a maximum of $2,000 per child per year, a 529 plan will let participants contribute up to $300,000 per child over the lifetime of the account.
- No income or age restrictions. Many government-sponsored savings programs typically have an income restriction, but with a 529 plan, an owner is eligible to participate regardless of household income. There are no age restrictions with 529 plans, which mean they never have to shut down based on the age of the beneficiary or the account owner. Thus, a 529 plan can be a lifetime educational savings vehicle that may be used for several generations of one’s family.
- Asset control. The parent or account owner keeps control of the assets in a 529 plan until the day he dies. Upon establishing a 529 account, the owner names a successor owner on the account application form that ensures the continuity of the account even after the owner dies. The successor owner could be a spouse, best friend, trustee or even a beneficiary. Just be sure the successor is someone the client trusts to control the 529 assets for his beneficiaries after he is gone.
- Beneficiary control. Having control of the 529 monies allows your client to change the beneficiary at any time so long as the change is to a member of the family of the current beneficiary. The tax law defines members of the family to include parents, grandparents, children, siblings, grandchildren, nieces, nephews, first cousins, in-laws of any of the above, stepfamily members and legally adopted children.
- Tax-exempt withdrawals. When 529 plans are used for higher educational expenses, those withdrawals are exempt from both federal and state taxes. A 529 account owner can also withdraw funds for noncollege expenses, but will incur a taxable penalty when doing so. The earnings portion of a nonqualified withdrawal is subject to ordinary income taxes at the owner’s rate, plus a 10 percent federal penalty and any additional state penalties on those same earnings.
- Gifting and estate-planning benefits. Contributions into a 529 plan qualify for the annual $11,000 gift exclusion, but there is also a provision in the tax law that allows for an acceleration of five years of gifts that could be made in the first year. There can also be multiple giftors to the same beneficiary.
The best way we can prepare our children for success is to recognize the need for higher education and save early and effectively to adequately cover their educational expenses. These 529 plans offer parents flexibility, control and tax advantages most other college-funding vehicles do not. Please share these benefits with your clients and engage in a discussion about their educational savings needs. Finding $150,000 to $300,000 to send one child to college is a huge savings burden, and parents need your help in reaching those goals.
Adapted from a speech given at the 2004 MDRT annual meeting. Reprinted with permission from MDRT. All rights reserved.
Jill Jensen, regional vice president and 529 product specialist for Mercury Advisors, has been working exclusively with 529 plans since 1999, educating the financial intermediary marketplace on the benefits and applications of 529 plans. She can be reached at 415-885-1265.