In fact, a client doesn’t even need a child of their own to start one. They can begin this tax advantaged account for future children…. However, the IRS may require a live human to be the initial beneficiary of the account. Some investors begin accounts with themselves as the beneficiary in order to meet these requirements.
Inflation may be slowing, but for many clients the cost of a tuition for their children remains a serious concern. The New York Times reported recently that almost one third of parents believe that the cost of college has outstripped its worth. College enrollments did decrease during the pandemic, yet for many parents educational savings strategies are top of mind. Advisors may want to offer proactive information for clients on these accounts. And what better way to educate clients than to rely on the 5Ws learned early on in the class room: who, what, where, why, when and how much.
Who: 529 plans are tax-advantaged plans that help families save for children’s education. Why families, not parents? Because anyone can contribute to the 529 account. Usually, a 529 account is owned by an account holder for a child’s education. In other words, the account is similar to a trust, with the college bound child in the position of a beneficiary. The account holder can change the beneficiary whenever they wish. The assets are considered the property of the account holder. Family members such as grandparents and others can contribute to a 529 plan for family members as well, though federal gift taxes may accrue to the beneficiary.
Clients don’t have to go it alone when saving for college tuition. Many employers provide tax advantaged accounts, such as 529 plans, to help their employees save for their children’s education. The employers who offer contributions to 529 plans usually do so through a matching plan similar to contributions to health savings accounts. For example, some employers offer a $1000 match to 529 plans for employees and others vary their plans.
What: According to the IRS, “A qualified tuition program (QTP), also referred to as a section 529 plan, is a program established and maintained by a state, or an agency or instrumentality of a state, that allows a contributor either to prepay a beneficiary's qualified higher education expenses at an eligible educational institution or to contribute to an account for paying those expenses.” A key part many clients miss in considering 529 plans is that they cover higher education expenses, not just college. That means funds in a 529 plan can also be used towards trade and vocational schools, including culinary schools and for apprenticeships in some cases.
Why: The benefits of the 529 plan include: 1) Earnings accumulate tax free while in the account; 2) Distributions aren't taxable when used to pay for qualified higher education expenses (unless the tuition is less than the amount distributed); and 3) the beneficiary generally doesn't have to include the earnings from a QTP as income.
Where: Things can get pretty complex when it comes to 529 plans. Clients don’t have to choose a plan in their own state, or even in the state nearby. One author wrote about contributing to their niece’s 529 plan in Ohio even though the niece was a resident of California, while the author lived in an entirely different state. The tax impact and benefits vary from state to state.
When: As with any investment plan, the best time to start is now. In fact, a client doesn’t even need a child of their own to start one. They can begin this tax advantaged account for future children. And, for those who started accounts and were unable to have children, they can assign the benefits of the account to nephews, nieces, and other family members. However, the IRS may require a live human to be the initial beneficiary of the account. Some investors begin accounts with themselves as the beneficiary in order to meet these requirements.
How: There are a variety of details to consider before beginning a 529 account. This includes brokerage fees, minimum accounts, and employer contributions. Clients may want to opt for an account that has the most flexibility. For example, a client may not currently have an employer match to a 529 account but shouldn’t use the present fact of not having one in choosing where to invest.
How much? One vital aspect to using 529 plans is the impact the 529 plan has on a child’s ability to get financial aid. This topic may be the center of some debate, with sharp opinions on each side. And for good reason, recall that there are so many 529 plans and permutations that folks have to rely on websites comparing them side-by-side. That means, two people who think they are similarly situated (both have similar salaries and tuition burdens) may have different results.
And there’s one more nearly impossible to predict variable: the forms schools use to measure assets for the child in need of tuition assistance aren’t necessarily the same. It’s a trap for the unwary. As one writer pointed out, the factors that go into how a 529 plan impacts a child’s financial aid package are pretty varied: “In general, how 529 plans are counted towards your child’s financial aid package depends on the financial aid form used, who owns the 529 plan, and your child’s college’s formula on how 529 plans are counted towards financial aid packages.”
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
get xpress proposal
