COLLEGE SAVINGS 101

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529 plans and Gen Xers: College planning for the forgotten generation
http://www.savingforcollege.com/articles/529-plans-and-gen-xers-college-planning-for-the-forgotten-generation

Posted: 2017-10-23

by Kathryn Flynn

FINANCIAL PROFESSIONAL CONTENT

Helping those who haven't started saving
Reviewing existing college savings accounts
Encouraging grandparents to help
Helping to fill a college savings gap

Helping clients prepare for future college costs has become an integral part of holistic financial planning. You may even find that families who save for college are more likely to stay on track for retirement, since they won't end up eventually dipping into their IRA or 401(k) to pay tuition. Millennials (as new parents) or Baby Boomers (as grandparents) often come to mind as ideal prospects for 529 college savings plans, but by ignoring the “slacker” generation, you could be leaving business on the table.

Generation X, those born between 1965-1979, have higher incomes on average compared to Boomers and Millennials, and are expected to collect a portion of the $30 trillion of wealth expected to be transferred from the Boomers. And many of these clients, remembering the pain of their own student loans, make saving for their children's education a top priority.

Here are four opportunities to grow your practice by helping Gen X clients plan for college:

Helping those who haven't started saving

Generation X includes parents in their late 30s through early 50s, which means you could be dealing with very different stages of family life. On the younger end, you'll encounter parents who delayed having children and now want to start saving for their newborn. These might be more affluent parents who had been focusing on their careers and have healthy retirement accounts. Their financial stability and longer time horizon should make it easier for you to find a 529 plan that fits their strategy.

Late starters can present more of a challenge. If their child is in high school or soon will be, you'll want to evaluate whether or not a 529 plan still makes sense. With a shorter time horizon, the family won't be able to take full advantage of a 529 plan's tax-free compounding, but they might be able to save money on state taxes. Currently 34 states offer a tax deduction or credit for 529 plan contributions, regardless of how long the account has been open. The potential savings will vary by state, but Indiana, Vermont and Oregon offer residents some of the most lucrative benefits. Just be sure to also take the plan's fees and investment performance into account before making a recommendation.

Reviewing existing college savings accounts

Many of your Gen X clients might already be putting money away for college. If that's the case, it's a good idea to have a conversation about where the funds are being held, and make sure they're on track to reach their goal. Consider clients who live in Minnesota or Massachusetts. They could be unaware that these states recently began offering a tax benefit, and are missing out on potential savings.

For clients who have custodial accounts for their child, you'll want to determine whether or not they should convert the account to a 529 plan. UGMA/UTMAs are generally very tax-efficient, but all of the untaxed earnings in the account will be triggered as capital gains once they are transferred to a 529 plan. The UGMA/UTMA Conversion Calculator can show you which account works best based on your client's individual situation.

However, if the beneficiary is nearing college age and will be applying for financial aid, a 529 plan will most likely be the best option. Custodial accounts are counted as student income on the Free Application for Federal Student Aid (FASFA), which means 20% of the value will be added to the Expected Family Contribution (EFC). 529 plans owned by a parent or dependent student are counted as a parental asset, and will only increase EFC by a maximum of 5.64% of their value.

Encouraging Gen Xers to ask their parents for help

No matter where your clients are in the college planning process, it never hurts to get help from family and friends. Many 529 plans offer creative ways to ask for gift contributions using email and social media. For example, clients who use the T. Rowe Price College Savings Plan can receive gifts through a simple gift contribution form, or with the Go Tuition Gifting Portal, which allows families to create a customized profile page that keeps track of gifts received and can be shared with grandparents or other friends and relatives.

Clients with more affluent parents will be interested in learning that 529 plan contributions qualify for the annual gift-tax exclusion ($14,000 in 2017), with an option to “superfund” the plan and utilize up to $70,000 in annual exclusions, as long as the grandparent elects to treat the contribution as made over a five calendar-year period for gift tax purposes.

Helping to fill a college savings gap

College financial planning is becoming increasingly more complex, creating an opportunity to add value with Gen X clients who will soon be paying for college. You can families get the best return on their investment by finding the right combination of school, choice of major and starting salary that will leave them with the least amount of student debt. A study by Fidelity found that 28% of parents would welcome advice from their financial advisor while helping their child select a college major, and 22% said their advisor is already helping.

Tools like the Financial Aid Calculator can help you estimate a client's EFC before they complete the FAFSA. By doing this exercise, you may uncover opportunities to make adjustments that can maximize the student's eligibility for financial aid, such as reducing the family's Adjusted Gross Income. Other ways you can help with the college funding process are finding scholarships and coming up with strategies to reduce costs, such as suggesting that the student start off at a community college.

FINANCIAL PROFESSIONAL CONTENT

Helping those who haven't started saving
Reviewing existing college savings accounts
Encouraging grandparents to help
Helping to fill a college savings gap

Helping clients prepare for future college costs has become an integral part of holistic financial planning. You may even find that families who save for college are more likely to stay on track for retirement, since they won't end up eventually dipping into their IRA or 401(k) to pay tuition. Millennials (as new parents) or Baby Boomers (as grandparents) often come to mind as ideal prospects for 529 college savings plans, but by ignoring the “slacker” generation, you could be leaving business on the table.

Generation X, those born between 1965-1979, have higher incomes on average compared to Boomers and Millennials, and are expected to collect a portion of the $30 trillion of wealth expected to be transferred from the Boomers. And many of these clients, remembering the pain of their own student loans, make saving for their children's education a top priority.

Here are four opportunities to grow your practice by helping Gen X clients plan for college:

Helping those who haven't started saving

Generation X includes parents in their late 30s through early 50s, which means you could be dealing with very different stages of family life. On the younger end, you'll encounter parents who delayed having children and now want to start saving for their newborn. These might be more affluent parents who had been focusing on their careers and have healthy retirement accounts. Their financial stability and longer time horizon should make it easier for you to find a 529 plan that fits their strategy.

Late starters can present more of a challenge. If their child is in high school or soon will be, you'll want to evaluate whether or not a 529 plan still makes sense. With a shorter time horizon, the family won't be able to take full advantage of a 529 plan's tax-free compounding, but they might be able to save money on state taxes. Currently 34 states offer a tax deduction or credit for 529 plan contributions, regardless of how long the account has been open. The potential savings will vary by state, but Indiana, Vermont and Oregon offer residents some of the most lucrative benefits. Just be sure to also take the plan's fees and investment performance into account before making a recommendation.

Reviewing existing college savings accounts

Many of your Gen X clients might already be putting money away for college. If that's the case, it's a good idea to have a conversation about where the funds are being held, and make sure they're on track to reach their goal. Consider clients who live in Minnesota or Massachusetts. They could be unaware that these states recently began offering a tax benefit, and are missing out on potential savings.

For clients who have custodial accounts for their child, you'll want to determine whether or not they should convert the account to a 529 plan. UGMA/UTMAs are generally very tax-efficient, but all of the untaxed earnings in the account will be triggered as capital gains once they are transferred to a 529 plan. The UGMA/UTMA Conversion Calculator can show you which account works best based on your client's individual situation.

However, if the beneficiary is nearing college age and will be applying for financial aid, a 529 plan will most likely be the best option. Custodial accounts are counted as student income on the Free Application for Federal Student Aid (FASFA), which means 20% of the value will be added to the Expected Family Contribution (EFC). 529 plans owned by a parent or dependent student are counted as a parental asset, and will only increase EFC by a maximum of 5.64% of their value.

Encouraging Gen Xers to ask their parents for help

No matter where your clients are in the college planning process, it never hurts to get help from family and friends. Many 529 plans offer creative ways to ask for gift contributions using email and social media. For example, clients who use the T. Rowe Price College Savings Plan can receive gifts through a simple gift contribution form, or with the Go Tuition Gifting Portal, which allows families to create a customized profile page that keeps track of gifts received and can be shared with grandparents or other friends and relatives.

Clients with more affluent parents will be interested in learning that 529 plan contributions qualify for the annual gift-tax exclusion ($14,000 in 2017), with an option to “superfund” the plan and utilize up to $70,000 in annual exclusions, as long as the grandparent elects to treat the contribution as made over a five calendar-year period for gift tax purposes.

Helping to fill a college savings gap

College financial planning is becoming increasingly more complex, creating an opportunity to add value with Gen X clients who will soon be paying for college. You can families get the best return on their investment by finding the right combination of school, choice of major and starting salary that will leave them with the least amount of student debt. A study by Fidelity found that 28% of parents would welcome advice from their financial advisor while helping their child select a college major, and 22% said their advisor is already helping.

Tools like the Financial Aid Calculator can help you estimate a client's EFC before they complete the FAFSA. By doing this exercise, you may uncover opportunities to make adjustments that can maximize the student's eligibility for financial aid, such as reducing the family's Adjusted Gross Income. Other ways you can help with the college funding process are finding scholarships and coming up with strategies to reduce costs, such as suggesting that the student start off at a community college.

 

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