COLLEGE SAVINGS 101

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Top 6 advisor misconceptions about 529 plans
http://www.savingforcollege.com/articles/common-advisor-529-plan-misconceptions-852

Updated: 2017-10-09

by Kathryn Flynn

Financial Professional Content

For many families, college will be one of the most expensive purchases they ever make, placing it at or near the top of their saving priorities. In fact, paying for college has become the number one financial concern for young parents. Yet while a financial planner helps with things like saving for retirement, insurance, and tax and estate planning, many arenít talking about 529 college savings plans with their clients. With direct-sold and advisor sold plans available, 529s are a great opportunity for commission-based brokers and fee-based planners to strengthen relationships with existing clients and also grow their business.

Itís time to clear up the confusion about these common misconceptions and see how 529 plans can benefit your clients:

RELATED: Is it a mistake not to hire a financial planner?

1. Itís not worth the time

This is probably the most common reason financial advisors donít like to talk about 529 plans, and it couldnít be farther from the truth. According to the College Savings Plans Network, as of June 30, 2015 the average 529 account balance reached an all-time high of $20,934 Ė an increase of over 110% since 2002. Whatís more, advisor-sold plans make up 48% of total market share, which means clients are looking for help from experts they trust.

529 plans are complex vehicles and contain certain attributes that wonít be found anywhere else in the investing space. Researching all of the plans and investment options available can seem like a daunting task, but Savingforcollege.com offers many helpful resources. For example, the Pro 529 Evaluator allows you to build a customized list of plans based on criteria you select, such as investment management, fees and state tax benefits.

RELATED: Study reveals more parents need help with saving for college

2. 529 plan savings have a big impact on financial aid eligibility

Yes, a 529 plan will affect how much a financial aid a family receives, but the amount is small compared to other savings vehicles. In fact, assets in a 529 plan receive favorable treatment on the FAFSA. If a dependent student or one of their parents owns the account it is considered a parental asset and will only reduce the studentís aid package by up to 5.64% of the account value. Other savings vehicles owned by the student, such as an UGMA/UTMA account, will be assessed at 20%.

Some might think a Roth IRA is a better option for your clients, since retirement assets are not counted on the FASFA. While this is true, itís when withdrawals are taken to pay for college that an issue arises. The money withdrawn will be counted as untaxed income in the EFC formula. Withdrawals from a 529 plan (when owned by the student or parent) do not have to be reported on the FAFSA.

RELATED: 6 ways to help your clients maximize financial aid

3. I have no advice to offer because my clients should always use their home stateís plan

While 529 plans are administered by the states, you can generally invest in any plan no matter where you live. 34 states, including the District of Columbia, currently offer a state tax credit or deduction for contributions. The majority of these states require that the resident uses his own stateís plan, but six of these states are parity states Ė meaning you can invest in any 529 plan and still receive a tax break.

Yet even if your client does live in a state that offers residents a tax deduction on contributions, their financial advisor should first explore the planís fees and performance before making a recommendation. Tax benefits donít always outweigh the costs of poor investment management or high fees. Savingforcollege.comís State Tax Calculator can help determine just how much their stateís tax benefit is really worth.

RELATED: How much is your clientís state tax deduction really worth?

4. There are age and/or contribution limits

If youíre not familiar with college savings plans, itís easy to mix up their rules. 529 plans have no age or time limits, which means an adult can open an account and name herself the beneficiary and save any leftover funds for future generations. This differs from a Coverdell Education Savings Account (ESA), which are not available for anyone over age 18, and the funds must be used within 30 days of the beneficiaryís 30th birthday.

Families who save with a Coverdell ESA are also limited to investing just $2,000 per year per child. 529 plans, on the other hand, have no annual contribution limits Ė only lifetime limits, which vary by plan but are typically very high, such as $425,000 in Maineís NextGen plan. Whatís more, contributions are considered gifts for tax purposes and will qualify for the annual gift tax exclusion, $14,000 per individual in 2015 ($28,000 for married couples filing jointly). Your clients can also choose to treat their contribution as if it were made over a five-year period, which will allow an individual to shelter up to $70,000 in one year ($140,000 for married couples).

RELATED: 10 rules for superfunding a 529 plan

5. 529s donít offer enough investment options

While 529 plans may not offer self-directed investing, todayís college savers have access to more investment options than ever before. In fact, according to a report from the AKF Consulting Group, the number of individual mutual fund options in advisor-sold 529 plan increased just over 10% from 2010-2012. This provides more opportunity for advisors to help with asset allocation and fund selection throughout the life of the account.

Direct-sold plans tend to offer more age-based options, where investments are automatically adjusted as the beneficiary gets closer to college. This type of portfolio is ideal for clients who prefer to Ďset it and forget ití.

RELATED: Investing trends of 529 college savers

6. 529 plans have high fees - families get ripped off

529 plan fees have seen a dramatic drop in the last decade. According to Savingforcollege.comís most recent 529 Plan Fee Study, there continues to be a significant decrease in plan fees. In fact, 48 direct-sold plans (without residency requirements) have at least one investment option available with 10-year costs on a $10,000 investment below $500. State treasurers and agencies who administer the plans have been pushing for fee reductions, and investment managers have been willing to accept lower fees as a percentage of assets as the plans grow.

This study doesnít include advisor-sold plans, but there are also ways around paying a sales load. If your client has other investments from the same program manager, such as an IRA or brokerage account, they may be eligible for discounted A-shares when they reach certain breakpoints. Also, fee-based planners can waive the A-share sales load entirely since they charge their own fees based on assets under management or an hourly rate.

RELATED: The 15 lowest-cost 529 plans

Financial Professional Content

For many families, college will be one of the most expensive purchases they ever make, placing it at or near the top of their saving priorities. In fact, paying for college has become the number one financial concern for young parents. Yet while a financial planner helps with things like saving for retirement, insurance, and tax and estate planning, many arenít talking about 529 college savings plans with their clients. With direct-sold and advisor sold plans available, 529s are a great opportunity for commission-based brokers and fee-based planners to strengthen relationships with existing clients and also grow their business.

Itís time to clear up the confusion about these common misconceptions and see how 529 plans can benefit your clients:

RELATED: Is it a mistake not to hire a financial planner?

1. Itís not worth the time

This is probably the most common reason financial advisors donít like to talk about 529 plans, and it couldnít be farther from the truth. According to the College Savings Plans Network, as of June 30, 2015 the average 529 account balance reached an all-time high of $20,934 Ė an increase of over 110% since 2002. Whatís more, advisor-sold plans make up 48% of total market share, which means clients are looking for help from experts they trust.

529 plans are complex vehicles and contain certain attributes that wonít be found anywhere else in the investing space. Researching all of the plans and investment options available can seem like a daunting task, but Savingforcollege.com offers many helpful resources. For example, the Pro 529 Evaluator allows you to build a customized list of plans based on criteria you select, such as investment management, fees and state tax benefits.

RELATED: Study reveals more parents need help with saving for college

2. 529 plan savings have a big impact on financial aid eligibility

Yes, a 529 plan will affect how much a financial aid a family receives, but the amount is small compared to other savings vehicles. In fact, assets in a 529 plan receive favorable treatment on the FAFSA. If a dependent student or one of their parents owns the account it is considered a parental asset and will only reduce the studentís aid package by up to 5.64% of the account value. Other savings vehicles owned by the student, such as an UGMA/UTMA account, will be assessed at 20%.

Some might think a Roth IRA is a better option for your clients, since retirement assets are not counted on the FASFA. While this is true, itís when withdrawals are taken to pay for college that an issue arises. The money withdrawn will be counted as untaxed income in the EFC formula. Withdrawals from a 529 plan (when owned by the student or parent) do not have to be reported on the FAFSA.

RELATED: 6 ways to help your clients maximize financial aid

3. I have no advice to offer because my clients should always use their home stateís plan

While 529 plans are administered by the states, you can generally invest in any plan no matter where you live. 34 states, including the District of Columbia, currently offer a state tax credit or deduction for contributions. The majority of these states require that the resident uses his own stateís plan, but six of these states are parity states Ė meaning you can invest in any 529 plan and still receive a tax break.

Yet even if your client does live in a state that offers residents a tax deduction on contributions, their financial advisor should first explore the planís fees and performance before making a recommendation. Tax benefits donít always outweigh the costs of poor investment management or high fees. Savingforcollege.comís State Tax Calculator can help determine just how much their stateís tax benefit is really worth.

RELATED: How much is your clientís state tax deduction really worth?

4. There are age and/or contribution limits

If youíre not familiar with college savings plans, itís easy to mix up their rules. 529 plans have no age or time limits, which means an adult can open an account and name herself the beneficiary and save any leftover funds for future generations. This differs from a Coverdell Education Savings Account (ESA), which are not available for anyone over age 18, and the funds must be used within 30 days of the beneficiaryís 30th birthday.

Families who save with a Coverdell ESA are also limited to investing just $2,000 per year per child. 529 plans, on the other hand, have no annual contribution limits Ė only lifetime limits, which vary by plan but are typically very high, such as $425,000 in Maineís NextGen plan. Whatís more, contributions are considered gifts for tax purposes and will qualify for the annual gift tax exclusion, $14,000 per individual in 2015 ($28,000 for married couples filing jointly). Your clients can also choose to treat their contribution as if it were made over a five-year period, which will allow an individual to shelter up to $70,000 in one year ($140,000 for married couples).

RELATED: 10 rules for superfunding a 529 plan

5. 529s donít offer enough investment options

While 529 plans may not offer self-directed investing, todayís college savers have access to more investment options than ever before. In fact, according to a report from the AKF Consulting Group, the number of individual mutual fund options in advisor-sold 529 plan increased just over 10% from 2010-2012. This provides more opportunity for advisors to help with asset allocation and fund selection throughout the life of the account.

Direct-sold plans tend to offer more age-based options, where investments are automatically adjusted as the beneficiary gets closer to college. This type of portfolio is ideal for clients who prefer to Ďset it and forget ití.

RELATED: Investing trends of 529 college savers

6. 529 plans have high fees - families get ripped off

529 plan fees have seen a dramatic drop in the last decade. According to Savingforcollege.comís most recent 529 Plan Fee Study, there continues to be a significant decrease in plan fees. In fact, 48 direct-sold plans (without residency requirements) have at least one investment option available with 10-year costs on a $10,000 investment below $500. State treasurers and agencies who administer the plans have been pushing for fee reductions, and investment managers have been willing to accept lower fees as a percentage of assets as the plans grow.

This study doesnít include advisor-sold plans, but there are also ways around paying a sales load. If your client has other investments from the same program manager, such as an IRA or brokerage account, they may be eligible for discounted A-shares when they reach certain breakpoints. Also, fee-based planners can waive the A-share sales load entirely since they charge their own fees based on assets under management or an hourly rate.

RELATED: The 15 lowest-cost 529 plans

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