How to Grow Your Practice With 529 Plans

Kathryn FlynnBy Kathryn FlynnBy Savingforcollege.com

As college costs continue to rise, parents and grandparents are seeking help from financial professionals to help with college funding. College is a major expense, second only to the cost of housing, transportation, taxes, retirement and healthcare. The amount a family invests in a 529 plan can have a big impact on their overall financial plan. Helping families with college funding can help you grow your client base and increase assets under management.

Build lasting relationships

Most parents who save for college start early. According to data from Ascensus, the largest college savings service provider, just over half of 529 plan accounts on the Ascensus platform were opened when the beneficiary was 5 years old or younger, and 38% were opened when the beneficiary was 2 years old or younger.

Financial advisors can help young parents select and manage their 529 plan until the child is ready for college. Once the child is ready for college, an advisor can help with the college selection process and finding scholarships and financial aid. For example, an advisor may recommend selling an investment to strategically time a loss. The loss would reduce the family’s adjusted gross income (AGI) and potentially increase eligibility for need-based financial aid.

By including college funding into a family’s complete financial plan, an advisor can make sure the family is saving appropriately to keep their children out of debt without jeopardizing their own retirement goals.

Provide added value to existing clients

It’s worthwhile to bring up 529 plans during year-end meetings with existing clients. Families who are currently saving might need a nudge when it’s time to contribute more to their 529 plan. You should also review clients’ 529 plan investments on a yearly basis to make sure the family is comfortable with the portfolio’s level of risk based on the child’s age and current market conditions. You can also help prevent the family from panicking during economic downturns.


Here are other opportunities where a 529 plan might be a good fit for a client:

UGMA/UTMA custodial account conversions

Custodial accounts were once a popular choice for families saving for college, but today 529 plans offer superior benefits, including:

  • Tax-deferred growth and tax-free distributions when funds are used to pay for qualified education expenses
  • 529 plan savings must be used to pay for qualified education expenses; the earnings portion of a non-qualified distribution is subject to ordinary income tax and a 10% penalty

For many clients, it might make sense to convert their custodial account to a custodial 529 plan account. Keep in mind, however, that liquidating mutual funds in a client's custodial brokerage account may trigger capital gains, which are reported on the child’s tax return.

College planning

If you have clients with children heading to college, there is an opportunity for you to present yourself as an objective third party who can provide valuable insight regarding:

  • Scholarship and grant search
  • College selection and college affordability
  • Student loans
  • Financial aid

Grandparents

Grandparents may open a 529 plan in their own name or contribute to a parent-owned 529 plan account. Depending on the state, grandparents may qualify for state income tax benefits. Grandparents can retain control of the assets if they are the 529 plan account owner, but distributions from a grandparent-owned 529 plan can have a negative impact in the student’s need-based federal financial aid eligibility.

Estate planning

Grandparents can be much wealthier than parents and could benefit from using a 529 plan as an estate planning tool. By contributing to a 529 plan, grandparents can shelter a large amount of assets from their taxable estate while retaining control of the funds. With 5-year gift tax averaging, or, superfunding, grandparents can contribute a significantly large amount per grandchild by spreading the gift contribution as if it were made over a 5-year period. Contributions up to $75,000 per donor, per beneficiary will be excluded from the donor’s taxable estate and will not count against their lifetime gift tax exclusion limit.

529 plans can be a wonderful way for grandparents to leave a legacy for their grandchildren by giving them the gift of college. Grandparents who have funded their retirement may feel more comfortable contributing to their grandchildren’s 529 plans. Providing advice about college funding may be a steppingstone for an advisor to gain the rest of a grandparent’s investing business.

Required Minimum Distributions (RMDs)

When your clients are approaching age 70 ½, consider using their RMDs to fund a grandchild’s 529 plan. When transferred to a 529 plan, the investment will continue to grow tax-deferred and distributions are tax-free when the funds are used to pay for qualified education expenses for the designated beneficiary.


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