Parents turn to financial advisors for help with college savings

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Kathryn Flynn

By Kathryn Flynn

August 30, 2018

When it comes to saving for college, some parents are unclear about which account to use and how much they should be putting away – so they seek help from a financial advisor.

According to a new study from Fidelity, 64 percent of families said their financial advisor keeps them on track to meet college savings goals. Families who have a financial advisor are also more confident about their plan to save for college.

Understanding the best way to save for college

Sixty-seven percent of families who work with a financial advisor believe they have a good understanding of how to best save for college, compared to only 40 percent of families without an advisor.

For most families, a 529 plan is the best way to save for future college expenses. 529 plans offer tax-free investment growth and tax-free withdrawals when the funds are used to pay for qualified higher education expenses. With so many different options available, some parents prefer to work with a financial advisor when setting up a 529 plan. For example, an advisor can help determine whether it makes sense to use the plan offered by your home state if a tax benefit is available. Once you select a plan, your advisor can guide your investment selection to best meet the needs of the beneficiary.

The majority of 529 plans are direct-sold plans, which are set up by the account owner. There are also 30 advisor-sold plans available, which have to be purchased through a licensed financial advisor. However, families who want to work with a financial advisor are not always limited to advisor-sold 529 plans. Some fee-based RIAs will help families set up a direct-sold plan and select investment options.

Getting a head start on saving for college

According to the study, 86 percent of families who work with a financial advisor have started saving for college, compared to 59 percent of families without an advisor.

The earlier you start to save for college, the more time your earnings will have to compound tax-free. Families who start to put away money as soon as their child is born will be able to achieve about one-third of their goal from earnings. But, for those who wait until high school to start saving, less than 10 percent of the goal will come from earnings. These families will have to contribute six times as much per month as the family who started at birth to meet the same college saving goal. If that’s not possible, the student may end up borrowing more than they originally intended and could end up with high monthly loan payments after graduation.

Using a dedicated college savings account

Financial advisors may influence a family’s decision to have a dedicated account for college savings. According to Fidelity, 43 percent of families with a financial advisor plan to have a separate account for college savings, compared to 33 percent of those who do not work with an advisor.

There are numerous benefits of using a dedicated account to save for college. Setting and working toward an end goal is much easier when all of the funds in an account will be used for the same purpose. With a dedicated account, families can determine how much to contribute and which investment options to select based on the beneficiary’s individual needs.

If parents choose to open a 529 plan to save for college, they can also take advantage of federal, and sometimes state tax benefits that can help boost their savings. Some states also offer matching grants for residents who make contributions to their 529 plans. For account owners who prefer a hands-off approach, many 529 plans offer age-based investment options that automatically shift asset allocations over time. Generally, the portfolio moves from equities to more conservative fixed income investments as the beneficiary gets closer to college.

Find a financial professional in your area who specializes in college financing:

Opportunities for advisors

The study also found that some advisors are not discussing college savings with clients. Thirty-four percent of families who use a financial advisor haven’t talked about 529 plans, and only 29 percent had discussed the benefits of using the 5-year gift tax election to make large tax-free gift contributions (down from 45 percent in 2016). 529 plan contributions are treated as gifts for tax purposes, which means contributions up to $15,000 (in 2018) will qualify for the annual gift tax exclusion. Individuals who want to give a larger gift can treat contributions between $15,000 and $75,000 ($30,000 and $150,000 for couples) can spread the amount equally over five years.

If their clients have young children, financial advisors should also keep them up-to-date on the recent changes to 529 plans. As of January 1, 2018, up to $10,000 per year can be withdrawn from a 529 plan tax-free to pay for K-12 tuition expenses. Some families may also qualify for an additional state tax benefit when using a 529 plan to pay for elementary or high school. According to Fidelity, only 31 percent of parents were aware of this change.

A good place to start:

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