September is National College Savings Month, which means now is the perfect time to look at your list of clients and assess which families you serve might benefit from a conversation about how to pay for the future educational expenses of their children.
But keep in mind—the education conversation isn’t limited to young families. Grandparents may have a desire to contribute to their grandchildrens’ education as well. Rather than only focusing on clients with school-aged children, the savings discussion is one you could have with clients of any age—as long as you know their situation well enough to understand if it’s appropriate for them.
If you do have clients who you think could benefit from including education expenses in their financial plan, the conversation begins with what type of account they should invest in to cover tuition and more.
In this article, we’ll be exploring the benefits of 529 plans, which offer tax-free earnings, as well as how to talk about them with your clients.
Why College Savings is an Important Discussion
If your firm offers comprehensive financial planning services, there’s no way to get around it—you need to be covering all the financial details of your clients’ lives, and that goes far beyond retirement planning.
Planning for and paying for future educational expenses is a niche focus within the complete financial planning picture, but there are unique investment opportunities to take advantage of that are specifically designed to minimize taxes and increase the amount of money clients can use toward qualified educational needs.
Having a conversation about education funding is simply part of being a fiduciary for your clients. And, it’s appreciated. One Fidelity found that 64% of families surveyed said their financial advisor keeps them on track for their college funding goals.
You don’t want to be included in the other 36% of advisors.
Beyond the scope of assisting clients with important planning considerations, it also makes good business sense.
By managing accounts specifically reserved for education, you give yourself an opportunity to earn more of your clients’ business and manage the money that they might otherwise funnel into a savings or checking account, where it might seem safer but won’t produce the returns necessary to meet their future needs.
How to Pay for Education Expenses
There’s not one simple way to account for education expenses; there’s a number of them.
If your client is into their 60s, using withdrawals from a Roth IRA might be a solution if they don’t already have another account set up specifically for education funding.
Cash accounts are always a possibility, but rarely the best way to approach the situation.
If you’re on the front end of planning and have time to put your client into a specific account purpose-built for education, the two most popular options are Education Savings Accounts and 529 plans.
In this article, we’re going to look at the advantages offered by 529 plans.
Six Advantages of a 529 Plan for College Savings
While a 529 account may not be right for every family or individual (making that decision is up to each advisor and their client) there are some intriguing advantages that tilt the scale in the 529’s favor:
- Withdrawals are tax free as long as they’re used for education expenses. This enormous benefit is the greatest strength of a 529 plan.
- Other people, like grandparents or aunts and uncles, can make contributions
- Many states offer deductions or credits on contributions
- Some states allow funds to be used toward elementary or secondary expenses, not just college
- Only 5.64% of the assets in a 529 account are used by FAFSA to determine financial aid eligibility—making it more likely that a student can qualify for additional loans and grants
- There is no annual contribution limit
If your client is a grandparent, a 529 account can be an advantageous component of their estate and legacy planning strategy. While there is no annual contribution limit, contributions from a single donor over $15,000 in a given year does trigger the gift tax.
However, if your client wants to make a larger contribution, they can contribute up to five years’ worth—$75,000—at once, as long as they don’t make another contribution for five more years.
Because 529 plans can vary state by state, it’s important to do your research into any particular differences you might need to be aware of based on where you or your clients live.
Getting Started with a 529 Plan
College expenses are high and expected to continually rise. One study estimates that by 2030, the average public tuition per student will be over $44,000.
Education funding can be one of the largest expenses of a client’s life—and if not planned for properly, can throw off the rest of their retirement strategy and put their lifestyle and goals at risk.
If you haven’t been sure how to start a conversation about college savings, National College Savings Month is the perfect opportunity to bring up the topic, gain an understanding of what your clients want to accomplish, and then do what you do best—offer them personalized, human financial advice that makes their life easier, financial situation more clear, and future goals more attainable.
CLS Investments has years of experience in managing state 529 plans. If you need to open an account for yourself or a client, click here to get in touch.