529 Education

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Service: (877) 615-4116

Unlike saving for retirement, college savers have a much shorter time frame – usually 18 years at the most. And they have a much shorter time frame for using the money – usually within four years. That calls for a Goldilocks investment approach – not too aggressive, not too conservative.

• Stocks may provide growth potential, which is important when children are young and college is years away.
• Bonds may provide lower risks, which is important when children are older and distributions are coming sooner rather than later.

Choosing an initial allocation and adjusting it as the years go by is a critical task. Many parents choose age-based portfolios that have a built-in glide path that adjusts the allocation over time. But not all age-based portfolios are built alike so consider plans that design the portfolio with the unique needs of college savers in mind.

Many people think that the goal is too big to achieve. People see the "sticker price" of college and do nothing because the amount looks unachievable. Parents don't need to save the full sticker price. If you put away a little bit of money for a long time, you'll have a lot more money saved than if you didn't. The most important step is the first step – getting started.

This is an important question to consider as you help parents incorporate paying for college into their overall financial plan.

There are three drawbacks with funding a single 529 for two or more children:

1. 529 plans can be used only for qualified higher-education expenses of the named beneficiary, and only one beneficiary at a time.
2. Investment allocation in age-based 529 portfolios are based on the age of the beneficiary, moving from aggressive to more conservative as college gets closer.
3. Your client may not be able to take full advantage of tax breaks that 529 accounts offer, including individual gift tax exclusions.

One account for two children may make sense if, for example, there's a significant age difference. The owner could change the beneficiary when the older child has completed college and, of course, tweak the 529 investment allocation for the younger child.

Consider the strategy of opening a 529 account for each child. It remedies the drawbacks of having only one account for multiple kids because:

• All funds for qualified expenses are distributed tax-free¹ for each beneficiary
• The most appropriate time-based investment allocation can be chosen for each child
• Your clients could potentially minimize tax breaks
• It's easier to track progress for each child

As a result of the Tax Cuts and Jobs Act, 529 savings plans aren't just for college expenses anymore.

Families with children in grades K-12 can now take federal tax-free withdrawals¹ of up to $10,000 per year to pay for public, private, religious elementary or secondary school tuition. However, whether K-12 tuition will qualify for state tax benefits is still being determined on a state-by-state basis.

The cost of college is rising quickly, and your clients need their money to grow in order to keep up. Fortunately, there are several types of college savings solutions available, each with its own unique set of rules, features and potential benefits — understanding the basics is an important first step in the selection process.

1. 529 plans: Operated by a state or educational institution, 529 plans can make it easy to save for education for a designated beneficiary. There are two types of 529 plans: pre-paid tuition plans, which lock in costs and have residency and other restrictions, and savings plans, which don't lock in costs but are much more flexible. While certain withdrawals are subject to federal, state and local taxes, 529 savings plans are tax-advantaged savings plans that have high contribution limits and allow earnings to grow tax-free when used for education expenses¹. Many states also offer additional tax incentives.
2. Coverdell Education Savings Accounts (CESA): These accounts are used to pay the education expenses of a designated beneficiary. They offer tax-free growth and tax-free withdrawals¹ when the funds are used for qualified education expenses. Withdrawals can be used for qualified elementary and secondary education expenses, as well as for college. However, the maximum annual contribution is low at only $2,000 per beneficiary, and they are only available to families with income below a certain level.
3. Custodial accounts (UGMA/UTMA): Custodial accounts are used by parents or grandparents to invest in a child's education, while taking advantage of the child's generally lower tax rate. These accounts also have no maximum investment limit. Because minors can't directly own an investment or bank account, an adult custodian must manage and use the funds for the benefit of the minor child, as prescribed under the state's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).
4. Taxable accounts (savings accounts): These accounts are set up and owned by individuals with after-tax dollars to save for college or other goals. All earned income is taxable annually at the account owner's federal and state income tax rate and dividends and capital gains are taxed at a lower rate.

529 rollovers are an exception rather than routine, but you should consider five scenarios:

1. There's a more appropriate option. If there's a new investment manager that offers investing options and underlying investments with greater potential to help your client meet his goals, it may be wise to consider a change.
2. Your client's plan suffers chronic underperformance. If you anticipate your client's current 529 will continue to underperform versus benchmarks or competing plans, you may want to consider a change.
3. There's a better value for the money. You may want to consider a lower cost plan, as long as it offers the features, service levels and performance that make the switch worth it.
4. Your client can get a home-team advantage. Your client may benefit from a home-state 529, depending on whether the state allows the deduction for rollover contributions.
5. The plan has restrictions that interfere with your client's goals. For example, a grandparent sets up an account for a grandchild beneficiary and then later decides to turn ownership of the account over to his son, the father of the beneficiary. If the 529 doesn't allow for voluntary ownership change, rolling over to a 529 that does allow owner changes may meet the grandparent's needs better.

There's one more important factor to consider: Before suggesting a 529 plan change, check whether a rollover may trigger processing fees or state tax recapture fees, which vary by state, and be sure you understand any tax implications