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Advisors can better serve their clients on one of the most important investments they will ever make – their family’s education.
At a time when advisors are focused on delivering the value of a trusted guide to serve all of their clients’ financial needs, there is an opportunity available to them in education savings. Sending one or more children to college will be one of the largest financial commitments a family will make. Yet for many advisors, the amount of information they need to adequately prepare to engage their clients in this vital issue is daunting.
For example, advisors may not be familiar with education savings tools, such as the many 529 college savings plans available in states across the U.S., or may not be aware of how recent legislation has extended the use of 529s beyond post-secondary education to fund K-12. Just this past December, the SECURE Act extended them to cover costs associated with apprenticeships and re-payments on student loans.
This knowledge will be invaluable in contributing to a family’s overall financial picture and cementing the long-term client relationship. It also offers an opportunity to approach new clients, such as grandparents and adult children of clients, by including college savings in a holistic approach to serving the entire financial needs of the family, as well as estate planning solutions.
A recent TDAmeritrade survey showed just how much of a family’s goal this has become. Among parents, 84% were currently saving or have already saved for their child’s college; and 79% were “somewhat” or “very” stressed about their child paying them back for college. Among Gen Zs (15-21), 62% are saving for college; and 63% of them are stressed about paying back student loan debt.
Let’s look at the hypothetical client of millennial parents, themselves saddled with student debt1 and the likelihood of working a long, varied career requiring additional education or re-training along the way. Not only can their children be beneficiaries of higher-education savings, but they themselves may also be able to utilize 529 plans.
The cost of education will be one of a family’s largest financial expenses, especially when there are multiple children. The average cost of raising a child today to age 18 is estimated to be over $230,000. For college-bound children, it’s wise to plan five years of college, which currently could amount to an additional $127,000 for in-state public school or $255,000 for a private school for parents planning to pay full tuition and living expenses. Professional certifications can run from several hundred to several thousand dollars per year, plus organization memberships.
Many millennials are more open to advisory relationships than to robo-advisors. A LendEDU poll of millennials showed that young Americans have a preference for real-life human financial advisors as opposed to robo-advisors. For example, nearly 69% of millennials surveyed thought a human advisor would get them a better return on their investments, compared to the 31% who thought the better ROI would come from a robo-advisor. Among respondents, 62% believed that robo-advisors were much more likely to lose their money than were traditional advisors.
Here are basic facts and guidelines to support an advisor with exploring education savings with their clients:
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Tax-exempt earnings: Money invested in 529 accounts has the potential for any earnings to grow free from federal, and usually state, income taxes.
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Flexibility: 529 plans can be established by and used for anyone – children, grandchildren, nephews or even parents themselves – and for a wider variety of tuition and educational expenses2 beyond traditional public and private four-year colleges:
- 529 plans have long been able to be used for qualified trade schools and vocational programs.
- Thanks to the SECURE Act recently passed in late December 2019, they can also go towards costs of apprenticeship programs. 529 plan account owners may now withdrawal up to $10,000 (lifetime limit) per beneficiary or sibling of the beneficiary tax-free for payments toward qualified education loans. The $10,000 is a lifetime limit applies separately for each the beneficiary and the sibling.
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Gifting options: There is no income or age limits on 529 contributors, allowing extended family members and friends to contribute.
- Clients can contribute up to $15,000 per year (or $30,000 for a married couple electing to split gifts) per beneficiary without incurring federal gift taxes. They can also elect to make a special gift tax election and make a single contribution of up to $75,000 ($150,000 for married couples) of up to five years’ worth of gifts.
- Contributions are generally considered completed gifts and excluded from a client’s estate for federal estate tax purposes, even though they are the account owner and still maintain control of the account.
- Clients can open multiple accounts and gift contributions if they have multiple children or grandchildren, with gift tax rules applying separately for each beneficiary.
- In addition to these options, clients are also able to make gift contributions to commemorate a special occasion such as a birthday, graduation or holiday – by making gifts to a family’s particular 529 plan or through an online gifting tools, crowdfunding platforms, e-gift cards and downloadable gift certificates. For a list of gifting programs offered by CSF members (see here).
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Control: Your clients can maintain control of assets placed in a 529 account, including being able to make investment and withdrawal decisions as well as the ability to change the account beneficiary as often as they wish as long as the new beneficiary is a family member of the original beneficiary.
Education savings strategies is an evolving topic, but one where an advisor can assist clients in the most important aspect of their lives: as parents.
Vivian Tsai is chair of the College Savings Foundation (CSF), a Washington, D.C.-based not-for-profit organization with the mission of helping American families achieve their education savings goals by working with public policy makers, media representatives and financial services industry executives in support of education savings programs.
1 An Age Wave study found that 81% of early-adult households carry a collective debt of nearly $2 trillion. This is mainly made up of student-loan debt and credit-card debt.
2 Qualified education expenses are: (1) College tuition and fees; (2) Room and board; (3) Books, required supplies and equipment; and (4) Computers, computer accessories, software or Internet access and related services. Up to $10,000 per year per designated beneficiary from all 529 accounts for tuition in connection with enrollment or attendance at a public, private or religious elementary, middle or high school
Read more articles by Vivian Tsai
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
