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Advising Clients on 529 Plans and Tax-Efficient College Savings Strategies

Advise your clients on 529 plans and more tax-efficient strategies with powerful insights from a recent episode of “The Bucket Plan® On-Demand” podcast.

In this episode, Seth Meisler, CFA, CFP®, CPA, and Stoyan Petev, CFA, CFP®, CLU, ChFc, discuss the tax advantages and flexibility of 529 plans to pay for college or other educational-related expenses for a loved one.

As a financial advisor, understanding these insights can enhance your planning approach and offer significant value to your clients.

Here are the main points discussed, along with actionable advice and key takeaways from the podcast.

The Basics of 529 Plans

As Seth Meisler, lead advisor at JL Smith Holistic Wealth Management, explained: “529 plans allow individuals to save money in a tax-deferred or tax-free manner if the money is used specifically for college for an accredited university.”

Types of 529 plans:

  1. Savings Plans: These plans function similarly to retirement investment accounts, with contributions invested in mutual funds or other investment products. The funds grow tax-free, and the government does not tax withdrawals for qualified education expenses.
  2. Prepaid Tuition Plans let you pay for future tuition at current rates, protecting you from tuition cost increases. Senior Vice President of Advanced Markets at C2P, Stoyan Petev, explained, “Prepaid plans are state-covered plans that allow you to prepay for state public universities and colleges.”

Tax Benefits and Strategic Gifting

Contributions to 529 plans grow tax-deferred and withdrawals for qualified expenses are tax-free — making them an effective, often preferred strategy advisors recommend for tax-efficient college savings.

Meisler also noted, “there are tax benefits for people who are gifting in certain states,” but this can vary, so it’s crucial to understand each state’s unique offerings before factoring that in.

529 plans can also be used as a strategic gifting strategy. For example, grandparents can contribute to an education fund without paying gift taxes by using the five-year election. This technique lets them give up to five years’ worth of contributions all at once. As Stoyan noted, “from an estate planning perspective, that’s actually a pretty good planning technique.”

Advanced Tax Planning Strategies

Clients may want to manage their 529 plans independently. However, a knowledgeable advisor can help them understand the complexities and maximize the benefits.

Here are some examples of the advanced strategies an advisor could offer:

  1. State Tax Deductions: Dave Alison, CFP®, EA, BPC, shared one valuable strategy: “Instead of having the grandparents contribute directly into the 529, we had the grandparents give a cash gift to mom and dad, who then made the contributions into the South Carolina plan.” This maneuver helped the parents secure a significant state tax deduction.
  2. Blending 529 Funds with Other Savings: To get the most tax credits, it can be helpful to use both 529 funds and pay for expenses yourself. Alison noted, “We wanted to use a certain amount of after-tax money to pay for education, not use all 529 money, to ensure eligibility for the American Opportunities Credit.”
  3. Roth IRAs as an Alternative: While 529 plans are powerful tools, Roth IRAs can also be useful for college savings. Seth Meisler pointed out, “The earnings would not be subject to a 10 percent penalty if used for college contributions, and if you’re over 59 and a half, there’s no tax on the earnings.”

The Importance of Ownership and Beneficiary Designations

The structure of a 529 plan can impact financial aid calculations and estate planning. Petev highlighted the importance of ownership: “Make sure that you have a successor owner set up on that 529 plan account. It is very important for estate planning and ensuring control continuity.”

Additionally, the FAFSA rules have changed, making it advantageous for grandparents to contribute to 529 plans without affecting the student’s financial aid eligibility. Meisler explained, “Any amount paid by a grandparent, whether direct or from a 529, is not included in the FAFSA calculation starting in 2024.”1

Enhancing Client Value with Holistic Financial Advising

As Seth Meisler concluded, “There’s a lot of flexibility with 529s, and the right guidance can make a significant difference.”

By understanding the complexities and benefits of 529 plans, you can provide exceptional value to your clients. Using these strategies in your overall financial plan can help clients save for college efficiently and reach their financial goals.

At C2P, we are committed to supporting financial advisors with the knowledge and tools needed to help clients succeed. Listen or watch the full podcast episode on 529 plans for more detailed advice and strategies.

Looking for the latest financial advising industry news and insights? Schedule a call and subscribe to one of our C2P podcasts!

Meet the Specialists

Stoyan Petev, CFA, CFP®, CLU, ChFc, serves as the Senior Vice President of Advanced Markets at C2P, where he spearheads the in-house life insurance division and assists advisors with his knowledge in investment sales and sophisticated planning. His role is pivotal within C2P’s planning-first RIA, Prosperity Capital Advisors, serving both on the Investment Committee and Leadership Team. Stoyan’s journey before C2P spans nearly three decades, during which he has honed his skills across various capacities such as an advisor, distributor, research and investment analyst, due diligence officer, and consultant.

Seth Meisler, CFA, CFP®, CPA, is a lead advisor at JL Smith Holistic Wealth Management. With over 17 years of experience, he is known for his strategic approach to financial planning, tax planning, and investment management. He is also a member of Ed Slott’s Master Elite IRA Advisory Group and has been featured in prominent publications like Marketwatch.com and Forbes.

For Financial Professional Use Only

The information provided in this presentation is not intended as investment advice or legal advice. The information provided is for informational and training purposes only. The information in this presentation was accurate as of the time the material was created. Tax laws and rulings can frequently change. Please discuss the client’s current situation with an accountant or tax advisor.

Citations:

  1. https://www.savingforcollege.com/intro-to-529s/does-a-529-plan-affect-financial-aid#:~:text=What%20percentage%20of%20529%20assets,Expected%20Family%20Contribution%20(EFC).
  2. https://c2penterprises.com/bucket-plan-on-demand/529-plans-tax-smart-college-savings/