NU Online News Service, May 9, 10:19 a.m. – Financial advisors and broker dealers are beginning to see 529 college savings plans as an integral part of their investment lineup, says a new study from Financial Research Corp., Boston.
“It’s got to the point where if you want to provide your clients with a total suite of products, it’s as necessary to have a 529 as an IRA,” says Art MacPherson, vice president of FRC and senior writer of its report, “Distribution Strategies for the 529 Market.”
Section 529 of the federal Internal Revenue Code lets each state set up its own college savings program. Investors who live in the state that sponsors a program can often defer state income taxes on contributions. Perhaps more important, consumers who invest in a program sponsored by any state can usually defer federal income taxes on the contributions.
Students can withdraw the assets for tuition and living expenses without paying federal income taxes on the withdrawals.
MacPherson sees the 529 plan as a product that agents can use to broaden their relationships with clients, because it help parents avoid the gift tax while providing college funds for family members.
The plans also have a strong attraction for grandparents, he notes.
“The grandparent market is a big target,” he says. “If you are going to leave cash to your grandchild anyway, this has some advantages over just keeping it in the bank.”
Most states that set up 529 programs hire professional money managers to handle the plans’ assets.
In some cases, the managers are insurance carriers.
New York state and Mississippi picked the Teachers’ Insurance and Annuity Association-College Retirement Equities Fund, New York, to run their plans. New Mexico hired New York Life Insurance Company, New York, and West Virginia hired Hartford Financial Services Inc., Hartford.
Agents who carry these carriers’ 529 products can sell the 529 products in any state where they are licensed to do business — even outside the states that sponsor the plans.
FRC found five plans where 80% of assets came from out-of-state residents.
In most cases, life insurers get involved in 529s through distribution agreements with designated managers, such as Nevada, whose plan is managed by Strong Financial Corp., Menomonee Falls, Wis., and distributed by American Skandia Investment Services Inc., Shelton, Conn., and other financial firms.
Although only a few banks are now involved in distributing 529 plans, the plans are likely to become a favored product with bank agents and broker/dealers, MacPherson predicts.
Bank of America Corp., Charlotte, N.C., is managing South Carolina’s plan. Banc One Corp., Chicago, is handling Indiana’s plan, and Union Bank and Trust, Lincoln, Neb., is managing Nebraska’s plan.
Although 529 plans look like a sure thing, MacPherson has a word of caution for companies and agencies that sell 529 plans sponsored by one state to residents of another state. Sellers of the out-of-state plans have an obligation to inform investors that they might be able to reduce their state income taxes by investing in in-state plans, MacPherson says.
For example, an agent in California selling a plan to a grandfather living in New York would be obliged to advise the grandfather that New York allows a state tax credit of up to $10,000 for contributions to New York’s own 529 program.
“But you could say, ?Put $10,000 in your state’s plan and put the rest in the plan I’m selling, because it’s a good plan,’” MacPherson says.