Section 529 plans, a major college funding and estate planning tool for boomers and their parents, are poised for rapid growth, says a new study.
Assets in these tax-advantaged vehicles for financing higher education will grow from just over $35 billion at the end of 2003 to $300 billion by 2010, predicts the study, released by the Financial Research Corporation, Boston.
That growth will go hand in hand with big changes for vendors and financial advisors that sell Section 529 plans, FRC says in its report, 529 Strategies for Success: Graduating From Start-Up Mode to Profitable Asset Growth.
The industry will experience a radical transformation as investment companies realign their business strategies to satisfy the interests of college savers looking to meet the rapidly escalating costs of higher education, says Whitney Dow, FRC director of education savings research.
Many financial advisors say growing concerns by parents and grandparents about education costs will make 529 plans increasingly important. Their tax advantages also have significant implications for estate planning, they agree.
529 plans offer federal income tax-deferred growth, tax-free withdrawals for qualified expenses, and estate and gift tax exclusions, as well as additional tax advantages in many states.
FRC predicts legislators will move to extend the tax-free status of 529 withdrawals for qualified expenses beyond the current sunset date of 2010.
Joseph F. Hurley, senior partner of Bonadio & Co. LLP, Pittsford, N.Y., agrees Congress may extend the tax breaks. He thinks FRCs projection of eightfold growth for 529 plans is realistic, with one proviso: If all of a sudden the lifetime saving account comes into being, we can see a significant negative impact on growth projections.
Bard Mulovaney, a financial planner with Financial Council Inc., Annandale, Va., also expects 529 plans to continue to grow.
They are a pretty attractive saving tool, he says. There are few places where you can get tax-free growth, and this is one of them.
They also are very useful in estate planning because they allow the client to pass along cash to children and grandchildren tax free, he points out.
Robert J. Kuehl, a certified financial planner with H.C. Denison Co., Sheboygan, Wis., cautions that 529s are almost exclusively marketed to high-net-worth individuals. Someone with $1,000 they collected from a birthday party is not a candidate.
For clients who can benefit, however, the 529 plan has some pretty neat features that arent available with other products, he says. For example, you can prorate gifts over 5 years, so you can get money out of the estate and not pay any gift tax. If the client has 10 grandchildren, he can effectively move perhaps $1 million out of his estate. He also controls the money, which you cant get with other college savings products.
Kuehl is not convinced 529s will achieve the level of expansion projected by FRC, though.
Theyve been hyped to some degree, he says. Theyre a great plan, but I dont see how youd get that high growth.
For one thing, the sunset provision for tax-free distributions still is scheduled to expire in 2010. That adds a degree of uncertainty, Kuehl believes.
Im absolutely not banking my career on 529s, he says. I suppose you could if that were your bailiwick, but I would approach it as a college planning expert, selling other things, as well, such as education savings accounts and custodial accounts. Being strictly a 529 plan guy is just myopic.
Joseph Hurley of Bonadio still encourages advisors to prepare for the likely growth in 529s.
Learn and understand the various aspects, including the many different tax incentives for families, he advises. That helps you to market yourself effectively to families who are confused by all the options.
Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.