Section 529 College Savings Plans have experienced a surge in growth as parents take advantage of provisions of the Pension Protection Act of 2006, industry sources say.
One section of that law made the tax advantages of 529 plans permanent. Previously, they were set to expire in 2010 under a provision of the 2001 Economic Growth and Tax Relief Reconciliation Act, which allowed the federal tax exclusion for qualified withdrawals from a 529 plan.
(The Pension Protection Act does not affect Coverdell education savings accounts, whose tax benefits under the EGTRRA are still set to expire in 2010.)
Section 529 of the Internal Revenue Code allows each state to set up its own college savings plans. It exempts taxpayers from paying federal income taxes on either contributions to or distributions from such plans for normal education expenses. States, too, often allow tax exemptions for their 529 plans, although usually just for state residents.
The PPA, enacted last September, has already had a significant impact on sales of 529 plans, says Jeff Coghan, assistant vice president and director of 529 Plans for the Hartford Financial Services Group Inc.
“In our primary 529 product, sales last year were up 25% year over year,” Coghan says. “The Pension Protection Act’s passage encouraged interest from advisors and wholesalers, and a marketing campaign we introduced in the fourth quarter also took hold.”
He notes sales are up for the whole 529 industry, too.
By eliminating the chance that the tax exemption for 529 plan contributions would sunset, the PPA removed a concern that really had weighed on the minds of both families and advisors, according to Coghan.
“People had been thinking about that sunset provision,” he says.
Advisors seeking to take advantage of this momentum afforded by the PPA can take a number of steps, experts in the field say. Among them:
Start prospecting. Taking advantage of opportunities for public speaking or involvement in community social events can advance one’s reputation as an expert on college education, a number of professionals point out.
Ray Loewe, president of College Money, a financial planning firm in Marlton, N.J., says that sponsoring workshops or speaking at meetings of PTAs, clubs and affinity groups can connect with many prospects.
“Reach people through such venues as the soccer clubs or the swim team, when most parents are interested in college. For instance, help them figure out if they are going to get financial aid or not,” Loewe says.
Coghan urges financial advisors to really get to know their existing clients so they can identify which ones are candidates for 529s.
“Start by asking for their kids’ names and ages if you don’t already know them. Then you can build from there. Also use the 529 to build relationships. Ask who else in the client’s family would like to help with their children’s education. Those other family members can eventually become candidates for sales of rollover IRAs, life insurance and so on.”
Take care of the client’s retirement first. “For somebody having difficulty saving, I always tell them to fund their retirement first, because if they have to, they can borrow from retirement accounts to pay for school,” says Margaret A. Munro, a financial advisor in Montpelier, Vt. “Retirement funds are not counted for aid calculations.”