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PPA Gives 529 Plans A Boost

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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.”

For families pulling in less than $50,000 a year, 529s are probably not the best way to fund their kids’ education, says Munro, who is the author of 529 And Other College Savings Plans For Dummies. “529s mostly benefit people who can afford 4 years of college and expect to contribute to the full cost.”

Get relatives into the act. If a parent doesn’t have the income to make significant contributions, a grandparent or another relative may be willing to get the ball rolling with a lump sum contribution.

“When they put $25,000 in early in a 529 and let it compound, you get tax-free compounding,” notes Loewe. “So some grandparents put a lot of money up front to get the 529 started. Some grandparents also like to do match plans, where they put in $1 or 50 cents for every $1 the parent puts in.”

Coghan adds that pulling relatives into supporting a plan often carries a bonus for the advisor.

“It’s an opportunity for the advisor to build his business and develop relations with a grandparent, aunt or uncle as a trusted source of financial information,” he says.

For many grandparents, a 529 can afford an opportunity to shield retirement income they don’t need from taxes, Coghan says.

“Grandparents may have to take a required minimum distribution from their retirement account,” he explains. “Many aren’t looking to use this money immediately, and a 529 contribution is one way to redeploy it. They pay the tax, but then they can put it right back into a tax-advantaged account. So rather than take a $10,000 required minimum distribution, put it into a 529, where it grows in a tax-free way.”

Involving grandparents and other relatives also has an advantage for parents applying for financial aid, notes Munro.

“Those relatives have finished putting kids through school, but they may have deep enough pockets to put a grandchild through school as well,” she says. “Even if they can’t fund the whole tab, the 529 plan they sponsor won’t have an impact on the parents’ application for aid because the grandparent owns the plan, and the parents don’t have to report it as assets.”

Other pointers. Margaret A. Munro also offers these recommendations:

–Suggest a 529 for a parent’s continuing education, which can pay off in higher income. “I have a 529 plan and a husband in school, and I took some of money from our kid’s fund to help pay for that, and it worked really well,” Munro says.

–Consider applying to colleges far from home. Every college wants a diverse population of students, Munro points out. A child from small state such as Vermont is likely to get stronger incentive aid offers from schools in, say, California or Idaho because most schools want at least one kid from every state, she says.

“Student aid packages they’re getting from schools far afield are much better than those from Vermont schools,” she says.

–Start spending for college early. Reducing a parent’s or child’s assets can pay off by allowing them to qualify for higher financial aid, Munro points out.

“For instance, buy a computer for college in the junior year of high school rather than the senior year. Or put that money into buying a car for the student, so it is out of your account before you file for aid.”

By the same token, urge clients to pay down credit cards and other debts, she advises. “The parent has to pay those debts, but FAFSA [Free Application For Federal Student Aid] doesn’t look at that when it calculates how much aid you need.”


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