Because clients tend to view assets allocated toward a child’s education more emotionally, they’re also at risk of investing too conservatively. A recent study found that 61% of college savers use savings accounts, compared to only 37% using 529 plans.1
Savings alone won’t pay for college, especially with FDIC-insured accounts now yielding far less than annual tuition inflation. J.P. Morgan Asset Management’s, College Planning Essentials guide provides advisors with a tool for informing their 529 plan discussions and investment decisions.
Illustrate the tax benefits
More than half of college investors aren’t even aware of 529 plans and their tax benefits.1
College Planning Essentials includes charts and investing illustrations you can use to:
- Compare 529 plans to other commonly used college savings vehicles
- Evaluate after-tax outcomes for 529 plans and taxable accounts
- Demonstrate potential cost savings of investing in a 529 plan versus borrowing or paying out of pocket
Take advantage of special estate and gift tax benefits
Only 529 plans allow five years of “accelerated” tax-free gifts in a single year. With annual gift tax exclusions rising in 2018, 529 plan gifts can now be completed up to $75,000 per beneficiary from individuals and $150,000 from married couples filing jointly.2 For clients with estate planning needs, all 529 plan gifts and investment earnings are removed from the contributor’s taxable estate without losing control over the assets.
Discuss the limited impact on financial aid eligibility
Some families don’t invest in 529 plans because they mistakenly believe it will severely hurt their chances for financial aid. The fact is, assets count much less than income in the formula for awarding federal aid, especially when held in parents’ names.
In calculating Expected Family Contribution (EFC), the Department of Education considers up to 47% of parents’ income but only a maximum of 5.64% of their assets – even those earmarked specifically for college. You can find more details in College Planning Essentials, along with EFC estimates and a case study comparing financial aid packages for investing and non-investing clients.
Set realistic expectations for free financial aid
Another reason 529 plans are underused is that one-third of parents expect free financial aid to foot the entire bill.1 In reality, only about half of all families receive grants or scholarships, usually covering just a small fraction of total college costs.3 To make up the difference, advisors can position 529 plans as a more affordable and less burdensome alternative than student or parental loans.
Promote a 529 plan’s access and flexibility
A 529 plan isn’t bound by the income or age requirements that can limit access to other college savings vehicles. No matter how much your clients earn, they’re likely eligible to invest for any loved one of any age planning to attend college in any state. Account owners also have the flexibility to change the named beneficiary to another family member and withdraw funds for qualified higher education expenses at any eligible institution across the U.S. or overseas.
Discuss 529 plans during year-end meetings
With December 31 and tax filing season fast approaching, your clients may be more receptive to a conversation around tax-advantaged college investing. Encourage contributions by year-end to maximize any state tax deductions. Talk about allocating part of year-end bonuses and tax refunds toward college. Emphasize the importance of using the full annual gift tax exclusion each year. For clients interested in larger gifts, consider investing up to the 2017 limit by December 31 and then making accelerated gifts at the newly increased maximums in early 2018.
J.P. Morgan Asset Management is investment manager and distributor of New York’s 529 Advisor-Guided College Savings Program®. For more 529 plan insights and investment ideas, download College Planning Essentials at www.jpmorganfunds.com/ny529.
1 Sallie Mae, How America Saves for College, 2016.
2 No additional gifts can be made to the same beneficiary over a five-year period. If the donor does not survive the five years, a portion of the gift is returned to the taxable estate. Please note, the annual gift limit for 2017 is $14,000 from individuals and $28,000 from couples; the maximum five-year tax-free gift is $70,000 and $140,000, respectively.
3 Sallie Mae, How America Pays for College, 2017.