Practice Management
Sep 18, 2024|ByMark DiSipio, CIMA®
Key takeaways
- While advisors typically discuss 529 plans with their clients as they expect children or grandchildren, there are critical opportunities to revisit and keep these plans on track at every life stage.
- It’s important to start education savings early, even before a child is born. A 529 plan can be opened at any time, and the beneficiary can be changed later. This allows for compounding returns and greater growth potential over time.
- These engagements offer an excellent opportunity to connect with more family members, to foster long-term relationships and bridge the gap to the next generation for your practice.
As the back-to-school season fills your social media feed with first-day photos and ads for the latest school supplies, it is also a prime opportunity for financial advisors to reconnect with clients about their education savings plans. Education savings conversations should not be limited to only parents. Grandparents (as well as aunts and uncles) can use a 529 account to build a family legacy around the importance of education, while deriving tax benefits. Ensuring these plans are on track at every stage of life is crucial, and now is the opportune time to initiate/revisit these conversations.
Young Couples: Starting Early, Even Before Kids
Many assume education savings cannot begin until a child or grandchild is born, but that is a misconception. A 529 plan, such as a BlackRock 529, can be opened at any time, with the option to add or change beneficiaries as needed. For clients who recently married or are planning to start a family, now is an ideal moment to begin saving. With compounding returns, the earlier the contributions start, the greater the potential growth over time.
Inline Tip: A 529 savings account can be opened before a beneficiary is born, allowing your clients to start building an education fund early. An account owner can name themselves or a spouse the beneficiary, to start growing this investment and update the beneficiary to the intended child at a later time.
Grandparents, great-grandparents, godparents, aunts, uncles and even friends, those who are an important figure in the child’s life might also consider contributing to 529 plans, balancing this with their own savings goals. If any of your clients’ children have recently married or started a family, this could be an excellent time to discuss multi-generational contributions.
Preschool and Elementary School Years: Building Momentum
Parents love sharing updates about their children’s achievements, making this a natural time for financial advisors to check in. If a child is entering elementary school, the family may no longer have daycare expenses, freeing up funds that could be redirected to a 529 plan. This shift can significantly boost education savings without affecting the family’s discretionary spending.
If a child has transitioned to a new school, particularly a private one, this is a key moment to reassess the family’s education savings strategy. Education savings plans cover more than just college tuition—they can also be used for K-12 private school tuition1. With the high cost of private school, grandparents can consider making contributions to 529 plans to help their children out – even before they are asked for financial assistance! Discussing how best to fund these expenses can add significant value to your client relationships.
Even families with children in public school can benefit from revisiting their 529 contributions. Consider setting up automatic transfers for contributions and encourage discussions with extended family members about making 529 contributions as part of their annual gifts for holidays or even graduations.
Birthdays also present a unique way for loved ones to contribute to a child’s future education. Instead of physical presents, parents ask that any funds that would have been put toward a physical gift be given as a contribution to the 529 account.
Middle and High School Years: Fine-Tuning the Plan
As children grow older, the back-to-school season often brings the realization that college is just around the corner. This is a pivotal time to engage with clients about their 529 savings. They may have a clearer idea of whether their child will attend a public or private college, in-state or out-of-state, and what scholarships or financial aid for which they might qualify.
It is also important to remind clients that plans can change significantly from freshman to senior year. Maintaining regular discussions about staying on track and even increasing contributions can help ensure that their education savings goals are met. Key points to emphasize include:
- Beneficiaries: If the oldest child receives a scholarship, the beneficiary of the 529 plan can be changed to another family member, rolling over the accumulated assets to the next beneficiary.
- Qualified Expenses: 529 plans cover more than just tuition—expenses like room and board2, books, supplies, and even study abroad programs3 (if approved by the home institution) are included.
- Roth IRAs: Starting in 2024, unused 529 funds can be rolled into a beneficiary-owned Roth IRA tax-free and penalty-free.4
College and Graduate School Years: Crossing the Finish Line
Saving for education does not stop once college starts. Remind your clients that continuing to contribute to a 529 plan, even as they make withdrawals, offers tax benefits.5 Though it might seem counterintuitive to deposit money just to withdraw it shortly after, this strategy can help maximize tax advantages while ensuring funds are available to cover tuition and other qualified expenses through graduation. If children have goals of pursuing advanced education post-college, 529 plans can be used for many educational expenses here as well.
By engaging clients at these key life stages, you can help them navigate the complexities of tax efficient education savings, ensuring they are prepared to meet their goals and maximize the benefits of their 529 plans. These plans offer an excellent opportunity to connect with more family members, such as children and grandchildren, who you may not have engaged with before in your practice. Not only are you helping families achieve valued education goals, you are fostering long-term relationships and bridging the gap to the next generation of clients.
Mark DiSipio, CIMA®
529 Sales Leader
Mark DiSipio CIMA®, is Vice President and 529 Sales Leader at BlackRock, responsible for business development and platform strategy for BlackRock’s 529 college savings platform.
Lacy Garcia (Willow)
Founder & CEO of Willow
Lacy Garcia is the Founder & CEO of Willow, a wealthtech platform connecting individuals with financial advisors. She is a nationally recognized speaker and thought leader.
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1 Considered a qualified expense for U.S. tax purposes. 529 plans cover tuition expenses up to $10,000 annually for K-12 public, private or parochial schools. For state tax treatment, check your individual state guidelines. Not all states consider this a qualified expense.
2 Expenses for room and board and computer equipment and technology are subject to certain eligibility requirements.
3 Distribution must be used to pay for qualified higher education expenses at an eligible educational institution. Eligible educational institutions include colleges and universities that are eligible for Title IV federal student aid. A list of eligible schools is available here: https://fsapartners.ed.gov/knowledge-center/library/federal-school-code-lists/2024-07-26/2024-25-federal-school-code-list-participating-schools-august-2024
4 SECURE 2.0 Act allows for a 529 plan account to be rolled over to a Roth IRA for the 529 account’s designated beneficiary. Transfers are subject to an aggregate limit of $35,000 with respect to the designated beneficiary. The 529 account must have been maintained for at least 15 years, and the distribution cannot exceed the aggregate amount contributed to the program (and earnings) before the five-year period ending on the date of the distribution. Although the amount that may be transferred may not exceed either the Roth IRA dollar limit or the amount of compensation the designated beneficiary earned that year, the income limits applicable to Roth IRA contributions are not applicable. The Internal Revenue Code does not explicitly address how to apply these requirements to 529 accounts where the account owner has changed the designated beneficiary. The U.S. Treasury and the Internal Revenue Service may issue regulations, notices or other guidance clarifying this and other issues presented by these new changes. We urge you to speak with your tax advisor before requesting a 529 to Roth IRA rollover, in particular if your account has had a change in designated beneficiary.
5 Withdrawals from a 529 plan are not subject to federal tax and generally not subject to state tax when used for qualified education expenses.
Investing involves risk, including possible loss of principal. Account Owners assume all investment risks as well as responsibility for any federal and state tax consequences.
Please note that any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; this communication was written to support the promotion or marketing of the matters addressed herein; and you should seek advice based on your particular circumstances from an independent tax advisor.
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