Help hesitant clients save for college
Key takeaways
Ever-rising cost of college
Tuition has been steadily rising so it’s important for clients to start saving as soon as possible.
Tax advantages
Contributing to a 529 plan may help clients reduce their state income taxes.
Investment choices
There are several investment options, so a client can choose what they’re comfortable with.
With the cost of college rising yearly, it's important for clients to start saving as soon as possible for a child’s education (or grandchild, niece, nephew, or family friend). With everyday expenses higher these days, negative economic news, and stock market ups and downs, it may not be easy to get clients to prioritize college savings with a 529 college savings plan. Here are some ways to encourage them.
The earlier, the better, and any amount helps
The earlier a client starts saving, the more time their money has to grow. Remind them that any earnings in a 529 plan grow tax-free, which gives more of the money the opportunity to grow. A small amount is better than no amount. For instance, by the time a student reaches age 18, a $50 monthly contribution could grow to more than $19,000. While it may not seem like a lot, it’s better than a loan for that amount. Contributing $100 a month for 18 years could grow to more than $38,000.1
Tax benefits
Who doesn’t want a tax break? Contributing to a 529 plan may help clients reduce state income taxes. Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit. (Contributions to 529 plans are not federally tax deductible.) In most states that offer tax benefits, anyone who contributes to a 529 plan can get a state income tax deduction. In 10 states, however, only the plan account owner can claim a tax benefit. Get 529 tax benefits by state.
Smooth out market ups and downs
If they’re nervous about investing when the markets are down, remind them about dollar cost averaging. More shares are purchased when prices are down and fewer when prices are high. Over the long term, it has the potential to even out the average cost per share. In essence, they’re making the market’s ups and downs work for them — rather than against them.
Many investment choices
A diversified investment portfolio can help mitigate the risks of a volatile market. For a client less comfortable with risk and who is a more of a set-it-and-forget-it investor, an age-based portfolio may be a good choice. On the other hand, if they want to be aggressive (and you understand the risks), a static portfolio might be right.
A 529 plan isn’t bad for financial aid
Often clients think that savings will impact financial aid. In fact, a 529 plan has a minimal impact on financial aid. The federal aid formula assesses parental assets at a maximum rate of 5.64%. That means that, in general, for every $1,000 in a 529, the "expected family contribution" toward college costs could increase by only $56 at most.
Help ensure that clients don’t miss out on the potential benefits of a 529 college savings plan. They’ll be appreciative when their child or grandchild heads off to college.
Get more 529 plan ideas on our resources page.
Footnotes
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1
These hypothetical illustrations don’t represent the performance of a specific investment and assumes 5% growth every year. Compounded growth is determined by multiplying the balance by 1.05 to show growth. There’s no compounded growth in the first year.
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2
Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements, and certain withdrawals are subject to federal, state, and local taxes.
