College Savings Month: Educate clients about 529 plans

September is College Savings Month, a good time to educate clients about the potential benefits of a 529 college savings plan. (Or check in with those who already have one.) With the cost of higher education rising yearly, it’s important for parents, grandparents, uncles and aunts, and family friends to help ensure a bright future for the next generation without the financial burden of loans. Here are three potential benefits for clients during College Savings Month.

Saving early and often can pay off

Trying using this simple acronym, SESO. It stands for save early, save often. The earlier the client starts to save, the greater the potential benefits. Clients may think they cannot afford to save, but even a small amount could add up and make a difference. For instance, by the time a child reaches age 18, a $50 monthly contribution could grow to more than $19,000.¹  While it may not seem like a lot, it’s better than a loan for that amount. If they can contribute $500 a month for 18 years, it could grow to more than $191,000.¹  To ensure they save regularly, suggest setting up automatic contributions.

Take advantage of tax benefits

Explain to clients that 529 plan contributions may help them reduce state income taxes. Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit for contributions to a 529 plan. (Contributions 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. See state tax benefits.

Point out that any earnings in a 529 college savings plan grow tax-free, which gives more of the money the opportunity to grow. Withdrawals are federal and state tax-free as long as the money is used for qualified education expenses, such as tuition, room, board, books, and supplies for post-high school education. Up to $10,000 per year can be withdrawn tax-free to pay for tuition for grades K-12 for public, private, and religious schools.²

529 plans have minimal impact on financial aid

Many think that saving in a 529 plan will impact a student’s financial aid. In fact, a 529 plan has a minimal impact on financial aid. Here’s an example to share with clients: 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.

Encourage saving for a child’s future

College Savings Month is a timely opportunity to educate clients about the importance of saving for a child’s college education. Encourage parents, grandparents, aunts and uncles — really anyone who wants to help educate a child — to start saving and to take advantage of the tax benefits and the potential compounding growth of a 529 plan.

For more ideas on ways to help guide a client, visit our financial professional’s resources page.