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State 529's not broker sold

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Apr 22, 2008 10:16 am

NC recently removed the income limitations to claim a tax deduction for 529 contributions (up to $5000 if filing jointly.) However the NC 529 plan is not broker sold. Using out of state plans didn’t use to be an issue b/c none of my clients were eligible for the old NC deduction anyway. Now everyone is eligible. That being said, I have many clients already using out of state 529’s. I guess now I have to tell them to go elsewhere. How have others delt with this delema? I know that it is the case in several states.

Apr 22, 2008 6:01 pm


  Your question gets me thinking in a bunch of different directions.   I'm going to beat up on you a little bit.  Don't take it personally because obviously I know nothing about you and your practice.  I'm just making some general observations of the things that cross my mind about the typical rep who asks the kind of question that you are asking.   1) You have never made the affirmative decision to always do what is in the client's best interest no matter what.  If you had, you would never have a dilemma.   2) You are financially struggling.  A $5000 investment into a Class "A" share will lead to GDC of $250 at the most.  How does this dollar figure cause a dilemma?  It only does if you haven't made the affirmative decision and you are struggling for every dollar that you can get.   3) You are short sighted.  Sending business elsewhere is an incredible way to build trust and have a practice in which you have life long clients and not customers.  "Mr. Client, a 529 plan makes a lot of sense for you.  However, I do not want you to do this business with me.  The best 529 plan for you is the NC 529 plan.  My firm does not have a selling agreement with them, but like I promised, my advice is always going to be based upon what is in your best interest.  Here is the plan's phone number and website.  I will give you as much help as I can with that plan, but securities' laws limit what I can and can't say.    P.S. As a rep, 529 plans force us to walk a narrow line.  In fact, I think that no matter what we do, we probably break some rules.  If we don't talk about the in-state plan, we get in trouble.  If we do talk about and recommend the in-state (direct-sold) plan, we are getting into selling away issues.   Do others agree with me on this?   
Apr 22, 2008 8:32 pm

Here’s another observation…I think the state of NC is foolish to not offer a broker-sold option.  My state has both broker-sold and direct and although I always advise clients they can go direct and eliminate my “charge for paperwork”, I can count on one hand, the times they have taken me up on that offer.  Almost without fail, I get “we’d rather have you do the paperwork for us.”  My wholesaler, whose company manages both channels, indicated to me not long ago that the broker-sold channel is about 7X the direct channel, so I can’t imagine our state being dumb enough to eliminate the broker-sold channel.  Despite a similar state break, 529 sales would probably plummet here if the broker-sold option was eliminated.

  One more random observation...spelling, punctuation and grammar are apparently a lost art.
Apr 22, 2008 10:35 pm

Anon is SO on the money!  I’m in a state without a state income tax, but often end up with a client who lives in a state where the tax break for using that state’s 529 provides a compelling reason to utilize it.  After a year, 529 assets can be transferred.  If it is a no-load plan, there is no disadvantage (such as an up-front s/c) to moving the funds to the plan you really want to use after a year.  My clients prefer that assets be where I can see and manage them, but they love it when I explain that we’re going to put the funds in an account for a year to get the tax break and then we’ll be able to transfer them to my management. 

  You will never go wrong by doing the right thing!
Apr 23, 2008 1:03 am

Read the fine print.  CT has a similar tax break.  A couple may reduce their taxable income by 10k per year, usually translating into $500 difference.  They may also carryover deductions for 5 years if they contribute up to 60k in one year.

  The state has no minimum holding period.  One can advise a client to open the state plan and immediately roll it into a broker sold plan.  The client gets their deduction, and they get to have the advisor manage it, in funds that they are used to using.  The drawback to the client is that they can be in the state (TIAA-CREF) plan at NAV.   It also gives the advisor the opportunity to add value to clients who have children in college to take full advantage of the tax rule.  Instead of writing the tuition check to the school, run it through the 529 and bank a deduction.   I was recently discussing this strategy with a wholesaler (of a broker-sold) 529, who feels that this strategy is unethical because it is a loophole.  I disagree, thinking there is nothing wrong with taking full advantage of tax rules.  If it is indeed an oversight by lawmakers, they will change it and it will stop.  What is your opinion on the ethics question?
Apr 23, 2008 1:20 am

Oldlady and Imabroker, you just have to be very careful to know the ins and outs of the particular 529 plan.  For instance, lots of them are subject to recapture.  If the money is rolled into another state's plan the prior deduction will need to be picked up as income.

You also want to have a very strong understanding of EXACTLY how the tax break works.  It can make a big difference.  They all work differently on the state level.

Apr 23, 2008 3:10 am


  1) You have never made the affirmative decision to always do what is in the client's best interest no matter what.  If you had, you would never have a dilemma.  [/quote]   I have to disagree here. I don't sell the Texas 529 plan to Texas residents (I usually use the Virginia plan for various reasons).  Texas has no state income tax, so there is no reason to use the Texas plan.  Am I not doing what is in the client's best interest? However, if Texas passes a state income tax, I would have a dilemma. Do I move the assets to a Texas plan, do I leave them there but have new contributions go to the Texas plan? Who knows.   It seems to me that RayRay used other plans (probably for cheaper fees, better perfomance, who knows) because it was tax neutral to his clients. How is that bad?
Apr 23, 2008 3:30 am

Anon, thanks for the heads up on state tax law.  I will be sure to double check the recapture rules of each state.  I appreciate it, as someone who doesn’t have to deal with the day-to-day of state income tax, I tend to think of it as a shadow of federal income tax.  You reminded me this is a dangerous way to consider it!  I appreciate it.

Apr 23, 2008 10:40 am


I must not have been clear in my post.

"However, if Texas passes a state income tax, I would have a dilemma."   If you have made an affirmative decision to always do what is in your client's best interest, there is no dilemma.  You'll figure out what is in your client's best interest and proceed accordingly.   I'm not saying that deciding between a good plan with no tax deduction and a mediocre plan without one isn't a difficult decision.  It is a tough decision.  I'm speaking of ethical dilemmas and my point is that an affirmative decision to put the client first virtually eliminates all these dilemmas.  It doesn't matter if we are talking 529 plans or anything else.   If Texas passes a state income tax, or if you have a client in a state that has a deduction, you can still go out of state if that is what you think is best for the client.  You just need to let them know that they are passing up the income tax break and they need an explanation of why the out of state plan is better for them.    In one of my states, I used to always recommend that the client go out of state.  In this same state, I now always recommend that they go in state due to changes in the plan.  Often, I will recommend that the client buys both an in-state and out of state plan.   We use the in-state to the extent that we can get the deduction and then do the rest out of state.   Old Lady, It's nice to know that I gave some useful information.  Unfortunately, with each state, you really have to invest the time to learn the ins and outs.  It's not easy because if you call the plan, there is a decent chance that you will get wrong information from the person answering the phone.
Apr 23, 2008 2:39 pm

All this just reiterates that we should follow any such recommendation with advice to clear the strategy with the client’s tax advisor to make sure it works as we expect.  Heck, I’m a CPA, I do tax returns, and I STILL say that for all my clients that I don’t do tax returns for (which is 95% of them).

Apr 24, 2008 4:24 pm

Not to be too flip about it, but is your advice worth the $200 tax break?  You certainly have to disclose the issue, but I don’t think that means you always have to use the state plan.

  I have used my state's plan (probably 75% of the time), but due to breakpoints it is frequently a wash between that plan or something with American or whatever fund family they have investments with.    I don't think it is automatically in the client's best interest to go somewhere else.  When they decide to move to moneymarket in January of 03, you aren't going to be there to advise them.  When they decide to go 100% in the aggressive growth in January of 2000, you aren't going to be there to advise them.   I agree the tax break is an issue, but it is by no means the only issue, or even the most potentially expensive issue.