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Generations: Tackling the 529

There are a few major things to consider as you help your clients set up 529 college savings plans.

Helping clients put money into a 529 college savings plan can feel a little bit like when you help your kids get their first puppy: You're well aware of the advantages and you know it will make them happy, but you don't look forward to the hassle involved in the initial undertaking and ongoing maintenance — most of which will fall on your shoulders.

Still, just like when you buy a dog, there are a few guidelines that can help reduce the amount of work and stress involved on your end. In the meantime, you'll still win the eternal gratitude of the recipients. Here are the answers to some less-frequently-asked (but still important) questions about opening and maintaining 529 college savings plans for your clients.

”Do I have to use the clients' state 529 plan?“

NOT NECESSARILY. But for legal, ethical and financial reasons, you do have to at least start with any 529 plan that offers clients special incentives, such as a reduction in state taxable income for deposits. There are complete lists of the state-specific enticements available at sites like, and

You should compare the in-state offering with any others you recommend, especially to find out how valuable the tax breaks might be. You can punch in your clients' income and deposit information via a calculator like the one at

But once you and your clients see the results of that calculation, you may find that the incentives aren't quite as material as they first appeared to be. That's especially true if the clients are making a large one-time deposit, instead of several smaller systematic ones over the coming years.

You may also discover that the in-state plan has higher fees and/or lower quality and quantity of investment options. If so, document that you discussed the positives and negatives of the in-state plan with your clients, and why you decided to forego the incentives for another option.

“What if the state plan wins?”

EVEN IF THE NUMBERS tilt the clients toward the in-state 529 and away from your offering, there are several ways to get the best of both plans. First, you can instruct the clients to put just enough into their state plan on their own to maximize any incentives. Then you can take the remainder of their intended deposit and put it in the plan you prefer.

You also may be able to transfer any balances accumulated in a client's home state plan into a different 529 plan, without giving up the tax incentives received on the initial deposit (check the in-state plan's rules first, to be sure).

Finally, you can just suggest the clients use the in-state plan on their own, even if it doesn't provide you with any compensation. Either the clients will still insist on paying you by using your preferred plan, or you can redirect your focus to larger asset classes, like their IRAs.

”Which share class should we use?“

ASSUMING YOU AND YOUR CLIENTS agree on using a 529 plan that provides payment to you, your next question is whether to recommend the “A” share class, or an available “C” share?

Obviously, the answer lies not in how much money you want to earn, but on what the client's current and ongoing planned deposit amounts are, and how long the money is going to be in the account.

Big, one-time deposits are usually better off going into “A” shares and getting the client the ensuing breakpoints on sales charges. “C” shares may be more advantageous to clients who are only going to leave the money in the plan for a few years.

”What's better: Safe or sorry?“

MANY ADVISORS approach 529 investment options with the same mindset used for retirement savings: “We need growth, and can afford some short-term volatility, so let's pick an equity-heavy portfolio.”

But unlike the several decades that clients have to save for retirement, the college savings accumulation period is relatively short. And the period in which college savings money will be withdrawn is even less — perhaps four or five years at the most.

Therefore, it's usually better for your clients to save aggressively into a 529, rather than invest aggressively once the money gets into the account. This consideration is even more urgent when clients are funding a 529 with a lump sum, instead of using systematic dollar-cost-averaging deposits.

You might find that if older, more conservative grandparents are funding 529 accounts, they will prefer a commensurately conservative investment strategy as well.

”How do I reallocate?“

CHOOSING AN INVESTMENT allocation for a 529 plan is particularly tricky, as you and your clients can only change it once per calendar year (unless the beneficiary is being changed, or the assets are being moved to a new state's plan). Even though most 529 plans offer you the chance to build your own custom portfolio, you may find the best-laid investment plan is handcuffed by the transfer restrictions.

That's why an age-based asset allocation may make the most sense for both you and your clients. The allocations start out aggressively when the child is younger, and gradually and automatically become more conservative as the child ages. This shifts some of the burden of ongoing investment management to the 529 provider, yet still gives you and your clients the option of invoking the allowed one-change-per-year.

Keep two things in mind as you're looking at each plan's age-based asset allocation options: First, allocations for the same age range can differ greatly from one 529 plan to another. Secondly, when choosing the year of matriculation on which to base an allocation, don't automatically take the beneficiary's year of college enrollment.

A child who may get a master's degree or go to law or med school will have a longer “window” of college spending, and should have a longer investment strategy to match.

Hopefully, the extra growth will expand the kitty so that some money is available for her advanced degrees. And maybe she'll even have a little left over to buy her own puppy.

Writer's BIO:

Kevin McKinley
CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid a Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at


T. Rowe Price has incorporated Monte Carlo simulations into its online college calculator, giving you not only the basic numbers you need (i.e. potential cost, initial and monthly deposits needed), but also the probability that your clients' efforts will meet their goals.

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