Editor’s Letter: Top 3 Tips for Year-End Planning

Happy Halloween, the unofficial kick-off to year-end planning. Now that we are one month into the fourth quarter of 2016, it’s time for you to start strategizing your year-end meetings with clients. Typically this is the meeting to allocate time to confirm, update or create a long-term plan, including college financial planning. Given the tight time frame that the goal of paying for college takes place in when compared to other financial goals, it is more important to use a detailed plan based upon a set and methodical strategy. Beyond saving and investing, college financial planning involves creating an efficient strategy in terms of tax planning, financial aid and estate planning. In turn, one size fits all types of solutions rarely have the capability to solve this multi-factored goal, and especially in light of multi-goal holistic planning. Therefore, this week’s article provides the top three tips on how you can incorporate college financial planning into your annual review process with clients.

Market Sizing: Based on Strategic Insight’s “Asset Management Industry Market Sizing, 2015-2020” report, there was a total of 345,181 financial advisors as of 2015 compared to 359,548 five years prior in 2010. While there were 126,110 advisors within the independent channel as of 2015, there were 54,206 advisors within the wirehouse channel and 25,186 RIA and fee-only planners. Due to the volume of financial advisors in the marketplace and other factors shifting the competitive landscape, differentiation is key to building and protecting your book of business for the long-term. As college financial planning provides this differentiation and continues to grow in demand by parents and grandparents, incorporate college financial planning into your year-end annual review with clients.

Top-3 Year-End College Financial Planning Tips:

—Do Not Leave Money on the Table. For residents in over 30 states plus D.C., accountholders also receive a state tax deduction or credit for contributions into a 529 plan in addition to other benefits. Four of those states as of publication of this article provide an unlimited deduction against taxable income for state tax returns including (in alphabetical order) Colorado, New Mexico, South Carolina and West Virginia. Also, while some states provide a tax deduction or credit only on contributions to their own state’s 529 plan(s), five states currently as of publication of this article provide “tax parity”, which provides a tax deduction or credit on contributions to any state’s 529 plans: Arizona, Kansas, Missouri, Montana and Pennsylvania. Additionally effective in 2017 tax year, Massachusetts will offer a state tax deduction up to $1,000 per individual and $2,000 per joint tax return, and so the state tax benefits continue to improve. As the majority of your clients systematically overlook the opportunity, get the free money for your clients.
—Align Timing of Distributions in Year of Expense.  While assets in 529s grow tax-free and distributions are tax-free when used for qualified higher education expenses such as tuition, room and board (if registered as a student at least half-time) and other qualified higher education expenses at eligible schools, qualified distributions need to take place in the same calendar year as the qualified expenses. Otherwise, the gains portion of the distributions are subject to a 10% penalty and taxes. Additionally, any state tax benefit received from making the contribution would typically need to be paid back to the state as referred to as a tax recapture. While non-qualified distributions with or without the exemptions will result in paying taxes on the gains and potentially a tax recapture on the initial amounts put into the account over time, there are certain scenarios called exemptions covered in prior articles where one would not have to pay the 10% penalty. Therefore, keep it simple and ensure qualified distributions take place in the same calendar year as the qualified expenses.

—Confirm the Goal, Strategy and Plan Annually with Clients. First, confirm the goal that the client is seeking to achieve, whether it be pay for 100% or 50% or one year of the cost undergraduate and/or graduate education. Based on this response, project the amount and timing of the assets that you are seeking to achieve to cover this this future liability. Second, confirm the savings rate needed to reach the goal, and set up and/or update the level of automatic contributions in the accounts used to pay for college. Additionally if the opportunity existing, confirm and create one-time lump-sum contributions to help the client achieve their set goal. Third, review your investment vehicles and investment options used to save and pay for education, and adjust step two as needed. Therefore, work with your client to confirm and update their goals, strategies, milestones and next steps towards efficiently saving, paying and repaying the cost of higher education.

Therefore, advisors, accountants and estate planners should incorporate college financial planning into part of your annual review process with clients. Happy Halloween, thank you for your mindshare and have the college financial planning discussion with your clients today.