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Savvy Education Planning: 529 Plan to Roth IRA and More

Joe Buhrmann May 29, 2024

529 to Roth IRA college planning

College planning is not just a smart move for families, it’s also a promising service area for financial advisors seeking to connect with the next generation of clients. A recent survey of advisors showed 78 percent view the 529 plan in particular as a multigenerational tool that supports client retention and acquisition.1

Recent developments, including a new rule that allows a 529 plan rollover to a Roth IRA, add a layer of complexity that emphasizes the value of financial advice. With 95 percent of financial planners providing education planning, it pays to explore how to differentiate your offering.2

Downbeat to Determined: The Power of Planning

Before we dive into that, I wanted to share a story of when I was conducting a focus group. I’m watching one of my advisors through one-way glass, and he’s meeting with a guy who wanted financial planning, with dual goals of funding his children’s education and his own retirement.

The man’s demeanor was downcast. As it turned out, he had worked for a firm that went bankrupt during the tech bubble. In his paperwork, it showed he had stock options that at one point were worth seven figures (all in front of the decimal point!) and were now worthless. It was like having the winning lottery ticket and watching it blow down the drain.

We went through the planning process and discovered that he had a diversified portfolio, and was setting aside money for college with 529 plans. He came in thinking his kids’ college dreams were ruined and he was going to have to work until the day he died. After the planning process, he knew that college wasn’t out of reach with the help of loans and insightful planning. And if he worked until age 67, he was going to be able to retire comfortably. That’s what I love about financial planning—it can help answer those questions that keep people up at night and can help turn nightmares into pleasant dreams.

With that said, let’s explore three ways you can stand apart in helping guide families in paying for higher education.

1. Stay Updated on College Savings Strategies

There has been quite a bit of change in the college planning process, from an overhauled FAFSA to shifts in tax law that make grandparent-owned 529 plans more valuable. This presents an opportunity to add value for your clients through education and taking advantage of strategies as they become available. (If you need a refresher on the impact of changes in tax law, catch the replay of our 2024 Tax Legislation Insights, Proposals, and eMoney Analysis.)

The big headline this year is that the SECURE 2.0 Act allows you to roll unused 529 assets—up to a lifetime limit of $35,000—into the account beneficiary’s Roth IRA without incurring the usual 10 percent penalty for nonqualified withdrawals or generating any taxable income.3 This might be a relief to those worried about overfunding a 529 account. Now, there are conditions you must meet—the account must have been open for at least 15 years, for example. But this continues the trend of making these vehicles more flexible.

One last note about 529s, which vary by state. Identifying opportunities for state-matching funds or state income tax deductions for deposits can be a boon.

I don’t want to leave out other ways to save for college. Only nine states offer prepaid tuition plans currently open to new enrollees, but these should not be overlooked.

There are also Coverdell Education Savings Accounts, though they have income limits and the annual contribution limit is low.

Finally, money in a Roth IRA can be used to cover qualified higher education costs without incurring the 10 percent early distribution penalty.

2. Learn Ways to Add a Personal Touch

When setting up an education goal for your client in your planning software, take advantage of features that can make it feel more real for them. Adding a photo of the college campus, the mascot, or the child who will be attending in a client portal can help keep clients focused on their goals.

The most important thing to remember is to celebrate with your client. Mark your calendar for those important days or set an alert and send a personal note: selection/acceptance letters, the first day of class, internships, graduation, and celebrating when loans are paid off.

As an advisor, it was always fun to select gifts for the proud parents, like sending them a T-shirt or sweatshirt from the college their child has been accepted into.

If their child is just starting to explore colleges, you can help them set aside money for college visits and maybe even help them plan the itinerary.

It’s also crucial to emphasize financial literacy. You want the next generation to feel prepared for college living. Setting up a checking and savings account and a credit card in their name (with a parent’s backing) can help them start building credit, so check with your clients to see if they’d like any assistance in this area.

Our 2023 research shows a significant link between client motivation and having a highly personalized financial planning experience.4 Clients who experience personalized planning say their financial advisor contacts them on a regular basis to stay in sync and is open to discussing what they value most in life.

3. Understand Your Client’s “Why” When It Comes to Education

You don’t want clients to end up financing a degree from a college that’s a bad financial fit for their situation. Emotion can cloud decision-making in this area. Around 58 percent of U.S. adults saving for both college and retirement say they’re delaying retirement “significantly or moderately due to these dual financial goals,” a 2023 survey shows.5 I know I have more than once reminded a client: You can get a loan for college, but you can’t get a loan for retirement.

First, recognize the cultural, socioeconomic, and religious heritage that can impact your clients’ money behaviors. That’s emotional intelligence at play. Our 2023 research revealed that only 34 percent of investors agreed with the statement “My advisor makes an effort to learn about my cultural values.”4 So take the time to learn those values, and plan around them.

Also, don’t just talk to them about the impact of saving for college versus retirement—show them the impact in a planning platform. Clients learn differently, and running a Monte Carlo simulation that visualizes an expected outcome and probability of success could be the input they need to make a good decision.

Pursuing Education Goals with Confidence

When you get it right, college planning can be a differentiator for your practice. The increasing complexity of college savings strategies (and the associated tax implications) highlights the need for professional guidance. By staying updated on the latest approaches, adding a personal touch to the planning process, and understanding clients’ motivations for saving, you can make a significant impact as you build a relationship with the next generation.

If you’d like to learn more about this topic, check out the article How to Start the College Money Talk, which includes a video featuring Nancy Paul, author of “The Little Book About Scholarships.”

Sources:

1. ISS Market Intelligence. “529 Industry Analysis,” June 2023.

2. The Cerulli Report. “State of U.S. Wealth Management Technology,” May 2024.

3. Fidelity. “How Unused 529 Assets Can Help with Retirement Planning,” May 2023.

4. eMoney Beyond the Plan Research Study, June 2023, n=1,507.

5. SOA Research Institute. “Financial Perspectives on Aging and Retirement Across the Generations,” July 2023.

 

DISCLAIMER: The eMoney Advisor Blog is meant as an educational and informative resource for financial professionals and individuals alike. It is not meant to be, and should not be taken as financial, legal, tax or other professional advice. Those seeking professional advice may do so by consulting with a professional advisor. eMoney Advisor will not be liable for any actions you may take based on the content of this blog.

Image of Joe Buhrmann
About the Author

Joe serves as a Senior Financial Planning Practice Management Consultant at eMoney Advisor. With more than three decades in the financial services industry, Joe aligns his know-how and passion to help firms of all sizes increase usage, adoption, and engagement through a modern financial planning experience. He leverages his expertise and supports internal departments across the enterprise, helping Communications, Marketing, Relationship Management, and Sales. Joe attended Illinois State University, where he received his bachelor’s degree in Applied Computer Science and his MBA.

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