Education Planning Recommendations
529 plans are the primary Series 6 product for education savings. Understanding when and how to recommend them, including comparisons to alternatives, is essential for making suitable recommendations.
529 Plan Suitability
When 529 Plans Are Suitable
| Situation | Why 529 |
|---|---|
| Saving for college/education | Tax-free growth for qualified expenses |
| Long time horizon | Time to benefit from tax-advantaged growth |
| Want control | Account owner retains control (unlike UTMA) |
| State tax benefit available | Additional tax savings |
| High-income contributor | No income limits |
When 529 Plans May Not Be Suitable
| Situation | Concern |
|---|---|
| Uncertain about education use | 10% penalty for non-qualified withdrawals |
| Need flexibility for other uses | Limited to education expenses |
| Child may not attend college | Potential penalty situation |
| Very short time horizon | Little time to benefit from tax-free growth |
Age-Based Portfolios
Most 529 plans offer age-based portfolios that automatically adjust:
| Child's Age | Typical Allocation |
|---|---|
| 0-5 years | 80-90% stocks |
| 6-10 years | 60-70% stocks |
| 11-15 years | 40-50% stocks |
| 16-18 years | 20-30% stocks |
| College age | Mostly bonds/stable value |
Benefits of Age-Based
- Automatic rebalancing
- Appropriate risk adjustment
- No ongoing management needed
- "Set it and forget it"
Alternative: Static Portfolios
- Fixed allocation regardless of age
- For those with specific risk preferences
- Requires manual adjustments over time
529 vs. Alternatives
529 vs. Coverdell ESA
| Feature | 529 Plan | Coverdell ESA |
|---|---|---|
| Annual contribution limit | None (gift tax applies) | $2,000 |
| Income limits | None | $110K single/$220K joint |
| Use by age | No limit | Must use by age 30 |
| Investment options | Limited by plan | Self-directed |
| K-12 expenses | $10,000/year tuition | Full qualified expenses |
| State tax benefit | Often yes | No |
Key Point: 529 plans are generally superior for most families due to higher contribution limits and no income restrictions.
529 vs. UGMA/UTMA
| Feature | 529 Plan | UGMA/UTMA |
|---|---|---|
| Control | Owner retains control | Minor owns at majority |
| Use restrictions | Education only | Any purpose |
| Tax treatment | Tax-free for education | Kiddie tax applies |
| Financial aid impact | Parental asset (5.64%) | Student asset (20%) |
| Beneficiary change | Yes, to family member | No |
Key Point: 529 plans are better for most education savings because owner retains control and has less financial aid impact.
Financial Aid Impact
FAFSA Treatment (2024-25 and later)
| Account Type | Treatment |
|---|---|
| Parent-owned 529 | Parental asset (up to 5.64% counted) |
| Student-owned 529 | Parental asset (up to 5.64% counted) |
| Grandparent-owned 529 | NOT reported on FAFSA |
| UTMA | Student asset (20% counted) |
Major 2024 Change: Grandparent-owned 529 distributions are no longer counted as student income on FAFSA. This eliminates a previous disadvantage of grandparent-owned plans.
CSS Profile Note
Some private colleges use the CSS Profile, which may still ask about grandparent-owned 529s. Check specific school requirements.
Grandparent-Owned 529 Plans
Advantages
| Benefit | Description |
|---|---|
| No FAFSA impact | Distributions not reported starting 2024-25 |
| Estate planning | Removes assets from grandparent's estate |
| Control | Grandparent retains control |
| State tax benefit | Grandparent may get deduction |
Considerations
- Grandparent controls timing of distributions
- Less coordination with overall education plan
- CSS Profile schools may still consider
State Tax Considerations
Choosing a State Plan
| Factor | Consideration |
|---|---|
| State deduction | Home state may offer tax deduction |
| Fees | Compare expense ratios across plans |
| Investment options | Variety and quality of choices |
| Plan ratings | Research independent ratings |
State Tax Strategies
- Some states allow deduction for ANY state's plan
- Others only for their own state's plan
- Calculate if deduction outweighs any fee difference
- Non-residents may still benefit from any state's plan
Gift Tax and Superfunding
Annual Limits (2025)
| Contributor | Annual Amount | 5-Year Superfunding |
|---|---|---|
| Individual | $19,000 | $95,000 |
| Married Couple | $38,000 | $190,000 |
Superfunding Considerations
- Great for estate planning
- Removes large sum from estate immediately
- No additional gifts to that beneficiary for 5 years
- Must file Form 709
529-to-Roth Rollover (SECURE 2.0)
Starting 2024, unused 529 funds can roll to beneficiary's Roth IRA:
| Requirement | Detail |
|---|---|
| Account age | 529 open at least 15 years |
| Lifetime limit | $35,000 per beneficiary |
| Annual limit | Subject to Roth contribution limits ($7,000) |
| 5-year rule | Can't roll recent contributions (last 5 years) |
| Earned income | Beneficiary must have earned income ≥ rollover |
Key Benefit: Families can overfund 529s without penalty risk - excess goes to retirement.
Key Exam Points
- 529 advantages - Tax-free growth, no income limits, owner control
- Age-based portfolios - Automatically become more conservative
- 529 vs. UTMA - 529 better for most (control, aid impact)
- Grandparent plans - No longer hurt FAFSA (2024-25+)
- Superfunding - $95,000 individual/$190,000 couple (2025)
- 529-to-Roth - 15-year account, $35,000 lifetime limit
- State tax benefit - May favor home state plan
A grandparent wants to help pay for their grandchild's college education. How are distributions from a grandparent-owned 529 plan treated on the FAFSA starting in 2024-25?
What is the primary advantage of age-based portfolios in 529 plans?
A parent is deciding between a 529 plan and an UTMA account for their child's education savings. Which is a key advantage of the 529 plan?
5.7 Recognizing Unsuitable Recommendations
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