Coverdell Comparisons
Third-party distribution of Section 529 qualified tuition programs is a recent phenomenon. While creating a significant practice-growth opportunity for advisers, the technical complexity of these state-sponsored college investment programs and their many structural differences require that financial professionals expend considerable effort in educating themselves before making recommendations to clients. Although most 529 plans are open to state residents and nonresidents alike, many states offer compelling tax incentives for residents who invest in their own programs. This article explores the question of in-state versus out-of-state 529 plans and provides advisers with a methodology to use in assessing the value of state tax incentives.
There are many considerations, besides an upfront state income tax deduction, when recommending or selecting which particular program to use. The financial adviser should calculate the dollar amount of the tax benefit provided by a contribution to the in-state 529 plan. One of the more intriguing new investment opportunities to emerge in recent memory is the Section 529 qualified tuition program, commonly known as the 529 plan. Offering professional investment management, valuable income tax benefits, and the potential to remove large amounts from an investor's estate while permitting the investor to retain ownership rights, these state-- sponsored college savings programs have been bright spots for the financial services industry Assets in all 529 savings programs tripled during 2001, from $3 billion to approximately $9 billion, and industry observers are anticipating that total assets will approach $25 billion by the end of 2002. The role of the investment adviser and financial planner in this marketplace continues to grow as an increasing number of nationally distributed 529 plans are made available for sale through intermediaries. At the start of 2001 there was only a handful of 529 plans offering sales commissions; one can now count more than 30 such programs vying for the attention of broker-dealers and their registered representatives. Industry data suggests that adviser-sold 529 plans have quickly taken much of the stage away from their direct-sold counterparts. Approximately three-quarters of all contributions into 529 plans are now coming through an adviser, with only one-quarter coming directly from investors into "no-load" 529 plans. While the 529 opportunity has never been greater, advisers face unique challenges in offering these investment programs. One such challenge is the technical and operational complexity of Internal Revenue Code Section 529. The governing statute describes a unique set of program qualification requirements, income tax rules, and gift and estate provisions. Questions abound, and clear guidance from the IRS is lacking in many areas. Another challenge is determining which particular 529 plan, or combination of plans, is best suited to the investment objectives and personal circumstances of the investor and his or her family. The fact that 529 plans are created by the states means that their investment offerings and program features can differ greatly Further, 529 plans tend to undergo alterations on a fairly regular basis. The states have been active in revising the laws surrounding their 529 plans and in adding options or features to their programs, realizing that if they are not able to offer a competitive 529 product, many of their residents will go beyond state borders in search of a program that delivers a more attractive product. As with any new financial product, a significant educational effort is required of the adviser seeking to add 529 plans to his or her repertoire. Many advisers at this point have had little direct experience with 529 plans, although that is quickly changing. Many broker-dealers, as well as the product providers that benefit from third party distribution, are making a significant effort to provide education and back-office resources to the adviser so that the myriad questions that arise in discussions with clients can be handled effectively. |