The In-State 529 Sales Challenge
One of the largest obstacles faced by many financial advisers is selling against the in-state 529 college savings program. Twenty-four states currently offer a deduction to their taxpayers against state income tax for all or a portion of contributions made to the in-state 529 plan. In no case is the deduction offered for contributions made to an out-of-state 529 plan.
The reason the states offer an up-front tax deduction is an obvious one: the immediate boost to returns is a powerful incentive for families considering their options in saving for college. The states restrict the deduction to their own 529 plans simply because they do not want their residents placing their college savings with another state's 529 plan, especially if tax dollars are being used to subsidize those savings. As states and their 529 program managers make new commission share classes available, advisers will increasingly have the ability to show both in-state and out-of-- state 529 products to their clients. However, in some states an adviser will not be able to earn commissions from the in-state 529 plan. How can the adviser convince a client that the 529 plan he or she sells is a better investment program than one that offers the state tax break? There are tactics advisers can employ to address the potential in-state tax advantage issue fairly. The following suggestions are intended to help the financial adviser discuss the issue of in-state versus out-of-state 529 plans with clients. Failing to disclose the existence of a state income tax deduction is not among the suggestions. A client will certainly find out about the "missed" tax break and may react negatively. Many broker-dealers have specific policies with respect to this disclosure; thus it is compulsory for the registered representative to follow those procedures. (The Municipal Securities Rulemaking Board and the National Association of Securities Dealers are actively considering new rules relative to dealer activities with 529 investment products that may impact disclosures.) |