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College Planning: Considerations for High-Net-Worth Parents

As we move into the second half of Summer 2022, it seemed like a good opportunity to go back to our archives for an article on a particularly timely theme. After all, it’s the time of year when many recently graduated high school seniors are looking forward with eager anticipation to their first semester in college or, possibly, vocational or technical training. Many of these students and their parents will be funding some portion of their expenses with 529 education savings plans. And in addition, since the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, students in private K-12 schools and academies may also benefit by using 529 funds to cover tuition and other qualified educational costs.

Many parents with good financial means already know about 529 plans: the tax-advantaged plans “designed to encourage saving for future college costs,” sometimes known as “qualified tuition plans,” In fact, since their inception in 1996, parents and grandparents have put more than $398 billion into them. These plans permit accumulation that is exempt from federal and, in many cases, state income taxes. Furthermore, withdrawals from the account that are used for qualified expenses such as tuition, room and board, books, and fees, are also not taxed as current income. And the high contribution limits—some in excess of $200,000—allow parents with the financial resources to set aside enough to cover most of the expenses directly associated with their child’s attendance at a college or university or, since 2017, expenses for private elementary and secondary education.

It’s also possible that 529 plans may become more attractive for another reason. On June 14, 2022, Sen. Richard Burr (R-NC) and Sen. Bob Casey (D-PA) introduced the College Savings Recovery Act, which would permit 529 plan owners to roll over unused balances in a 529 plan to a Roth IRA. With the intent of giving families “greater control over their own savings” by allowing them to transfer unused 529 balances to an individual retirement account, the College Savings Recovery Act, if it passes both houses and is signed into law, could provide a tax-efficient alternative for ensuring that funds originally set aside for future savings aren’t diverted into unnecessary tax expenses. It will be interesting to see if this legislative effort gathers steam in Congress.

But aside from 529 plans, are there other good options for defraying college expenses? Should high-net-worth parents be looking elsewhere in their search for college funding? Following are a couple of suggestions that can also offer financial help for higher education costs.

Don’t forget about merit-based scholarships. Because these are not predicated on financial need, but rather on the student’s scholastic and other achievements, they can become a major source of financial assistance. Often, however, high-net-worth parents don’t fill out the required Free Application for Federal Student Aid (FAFSA) form, assuming that their financial resources will disqualify them for financial aid. The problem is that the FAFSA, or its counterpart, the College Scholarship Service (CSS) form, is required in order to be considered for most merit-based scholarships. So, parents, fill these forms out, by all means.

Many parents utilize the Uniform Transfers to Minors (UTMA) account to accumulate funds for college. These should be used with caution, however, since the assets in such plans, which are registered in the student’s name, can limit the student’s access to other types of financial aid that might otherwise be available. Sometimes, it is a good idea to “spend down” these accounts for uses like summer camps, prep school tuition, or even braces, and re-allocate the funds you would have used for such expenses to a 529 plan.

Finally, don’t be afraid to use the good, old-fashioned technique of direct negotiation with the college. Let’s say your child’s first-choice college isn’t offering quite as much in the area of scholarships or special grants as the second-choice school. You should tell school #1 about the other offer and give them the opportunity to match it. Many times, admissions counselors who believe that a student is a good fit with their institution will find money somewhere in order to remain competitive and ensure the student’s enrollment. You can and should leverage the competition among colleges and universities for the most qualified students—it can pay off in lower costs for your child’s higher education.

At Bernhardt Wealth Management, we work carefully with parents and grandparents to develop tax-efficient ways of providing for the next generation. To learn more, click here to read our article, “Should You Begin Transferring Your Wealth to Your Children? Some Points to Consider.”

Buen camino!

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