COLLEGE PLANNING
a 401 ( k ) while they pay off their student loans , it still may be a while before most employees have access to the provision .
“ With each one of these benefits that have been enacted , there ’ s always a catch , or at least a hurdle to overcome ,” says Sarah Mouser , director of financial planning at McLean , Va . -based Cassaday & Co ., which has roughly 3,000 clients and $ 5 billion in assets under management .
“ As we look at it , a lot of employers aren ’ t able to offer that yet because the plan providers don ’ t have the infrastructure in place to be able to manage it ,” she says . “ Some recordkeepers have put pilot programs into their systems , but in all reality , for this to be widely available , most employers are not going to be able to offer it to employees until 2025 or 2026 .”
To Kelli Smith , director of financial planning at Edelman Financial Engines , which manages $ 119 billion for advisory clients and $ 121 billion in 401 ( k ) plan assets , plan providers ’ ability to simultaneously help participants with both saving for retirement and paying off student debt is going to be a game changer for many Americans . “ It could be a little slow to adopt , but what I would expect is maybe ‘ go slow to go fast ,’” Smith says . “ We ’ ll figure out what that foundation looks like and then maybe there ’ s a blueprint for that .”
But the process is no different from when companies started to offer 401 ( k ) benefits and health spending accounts , she adds . “ It took a little while for companies to figure out what that looks like , but then there ’ s a lot of adoption along the way , after a little ramp-up period .”
Catch-529
Those wanting to roll 529 plans over to Roth IRAs will also have to deal with some quirks . The 529 account has to have been open for 15 years , and the assets in the account for at least five years . In addition , the rollovers have to be in line with regular Roth contribution limits , and there ’ s a $ 35,000 lifetime max . However , in this case , the Roth owner does not have to show income , and if the account owner — usually a parent or grandparent — has other 529 plans for other children , there is even more flexibility .
“ I ’ m a guy that loves multitools , and this is a multitool you can use for college for your kid or you can start a Roth IRA for them ,” says Timothy Parros , founder of Parros Financial Group in Ann Arbor , Mich ., which has roughly $ 100 million in assets under management . “ The one thing clients have been most fearful about with 529 plans is overfunding . So having that as another option for them , where they now can put the balance to a Roth IRA , is huge .” And if overfunding still happens , clients with multiple children or granchildren can shift their 529 plan savings from one beneficiary to another — as long as the beneficiaries are within the same generational bloodline . “ If grandparents have maybe six or seven grandchildren , they can , without any tax impact , shift those dollars between those plans ,” Mouser says .
And finally , with the Free Application for Federal Student Aid ( FAFSA ) Simplification Act , a parent ’ s retirement contributions are excluded from their income when they are applying for financial aid on the FAFSA form . The change allows parents to max out their retirement contributions and lower their income at the same time , potentially allowing their child to qualify for a more favorable aid package .
“ The catch here is it only applies to FAFSA . Not every school in the country uses FAFSA to determine financial aid ,” Mouser says . For instance , some schools , private schools in particular , use the College Board ’ s CSS Profile . “ Now with the CSS Profile , this is a school awarding their own aid and their own grants and scholarships . They still have you report retirement account contributions ,” she says .
These changes , sources say , are hopefully just the beginning of national recognition — and amelioration of pain — for parents squeezed by the dueling needs of their own retirement savings and their kids ’ college funding .
“ The one thing clients have been most fearful about with 529 plans is overfunding . So having that as another option for them , where they now can put the balance to a Roth IRA , is huge .”
— Timothy Parros
Clients Still Need An Overview
According to AmyJo Young McElfresh , a CFP and college planning specialist at Amphora Wealth Management in Chapel Hill , N . C ., these changes won ’ t add up to the sum of their parts if advisors don ’ t look at college and retirement planning in a multigenerational continuum . She says that such planning requires a truly holistic approach to get right .
“ The issue is a much bigger consideration than just what you see at the moment ,” says McElfresh . “ Yes , the FAFSA is changing and , yes , these other changes are happening . But with holistic planning it ’ s about options on saving for college expenses , finding tax efficiencies , planning for potential merit aid and negotiating the best financial aid package .”
That holistic approach includes grandparents ’ 529 plan contributions , gifting and estate planning strategies , parents ’ 529 plan contributions and retirement savings strategies , and the positioning of the child for the best financial aid package possible .
To help her own clients see the full picture , McElfresh says she likes to start the process when their eldest child hits the eighth grade . “ It ’ s really about having the parents understand how the financial aid formula applies to their family . And if you ’ re going to do that , you need to back up to eighth grade ,” she says . “ It ’ s like tax planning . You need time to figure out what changes you can make , and you need time to implement those changes .”
50 | FINANCIAL ADVISOR MAGAZINE | MARCH 2024 WWW . FA-MAG . COM