by Melissa Klein

Perhaps the only thing tougher than getting into college is figuring out how to pay for it.

For the 2002-2003 academic year, the average tuition and fees charged by a four-year private college reached $18,273, according to The College Board, a New York-based nonprofit organization that tracks college tuition and admission trends.

Fortunately, college funding options abound. One of the most popular among them is the 529, or college savings, plan. With no income or age limits and federal tax exemption, the plans are an attractive choice for many taxpayers.

"One of the great things about 529s is that clients can transfer money to their children and move it out of their estate, but the kids don’t have control," noted Richard Rosenberg, CPA, CFP, with Clarfeld Financial Advisors in Tarrytown, N.Y.

Today, all 50 states offer some type of 529 plan. And as more investment companies get in on the 529 act, the options continue to grow. Some states offer multiple plans, and others offer state tax incentives. Investment options are expanding rapidly, with some plans offering access to mutual funds. And thanks to a provision allowing colleges to offer their own plans, expect to see more 529s popping up this year.

"Clients are going to expect their CPA to help them understand 529s and make decisions to help them get the most tax breaks for sending their kids to college," said CPA Joseph Hurley, of Pittsford, N.Y.-based, a Web site that offers consumers and planners information on 529 plans. It’s also a practice-building opportunity, since several family members are often involved. And in many cases, college planning can lead to more retirement planning, "which is still where the big dollars are," noted Hurley.

Of course, 529 plans aren’t without drawbacks.

As with any investment, they aren’t appropriate for every client, and they shouldn’t be the only vehicle that families use to fund college.

"529 plans are a small part of college funding," advised Rick Darvis, CPA and president of College Funding Inc. in Plentywood, Mont. "Not only are they not the only option, in some cases, they might be the worst."

"College planning, tax planning and retirement planning are all joined at the hip," said Darvis. "CPAs may not realize that tax planning can sometimes have a negative effect on college funding planning and on financial aid. Otherwise, good strategies can backfire."

One potential pitfall is that the plans can impact financial aid eligibility. "It’s up to each college to decide how to treat the 529 for financial aid purposes," Darvis noted. And coordinating 529 withdrawals with the HOPE and Lifetime Learning education credits requires careful planning. "You can’t Ôdouble dip’ - take the tax-free withdrawal and claim education credits on the same fees," said Darvis. "There’s a lot of complexity."

Another caveat is that money in a 529 that is used for anything other than a qualified higher education expense is subject to both a 10 percent penalty and the ordinary tax rate, he added. "Don’t get blinded by the fact that they’re tax free. You have to look at rate of return," warned Darvis. "Everybody seems to be forgetting that lesson when it comes to 529s. There are fees, there’s a lack of direct control over your investments, and many plans get more conservative as you get closer to college, which means the rate of return gets lower."

The plans may not be the best option for the super rich, since people generally use their estate and gift tax exclusions in funding the plans.

"Wealthy clients might better utilize their annual exclusion in other ways," said Rosenberg. "From an income tax standpoint, there’s almost no better thing out there. But from an estate and gift tax planning standpoint, you have to be careful not to make a blanket recommendation."

"Another downside is that the investment choices are somewhat limited, depending on the state," Rosenberg added.

"They’re not appropriate for the day trader mentality - someone who likes frequent contact with their investments and the ability to shift their money around constantly," Hurley advised. "Most plans only allow you to change your investments once a year."

He added, "Certain people who don’t have a lot of money to invest might be more attracted to Coverdell savings plans, which can be used to pay for kindergarten through 12th grade. They also offer more investment options. In a lot of cases, they work more like self-directed IRAs."

And fees must be considered. "Fees range anywhere from 35 basis points in annual expenses to 200 basis points in annual expenses, excluding other broker expenses that might be tacked on," Hurley said. "The other benefits have to exceed additional cost or you’re swimming upstream."

"Picking the best plan can be a difficult task," warned Darvis. "You can’t assume that your state plan is the best one for you even though there may be state tax benefits for residents. A plan may have high fees that more than offset the tax benefit. Or it may have a poor track record, or restrictive features."

Features to consider include acceptance of out-of-state students, investment options, portability (the ability to roll over money to another state plan) and penalties, Darvis said.

"One of the biggest misconceptions people have is that 529 plans all follow the same mold," said Hurley. "People think that once you understand one plan, you understand them all. But the plans are all creatures of state law. There are all sorts of differences."

Advising clients on 529 plans also raises the question of how to bill for the service. "A lot of 529s are being sold through financial advisors who get compensated by the product provider," said Hurley. "It works well for the advisor because it’s not hourly based. More and more CPAs are putting themselves in a position to do that and being very successful."

"I think charging hourly is difficult because it takes a lot of hours to get up to speed," he added. "You’re also not typically talking about substantial amounts of money. When they invest in 529 plans, many people try to stay within the annual gift tax exclusion, so they might not invest more than $10,000 to $20,000."

"Preparing a tax return for a child is usually a low dollar project, but now with all these different tax vehicles and other special rules, just to prepare the child’s return can be a project," said Hurley. "CPAs need to focus on how much time it takes, and to charge appropriately. They have to make clients aware of the dollars involved and of the amount that can be saved by structuring a plan properly and taking advantage of the tax breaks when paying for college."

"If we decide a 529 makes sense, we’ll find the best plan for the client based on different criteria. Then we help them complete the application and choose the investments," said Rosenberg. The service is provided as part of the financial planning engagement, for which the firm charges by the hour.

He estimates that among the firm’s clients - high-net-worth individuals with investable assets of $1 million and above - about 30 percent of those who have children younger than college age are using 529s.

No matter how they decide to charge for the service, Darvis said, "The worst thing CPAs can do is undercharge."

"If you bill by the hour, the rate for college funding should be at least what you charge for any other service because this is a specialty area," he said. "The information is at least worth the billing rate for estate planning, tax planning or retirement planning."

For flat-fee engagements, he recommends a minimum of $800 to over $2,000 per engagement in urban areas. Another option is to charge a combination flat fee plus an hourly rate for additional services, such as helping the client appeal to a college for money or filling out financial aid forms.

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