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Is There a Better Option for College Savings than Using a 529?

/// Posted by Aviva Sapers

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Many people feel that the most cost effective way to fund college for their kids is by contributing to a 529 plan.  The benefits are:

  • All earnings grow tax free and are distributed tax free if used for qualified education expenses
  • 30 states offer full or partial deduction – Not MA
  • Owner can change beneficiaries and maintain control past college
  • Funding can vary as needs dictate
  • No age or income limits or annual contribution limits (up to $500,000 per beneficiary)

     

However, there are some definite drawbacks to college funding via 529 savings plans:

 

  • Lack of liquidity while you save – cashing it in results in a 10% penalty + income taxes
  • Single purpose vehicle for life
  • Market risk – Expected duration of 22-26 years (18 years of accumulation and 4-8 years utilization). Could see many down years with likelihood of 4 of those down years being greater than 10% – where you could lose money

In addition to the drawbacks mentioned above, there are other factors to keep in mind.  Off Campus room and board may not be fully covered by a 529 plan.  Not all tuition is considered qualified tuition and things like insurance, sporting events, parking, transportation and some administrative expenses are not covered.  Payments must occur in the same calendar year as withdrawals.  You must track expenses covered by 529 plans as you will get a 1099-Q and a 1098-T for each 529 that you will need to reconcile annually and file with your taxes.  Finally, during the withdrawal phase, you can’t move your money into cash so you expose the account to market corrections during the 4+ years in which you are paying tuition.

So what is the alternative?  The Ultimate 529 – An indexed universal life policy (IUL) used to fund the same needed payments.  An IUL provides tax free growth and distributions.  You decide when you use your money.  No restrictions on where you use your money or what it covers, with complete downside protection on investment risk.  You can fund as much or as little as you want and can change beneficiaries as needed.

A few other benefits of the Ultimate 529:  It is not reported to the IRS nor is it required on the FASFA application for financial aid.  It is one asset that can be utilized for all your kids’ purposes, such as college, first home, wedding, car, business start-up capital, or even retirement funding.

Insurance offers nearly all of the benefits of a traditional 529 Plan without all the headaches and limitations and with none of the investment risk.  It is a terrific asset for those looking to fund education goals but want to maintain flexibility and long term planning options.

 Feel free to call us  for a consultation.