The Pros and Cons of 529 College Savings Plans
If you are like most Americans, meeting the future financial obligation of sending your child to college requires years of disciplined saving and intelligent investing. One strategy for accumulating the necessary funds to pay for college is through a 529 college savings plan. But, is it the right approach?
What is a 529 Plan and What are Factors to Consider
A 529 college savings plan allows you (or other individuals, e.g., grandparents) to save for your child’s education on a tax-advantaged basis. Earnings in a 529 plan are not taxed currently and may be withdrawn if they are used for qualified colleges, universities, and graduate schools in the United States.
Contributions are not tax-deductible, and the maximum amount you may contribute to a 529 plan varies by state.1 529 plan contributions will constitute a gift to the designated beneficiary. However, contributions of up to $15,000 ($30,000 if both parents make a separate gift)2 can be made without incurring a federal gift tax. 529 plans also provide for accelerating contributions by five years, allowing a lump sum contribution of $75,000 ($150,000, if both parents contribute) to be made free of federal gift tax.
The existence of a 529 plan may reduce your child’s ability to receive financial aid, though this disadvantage evaporates if the account is owned by a grandparent or a nonparent relative.
There are restrictions on the investment choices and limits on the number of times you can change the investment. Consequently, there may be instances when investing outside of a 529 plan is more effective.
For example, your college funding strategy can include a combination of saving plans, including whole life insurance. Many people think of whole life insurance solely in terms of its death benefit, but a policy can be part of your overall college savings approach. How?
- Cash value on a whole life policy grows on a tax-deferred basis and withdrawals are generally tax-free.3 4 5
- Cash value can be used for anything at any time.
- Unlike a 529 plan, whole life is not subject to market performance.
- The Federal Student Aid methodology doesn’t include life insurance cash value when calculating expected family contribution.
Is a 529 Plan Right for Your Circumstance?
There are pros and cons to having a 529 plan in your college savings portfolio. Finally, it may take time for the benefits of a 529 plan to be realized, so it may not be the most appropriate choice for a child just a couple of years from attending college. 529 plans may be a better option for younger children.
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2020-93334 Exp. 1/22