The Pros and Cons of 529 College Savings Plans
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 Earnings in a 529 plan are not taxed currently and may be withdrawn if they are used for qualified colleges, universities, and graduate schools in the United States.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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