The Best Investments for College Planning
Are not 529 plans for the vast majority of people? In fact, 529 plans are assessed against a family in the financial aid formulas. 529 plans are assessed as a parental asset regardless of the beneficiary. This means that all the 529 plans a family owns are assessed when the oldest student begins college. It doesn’t make any difference if the money is actually designated to a younger student that is not in college or not.
Life Insurance – Universal and whole life insurance products gain cash value that is tax deferred much like a 529 plan. However, life insurance has many other benefits for college planning. For instance, how is a student going to pay for college if his/her parents die unexpectedly? Life insurance can help cover the cost of college if something does happen to the breadwinners of the family. Best of all, the cash value of life insurance is not an assessed asset in the financial aid formulas. In many instances, you can qualify for more grants and scholarships by repositioning assets in life insurance products.
Annuities – Annuities have some of the very same characteristics of life insurance. The money may also grow tax deferred.
Many people dispute that annuities are not good investments for people more than five to seven years before the age 59 ˝. The reason being that a 10% penalty will be assessed for early withdrawal before that age. Money in non-retirement vehicles is assessed at around 5% every year. Would you rather have a one time 10% penalty on your interest gains or a 5% penalty on your gains and principal every year for six years? The average student is now in college for six years to obtain an undergraduate degree. It is a no brainer to take the one time 10% penalty.
SPIA’s have no early withdrawal penalty as long as the distributions are equal and taken at specific times, say on an annual basis. This can be a wonderful way to fund a student’s education. For example, let’s take $50,000 from a 529 plan and use that money to purchase a 5-year SPIA with annual distributions. This will get the money out of the financial aid formulas to avoid the 5% assessment. The student will get $10,000 plus interest each year to help pay for college. The student will likely not incur any increase in the financial aid formulas if this is properly executed. Many parents also love this strategy because the students do not have access to all the funds at once. Also, this can give the student a monetary incentive to want to graduate on time. That is of course when the parent(s) tell the student they can keep the distribution in the 5th and final year if the student graduates in four years.
It is strongly suggested that parents consider saving money via annuities and life insurance policies, all which offer flexibility and tax-free savings opportunities. These accumulated savings can be pulled out in differing quantities whenever college cost needs arise, and funds in both types of vehicles are also creditor-protected.