Paying for a child's or a grandchild's college education has become increasingly difficult as the costs of college continue to increase. I am amazed at what it costs to attend college now.
Today, Section 529 plans seem to be the tool of choice to pre-fund and build a tax-favorable pool of money for college education. I put together my own brief list of the pros and cons of 529 plans:
Pros of 529 Plans
1. Once the plan is funded (after-tax), the money can grow tax-free and be removed tax-free for qualifying college education expenses.
Today, Section 529 plans seem to be the tool of choice to pre-fund and build a tax-favorable pool of money for college education. I put together my own brief list of the pros and cons of 529 plans:
Pros of 529 Plans
1. Once the plan is funded (after-tax), the money can grow tax-free and be removed tax-free for qualifying college education expenses.
2. If owned by the parent(s) or grandparent(s), and funded correctly, the plan's assets (including growth) are out of their estate for estate tax purposes.
3. If the plan is owned by the parent(s) or grandparent(s), and if the child or grandchild does not go to college, the money can be used by the owner(s) for other purposes and would act like an IRA (with similar income taxes and penalties).
Cons of 529 Plans
1. If the child does not go to college, the growth on the money becomes taxable and subject to potential penalties when withdrawn or otherwise used by the parent(s) or grandparent(s).
2. The money in a 529 plan is subject to loss due to market risk.
3. If the plan is owned by the parent(s) or grandparent(s), and if the child or grandchild does not go to college, the money can be used by the owner(s) for other purposes and would act like an IRA (with similar income taxes and penalties).
Cons of 529 Plans
1. If the child does not go to college, the growth on the money becomes taxable and subject to potential penalties when withdrawn or otherwise used by the parent(s) or grandparent(s).
2. The money in a 529 plan is subject to loss due to market risk.
3. 529 plans are not "self completing," should a parent or grandparent die prior to complete funding.
4. 529 plans have funding limits. Funding is limited by the $12,000 annual gift tax exclusion (although they can be super-funded in year one by pouring in the first five years' worth of gifts all at once, totaling $60,000).
Using Permanent Life Insurance as an Alternative Funding Vehicle
Why would anyone use permanent life insurance (universal life or whole life) as a funding vehicle to pay for college education? There are several good reasons. (I'll assume that the life insurance policy will be written on one of the parents.)
4. 529 plans have funding limits. Funding is limited by the $12,000 annual gift tax exclusion (although they can be super-funded in year one by pouring in the first five years' worth of gifts all at once, totaling $60,000).
Using Permanent Life Insurance as an Alternative Funding Vehicle
Why would anyone use permanent life insurance (universal life or whole life) as a funding vehicle to pay for college education? There are several good reasons. (I'll assume that the life insurance policy will be written on one of the parents.)
1. Life insurance is a "self-completing" plan. Let's assume dad is the breadwinner in the family. If he dies when a child is young without fully funding a 529 plan, there will be a significant shortfall when the child goes to college. But if dad owns life insurance, it would pay an income tax-free death benefit to the beneficiary (presumably the surviving spouse) who can use that money for the child's college education.
2. Cash value in a life policy will not only grow tax-deferred, but can be removed tax-free (within limits) for college expenses, through policy loans.
3. After borrowing from the policy, it will still have cash value that can grow for years to come. When the parent is in retirement, he or she can access that cash through withdrawals and policy loans. A 529 plan does not allow this.
4. Money in a permanent policy is not a countable asset when a child applies for college financial aid.
Contact us for more information: anecamara@mintcofinancial.com
2. Cash value in a life policy will not only grow tax-deferred, but can be removed tax-free (within limits) for college expenses, through policy loans.
3. After borrowing from the policy, it will still have cash value that can grow for years to come. When the parent is in retirement, he or she can access that cash through withdrawals and policy loans. A 529 plan does not allow this.
4. Money in a permanent policy is not a countable asset when a child applies for college financial aid.
Contact us for more information: anecamara@mintcofinancial.com
Florida: 813-964-7100
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www.Mintcofinancial.com
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