As college costs continue to rise, having a college degree is more important than ever. According to studies by The College Board in 2011, those with college degrees earn 74 percent more than high school graduates, experience higher job satisfaction, and have lower unemployment.
For parents like me, college tuition costs can be sizeable. In the aforementioned study, the cost of one year at a public university averaged more than $20,000, while a year at a private school exceeded $28,000.
Arguably the most popular college savings plan being promoted by financial professionals and utilized by families nationwide is the 529 college savings plan (529 plan). Depending on which state you live in, the features and benefits of these plans can vary. For example, in my home state of Virginia, the only investment option available for 529 plans is the American Funds. However, in other states, investors must choose among different mutual fund companies.
What is a 529 plan?
The following definition of a 529 plan was taken directly from the American Funds website:
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“Named after Section 529 of the Internal Revenue Code, 529 savings plans provide a tax-advantaged way to save for qualified higher education expenses. These plans are generally sponsored by individual states, while plan assets are professionally managed by independent investment firms or state government agencies.”
529 plans: key features and benefits
- Save for anyone: With a 529 plan, investors can save for anyone — their child or grandchild, niece or nephew, friend, or even themself.
- Tax advantages: Earnings in 529 accounts can grow free from federal tax, and withdrawals for qualified higher education expenses are free from federal tax, and some states also allow for a deduction (or credit against) contributions.
- Contribution limits: Investors can contribute up to $14,000 ($28,000 for married couples) annually without gift-tax consequences. Under a special election, you can invest up to $70,000 ($140,000 for married couples) at one time by accelerating five years’ worth of investments.
- Income limits: There are no income limits, so investors can contribute regardless of how much income they earn.
- Investment flexibility and options: Though plans are administered by individual states, investors can choose among many types of investment options, regardless of where they live. These investment options can also be changed, but investment allocation changes can only be done at certain number times and dates on an annual basis.
- Control: The investor, as the account owner rather than the beneficiary, maintains full control of all account assets and determines the timing and amount of distributions.
- Beneficiary options: Investors can change beneficiaries, without penalty, provided the new beneficiary is a member of the previous beneficiary’s family.
Whole life insurance for college savings plans?
Although rarely discussed as the ideal college savings plan, a solid argument can be made for using whole life insurance versus a 529 plan. So for illustrative purposes, I will refer to the whole life insurance option as a whole life plan.
Wait a minute. Did I just say that whole life insurance can be a better college savings plan than a 529 plan? Yes, I absolutely did.