Planning for your child’s college education is one of the top priorities of the clients I work with. Many of them come to me with questions about how to start a 529 account to help with college costs.
Understanding the Limitations of 529 Plans
Truth be told, 529e plans are poor college funding vehicles. They only allow the family to save for the actual cost of tuition, nothing more. Other expenses like books, room and board and supplies are not included. In addition, 529 plans have volatile return rates making it hard to determine exactly how much money will be available when a child is ready. Then, if your child decides not to attend college, the 529 account is taxed in the same manner as an IRA. The upside to a 529 is that it is tax-free and has a $200,000 limit per individual if it is used to pay for college tuition. This makes it a good account for a grandparent looking to secure funding for a grandchild, but there are other options that make much more sense for the immediate family.
Roth IRAs May Not Be the Total Solution
Roth IRAs are a potential college education fund, but still have limitations that make them less suitable for a family. They are more predictable than 529 accounts, and the money can be used toward whatever expense is deemed necessary. The major knock against Roth IRAs is that they have an annual limit on tax-free contributions. The current maximum is $5,500 ($6,500 if you are 50 or older). According to the College Board, the average cost of tuition and fees for the 2013–2014 school year was $30,094 at private colleges, $8,893 for state residents at public colleges, and $22,203 for out-of-state residents attending public universities. With the disparity between the upper limit of the Roth and he costs of tuition; it is easy to see why the Roth IRA route is not a total solution.
Undeniable Benefits of Universal Life Insurance
The good news is that there are options other than the 529s and Roth IRAs. The one that fits most families is the universal life insurance policy. With a universal life insurance policy there are no limits to the amount of contributions, the money may be accessed at any time and for any reason and if the policy holder passes away, the money can be used to cover college expenses without taxation. In the case of college funding, money can usually be withdrawn from these contracts through policy loans, often at low interest and repayment is not required. This type of plan allows a parent to save for college while still keeping the funds liquid in case of emergency need.
There Are Many Ways to Fund a College Education
Choosing a college funding plan that fits your means and goals is one of the most valuable investments you can make in your child’s life. To learn more about which plan is right for you, call us or contact us online for a consultation.