The 529 Plan:
The Plan That Could Be Costing You
The 529 Plan is the go to plan for college savings plans. It is endorsed by popular financial pundits like:
- Suze Orman
- Dave Ramsey
- Jean Chatzky
So, it only makes sense that the 529 plan has caught fire. Let's see why many are enamored with this strategy.
Why they like it.
- Grows tax advantaged. There are no federal or state taxes imposed at withdrawal for college related expenses.
- Easy, or harsh, on the wallet. You can contribute as little as $15 per month. On the other hand, some states let you contribute up to $300,000 or more.
- Shockingly easy. Like 401k retirement plans, you can set up automatic payroll deductions. Or, automatic withdrawals can be taken from a bank account.
- Control. The contributor has control over the account, not the beneficiary. And, the beneficiary can change at the donor's request. So, don't upset mom and dad.
- College costs. Funds can be used at any accredited college.
- Protection. Cash within the plan are protected from bankruptcy. Assets are not part of the donor's estate. Thus, the money is protected from future estate taxes.
Well, this sounds good. But before you sign you up for such a plan, let's look on the flip side and see if we can poke holes into this strategy.
Start Asking Questions
Start asking questions to see if it will fit your needs in multiple situations.
- What if little Johnnie won't be going to college (not the sharpest tool in the shed)? I've seen that only 70% of all High School graduates go on to college. What would happen to your money?
- What if the market goes down? Is your money protected?
- What if you die or become disabled? Does this mean little Johnnie can't go to college?
Once you start asking these sort of questions, you may soon discover...
Why we don't like it.
- Double taxation. If you use the funds for college related expense, all is well. However, if they are not used for college related expenses, the money withdrawn will incur a 10% penalty fee and be subject to income taxes (one of the eroding factors of money).
Remember, you put after tax dollars into the plan. If you don't use the funds according to the plan, you will be taxed on the money coming out. That's double taxation.
- Affects financial aid. The plan affects financial aid as part of the amount in the 529 plan is counted towards the expected family contribution.
- Up and down. This plan is subject to market trends. Money can go up and it go can down. Unfortunately, you cannot write off a loss in 529 plans.
One Bucket. One use.
The money is being put in one bucket and is earmarked to do one thing: fund college tuition. Although saving for college, or having a plan to pay for it, is important, having your dollar perform one function means that its true potential is contained.
We promote making your dollars do more than one thing: velocitize. That way, you can unleash it's potential for productivity.
Alternative To College Savings Plans
When our son was born, we purchased a whole life insurance policy on him. While life insurance for children is used to protect the value life, the owner controls the policy.
While we can use the cash value in the policy to pay for his college, the money isn't "earmarked" for that single purpose.
The money is in safe place, liquid, and earning interest. These are a few of the multiple advantages of whole life insurance.
A more tempting alternative is to leverage other people's money (OPM) through a home equity line of credit or federal loans. Then, take a policy loan against the cash value to pay for the HELOC or federal loan. The cash value in his policy can be used as collateral and we can also take advantage of the tax deduction.
All the while, the money stays in the policy and will continue to grow.
529 plans can be tools to use for personal finance help. But, if there is a better method or process, utilize those financial freedom resources. The first step is opening your mind to be aware of them.
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