For the vast majority of people, the best investments for college planning
are not 529 plans. 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 matter whether the money is actually designated to a younger student who is in college or not. Here are the best investments advisors can suggest for their clients' college planning.
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 or 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 have some of the very same characteristics of life insurance. The money may also grow tax-deferred. Many people argue that annuities are not good investments for people more than 5 to 7 years under the age 59½. The reason being that a 10 percent penalty will be assessed for early withdrawal before that age. Money in non-retirement vehicles is assessed at around 5 percent every year. Would you rather have a one-time 10 percent penalty on your interest gains or a 5 percent penalty on your gains and principle 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 percent penalty.
Single premium immediate annuities
Single premium immediate annuities (SPIAs
) 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 five-year SPIA with annual distributions. This will get the money out of the financial aid formulas to avoid the 5 percent 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 fifth and final year if the student graduates in four years.
See also: How advisors can attract additional assets utilizing college planning
I strongly suggest you advise your cilents to save money via annuities and life insurance policies, which all 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.