Over the last decade, college tuitions have increased an average of five percent each year and that number is expected to increase over time. Putting money into a savings account that’s yielding one percent probably isn’t going to get you where you need to be (although a savings account is never a bad idea!). So, what other options do you have?
These plans help you set aside money for college with certain tax advantages. The money earned in 529 plans is not subject to taxes, as long as the withdrawals are used for expenses, such as tuition and/or room and board. If the funds are used for ineligible expenses, the earnings are subject to a 10 percent federal tax.
There are two types of 529 plans: one is set up directly with a school to purchase units or credits at participating institutions for future tuition, the other places money in investments such as money market accounts and mutual funds. The latter can be used at any college. Two important points to be aware of when considering 529 plans are that the funds within the account are treated like parental assets and will affect the student’s financial aid eligibility, and the account is not FDIC insured.
To learn more about 529 plans, visit the U.S. Securities and Exchange Commission site.
Indexed Universal Life (IUL) Insurance2
This may not seem initially intuitive, but it is a viable option when saving for college. There are plusses and minuses to using an IUL as a savings vehicle, so you’ll need to look at your particular situation to decide which road—529 or IUL—would make more sense. A financial advisor can help you work through the finer points.
Some of the positive aspects of IUL investments include:
Flexibility. With a 529 plan, you must use the funds for tuition and/or room and board. Your IUL withdrawals can be used for whatever you’d like.
It may not affect financial aid. If money is taken out of the account as a loan, it will not affect your child’s financial aid packet. It will, however, lessen the death benefit of the account.
Guaranteed returns. Many life insurance policies will offer guaranteed returns of around four or five percent, and if the market dips into the negative, your account will stay flat instead of taking a loss.
Individual Retirement Accounts (IRAs) are made for just that—retirement—and are meant to be withdrawn after age 59 ½. Early withdrawals come with a 10 percent penalty on top of an income tax payment. There is an early penalty exception if that money is being used for higher education, which makes them another way to save for college.
This exception applies to funds being used for college for you, your spouse, your children or even grandchildren. Plus, if you limit your withdrawals just to contributions, the distribution can be both tax and penalty free when used for qualified higher-education expenses.
Like the IUL, money in your ROTH IRA is not considered when schools are looking at financial aid qualifications (although withdrawals are counted as income, so they may affect the financial aid package the following year).
Saving for college can be stressful enough without worrying whether or not you’ve chosen the right investment vehicle for you and your family. Spending some time with a financial planner to cover your long-term goals is a great way to give yourself peace of mind and put a savings plan in place.
The information mentioned in this article is for informational purposes only, is intended to provide general guidance and does not constitute legal or tax advice. Each person’s situation is unique and may materially differ from the information provided herein. You should seek the advice of a financial professional, tax consultant and/or legal counsel to address your specific needs before any financial or other commitments regarding the issues related to your situation are made. Banco Popular North America does not make any representations or warranties as to the content contained herein and disclaims any and all liability resulting from any use of or reliance on such content.
1. Investments products available in 529 college savings plans are not insured by the FDIC and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value. Participants assume all investment risks, as well as responsibility for any federal and state tax consequences.
2. Insurance products are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value. Before investing, you should carefully consider your need for life insurance coverage and the charges and expenses of the indexed universal life insurance policy. You should also consider the investment objectives, risks, fees, and charges of each underlying variable investment options. Products, riders and features are subject to state availability. Riders contain exclusions, limitations, and can involve costs. Policy guarantees and benefits are not backed by the financial institution and/or insurance agency selling the policy, or any of its affiliates.
Investments products available in 529 college savings plans are not insured by the FDIC and are not deposits or obligations of nor guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including the possible loss of value. Participants assume all investment risks, as well as responsibility for any federal and state tax consequences.