Few moments in life are as exciting as when your child pursues higher education, and you know that all their hard work lays the foundation for a successful future. So wanting to provide them with strong financial footing only makes good sense.
You’ve probably heard that 529 plans are viable programs for educational expenses, and may even want to start one for your child, but this isn't the only savings option. The professionals at Leonard Financial Solutions encourage you to look into 529 plan alternatives as well.
What Is a 529 Plan and How Does It Work?
A 529 plan is a type of tax-advantaged savings plan designed to help families save money for educational costs such as tuition, books and supplies, room and board, and other related expenses. The funds in a 529 plan can be used at many accredited schools and educational institutions.
Here’s how it works. The contributor (usually a parent or grandparent) invests money into a 529 account, which is then managed by a designated financial institution. The money grows tax-free and can then be withdrawn at any time to pay for qualified educational expenses. Most states also offer additional tax benefits when contributing to a 529 plan.
Pros and Cons of 529 Plans
To determine whether a 529 plan is your best option, let’s take a closer look at the pros and cons.
- Tax benefits. Contributions to a 529 plan are usually made with after-tax dollars but the money grows on a tax-deferred basis. Also, most states offer additional tax benefits when contributing to a 529 plan.
- Flexibility. These funds can be used at many accredited schools and educational institutions.
- Control. The funds in a 529 plan are owned by the contributor and can be transferred between eligible family members without incurring taxes or penalties.
- Restrictions and penalties. Any withdrawals used for non-educational expenses will incur taxes and penalties.
- Investment Risk. Investing in any type of financial product carries an inherent investment risk, so investors should be aware of their potential losses as well as gains when investing in a 529 plan.
- Limited timeframe. Most states impose restrictions on the amount of time a beneficiary has to use their funds. If they’re used within this guideline, the account's balance is forfeited.
Using Whole Life Insurance as a 529 Plan Alternative in New Jersey
There are several different alternatives to 529 plans, including custodial accounts and trust funds. Another is whole life insurance in New Jersey. At Leonard Financial Solutions, we feel this is the best way to secure your child’s financial future while having more control and flexibility over how you spend the money.
Whole life insurance is a type of permanent life insurance. It includes a savings account—called a cash value—that grows over time. Once your child reaches adulthood, you can transfer ownership of the policy into their name. The cash value that adds up in a whole life insurance policy can be taken out at any time and is always tax-free.
Here are additional reasons why whole life insurance is recommended as a savings tool for college and other expenses:
- The cash value of whole life insurance grows over time as premiums are paid. This cash value can be accessed without penalty at any time, unlike a 529 savings plan.
- Whole life insurance offers lifelong protection for the policyholder as long as premiums are being paid. This makes it a reliable safety net in case of unexpected events.
- Whole life insurance premiums are more affordable when you purchase the policy at a young age, locking in low rates for the duration of the policy.
Another strong advantage to this type of 529 plan alternative is that whole life insurance isn’t counted as an asset when applying for financial aid, while 529 plans are. Thus, families who might not otherwise qualify for aid could get the assistance they need.
Get Help With 529 Plan Alternatives and Make Saving for the Future Stress-Free
Leonard Financial Solutions can provide advice on 529 plans and their alternatives, as well as how to budget each month to achieve your objectives. Find out more by getting in touch with us today. We offer a College Planning 101 session and free insurance quotes to help you make an informed decision.