If you've got a child headed for college, you should know what a 529 plan is. They used to be called "qualified tuition programs," but now you'll just hear them referred to by their section of the IRS code. They're run by your state as well as by qualified educational institutions.
Are they a good idea for parents of a college-bound student? Let's dig a little deeper to find out.
How College 529 Plans Work
When you open a 529 plan, you make after-tax contributions to it from your take-home pay. Your contributions grow tax-free, as an incentive for you to keep paying into the account. There are different investment options you can use to help make that money grow. Each person paying into the account can contribute a total of $14,000 per year (this means a couple can contribute $28,000 per year if they want).
Your account needs to have a designated "owner" and a designated "beneficiary," and these can't be the same person. The "owner" pays into the account as long as necessary. If your child doesn't go to college until age 25, for example, you'll be fine—there's no time limit or expiration date on using that money for college.
What Does a 529 Plan Cover?
There are strict definitions of what this plan will and won't cover. You can use this money to pay for:
- college tuition
- a new computer & related equipment (printer, wireless mouse or keyboard, etc.)
- internet access
- educational software
You cannot use this money to pay for anything that's not spelled out in the IRS guidelines. This is one big disadvantage of the 529 plan.
What Are the 529 Plan Rules?
The rules are pretty strict. First of all, your student needs to attend an eligible institution. If your child decides not to go to school in the U.S., for example, that's a problem. If your child decides to go to school in Europe, for example, that 529 account probably isn't going to be able to help pay for that. If your child decides to go to a technical or vocational school, there's a good chance that school might not be on the list.
Also, the IRS does not include regular living expenses in its list of approved uses for your money. Your student can't use that money for non-approved expenses such as rent, food, or transportation. This is a huge blow since scholarships often don't cover these expenses, either. As a parent, these are the kinds of expenses you might really want to help your child with. But your 529 plan won't allow it. It doesn't seem fair, does it?
What Other Options Do I Have?
If you're not keen on the limits imposed by a 529 plan, you do have other options. Permanent life insurance's cash value is one financial tool many parents use to help pay for school while retaining control and flexibility. It offers you the same ability to pay into an account that grows tax-free over time. As you fund your policy, the cash value grows. When it's time to send your kid to college, you can pull out all the cash value you want, up to the value of premiums you've paid, absolutely tax-free. Plus, there are no restrictions on what you can use that money for. If your child won a scholarship, for example, your cash value dollars can pay for room and board, or transportation costs.
If your child decides not to go to college, you also won't have to incur a penalty. With a 529 plan, you'll have to pay a 10% penalty to get your money out of that 529 account. With permanent life insurance, you're free to use that money in any way you see fit.
Of course, the number one reason to buy a life insurance policy is the peace of mind and financial security it provides for your loved ones. No matter what your family faces in the future, chances are life insurance can help.