529 Plans and Roth IRAs aren’t the Answer

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When it comes to saving money for the expense of a college education, “conventional wisdom” espoused by Wall Street, financial advisors, and the mass media drive parents toward 529 plans and Roth IRAs. 

After all, 529 plans have the best “odds of having the most money when you need it.”  Never mind the fact that your first decision is where to invest your funds.  Moreover, since the investments are tied to the market, a 529 plan could end up with less money available then the total contributed.  And, let’s not fail to mention the restrictions placed on the use of those funds. 

Parents saving in a 529 plan will see an increase in the amount they are expected to pay for an education.  Moreover, the amount of financial aid for which they qualify could be reduced or eliminated.  And, it may disqualify a family for grants and awards that need not be repaid.

A 529 plan is tax-free; provided, however, the funds are used for qualified education expenses.  What if the money is not used for such expenses?  What if your child decides not to attend college?  What if they receive a scholarship that covers all or some of the expense?  It becomes an expensive proposition…

Even the Free Application for Federal Student Aid (FAFSA), the form used by colleges and universities to determine what a family can pay for an education, identifies Coverdell Savings Account and 529 Plans as investments and assets.

Roth IRAs are a bit more flexible.  If you don’t need the money, you can use it for retirement and distributions are tax-free.  However, a Roth IRA is an investment vehicle, not a savings vehicle, with certain restrictions.  Those restrictions include an age 59½ restriction and a 5-year rule.

And, while Roth IRAs may be a better choice than 529 plans, an even better option than Roth IRAs exists.  In fact, the FAFSA states the value of this financial vehicle is neither an investment, nor an asset.

What vehicle might that be?

A properly-designed, cash-building, whole life insurance policy!  Don’t believe me?   Read on…

When most people hear “life insurance,” they immediately shut down.  After all, it’s about death, and who really wants to discuss that finality? 

What most people fail to understand, primarily because they stop listening, is that, while the type of policy in question does provide a death benefit, it is designed to provide the lowest possible death benefit in combination with the highest possible gash growth.  Moreover, such policies can and do provide living benefits such as terminal illness coverage, critical illness coverage, and chronic illness coverage, as well.

Why choose a properly-designed, cash-building, whole life insurance policy over a Roth IRA or a 529 plan?

  1. Life insurance is neither an asset, nor an investment.  The growth in such a vehicle is not subject to market fluctuation.
  2. If you don’t need the life insurance cash value for college expenses, the money can be used penalty-free and tax-free for any reason, including retirement.
  3. Life insurance allows you to repay the money borrowed against the contract, thereby continuing to increase the growth for later use.  Money you may want to put back in a Roth IRA does not grow tax-free.
  4. Should a student remain in college for 4, 8, or 12 years, the cash value in a life insurance policy continues to grow and need not be used to repay school debt until that debt comes due, typically 6 months after graduation or dropping below full-time.  The money that would have been paid every month on a PLUS loan can be directed to a life insurance policy to keep your money growing tax-deferred for tax-free use.
  5. Life insurance doesn’t have a 10% distribution penalty on pre-59½ distributions; a Roth IRA does.
  6. Life insurance provides more liquidity, use, and control than one has with a Roth IRA.
  7. Upon death, the death benefit is transferred to your beneficiaries tax-free.
  8. In order to contribute to a Roth IRA, one must have earned income; such is not the case with life insurance.

While Roth IRAs are a better option than 529 plans, the best financial vehicle for college savings is a properly-designed, cash-building, whole life insurance policy.

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