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The pros and cons of 529 college savings plans

The pros and cons of 529 college savings plans

March 08, 2023

If you are like most Americans, meeting the future financial obligation of sending your child to college requires years of disciplined saving and thoughtful investing.

One strategy for accumulating the necessary funds to pay for college is through a 529 college savings plan. But, is it the right approach?

What is a 529 plan and what are factors to consider

A 529 college savings plan allows you (or other individuals, e.g., grandparents) to save for your child’s education on a tax-advantaged basis. Earnings in a 529 plan are not taxed currently and may be withdrawn if they are used for qualified colleges, universities, and graduate schools in the United States.

Contributions are not tax-deductible, and the maximum amount you may contribute to a 529 plan varies by state.1 529 plan contributions will constitute a gift to the designated beneficiary. However, contributions of up to $16,000 ($32,000 if both parents make a separate gift)2 can be made without incurring a federal gift tax. 529 plans also provide for accelerating contributions by five years, allowing a lump sum contribution of $80,000 ($160,000, if both parents contribute) to be made without being subject to federal gift tax.

The existence of a 529 plan may reduce your child’s ability to receive financial aid, though this disadvantage may be avoided if the account is owned by a grandparent or a nonparent relative.

There are restrictions on the investment choices and limits on the number of times you can change the investment. Consequently, there may be instances when investing outside of a 529 plan may be more effective.

For example, your college funding strategy can include a combination of tools, including whole life insurance. Many people think of whole life insurance solely in terms of its death benefit, but a policy can be part of your overall college savings approach. How?

  1. Cash value on a whole life policy grows on a tax-deferred basis and withdrawals are generally tax-efficient.3 4 5
  2. Cash value can be used for anything at any time.
  3. Unlike a 529 plan, whole life is insulated from market performance.
  4. The Federal Student Aid methodology doesn’t include life insurance cash value when calculating expected family contribution.

Is a 529 plan right for your circumstance?

There are pros and cons to having a 529 plan in your college savings portfolio. Finally, it may take time for the benefits of a 529 plan to be realized, so it may not be the most appropriate choice for a child just a couple of years from attending college. 529 plans may be an option to consider for younger children.

4 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
5 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Investors should consider the investment objectives, risks, charges and expenses of a 529 plan carefully before investing. This and other information are contained in the Program Description, which may be obtained from your investment professional. Please read it before you invest. A 529 plan is a tax-advantaged savings plan, issued and operated by a state or educational institution that helps families save for college. Investments in 529 plans are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed and are subject to investment risks, including loss of the principal amount invested. Tax implications vary significantly from state to state. If you or the designated beneficiary is not a resident of the state offering a 529 plan, you may want to consider, before investing, whether your state or the designated beneficiary’s home state offers its residents a plan with state tax advantages or other benefits. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
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