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John Nicholson is the founder of www.The 401K Man.com, an independent insurance & financial services agency dedicated to helping others find their solutions through the myriad of choices when seeking insurance, retirement and financial advice. John's career path began with helping others in the late 1980's and early 1990's. The 401K Man is an independent agency servicing the Midwest which provides a wide variety of choices as opposed to one size fits all plan available at many of the larger financial or "brand" insurance companies & firms. We offer many solutions from basic insurance policies to comprehensive estate planning.

Saturday, February 15, 2014

529 Plans & Coverdell Plans

It is sad to see how many people are unaware of the potentially useful benefits of a 529 investment plan. 
Primarily used as an investment vehicle for college or higher education expenses, the plan has many attributes that make it very useful for planning purposes beyond the college bound funding it was set up to enable. 
The 529 Plan as a retirement vehicle is often overlooked with so many chances to fit where many other financial plans may not.
These are a very good way to avoid trusts that can be very limited and sometimes final in the way there scope is allocated. Below are just a few of the benefits a 529 Plan could offer, 
  • Estate planning solutions are one topic to review with a 529 Plan, as contributions made to a 529 plan are removed from your estate.
  •  The 529 Plan provides one of the lowest cost estate planning vehicles available with the ability to change plan beneficiaries and investments yearly.
  • $65,000 contribution limits for individuals or up to 130,000 for couples to contribute along with the ability to donate to an unlimited amount of beneficiaries can make this a very useful estate planning tool.
  • The 529 plan has the ability to grow tax free and offer a lower cost alternative to withdrawing money in retirement with a 10% tax penalty after potential decades of growth on the principal.
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The following definition of a 529 plan was taken directly from the American Funds website:
“Named after Section 529 of the Internal Revenue Code, 529 savings plans provide a tax-advantaged way to save for qualified higher education expenses. These plans are generally sponsored by individual states, while plan assets are professionally managed by independent investment firms or state government agencies.”
529 plans: key features and benefits
  • Save for anyone: With a 529 plan, investors can save for anyone — their child or grandchild, niece or nephew, friend, or even themself.
  • Tax advantages: Earnings in 529 accounts can grow free from federal tax, and withdrawals for qualified higher education expenses are free from federal tax, and some states also allow for a deduction (or credit against) contributions.
  • Contribution limits: Investors can contribute up to $14,000 ($28,000 for married couples) annually without gift-tax consequences. Under a special election, you can invest up to $70,000 ($140,000 for married couples) at one time by accelerating five years’ worth of investments.
  • Income limits: There are no income limits, so investors can contribute regardless of how much income they earn.
  • Investment flexibility and options: Though plans are administered by individual states, investors can choose among many types of investment options, regardless of where they live. These investment options can also be changed, but investment allocation changes can only be done at certain number times and dates on an annual basis.
  • Control: The investor, as the account owner rather than the beneficiary, maintains full control of all account assets and determines the timing and amount of distributions.
  • Beneficiary options: Investors can change beneficiaries, without penalty, provided the new beneficiary is a member of the previous beneficiary’s family.

Wait a minute. Did I just say that whole life insurance can be a better college savings plan than a 529 plan? Yes, I absolutely did. Far too many financial professionals, families and investors get caught up in focusing on the name of their plans and investments.
For example, it is traditionally common, popular and acceptable for a retiree to mention that their retirement savings plan is a 401(k) or an IRA, but not so much to say a variable annuity plan. Likewise, it is traditionally common, popular and acceptable for parents and grandparents to say their college savings plan is a 529 plan, but not so much to say a whole life plan.
Therefore, rather than focusing on the name of the college savings plan of choice, the right thing to do is compare and contrast these two options, focusing solely on the facts, features and benefits.
Whole life plans: key features and benefits
  • Save for anyone: Investors in whole life plans can also save for anyone — their child or grandchild, niece or nephew, friend or even themselves. However, a whole life plan offers the ability to save for any person, regardless of their relationship to you, as well as save for any company, institution, or charity an investor may choose.
  • Tax advantages: Whole life plan cash value earnings also accumulate on a tax-deferred basis and, if managed properly (via withdrawals and/or loans), can be also be withdrawn on a 100 percent tax-free basis.
  • Contributions limits: Similar to 529 plans, whole life plans have certain contribution limits, particularly within the first seven years. However, most whole life plan contribution limits can be structured to exceed the limits of a 529 plans, and they are also not limited to the $350,000 lifetime limit of a 529 plan.
  • Income limits: Just like 529 plans, there no income limits, so any investor can contribute, regardless of how much income they earn.
  • Investment flexibility and options: Although whole life plans cannot offer investment upside potential, they do offer no downside investment risk. For many investors, the peace of mind associated with safety and guarantees are far more attractive, particularly when saving for a specific time frame and/or goal (such as retirement or college savings). In addition, whole life plans cash values offer more competitive “safe money” interest rates versus alternative fixed-interest rate vehicles (which are contractually guaranteed), as well the potential for annual dividends.
  • Control: The investor, as the account owner, rather than the beneficiary, maintains full control of whole life plan cash value and determines the timing and amount of distributions.
  • Beneficiary options: Similar to a 529 plan, investors can change whole life plan beneficiaries without penalty, at any time, and for any reason. However, unlike the family beneficiary restrictions of a 529 plan, a whole life plan allows you to change the beneficiary to any person, institution and/or charity, as well as choose as many beneficiaries to receive whatever percentage they deem appropriate.
  • Guaranteed completion: Arguably the biggest advantage of a whole life plan is the ability to guarantee that an investor’s college savings plan will self-complete under all circumstances.
  • Death: With a 529 plan, in the event of a premature death or unexpected disability, an investor’s college savings plan can only offer whatever money has accumulated up that point. However, whole life plans carry have contractual life insurance guarantees which provide large amounts of wealth to be used for college savings (or any other purpose) in the event of a premature death.
  • Disability: In the event of an unexpected disability, an investor is very likely to lose their ability to temporarily or permanently continue funding their 529 plan. However, whole life plans offer the option to add an affordable disability rider which contractual guarantees that, in the event of an unexpected disability, the policy premiums will be made by the insurance company and the cash value will continue to accumulate. (Note: This rider carries a small additional cost as well as age restrictions.)
  • Unlimited money options: If you withdraw money from a 529 plan for reasons other than specifically for qualified higher educational purposes, your earnings will be subject to federal income tax and possibly a 10 percent federal tax penalty. However, the cash value in a whole life plans can be used for any purpose whatsoever, whether related to education or not. (For example, joining a fraternity or sorority, buying a car, food, clothing, spending money, etc.) In other words, a whole life plan can essentially be used as “your own bank account”.
  • No taxes or penalties: There are many instances where college saving plans are simply not be needed, wanted, or utilized. For example, children or grandchildren may receive college scholarships, join the military, or simply choose not attend college. Whole life plan cash values provide important access and flexibility to change your plans for your college savings at any time, for any reason.
  • No financial aid restrictions: A robust 529 plan can negatively impact a student's chances of tapping into various sources of financial aid. However, another important advantage of a whole life plan is the ability to shelter funds from the federal financial aid methodology via the cash value.
  • Ownership change permitted: Unlike 529 plans, a whole life plan offers the ability to change the ownership of the policy at any time for any reason. Changing the ownership in a whole life plan changes both the accumulated cash value as well as the death benefit.

Now that you know there are more advantages doesn't it make sense to call and make an appointment with an expert to see how a 529 may provide a financial planning solution for your needs?
A Coverdell or Educational Savings Account is a type of account that can be opened to fund educational expenses for schooling. These accounts are still available yet rarely used since a 529 account has more advantageous benefits in most instances.Callus to learn about the differences and which might be a better solution for you.

What is a 529 plan? 
Although rarely discussed as the ideal college savings plan, a solid argument can be made for using whole life insurance versus a 529 plan. So for illustrative purposes, I will refer to the whole life insurance option as a whole life plan.
When choosing a college savings plan, our job as financial professionals is to provide education, personalization and customization. Both 529 plans and whole life plans are excellent college savings plans, and clearly, neither is the best option for every client.  There are also other college savings options to review and consider such as a Uniform Gift to Minors Account (UGMA), Uniform Trust to Minors Account (UTMA), Coverdell Education Savings Accounts, and regular investment accounts.