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Another option for funding your grandchilds college education


Tuesday, November 24th, 2009

Planning for educational expenses has become big business as mutual fund companies, colleges and universities and states emphasize the importance of putting away money for t uition and fees. And the state-sponsored Section 529 plan has become one of the more popular ways to fund this cost. Money in the account grows tax-deferred and distributions are not taxed upon withdrawal as long as they are used for qualified educational purposes. In addition, you can change the investment allocation once a year and name a new beneficiary. However, in spite of these features, a variable annuity may be a more flexible alternative.

One of the common complaints about 529 plans is the narrow number of investment choices that they offer, and the once-a-year allocation change rule can be restrictive as well. On the other hand, variable annuities tend to have more investment choices and allow you to make frequent changes to meet your individual requirements. Like a 529 plan, earnings within a variable annuity grow tax-deferred. But unlike the 529 plan, money withdrawn from an annuity for something other than educational use will not be hit with a 10% penalty (assuming you are over 59½). Therefore in case your grandchild decides not to go to college or you need the cash for an emergency, the funds are still available for other uses. Variable annuities have several variations of a guaranteed death benefit. For example, the stepped-up benefit provides for an increase each year above the original investment, such as 5% annually until age 80. The 529 plans do not offer this feature.

 Section 529 plans qualify for a gift tax exclusion that permits you to contribute up to $65,000 ($130,000 for a married couple) in one lump sum per beneficiary. This could help reduce your taxable estate. But even though a variable annuity may not remove assets from your estate, you can contribute an unlimited amount without paying the gift tax. The 529 plan is scheduled to phase out in 2010; variable annuities are not. In addition, annuity values are not included in the federal formula for financial aid whereas 529 plans are, no matter who owns the plan. This means that someone who applies for financial aid with a child that has $100,000 in a 529 plan may get little or no aid, while someone with the same amount of money in a variable annuity may be eligible for a great deal more.

 For this reason, parents who save money in 401(k) plans may be wise to choose a variable annuity contract as their plan investment vehicle, as this will shield at least a large portion of their retirement savings from FAFSA reporting.

By Mark C



The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



Tags: 529 plan , college education expenses. mo , guaranteed death benefit