A 529 plan is a state-operated educational savings plan with the primary purpose of helping families set aside funds for their child’s future college expenses. This type of plan allows parents to routinely contribute funds in small amounts as their child ages. This design has made 529s a popular and approachable savings option. Once the child is ready to attend college, the funds used from 529s towards education-related expenses (e.g. tuition or books) are untaxed and select states have been known to offer tax incentives associated with these plans.
Even though a 529 is a respectable way to accumulate college savings for a child, parents should be aware that these funds can be vulnerable. Fund managers place most of the money from these plans into bonds. While Bonds are safer than stocks, they are not immune to presenting losses. Parents with 18 and 19 year old students could be facing this realty in the next year as interest rates are expected to rise. Some 529s experienced a loss in the last quarter of 2016 and even though the average loss was under 1%, many faced losses of about 2%**. While these percentages may not be detrimental to the totality of savings, when the day comes to pay for the first year’s tuition a deficiency could be notable.
Should a 529 plan sustain losses without time to recover before the funds are needed, a supplemental resource could be paramount. An Indexed Universal Life (IUL) policy is an exceptional option for families looking to back up a 529 savings plan. While 529s may be vulnerable to market variation, the credited interest rate of an IUL will never be negative and will not result in a loss of value, even during years the stock market underperforms. IUL policy owners can access the policy’s cash value through tax-free loans or withdrawals, provided the withdrawal is less than the premiums paid until that point*.
According to the 2017 report from Sallie Mae families across the U.S. paid an average of $23,757 in college expenses this year alone, with the highest regional average breaking $35k. As recent 529s have yielded less savings than hoped for, and college expenses have continued to rise, it may be wise for parents to consider additional savings resources like an IUL. It could make a substantial difference on the day college tuition is due.
Additionally, if college expenses are covered without the need of supplemental funding, an IUL would still be valuable. The cash value has flexibility to be used later in life, perhaps as supplemental income during retirement years. This creates potential for multiple layers of financial security for parents, protecting some of life’s major milestones and the subsequent financial concerns that come with them.
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**College Savings in 529 Plans May Be Worth Less Than Hoped, Reuters