Subscribe
Share
Share
Embed
A podcast designed to help retirees and those nearing retirement navigate finances and life planning with expert insights from financial advisor Trevor Lawson. Tune in for practical strategies and inspiring ideas to ensure your retirement years are purposeful, fulfilling, and truly your best chapter yet.
*Securities and investment advisory services offered through Osaic Wealth, Inc. member FINRA/SIPC. Osaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Branch phone: 919-546-0400.
Trevor Lawson: [00:00:00] Welcome to The Retirement With and On Purpose Podcast. I'm your host, Trevor Lawson, and this show is all about helping you not just reach retirement. But truly thrive in it. You've put in the work. Now let's make sure you can enjoy every moment to the fullest. Today's episode is inspired by an article written in the, the Wall Street Journal, and this was, um, an article back in, back in May of last year.
So it's been. It's been quite some time, but the content is very quality and, and frankly timely with school back in and many of us thinking about education over time for our kids and grandkids. Today we're gonna talk about the pros and cons of four alternatives [00:01:00] to 5 29 plans for college. So for a long time, you know, advisors especially have.
Been of the camp that a 5 29 plan is, is the premier way to save for higher education. And there's, there's still a lot of merit behind that, that recommendation. However, for folks that are concerned, Hey, what happens if my, you know, my kid's not cut out for college? What happens if they go to the military?
What happens if they get a a full ride? What are some other alternatives that maybe give us a little more flexibility with how that cash can be spent? That's where this article comes into play. So quoting here, financial advisors, as I've mentioned, tend to recommend file 29 Education Savings plans for college financing, and it makes sense they allow for tax deferred growth and tax free with withdrawals for qualified expenses, expenses.
Such as tuition fees, books and equipment and new rules have given the plans more flexibility, allowing funds to be used to pay for [00:02:00] K through 12 tuition and for some leftover funds to be reallocated to a Roth IRA. So that was a big change over the past year with 5 29 plans is any monies that are not used for higher ed.
A portion of that can be reallocated to a Roth IRA to help the 5 29 plans beneficiary jumpstart their retirement savings journey. Still, some people aren't enamored of this type of savings tool, especially if they aren't sure about their child's higher education plans, or they're hesitant to tie up money they may need for other purposes.
So for alternatives, one is a taxable brokerage account. The nice thing about these accounts is they don't have contribution limits and the money doesn't have to be spent on qualified education expenses, says Hillary Stalker, executive Vice President at Cap Wealth in Franklin, Tennessee. One big disadvantage though is a taxable brokerage account is counted as an asset for federal financial aid [00:03:00] purposes.
So for those that are hopeful that they'll be eligible for some type of financial aid. Taxable brokerage accounts could, um, either disqualify you or, or reduce the amount you may be eligible for. Another disadvantages is that there is no tax free growth or tax-free withdrawals. So again, with 5 29 plans, money goes in, all the growth is tax deferred, and then if it's taken out for education, it's all tax free.
With taxable brokerage accounts, there's no, there's no tax free growth or tax free withdrawals. The second alternative to a 5 3 9 plan is surprisingly a Roth IRA. So many of you have Roth IRAs as part of your investment portfolio to diversify your your future taxes. The contributions to a Roth IRA, but not earnings, just the contributions can be withdrawn at any time without taxes or penalty.
These funds [00:04:00] could be used to supplement savers college financing sources without dipping into investment earnings. So just remember with a Roth IRA, your contributions can be withdrawn anytime penalty free and could potentially be used to pay for for education. The downsides with Roth IRAs are are generally.
The contribution limits are are capped. So for 2025, the annual limit is 7,000 a year or 8,000. For those age 50 and older, that's gone up some for 2026. There are also income limits for contribution purposes. So if you make over certain threshold, you're not eligible to contribute to a Roth fire ring. One final point of caution is anytime you're using retirement savings for college, quoting here, you want to make sure you have sufficient other means for retirement, says Isaac Bradley, director of Financial Planning in Atlanta.
So that's a very good point there. I, I tell my clients often that we can borrow money for, for college and higher ed. We can't [00:05:00] borrow money for retirement. So if it comes down to, you know, whether we should be prioritizing our own retirement or. College savings because of the borrowing capabilities that are offered with college and not with retirement.
We should, we should generally give a nod to our own retirement. The third alternative would be UGMA or UTMA accounts. So these are uniform gifts to minors act and uniform transfers to minor act accounts or types of custodial bank or brokerage accounts opened by parents for a minor beneficiary. These can be useful for education savings as there are no contribution limits and the funds aren't restricted for education.
However, again, just like a brokerage account, these types of accounts also have one of the highest impact on financial aid because funds count as student assets for federal financial aid purposes. That's a big disadvantage of these accounts. Another disadvantage is that the child gains control of the asset at the age of majority, which could be [00:06:00] 18 or 21, depending on the state, and some parents might not want that.
So that's, that's been a big disadvantage for this type of account in general, not just for, for college savings, but, but because the child has control of that account at their age of majority, that can sometimes discourage parents from having these to begin with because they're not sure their, their kid's gonna be.
Just responsible enough at that age to take over full, full control. The final alternative to a 5 29 plan is whole life insurance. Yes, whole life insurance that has cash value. A note of caution here though is parents who opt to go this route should aggressively fund a policy when their child, when their children are young, so the cash value grows enough to use for college.
Says Kirby. They should also keep in mind that this type of insurance offers fixed returns often in the range of one to 3.5% annually, which may be lower than what parents may be able to achieve through other investments. So if you're gonna [00:07:00] go this route of using whole life insurance, I would strongly urge you to start this type of, of savings early.
And again, you wanna, you wanna fund it aggressively to, to give the cash time to, to take off before the child reaches. College age. Also, whole life insurance premiums are often more expensive than simply buying mutual funds or ETFs in a taxable brokerage account, for example. This is because insurance premiums cover various costs, like the cost of the insurance, administrative fees, mortality charges, and fund management.
So of the, the four, that would be the one that in my professional opinion, um, you might wanna consider last, um, the other three. Taxable brokerage accounts, Roth IRAs, ugma, and UTMA could be be compared against the file 29 plan, but ultimately, despite having alternative choices for those that are wanting to save for, for higher [00:08:00] education, and because file 29 plans, there's a lot of flexibility around how they can be used now.
4K through 12 education, and again, a portion of that can be rolled into a Roth IRA, if not used for education. There's still a lot of pros for. 5 29 plans. But these are just some alternatives to help you make the best decision possible for you and your family when it comes to saving for education. I hope you found today's content very insightful and gives you some food for thought when thinking about the best way to save for education with your own family.
As always, please don't hesitate to reach out with any clarifying questions, and I will look forward to being with you again soon. Take care.
Thanks for tuning in to The Retirement With and On Purpose podcast. I hope you're walking away with new ideas. And a fresh perspective on how to make the most of your retirement [00:09:00] journey. And remember, retirement isn't the end. It's your time to live with purpose. Until next time, I'm Trevor Lawson. Here's to a fulfilling and thriving retirement.