What Is a 529 Plan?
529 Plan is a tax-free college savings plan that offers two types of options: a college savings plan and a pre-paid tuition plan, each with its own requirements, benefits and limitations. The money can be invested in a choice investment options. Although the 529 Plan has tax advantages, there are penalties for withdrawing funds for a non-eligible college expense or for claiming non-education related tax credits. The 529 Plan may be subject to the fluctuations that occur in the stock market, meaning there is greater financial risk. People always asked Gerber College Plan Vs 529 which plan is the the best considering “risks”? Continue reading for similarities.
Types of 529 plans
529 plans are usually categorized as either prepaid tuition or college savings plans as mentioned above.
- College Savings Plans work much like a Roth 401(k) or Roth IRA by investing your after-tax contributions in mutual funds or similar investments. The 529 college savings plan offers several investment options from which to choose. The 529 plan account will go up or down in value based on the performance of the investment options. You can see how each 529 plan’s investment options are performing by reviewing our quarterly 529 plan performance rankings.
- Prepaid Tuition Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges, sponsored by more than 250 private colleges.
Educational institutions can offer a prepaid tuition plan but not a college savings plan.
What can a 529 plan be used for?
A 529 plan is an investment account that offers tax-free earnings growth and tax-free withdrawals when the funds are used to pay for qualified education expenses. For college, university and other eligible post-secondary educational institutions, this includes tuition, fees, books, supplies, equipment, computers and sometimes room and board. The IRS also allows tax-free withdrawals of up to $10,000 per year, per beneficiary to pay for tuition expenses at private, public and religious K-12 schools.
Tax-free distributions may be used to repay federal and private student loans.
What is not covered by a 529 plan?
The funds in a 529 plan are yours, and you can always withdraw them for any purpose. However, the earnings portion of a non-qualified distribution will be subject to ordinary income taxes and a 10% tax penalty, though there are exceptions.
At the college or post-secondary level, a general rule of thumb is that expenses required for enrollment in an eligible institution are covered. However, there are some costs that you may believe are necessary, but the IRS does not consider a qualified expense. For example, a student’s health insurance and transportation costs are not qualified expenses, unless the college charges them as part of a comprehensive tuition fee or the fee is identified as a fee that is “required for enrollment or attendance” at the college.
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Gerber Baby College Plan
What Is the Gerber Life College Plan?
The Gerber Life College Plan is an individual endowment policy that provides adult life insurance and matures in 10 to 20 years. The money grows over time, without risk. Since you’ll know from the start the amount that your child will receive at the end of the term, planning for college will be easier.
The payout money can be used for funding higher education or for anything else, such as starting a business, or technical training, or the down payment for buying a home. In the unthinkable event that you pass away before the policy matures, your child as beneficiary will receive the full payout amount
However, unlike a whole life policy, coverage with an endowment policy lasts only for a fixed number of years. If you pass away during the period of coverage, your beneficiaries would receive the entire face value of the policy. If, however, you live longer than the period of coverage, you receive the policy’s face value which, at that point, would equal its cash value.
Gerber College Plans come with face values between $10,000 to $150,000, and are priced according to your health, since you’re the one who’s insured for the length of coverage.
Gerber College Plan Vs 529 – Which Plan Is Right For You? Lets Compare
Gerber’s endowment life insurance policy is called a College Plan, on the assumption that you’ll use the policy’s proceeds to pay for your child’s education. As an endowment life insurance policy, however, Gerber’s College Plan has several key differences compared with other college savings alternatives, such as 529 plans. Here’s how it’s different:
- The premiums are not state tax-deductible.
- You cannot choose how your cash value is invested; rather, the policy’s value at maturity is guaranteed.
- Endowment life insurance isn’t considered by colleges in financial aid calculations.
- You’re free to use the proceeds however you choose, not just for educational expenses.
While the College Plan provides life insurance coverage, it doesn’t have all the benefits of other life insurance policies. The biggest distinction is that your cash value investment gains are not tax free, which reduces the policy’s overall benefits. Considering the policy’s returns are fairly low, simply buying term coverage and investing in an alternative college savings account would probably be more lucrative.
To illustrate, say you’re a 35-year old father who just had a child and wanted enough money to pay your kid’s college costs 20 years from now. Gerber’s College Plan would charge $436.02 per month for a guaranteed coverage amount of $131,000. Over a period of 20 years, you would have paid $104,645 in premiums. Subtracting those premiums paid from the policy’s coverage amount yields a gain of only $26,355 before taxes. That figure represents an average rate of return over that period of only 2.1%, and even that yield would be further reduced after taxes are included.
Gerber’s College Plan might be a good option only if you’re concerned about your ability to consistently contribute to a college savings plan or are extremely risk-averse. Returns are guaranteed and, in the event you have an emergency and need access to money, you can either access the policy’s cash value through a loan or by surrendering the policy.
Policy loans come with an 8% interest rate, but you’re free to keep the money as long as is needed. Surrenders come with large fees initially, and typically no cash value is accumulated for the first three years of coverage. That said, once you pass the policy’s midway point, you are able to recoup the sum of all premiums paid.
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Which Plan Is Right For You?
Money put into a 529 Plan can be used only for qualifying educational expenses, which include tuition, fees, books, and room and board at accredited schools. The Gerber Life College Plan provides flexibility by letting the student use the payout funds for college or technical school or anything else, without limitation.
In terms of risk, the rate of return on 529 Plans is tied to the stock market. This offers the possibility of greater returns than the Gerber Life College Plan, but also means greater risk if the stock market goes down. The Gerber Life College Plan offers guaranteed growth that isn’t impacted by the stock market. You know exactly how much money you’ll have at maturity, assuming that all premiums are paid.
Think about what you’re most comfortable with. Are you okay with taking on a little risk, or do you want something stable? Would you like to limit funds to college use only?
What if something happens to me before my child starts college?
With a 529 Plan, if the unexpected happens to you before you’ve finished your planned contributions, your child is at risk for not getting all of the money to fulfill the planned goal. With the Gerber Life College Plan, if something happens to you before your policy reaches maturity, your child as beneficiary would receive the payout in full, regardless of how much you’ve actually put in.
If you’d like to discuss kids’ college funds and whether a Gerber Life College Plan could be right for you and your family, we’re here to help. Just call drop your question in the comment box below.
Whatever you decide, it’s best to start early. You’re protecting and preparing your child for his or her future in every other way, so it makes sense to take the final step and make sure that your child will be financially prepared as well.
Have questions about your college planning options? Call Gerber Life at 1-866-503-4487 today. Or drop your question in the comment box below.