The 529 Accelerator
The “529 Enhanced Replacement Plan” – A College Savings Plan With More Benefits and No Downsides
If you are looking to save money for higher education, a traditional “529” plan is probably one of the worst ways to do. Yet it is highly touted by investment advisors, because they are not familiar with the alternatives. (Another less than ideal way to save, in Florida, is the Florida Prepaid Plan, but let’s leave that for later.)
A better way is what I call a “529 Enhanced Replacement Plan,” which isn’t a “529” plan at all. But first, let’s understand what a “529” is, and the drawbacks.
What is a “529” plan? They vary by state, and the details vary, but the general concept is similar among all of them:
- Parents (and anyone else who want to give a child a gift) put after-tax money (that is, money they have already reported as income and paid income taxes on) into a specially created investment account, and then hope it grows over time.
- If all the right conditions apply (and there are many), the child can use some or all of the money to pay for some school expenses. If the money has grown inside the plan over the years, like it is supposed to, there are no income taxes due on the gain.
- If you violate some of the rules, you can be heavily penalized, and taxed. This applies to how you put money in, how you take it out, and what you spend it on. What makes sense to you may not make sense to the government, and they write the rules.
- If you end up applying for financial aid of any sort, for any reason, the funds you’ve saved in a 529 plan can severely reduce the amount of your award.
- There is a limit as to what you can put in.
- The money in the 529 plan needs to be managed in order for it to grow. If managed poorly, the plan can lose value. Everything is usually invested in the stock market, and the stock market goes up and down. Even after a substantial number of years, there is no guarantee that you will have more money than you put in, and you could have less. Some have high management fees.
- There are dozens of ways to mess up a 529 plan.
“529” plans are essentially glorified investment accounts, dependent on stock market returns.
(A Florida Prepaid Plan, on the other hand, will at least return what you put in, with no interest, if you don’t use it. But the amount you can put in is very limited, and so are the places where you can use the funds.)
My solution—the “529 Enhanced Replacement Plan.” It is a way to save for college with none of the downsides of a “529” or Prepaid plan, with many advantages:
- The money is income-tax free coming out. (You use after tax money to fund it, just like the other plans.)
- You can spend the money on whatever you want—college-related, or not.
- You continue to have money in the plan AFTER college is over, and it continues to grow, for you to use in middle age, or retirement, income tax-free.
- The growth is automatic, and guaranteed. It never loses value, and you don’t have to manage it. Almost always, the growth exceeds the guarantee. But it always grows, every year, irrespective of the financial markets.
- You can put in an unlimited amount. You can decide how much to contribute, and when to contribute. You can do it all at once, or year by year, and vary the amount contributed.
- It doesn’t count against you when you apply for financial aid or awards.
- There are very few rules.
- It is easy.
So why don’t more people use it?
Because it pays very little in commissions to those who sell it (so most advisors don’t bother to even learn about it), many advisors are simply unaware of it, and it has to be designed correctly in order to work properly. Plus, it does not have a “sexy” name with numerals in it—it is basically a well designed guaranteed investment inside a life insurance framework. But it has to be designed specifically for each client, with an advisor who is will work hard to create a structure that pays the lowest possible commission to the advisor, to put more of your money to work for you.