Planning for educational expenses is big business as mutual fund companies, colleges, and states emphasize the importance of putting away money. And the 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 as long as they are used for 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.
A common complaint about 529 plans is the narrow number of investments and the once-a-year allocation change rule. On the other hand, variable annuities often have more investment choices and allow you to make frequent changes to meet your individual requirements. Variable Annuities are sold by prospectus only. Please carefully consider investment objectives, risks, and expenses of the Varible Annuity and its underlying sub accounts before investing. For this and other information please call to request a prospectus. Please read it carefully before investing.
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 But unlike the 529 plan, money withdrawn from an annuity for something other than educational use will not be hit with a 10% penalty (assuming you are over 59½).v Therefore in case your grandchild decides not to go to college or you need the cash for an emergency, the funds are available.
Variable annuities have several variations of a guaranteed death benefit.v 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 $55,000 ($110,000 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.
If you have a grandchild who is 7 to 10 years away from starting college, contact me so we can discuss how to best prepare for his or her educational needs.
