ADVISOR
FINANCIAL SERVICES
Colorado Financial Advisor
Investing for College
Colorado Financial Advisor Investing for College
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Colorado Springs
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529 Plans Section 529 college savings plans allow you to invest in the stock market and bond market for the long term. You can choose from different plans such as age-based plans, which gradually reduce risk over the years, by moving more assets from stocks into bonds. Or you can choose a fixed portfolio such as aggressive growth, moderate growth or conservative growth, that maintain a fixed percentage in stocks and bonds. One big disadvantage with 529 plans is that you can only change your investment choice once a year. This could be a problem if the economy goes into a long recession, or there is a terrorist attack or other event that causes the stock market to drop sharply, or you would like to do more active management of your investments. 529 plans are basically long-term buy-and-hold investments, based on the hope and expectation that the stock market will rise over the years. There is no guarantee that the stock market will rise, and there have been long periods such as from 1966 to 1982, when the stock market went sideways for about 16 years when inflation and commodity prices were high, placing a drag on the economy. If you want to choose a 529 plan, we recommend investing directly in a plan that does not charge sales commissions. Why pay a broker a sales commission to put you into a 529 plan when they cannot manage the account since the rules only allow a change once a year? You can read the information on the plan website and choose the plan yourself and avoid the sales commission. If you invest in a 529 plan in your home state, there are tax deduction advantages, that reduce your out-of-pocket expenses. Invest before December 31st to get a tax deduction for the current year. For Colorado residents, we recommend the CollegeInvest Direct Portfolio College Savings Plan. You can enroll online. Call us for a Free Consultation. Coverdell Education Savings Account A Coverdell Education Savings Account (ESA) can be opened at many brokerage firms. We recommend using Scottrade. With an ESA, you can invest in any stocks, bonds, mutual funds or ETFs that you choose, and you can make changes and adjustments to the account at any time that you want. There are investments available that can make a profit in a rising, falling or sideways stock market. This is valuable in protecting and growing your account, especially with a volatile stock market. You can hire an investment advisor to manage or advise you on suitable investments for the ESA. The main disadvantage of an ESA is that you can only contribute a maximum of $2,000 per year, you can contribute more to a 529 plan. Call us for a Free Consultation. You can also put some money into a 529 plan, into conservative investments, and then put some money into the ESA into more aggressive investments. You can also invest ESA money into alternative investments outside of the stock market, such as land, trust deeds, tax lien certificates, mobile homes, cabins, water rights, private businesses, etc. Student Housing Rental Property Another strategy for college investing is to buy a rental property near a college and rent it to students. When your child is ready for college, they might live in the property for 4 years or you could sell or exchange the property for another rental property near another college that your child chooses. After college, you can sell the rental property to help pay for college costs and student loans. Variable Life Insurance for College Savings One problem with saving for college with annual contributions is that if the parent dies or becomes disabled and can't work, then the college funds won't be available. Parents can purchase a variable life insurance policy that builds cash value based on investment choices inside the policy. An investment advisor can be hired to manage the investments, which grow tax deferred. If the parent dies, or becomes disabled, then the life insurance policy can still pay the cost of college. Otherwise, the parent can add contributions to the policy to help build the cash value. You can buy variable life insurance policies with low or no sales commissions (low load or no load policies) so that the cash value builds more quickly, rather than paying a large sales commission to an insurance agent up front, which greatly reduces the cash value and compound growth of the policy. Equity Index Life Insurance for College Savings Equity index life insurance has a powerful advantage of gaining value during a rising stock market, while protecting your cash value from declines in a falling stock market. Even in a declining stock market a minimum interest rate is guaranteed by the insurance company. Many people do not know about this important product choice. At college age, tax-free loans or withdrawals can be made against the cash value of the life insurance policy. After college, the parents can again contribute to the policy to use it to accumulate additional retirement funds, that can also be removed at retirement age through tax free loans or withdrawals. One advantage of this strategy is that the value of a life insurance policy is not included as an available asset when applying for student aid. Call us for a Free Consultation to discuss college investing alternatives. |
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