Educational Funding in Your Retirement Plan

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How Educational Funding Fits Into Your Retirement Plan

For many families, helping a child or grandchild with their education is just as important as saving for their own retirement. The key to success is starting early and choosing the right savings vehicle. A consistent monthly contribution, even a modest one, can grow into a substantial college fund over time. Let’s explore some common options and how they fit within a larger financial strategy.

The 529 Plan

The NC 529 Program is a state-sponsored savings plan designed specifically for education. It offers significant tax advantages but also has important limitations.

  • Pros: The primary advantage is that the funds grow and can be withdrawn completely tax-free when used for qualified education expenses. The investment options have improved over the years, and any leftover money can be rolled over to another beneficiary.
  • Cons: Contributions are made with after-tax money and no longer offer a state tax deduction. Once you put money into the plan, you lose a degree of control; it belongs to the beneficiary for educational purposes. Withdrawing the funds for non-educational reasons will result in taxes and a penalty on the earnings. A 529 plan is also considered an asset that can count against the student when applying for need-based financial aid.

Uniform Gifts to Minors Act (UGMA) Account

An UGMA account is a custodial account used to hold gifts for a minor. While it has its uses, it is generally a poor choice for college savings.

  • Pros: A UGMA can be useful in specific inheritance situations where a grandparent wants to set aside funds for a grandchild’s future, not necessarily for college.
  • Cons: UGMA accounts offer no tax advantages and are heavily counted against a student for financial aid purposes. The most significant drawback is that the funds legally belong to the child and must be turned over to them when they reach the age of majority (typically 18 or 21). At that point, they can use the money for any purpose, and you have no control over their decision.

An “Out-of-the-Box” Solution: Cash Value Life Insurance

A less conventional but powerful strategy involves using a cash value life insurance policy on the child, structured for growth rather than a large death benefit.

  • Pros: When structured correctly, the cash value grows tax-deferred and can be accessed tax-free through policy loans for college expenses. The policy’s cash value is not considered an asset for financial aid calculations. This strategy also provides a death benefit and can become a valuable financial asset for the child later in life, even serving as a supplemental retirement plan if the loans are repaid.
  • Cons: This is a long-term strategy that requires consistent premium payments over many years to be effective. It is not a solution for those who need to save for college in a short timeframe.

Making the Right Choice for Your Family

The best way to save for education depends on your specific financial situation and long-term goals. These decisions are a critical part of your overall financial and estate planning.

If you would like to discuss how these strategies can be integrated into your retirement and legacy goals, our attorneys can help. Call our office at (919) 256-7000 to schedule a consultation.