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Why Military Families Should Reconsider Using 529 College Savings Plans

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The 529 College Saving Plan is often one of the most common tools talked about in the world of financial planning.  Think about it, what’s more important than taking care of your beloved little ones and ensuring they are set up for success in life. Well… I’d often say taking care of yourself financially first so that they don’t have to take care of YOU later in life, might be a slightly more important priority, sometimes we just need to have the peace of mind that college is going to be taken care of.

In comes the easiest sale in the world of financial planning for financial advisers and institutions.  The 529 plan.  It offers tax-deferred growth and tax-free withdrawals for all qualified college expenses! Truly, this is great and if you already have one, be happy about it.  There are plenty of ways we can make this an effective tool for you later in life.

However, when we are thinking more specifically about our military community, do the majority of parents really need to get a 529 as the first option for college savings?  There are lots of ways to save for college that will give you the exact same benefits as a 529 without any lack of flexibility to your greater financial goals.  Lets take a look at a few of the downsides one should consider before entering into a 529 plan.

529’s are better suited as an Estate Planning tool.

– Unlike an IRA with small yearly minimums for a retirement plan, 529’s can take much larger contributions without being subject to the Gift Tax.  So, are young parents going to be making these larger contributions, most likely not.  Usually, they’ll be making $100-$500 monthly contributions depending on their budget.  Then who on earth do these gifts benefit?  Grandparents!  529’s are great if Granny has a bunch of money she wants pass to her grandchildren for college, but not ideal for parents to do a monthly allotment.  Our military members are often focused on sending their children to college.  A noble goal, but that $100-$500 often should be directed elsewhere.

529’s can count against Financial Aid.

– Qualifying for financial aid is determined by a number of factors.  Income is one, but 529’s are also sources of available assets.  Parents have to list most of their financial investments on the FAFSA form, regardless of whether or not those assets are meant to pay for college.  So they certainly have to report 529’s.  Sounds like a double edged sword to me; a vehicle meant to help with college ends up hurting a middle class family’s ability to qualify for the aid that is readily available.  Most military income levels put them at a level to qualify, and most military assets are in retirement funds that need not be reported on the FAFSA form.

Most military qualify for the post 9/11 GI Bill.

​- When used properly, parents can significantly leverage this amazing benefit.  ​Not that they shouldn’t have assets available for college in a multiple child scenario.  However, there are better places to save that money for college that will give parents similar tax benefits while also allowing more flexibility for using the funds rather than only for educational costs.  They would have the freedom to use the money for retirement, if it ended up not being needed for college.  529’s get taxed and penalized on gains if not used for qualified college expenses.  If possible, Military should leverage the Post 9/11 GI Bill and focus more on saving for their own retirement rather than the assumption that their children will need it for college or even attend college at all.

What happens if your children don’t need college savings money?

If you have more than a couple kids, chances are you will need to dip into savings as the GI Bill won’t cover everything for all kids. But, do we ever consider the chances that the children of military parents (if they decide to attend college at all) may qualify for numerous scholarships?  They may end up in ROTC, directly enlist and qualify for the GI Bill themselves, or do what I did and attend a Military Academy. College was free for us!  Well sure, we paid for it in different ways but it was nice not to have to dig into my parents’ savings.  If one of these scenarios happens with your child, do you want to have 10’s of Thousands of dollars locked up in a vehicle with minimal flexibility?  In fact, if you want to use the money for something other than college, not only will you have to then pay taxes on the gains but a 10% penalty to the IRS as well.

The primary question with any financial plan should always be “what is best for us NOW, at this second, going forward in regard to saving and investing?”  For the many in the military community with children, the easy answer would be to buy a 529 plan through a well known bank we are all members of.  Its the easy sale.  But the better solution is to implement a plan that will encompass saving for college without negatively impacting your other financial goals.

So, let’s find a solution that will not count against your financial aid package.  It also won’t penalize you for using the money for other financial needs, and it will be flexible enough to get the same tax benefits for you, regardless of how you use it.

I love that we want to do everything for our children.  But sometimes it’s easy to forget the bigger picture.  With a “Wholistic” financial plan, I’m pretty confident we can do it all.  

Are you in a situation where you need to plan for your children’s college?  Do you already have a 529 plan?  Please visit my website to schedule a free consultation and we’ll talk about the best college savings solution for your family.

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