Tax-Smart Ways To Save And Invest For Your Children’s College And Financial Future

When my oldest child was just a baby, my parents approached me about starting a 529 plan for him – a tax-advantaged savings plan designed to help pay for education – as they wanted to start putting a little money aside each year for his college education.

Knowing very little about 529 plans or other options at the time, I was thrilled and grateful for their offer of financial help for my child’s educational future, so we moved forward and opened up the 529 plan.

As my other two kids came along, we did the same for each of them and went along happily with our lives, enjoying the email I would get each year around their birthdays announcing a new deposit had been made.

My husband and I started putting money into the 529 accounts as well and thought that the 529 plans would be our core path to saving for our children’s future.

It wasn’t until I started learning about real estate investing that I discovered all the other options out there, not only for us to grow our wealth and achieve financial freedom but also for us to save and invest for our children, to truly set them up on a path of financial success.

As I dove into my journey, the same questions kept circulating in my mind. Should I keep the traditional 529 plan that I had set up? If one or more of my kids choose not to go to college, what happens to that money? Is there an easy way to secure generational wealth and set them up for success as early as possible? Are there other / better avenues for helping our kids along the way financially?

In this article, we’re going to dive into not just the 529 plan, but multiple options, and we’ll share the pros and cons of each strategy so that you can begin saving and investing for your children’s future in a way that aligns with your goals.

Here are the strategies we’ll cover:

529 Plans
Whole Life Insurance Policies
Qualified Retirement Plans
Investing in Real Estate

As with any financial information presented here, we’ll take a moment to pause here to add in the disclaimer that we are not tax professionals or financial advisors. With any financial plan for your family we highly recommend you consult your tax accountant and financial advisor before implementing anything.

Now without further ado, buckle up, because we have a LOT of great information to share with you!

Strategy #1 – The 529 College Savings Plan

These days, 529 plans seem to be the most common and well-known options out there for parents to put aside money for their kids’ future education.

At a high level, a 529 plan is an investment account for after-tax dollars provided from parents or caregivers, which are put aside into an account in the child’s name. The money in the account can be pulled out (tax-free to the child) for education related expenses.

You can use a 529 plan to pay for college, K-12 tuition, apprenticeship programs, and student loan repayments. If using a 529 plan to save for college, your savings will typically have minimal impact on financial aid eligibility.

529 Plan – Pros To Consider

#1 – Federal Income Tax Benefits

529 plan investments grow on a tax-deferred basis, and distributions are tax-free when used to pay for qualified education expenses, including college tuition and fees, books, and supplies, some room and board costs, up to $10,000 in K-12 tuition per year, and up to $10,000 in student loan repayment per beneficiary and per sibling.

#2 – Low Maintenance

A 529 plan account can be opened online or through a licensed financial advisor. Families who prefer to “set it and forget it” can select an automatic investment plan linked to a bank account or payroll deduction plan. The ongoing investment management within a 529 plan is handled by the program manager.

#3 – High Contribution Limits And High Aggregate Limits

Unlike other savings plans, such as a Roth IRA, 529 plans have no annual contribution limits and high aggregate limits. Maximum aggregate limits vary by state, ranging from $235,000 to $529,000.

529 plan contributions are considered completed gifts to the designated beneficiary for tax purposes. In 2022, up to $16,000 qualifies for the annual gift tax exclusion. There is also an election to contribute as much as $80,000 in one year without generating a taxable gift if the contribution is treated as if it were spread over five years.

#4 – Favorable Financial Aid Treatment

When a dependent student’s parent or a dependent student owns a 529 plan, it is reported as a parental asset and has a relatively minimal effect on financial aid eligibility. Distributions from parent- and student-owned accounts are not counted as income on the FAFSA (Free Application for Federal Student Aid), which can be a substantial benefit.

529 Plan – Cons To Consider

#1 – Must Use Funds For Qualified Education Purposes

Non-qualified distributions are subject to income tax and a 10% penalty on the earnings portion of the distribution. However, there are exceptions to the penalty if the beneficiary gets a scholarship, attends a U.S. Military Academy, dies, or becomes disabled.

#2 – No Self-Directed Investments

A 529 plan account owner must select from a menu of investment options offered by the 529 plan. This typically includes static investment portfolios that aim to achieve a targeted level of risk, individual fund portfolios and age-based portfolios that automatically shift asset allocation as the beneficiary gets closer to college.

#3 – Fees

The more families pay in 529 plan fees, the less they are able to save for college. Direct-sold 529 plans are less expensive than advisor-sold 529 plans, but expenses can also vary among 529 plan portfolios. It’s important to research your options and find a low-cost 529 plan option that meets your college savings needs.

#4 – Ownership Rules

The 529 plan account owner, not the beneficiary, has legal control of the money in the account. The account owner can easily change the beneficiary at any time, or worse, they can take a non-qualified distribution and liquidate the plan.

This might become an issue if a parent is depending on a grandparent or other relative’s 529 plan to pay for their child’s college education.

Is A 529 Plan Right For Your Family?

For your family, some of these benefits will outweigh the drawbacks, making this a good choice moving forward. For others though these limitations will cause you to look elsewhere for options. What if your child isn’t college bound?

What if your child has a disability and won’t need higher education throughout their life? What if your child moves out of the country and will no longer access United States higher education? There are a lot of reasons that a 529 plan may not be the best option for you and your family. Read on to learn about some other options.

Strategy #2 – Whole Life Insurance Plans

As we get into this next strategy, you’re probably thinking, life insurance? How is that supposed to help me save for my kids’ future?

We were in the same position until we dove deep into this option and saw some of the amazing long-term benefits of investing in a whole life insurance policy, becoming your own banker through infinite banking, and unlocking the option to borrow against this policy to amplify returns through investing in assets like real estate.

What Is Whole Life Insurance?

In a nutshell, whole life insurance is a type of permanent life insurance that can provide lifelong coverage. The policies usually combine an investment account called “cash value” and an insurance product. As long as you pay the premiums, your beneficiaries can claim the policy’s death benefit when you pass away. That is the insurance policy portion of this.

The second piece of the whole life insurance policy (and this is where the magic comes from) allows you to leverage something called infinite banking – a process where you essentially become your own banker.

This option isn’t for everyone, as it does require serious commitment and enough earnings and cash flow to afford the monthly premiums, as well as a large amount of money has to be contributed to the insurance policy before borrowing against it.

However, if these hurdles don’t deter you, then read on to learn more about whole life insurance.

To start, take a predetermined amount of money and frontload a whole life insurance policy for each child. As you do need to have the immediate capital available, this can be a deterrent for some families.

After depositing the funds into the policy, you then take a loan out on the policy for the maximum possible (usually 80% is available immediately). It’s important to note that the loan on the policy you take out isn’t interest-free, so you’ll need to factor that rate into your calculations.

Once you have that loan in cash form, you can invest it into a rental property, syndications, or other cash flowing investments. You then use the cash flow to pay for the policy premiums (which will stop when the child turns 18, even though the policy will last their entire lifetime).

Once your child turns 18, you then have a whole life policy they can keep with them, as well as a cash flowing investment. If all that sounds a bit confusing, you’re not alone. Let’s break it down below.

Whole Life Insurance – Pros To Consider

As mentioned, using policy loans, you can fund college tuition, pay for a car, start a small business, and even purchase real estate. The sky is truly the limit, making this strategy extremely flexible.

Taking a policy loan has the added benefit of teaching your child to make payments responsibly, while continuing to grow their cash value. And often, you can lock in competitive loan rates that are more favorable than most federal loans. If they choose not to go to college, your child still has countless options, unlike with a 529 plan.

An added benefit of the whole life insurance strategy is if you invest into syndications and put most of the funds back into yours (not your child’s) whole life insurance policies, you might be able to qualify for financial aid too, since colleges don’t count life insurance policy cash value toward your income/net worth.

Whole Life Insurance – Cons To Consider

One of the largest cons of the whole life insurance strategy is that it takes dedication over a long period of time. You have to have a clear vision and financial plan and then stick to it.

You do need to continue reinvesting the money into syndications or real estate over time, so it does tie up that capital for multiple years as your kids get older. However, the benefit to growing that money over those years is that you can take that initial investment and turn it into much more over time.

Additionally, the loan you take out on the policy does have an interest rate associated with it, and that cost does need to be calculated for.

Is your mind reeling yet with all these possibilities? Good! That’s exactly what we were hoping for. There are lots of options out there, so let’s continue on to the next strategy.

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Strategy #3 – Qualified Retirement Plan

Is your child a budding entrepreneur with an after school business walking the neighborhood dogs? Did they finally land that first high school job? Or do they help you with your own real estate (or other field) business? If so, then looking into a Qualified Retirement Plan (QRP) might be the perfect option for your family.

What is a QRP?

When your child starts earning income from their budding babysitting business, you can set up a QRP for them and start contributing that money into it. As long as it’s set up as a Roth IRA account, then the money will offer tax-free growth.

Roth IRAs are ideal for kids because children have decades for their contributions to grow tax-free. Another great benefit is that the Roth IRA doesn’t count against the ability to get student loans if your child decides to go to college.

How To Super-Charge QRPs Through Real Estate Investments

With a QRP, you can invest in leveraged real estate, as well as take loans out against the QRP too (just like with whole life insurance). There is so much flexibility with this method that it’s easy to see why so many families are using this option to grow their kids’ future savings.

Some of the drawbacks are that it’s not as easy as just putting money into an account for your child. They have to be earning income to be able to contribute to the account.

However, once it’s set up, it’s one of the best ways for your child to save tax-free money for their future needs. Another great benefit is that it doesn’t have to be used for education. This money can help them start a business, purchase real estate, or go to college as well.

QRPs vs. 529 Plans: Which One Is Right For You?

One main difference between a QRP and a 529 plan is that the qualified retirement plan is in the child’s name, and they as the owner of the account have full control of it. When you set up the account, you can determine at which age they can have that full control over the account. Most states default to 18, but some, such as California, allow that age to be set at 25 years old.

In contrast, a 529 plan is controlled by the owner of the account – usually the parent or caregiver. This means that the owner can choose how to distribute or allocate the funds to the child.

Depending on your specific child, this could be a pro or a con. For a mature child who has been running their own business for a few years, having their own control of a QRP account would make more sense.

For a child who may need a bit more help and guidance, staying in control of the funds as the parent, would most likely be more prudent.

One last difference we’ll address is that the child’s ability to get student loans may be impacted by having a QRP account. Since the account owner is the child, those funds will be accounted for when determining student loan eligibility, unlike with a 529 plan.

With that, let’s dive into our final strategy, which is one of our favorite areas – real estate investing!

Strategy #4 – Invest In Real Estate

Spend long enough in the real estate space and I’m sure you’ll hear about this popular option – purchasing real estate with the intent to pass it along to your kids at an appropriate time. Read on below to find out why a lot of savvy real estate investors are flocking to this popular idea.

You’re out there living your best real estate life; purchasing single family homes/duplexes/small multifamily and you think to yourself, this could be a great investment for my kid in the future.

Thus is born the intention that you purchase the asset and that it will eventually become your child’s asset to control, manage, and/or liquidate at an appropriate age or time. This can be a great way to not only set them on a path to financial success but also teach responsibility along the way.

Single Family / Small Multifamily Investment Option

Say you have a newborn baby or a toddler, just a couple of years old. One option is to purchase a single family home and plan to pay it down on a 15-year schedule. When your child turns 18, that house could become theirs, resulting in having a paid-off asset. That house can be sold outright to pay for college, start a business, etc.

Alternatively, the house could be kept and instead use the cash flow from the rental to pay off any school debt they may incur. Additionally, the property could be refinanced to pull equity out, and then your child could start buying assets of their own with that money.

The deed to the home could stay with you as the guardians / parents until whatever time you dictate allowing that asset to pass to your child.

This option allows you to begin building wealth for your child as soon as they’re born. Along the way, a lot of lessons can be taught about responsibility, management and financial independence. Win-win!

Invest In Real Estate Syndications

Another great option is to invest in real estate syndications with the intent that the capital and gains made through these transactions will eventually be used to help your kids along the path of their financial success.

For this plan to be truly successful, it does take dedication and a long term goal to reinvest the money back into a new syndication every time an asset sells. That way the initial investment continues to grow over time.

The concept here is similar to the whole life insurance plan, but without the insurance layer. You take an initial $50,000, invest that into a syndication, and keep investing that back into each new deal every 3-5 years as the deals cycle out.

While the initial investment is growing through this reinvestment process, you can either use the monthly or quarterly distributions as cash flow. OR, you can commit to putting that money aside into a high-yield savings account or some other continued growth vehicle.

This allows years for the money to grow while your children are young. When they reach a point when you would like to help out financially, you can liquidate your holdings in any one of your syndications.

This will take some time on your part as hold times are usually 3-5 years so you’ll want to be aware of when you anticipate needing the funds.

The best part of investing in real estate syndications is that it gives you a very low maintenance way to grow your money while your kids are growing up!

Key Takeaways

When it comes to preparing for our kids’ future it’s helpful to know what options are available. There’s no one size fits all for these decisions, and you have to find the path that’s right for your family. Before we wrap, let’s review each of the options we covered in a nutshell.

Summary of the Options

Strategy #1 – 529 Plan

Using this low maintenance “set it and forget it” tax friendly plan can be helpful if you are certain your child is college bound where you know the money will be used for the approved educational purposes.

With fees for using the money for non-approved items, this plan may not be best for families that want more flexibility and options.

Strategy #2 – Whole Life Insurance And Infinite Banking

Using a long term strategy, through a combination of opening a whole life insurance plan for your child and employing the infinite banking concept, you use a loan taken out from the insurance policy to purchase real estate or other cash flowing investments.

This allows the insurance policy to grow while your investments are also growing, resulting in funds available when your child comes of age.

Strategy #3 – Qualified Retirement Plan

A QRP is best used for kids who are entrepreneurial in nature as this plan allows kids to earn income and start putting it away into a ROTH IRA retirement account.

This money can then be used as they see fit when they come of age. Start another business, invest in real estate or go to college.

Strategy #4 – Invest In Real Estate

Through either syndications or other real estate investing, you can purchase cash flowing assets that can grow over time. Those assets can then be passed down to your children to either manage or liquidate as you see fit. This option has a lot of growth possibilities through the equity gained over many years.

Next Steps

No matter what you decide to do to help your children, you’re taking the most important first step in educating yourself on the possibilities. There are more options out there than you think and with just a little bit of time spent, you can find the best fit for your family.

Continue educating yourself on the best options by viewing the videos we have on our Youtube channel, reading past blogs on our website and accessing our social media channels where we’ll share tips and tricks on things such as these.

Also, for kids and grandchildren of our investors, we offer our popular Moneywise Kids series. This is an exclusive program open only to kids of our investors, where they get to learn about money, investing, starting a business and most importantly install a lifelong desire to live life on their own terms while having fun learning about how money can work for them! To learn more, start by applying for the Goodegg Investor Club.

We hope that some of these options will work for you and your family as you navigate the best path forward for creating long term wealth and abundance in yours and your children’s lives!