770 Account for College Savings
College Savings – 529 Plan V.S. Infinite Banking Concept (IBC).
Before reading this blog, if you haven’t seen my video or read my blogs explaining what a 770 account is, then I would advise you to stop and watch/read that video/blog first – so you will have a better understanding of what I will be talking about here.
When we think about “saving for college,” the first thing we think about is the 529 Plan. There are some others that may think UTMA or UGMA accounts, but if you ask a financial guru, he will automatically tell you about the 529 Plan.
Why are they so popular? Well, because they have tax benefits. Once money is deposited in a 529 account, it grows tax-free, and when the money is withdrawn for college, it is not taxed! Sounds like a great plan, doesn’t it? What’s not to like? After all, it was specifically created to save for college.
Now, I don’t want to be the bad guy who is always carrying bad news…. but it is good to know the pros and cons of every plan. Knowledge is power, and I pray God will give you wisdom to know what to do with this knowledge.
There are many restrictions that you will encounter when you open a College 529 Plan, and the number one concern is:
1) The money MUST be used for qualified educational expenses, otherwise there will be taxes and penalties.
But - What if your child earns a full scholarship or decides to be an entrepreneur instead of going to college? Can you use the money for non-educational purposes? No. Your money may be locked up for years, unless you decide to change the account beneficiary to another one of your children – or go back to college yourself.
With a 770 account, you can use the money for non-educational purposes; you can use the plan beyond college – for the rest of your children’s lives.
2) So your child does end up going to college. Phew! We won’t be paying all those penalties, but can you avoid having the funds count against your child when they apply for federal student aid? The answer is “no.”
In other words, you won’t get all the aid you possibly can get if you were responsible enough to save for your kids’ education. The government will look at your 529 plan and will determine that you “don’t need” that much aid after all.
With a 770 account, your cash value does not count against you in the Department of Education’s financial aid formula used to calculate a family’s “Expected Family Contribution” for federal student aid. So your 770 account won’t sabotage your chances for grants, scholarships, and interest-free loans from the government.
3) Is growth of your money guaranteed?
You probably already know that a 770 account comes with guarantees, but how about a 529 Plan? I mean, with all those restrictions, there should be a good guarantee on your funds, right? You would think! But no – unless you have the money sitting in a money market account. However, most people invest in mutual funds, thinking that their money will grow faster, which creates another restriction:
4) Unlike 401(k)s, IRAs, etc., IRS rules for 529 Plans only allow you to make ONE EXCHANGE or reallocation of assets per year, at the beginning of the plan year. So if you decide your plan is losing too much money – or making too little – too bad! If you did a little adjustment in January and your fund tanks in February, you have to wait eleven very long months before you can do much about it. If you make changes more than once a year, you will incur severe tax consequences.
An article on MSN.com entitled “The Great College Savings Fiasco” noted, “… many parents who have invested in 529s, counting on the market to cover the soaring costs of college, would’ve been better off putting the money under their mattresses.”
5) You have planned to send your child to college for many years, and you have put a plan together to achieve that – but what if something goes wrong and you pass away? Can your plan be carried out if you die prematurely? The answer is “no.”
Many families avoid talking about this, but that is a critical question.
With a 770 account, your plan comes with a death-benefit that can make the plan self-completing.
So what are the cons of a 770 account as a college fund? There is no perfect plan – this is not a “too good to be true” kind of plan. It has some cons.
a) You have to make contributions for at least 10 years in order for this to be worth it. After all, you are buying a life insurance policy, so it takes some years for you to break even or capitalize the system. If you do it for less than 5 years, you will probably lose some money.
b) You can’t change the amount you want to contribute every year. There can be some flexibility, but you have to keep the contribution at a certain level every year.
c) You can’t buy a “Participant Whole Life Insurance” policy on your children, without having a life insurance policy yourself. The underwriters will only allow you to get a 770 account for your children if you have at least 2x the coverage that you will be getting for your children.
Now, some people have asked me – who is the owner of that policy?
The parent is the owner, but it can be transferable to the children at any point once he/she turns 18. This will not be automatic - very few young people know how to manage their money at age 18, so you can select the best time to transfer the ownership of the account.
And when is the best time to do that?
I recommend turning the policies over to your children once they’ve demonstrated financial responsibility – for example: taking a policy loan to make a purchase, and setting (and meeting!) a repayment schedule of their choosing.
My goal and dream is that my client’s children and grandchildren will never need to use the services of a bank, finance company, or credit card company, other than to have the convenience of a checking account and debit card. They will be using banks only for their convenience, and will not waste a big percentage of their income (which on average is about 20%) to pay interest to someone else.
That is possible by starting a 770 account, or participant whole life insurance that has been structured in a way that will let you maximize your cash value and minimize your death benefit. If you don’t know what I am talking about, please watch my other videos that explain what a 770 is and how to structure a 770 account permanent life insurance policy.
I also created a video on YouTube with some real numbers for a 5 year old child, so you can check it out at: 770 account for College Savings (1 of 2)
Thank you for reading.
God bless you
Edgar I Arceo
CEO of the Arceo Financial Group. www.arceofinancial.com
1616 Westgate Circle, Suite 359
Brentwood, TN 37027