Using an annuity to help pay for college

Planning for a child’s or grandchild’s future often means balancing more than one financial goal at a time. Along with helping pay for college, many families are also focused on building long-term savings, preparing for retirement and staying financially flexible as life changes.

While a 529 plan remains a popular choice for helping fund a college education, it is not the only savings tool available. Including annuities in a diversified financial strategy not only can help repay student loans, but can also offer a way to build tax-deferred savings for retirement, protect funds from market loss and create guaranteed income for the future.

529 plans

A 529 plan is an education savings plan sponsored by a state, state agency or eligible educational institution. It can offer several advantages:

Potential advantages

• 529 plans can be purchased not only by parents, but also grandparents and other relatives
• Interest in the 529 plan grows tax-deferred
• Any qualified withdrawals made are tax-free
• As a student reaches college age, the accumulated funds can be used to pay for qualified expenses including tuition, room and board, books and computer equipment
• Many states offer tax benefits for contributions to a 529 plan

Additionally, contributions grow tax-deferred and qualified withdrawals are generally tax-free, making these plans a popular option for college funding. However, because many 529 plans are invested in the market, account values are exposed to market loss and withdrawals for non-qualified expenses may be subject to taxes and penalties.

Limitations to consider

While 529 plans have many advantages and can be useful in preparing for the future, there are limitations to consider as well:

• An account can lose value due to market downturns depending upon the allocations selected
• You may pay penalties on any earnings if the money is not used for education purposes
• A portion of the account balance may affect the amount of financial aid awarded
• Many plans include yearly fees and administrative costs

Plus, if your child receives a scholarship, you may only need a portion of the money saved in your 529 plan. If there are funds remaining after your child is finished with college or decides not to enroll in school, the beneficiary can be changed to another family member. If there are no other family members still in school or left with college debt, you may have to pay penalties to withdraw your savings for other purposes, depending on the rules of your state’s 529 plan.

How an annuity can complement a 529 plan

For families looking to diversify their college savings strategy, a fixed or fixed indexed annuity can grow tax-deferred and provide protection from market downturns. So when the market is up, your money can grow, but when the market is down, your annuity is protected from market losses. If your child receives a scholarship or decides to pursue another path besides college, the money in your annuity can be accessed for other purposes down the road.

Since annuities are designed to help you reach long-term savings goals, there are a few things to keep in mind:

Helping pay tuition

As with many financial plans, there is no time like the present to begin saving. An annuity purchased when your children are young can assist with future tuition costs. One option would be to purchase an annuity with a Withdrawal Charge period that coincides with the length of time it takes for your child to reach college age.

For example, if on your child’s 8th birthday, you purchase an annuity with a surrender charge period that ends in 10 years; your child will be 18 and entering college. At this time, you’ll be outside the Withdrawal Charge period, meaning you’ll have full access to the annuity’s value to supplement tuition payments. Keep in mind that withdrawals made before age 59½ are typically subject to a 10% IRS penalty, so it’s important to wait until you reach that age to help avoid the additional fee. Also remember that any taxable amount you withdraw from the annuity is generally included in your taxable income for the year, which could affect your overall tax situation.

Paying off student loans

Graduating with student loan debt comes with tremendous responsibility, especially since interest continues to accumulate as time goes on. One way to help reduce a student loan balance is using income payments from an annuity.

• Over time, your premiums grow tax-deferred and then at a later date, you can elect to begin receiving payments. Depending on the type of annuity you choose, you can receive income immediately or several years later. These funds can then be used to help reduce any remaining student loan balance.
• Remember, some annuities specify that you must be a certain age before starting income payments, and there can be tax penalties for taking withdrawals prior to age 59½.

As you begin to take steps toward saving or paying for college, consider talking to your financial professional about which solutions fit your individual needs and objectives and can help make higher education accessible and more affordable. By starting the conversation now, you can help bring the dream of your child’s or grandchild’s higher education within reach, while still helping meet your other long-term financial goals.

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Athene Annuity and Life Company (61689), headquartered in West Des Moines, Iowa, and issuing annuities in 49 states (excluding NY) and in D.C., is not undertaking to provide investment advice for any individual or in any individual situation, and therefore nothing in this should be read as investment advice.

Any information regarding taxation contained herein is based on our understanding of current tax law, which is subject to change and differing interpretations. This information should not be relied on as tax, legal or financial advice and cannot be used by any taxpayer for the purposes of avoiding penalties under the Internal Revenue Code. We recommend that taxpayers consult with their tax or legal professionals for applicability to their personal circumstances.

Guarantees provided by annuities are subject to the financial strength and claims paying ability of the issuing insurance company.

Withdrawals and surrender of taxable amounts are subject to ordinary income tax, and except under certain circumstances, will be subject to an IRS penalty if taken prior to age 59½.