When first introduced in the late 1980s, 529 College Savings Plans were heralded as a safe, secure means to save for a child’s college education. For parents of an injured child, 529 plans may appear a tempting option to cover the child’s education costs. But how does a 529 plan compare to a structured settlement annuity when it’s time to pay for college? The answer comes down to the safety and security of the underlying assets.
A recent article (December 18, 2011) in the Los Angeles Times discussed the track record of 529s and found that timing has much to do with how a 529 account ultimately performs. According to the article, parents investing $1,000 annually in 1979 would have had more than enough money to fund their child’s four-year public school college education (4.27 years) by the time the child reached 18 (1997). Parents who invested $1,000 a year beginning in 1990, however, would have only saved enough money to fund less than a year (0.72 year ) of public college costs by the time the child reached 18 (2008). Some of the disparity had to do with increasing college costs, but the article found that most was the result of eroding stock prices and stock market gyrations.
Most 529 plans are invested heavily in age-based mutual funds, with the funds weighted in stocks, particularly while children are young. If the stock market does poorly, so do the 529 portfolios. Parents typically are allowed to change mutual funds within the plans once a year so if stocks are falling and a fund is losing money, parents can only sit and watch while the value of their account sinks.
The Annuity Option
Parents with an injured child who is eligible for a structured settlement have another option to pay for their child’s college education. They can choose to receive a lump sum payment from the annuity or T-bill yields when the child is ready to begin college. Whether the child is a newborn or a teenager, parents can be assured the amount of money they specify in the settlement will be available when the time comes. Payments are guaranteed so they are not subject to stock market fluctuations.
The 529 plans are funded in pre-tax dollars and the money grows federal tax and generally state tax-free as long as withdrawals are used for qualified college expenses. Structured settlement annuity or T-bill yield payments are always 100 percent federal and state tax-free, regardless of how the money is eventually used.
Security of principal and guaranteed payments are what make annuities attractive. Plaintiffs can determine upfront how and when they will receive payments. Even if the stock market has a bad year (or a bad decade as we’ve just experienced), annuity payments will not be affected. With a 529 account, parents must cross their fingers and hope the markets will have performed well enough to cover their child’s college costs. Recent history shows that’s a big maybe. Annuities give parents the peace of mind of knowing that the money will be there when their child is ready for college.
Read the full L.A. Times article, “529 College Savings Plans Have Their Downsides,” here.