Parents and grandparents often want to do something to help Junior build a college account and the 529 Plan can seem the natural choice.  After all, how can you beat tax-deferred growth – and penalty-free access for college expenses?

Not so fast.  Here are five factors you need to know before taking the 529 plunge.

1. Risk – the money you put into a 529 plan is exposed to market risk
2. More Risk – there is no way to lock in gains – so bad years can wipe out good years – or worse
3. Tax – money is taxable as withdrawn.  It may be at Junior’s rate – but it will increase the tax on Junior’s lawn-mowing money
4. Use-it-or-Lose-it – If Junior doesn’t go to college – the money can’t be accessed without penalty until retirement.  No trade school – no business seed capital
5. FAFSA Penalty – The FASFA form inventories your – and Junior’s – income and net worth to determine how much financial aid your may qualify for – versus the “Expected Family Contribution.”  Money in a 529 Plan reduces financial aid dollar-for-dollar.

Here’s an alternative.  Put money into an indexed universal life insurance policy for Junior.

• It’s very low cost – probably in line with the costs/expenses in a 529 Plan
• The money will grow tax-deferred, but is accessible tax-free
• There is no risk of loss of principal or gains
• Junior will have a bit of life insurance and locked in his “insurability” for life
• He’ll get a free long-term care benefit that probably won’t be needed but is nice to know is there
• Even if it is used for college – the plan can continue – and become a sweet retirement account or be accessed for another life need, tax-free
• The accumulated value IS NOT COUNTED on the FASFA form and therefore does not reduce qualification for financial aid

General rule:  Anything that has a government stamp on it is usually better for the government than for you.  The 529 is the centerpiece of that theory.