Life Insurance or Retirement
One of the most common mistakes in setting up a college fund is using a life insurance policy as a primary investment. Specifically, whole life insurance and variable life insurance, in addition to retirement, are incorrectly chosen as suitable vehicles.
Insurance agents often encourage taking advantage of the fact that life insurance or retirement allows for tax-deferred accumulation. Their theory is that if you bought the same mutual funds in a regular taxable account, you would pay taxes yearly on the growth. Thus, the insurance or retirement contract protects your growing college fund from tax erosion.
While this is partially true, the people who promote the use of retirement do not mention that you will have to pay income tax on the gains when withdrawing funds, plus a potential 10% penalty if you are under the age of 59 1/2. You may also face surrender charges if you withdraw funds from retirement early or cancel your life insurance policy.
They also do not mention that you can get better tax benefits even in a 529 account or Coverdell ESA (Educational IRA), with annual cost savings of 1% to 2% compared to an insurance or retirement contract.
Antiques and Artwork
While the appreciation of artwork and antiques can be significant, the opposite can be true as well. Unlike investments in stocks or bonds, which represent a tangible claim on real financial assets, the value of artwork and antiques is entirely dependent on people’s opinions.
The value of artwork and antiques can change drastically from day to day simply because there are no buyers for a particular type of item. Therefore, they are highly susceptible to things like fads, trends, and recessions.
While it may be fun to mix your appreciation for fine things with the growth of your net worth, this should represent only a small part of your overall portfolio, and should not be part of your college savings.
Gold and Other Precious Metals
For many people, gold represents the pinnacle of safety and security. It is real and tangible and has been in demand since the dawn of history.
However, the very tangible nature is exactly what can make precious metals a poor investment choice. The costs of acquiring and storing gold, especially in relatively small quantities, can wipe out any increase in value. Furthermore, holding gold in your possession, even in a secure place, can make you a target for theft.
Considering that gold has only earned 6-7% annually over the past twenty years, this type of investment seems to require more work than it is worth. If you really feel the need for some exposure to precious metals, consider buying a mutual fund that invests in reputable gold mining companies.
High-Risk / High-Return Stock Market Investments
While the promises of high returns are enticing, high-risk investments and strategies such as options, small companies, and international markets should be avoided. The main reason is that you have very little time to recover from investment mistakes as college approaches.
In particular, any type of investment where your “downside” is the potential for total loss should be avoided. This is true for many types of options like uncovered options and calls, as well as investments in small companies in unstable developing country economies.
Account
Your 401k
While your 401k account is a great investment vehicle for retirement, and even has investment options that rival your college fund, it should be avoided as a source for college assets. While the foundational investments may be acceptable, the cost and timing of accessing the funds can be disastrous for your broader financial picture.
For most people, their children will go to college within 10-20 years of their expected retirement. Taking a large distribution from what most consider main retirement assets can put them back at the starting line with little time to recover. Even taking a loan against the value of your 401k account typically freezes the underlying asset growth until the loan is repaid.
Worse than the loan is the idea of taking an actual distribution from your 401k account to pay for college expenses. By doing this, you will pay federal and state income taxes on the withdrawal, plus a 10% penalty if you are under 59 1/2. This can easily shrink a $10,000 distribution down to $5,000 or less.
Summary
In recent years, the government has encouraged parents to save for college by creating some very enticing investment accounts, such as 529 Accounts and Coverdell ESA. In addition to the enticing tax benefits associated with these accounts, you can choose from a wide range of investments ranging from guaranteed CDs to aggressive growth.
Before you look elsewhere, take a good look at these options. They should be more than sufficient to meet future college costs when combined with regular saving.
Source: https://www.thebalancemoney.com/investments-you-should-avoid-when-saving-for-college-795255
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: calc(12% – 20px);
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item img{
max-width: 100%;
height: auto;
object-fit: cover;
aspect-ratio: 1 / 1;
}
.lwrp .lwrp-list-item.lwrp-empty-list-item{
background: initial !important;
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
}@media screen and (max-width: 480px) {
.lwrp.link-whisper-related-posts{
}
.lwrp .lwrp-title{
}.lwrp .lwrp-description{
}
.lwrp .lwrp-list-multi-container{
flex-direction: column;
}
.lwrp .lwrp-list-multi-container ul.lwrp-list{
margin-top: 0px;
margin-bottom: 0px;
padding-top: 0px;
padding-bottom: 0px;
}
.lwrp .lwrp-list-double,
.lwrp .lwrp-list-triple{
width: 100%;
}
.lwrp .lwrp-list-row-container{
justify-content: initial;
flex-direction: column;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: 100%;
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
};
}
Leave a Reply