Section 529 college savings plan

How to choose a 529 plan

While a 529 plan account may the best vehicle for a your family’s College Fund, making the right choice means you’ll need to understand the basics. As you do your financial planning for college, keep these thoughts in mind:

  • It’s not where your child goes to college, it’s where your family lives that matters: You can contribute money to any state’s 529 plan, regardless of where you live, and you can use the money from your account to send your student to any qualified college in any state. The state “brand” of your 529 plan is important for tax and estate planning reasons, but it does not limit your ability to make payment to the school of your choice.
  • It’s not the student’s money: When you open a 529 plan account, you’re going to open the account in YOUR name (or your spouse’s name) because you are actually the account owner. This may come as a surprise, but your student is only the “beneficiary” of the account, meaning they can only access the account by going through you.
  • This money can only be used for college: Distributions from 529 plan accounts for purposes other than Qualified Higher Education Expenses (QHEE) may result in taxes and penalties, so store only college money in the 529 plan, not money you may need for private K-12 education.

Now that you understand the basics, lets look at the steps you’ll need to take as you do your financial planning for college.

  1. Find out if your state offers a tax advantage for 529 plan contributions. Colorado, Georgia, Idaho, Iowa, Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia, West Virginia and Wisconsin offer state tax benefits for 529 contributions made by taxpayers in those states.
  2. Figure out how your state’s tax break works. Contact your tax specialist and ask these three questions:
    • “How much money do I need to contribute to my state’s 529 plan to get the maximum tax benefit?”
    • “How much will I save in taxes when I make my contribution?”
    • “What’s the deadline for making a contribution?” Some states will only allow you to deduct calendar year contributions from your tax return while others will allow you to contribute up until the time your return s filed (as is the case with IRA contributions). If you discovered this article in March, this means you might still have a chance to save taxes if you forgot (or didn’t know) to make a contribution last year.
  3. Research investment results for both in-state and out-of-state plans. If your state offers a tax break for 529 plan contributions, it might seem like a no-brainer to sign up for your state’s plan. But what if your state’s plan is dogged by poor performance? The cost of lower returns may outweigh the benefit of the tax break, so do a little digging and run a quick calculation.
  4. Calculate the performance gap. That’s the difference in total return between your in-state plan and the out-of-state plan.
  5. Think about the amount of money you will have in the plan. If you’re targeting a four-year private university at a cost of $200,000 per student, and your family has nothing saved today, the average balance between now and then will probably be about $100,000.
  6. Calculate the opportunity cost of using the in-state plan by multiplying the performance gap by the average amount you’ll have invested, like this:(Amount Invested) x (Performance Gap) = Opportunity Cost)
  7. Let the opportunity cost help you choose your plan. If the tax benefit outweighs the opportunity cost, consider using your state’s plan. But if the opportunity cost is much larger than the tax benefit, the out-of-state plan might be a better choice. I say “might be” because there’s one more thing you need to consider as you choose your plan: asset protection. Some state plans confer a measure of protection against the claims of creditors, and in some states this protection only extends to physicians who live in that state and contribute to the in-state 529 plan. The law on this issue varies from state to state, so you might want to seek legal counsel if you’re at all concerned about the protections your plan may (or may not) afford.

Choosing the right 529 plan is not as easy as it should be, but these steps will help you make the right choice for your family.

Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF is the founder of Physician Financial Services. Based in New York, he offers income protection and wealth accumulation strategies for physicians nationwide. Contact him at (800) 481-6447 or

W. Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to make a plan and get on track with saving for college and invest for retirement.

Should physicians buy Variable Universal Life insurance? | W. Ben Utley CFP® answers in Ophthalmology Business magazine

Should physicians buy variable universal life insurance?
Should physicians buy variable universal life insurance?


"I just became a partner in a small group practice. My tax person tells me the bump in pay is going to mean a lot higher taxes. I am maxing out my 401(k) but still I got a huge tax bill last year. The agent who sold me my disability insurance policy says I should buy some variable universal life insurance from him because it will save me taxes, but I already have $2 million in term coverage from USAA for my wife and kids. One of my partners thinks VUL is a bad deal. What do you think?"


Since it’s early in your career and you have a family to think about, it makes sense to have life insurance. Based on what I have seen in similar cases, $2 million is a good start but it’s not enough to provide everything your family might need to pay off the house, send kids to college (or private school), and pay ongoing costs of living without you. So I do think you need more coverage, but I do not believe variable universal life insurance is the answer.

As a form of cash value insurance, VUL combines the benefits of life insurance with the features you might find in a mutual fund investment. The word “variable” refers to the fluctuations in the cash value as a result of changes in the value of the investments it holds, while the word “universal” means that premium payments are flexible (like a universal joint is flexible).

I would have named this product “variable flexible life,” or VFL for short, but I figure the “F” might be misinterpreted to stand for “fallacious” since misguided physicians who buy this stuff suffer from the mistaken impression that they will save taxes while making a great investment that will protect their families.

The promise of tax savings is more fiction than fact. Sure, the cash value has potential to grow tax-deferred and the death benefit might be income tax-free, but these benefits are not the same as true, permanent tax savings. Since Congress closed most of the loopholes with the Tax Reform Act of 1986, permanent tax savings have grown increasingly scarce, particularly for medical specialists and other taxpayers in the top brackets.

A VUL policy’s tax deferral feature—arguably the only attribute of any value to an investor—may actually cost physicians more money in both the short and long term.

Under current tax law, long-term capital gains and qualified dividends are taxed at a lower rate than ordinary income, but the gain on complete withdrawals from a VUL policy will be taxed as ordinary income. Given that the top federal tax rate on ordinary income is fully 23 percentage points higher than the capital gains rate, equity-based investments made in a variable universal life product may result in taxes that are twice as high as those paid on gains from investments in an after-tax account (a jointly held mutual fund account, for example).

To be clear, a VUL policy will not save you a dime in taxes but it may cost a fortune in fees. The mutual fund-like “separate account” investment options available inside these policies are laden with costs, including operating expenses for underlying funds, management fees layered on top of that, plus an annual policy fee. “Paying those expenses is like rowing a boat with a hole in it. No matter how fast you row, you’re gonna sink,” says Lawrence Keller, an insurance expert with Physician Financial Services, Woodbury, N.Y.

There’s a huge incentive to push these policies. Since it’s common for agents to receive at least half of the first year’s premium as commission, your $50,000 investment means the agent will walk away with $25,000. Not a bad payday… for him. But when you try to walk away from the policy yourself, you will trip over one last expense that physicians often overlook: the surrender charge. Since the insurance company pays the agent up front, it can only recoup the cost by locking you into the policy or charging you heavily if you pull out before they’re done, which may be 10 or 15 years. “Buying a VUL policy is a lot like buying a new car,” said Mr. Keller. “The day after you buy it, it’s worth less than you paid for it.”

Your partner had it right when he cautioned you against VUL, especially when there are so many other vehicles that might be a better fit for you.

Consider term life insurance. Like auto or homeowner’s coverage, term life is pure insurance without cash value. Term life costs far less than VUL on a dollars-per-thousand basis, so every premium dollar buys you more coverage than it would with VUL. You will send less money to the insurance company and keep more for your family.

What can you do with the money you save?

Look into a Section 529 college savings plan. Contributions grow tax-deferred (just like VUL) but withdrawals from a 529 plan are free from income tax when used for qualified higher education expense. Some states will even give you a break on your state income taxes when you contribute—a real, permanent tax savings. (See “Section 529 plans: The best way for doctors to save for college” in the July 2012 issue of Ophthalmology Business.)

Check out a “back door” Roth IRA contribution. Given the average physician’s income, it’s unlikely that you can make a direct contribution to a Roth IRA, and you probably cannot deduct contributions to a Traditional IRA (not unlike VUL). However, you can still make non-deductible contributions to a Traditional IRA, and your spouse can too. After you have made your contribution, ask your tax advisor if it makes sense to convert your Traditional IRA to a Roth, where those contributions can grow tax-free for retirement, no matter how much Congress amps the pain on taxpayers in the top brackets.

After you have maxed out your 401(k), your IRAs, and your 529 plan, think about investing in low-cost, tax efficient equity index funds or exchange-traded funds (ETFs) from companies like Vanguard, Barclays, or Dimensional Fund Advisors. To keep the balance right (and avoid the dreaded Medicare surtax on unearned income), you might also pick up some tax-free income from a municipal bond fund. Finally, you and your partners might want to adopt a defined benefit retirement plan (a “pension plan”) to soak up excess cash that can grow tax-deferred for the long haul.

Keep an Eye on Your Money

The key to financial security is vigilance. Get curious. Ask questions! Dig for answers … or email your questions to so I can do the digging for you. If I use your question in “Eye on your money,” I will send you one of my favorite personal finance books to feed your head and a cool “Eye on your money” coffee mug to satisfy your thirst for answers.

Mr. Utley is president and founder of Physician Family Financial Advisors Inc., which delivers fee-only financial planning and independent investment advice to clients coast-to-coast. Contact him at 541-463-0899 or visit

This article originally appeared in the April 2013 ezine of Ophthalmology Business, pages 12-13. To download a PDF version, click here.

Financial Planner for Physicians Q&A | Where to put college savings for the grandkids?


"My dad passed away recently. He left some money for my mom (who is in an assisted living center) and she wants to put away some money for college for my two kids and her other grandchildren. She’s thinking about $12,000 per grandchild (up to two children per family).

In this situation, what is the best way to handle the money? I don’t have a lot of experience in investing, and I was just considering CD's or something like that but I thought I’d ask you first.

So, what do you think?”


Your mom's well-being is the most important issue here, so I am going to assume that she has all the money she will ever need to pay for her cost of living and care for the rest of her life, and that whatever money she would give away is absolutely unneeded. If that's not the case, stop right here and look into her financial plan. Otherwise, here are some thoughts.

College Financial Planning for Physicians with Young Children

There are two things you need to think about when doing the financial planning for college:

  1.  Time Horizon: I assume your kids are young (since most of the financial planning for physicians we handle is for young physicians with young kids). That means you have a looooooong time before you’ll need to spend the money.
  2. Inflation: College costs have been rising at about 7% per year which is more than twice the inflation rate for other goods. At the same time, rates on certificates of deposit are near all-time lows, and pay even less than the inflation rate.

While the certificates of deposit (CD’s) are “safe,” you run the risk that your college fund won’t keep up with the cost of college, so they’re not a good match for the college goal.

To help your college fund keep up with the rising cost of college, you’ll need to invest it.

Financial Planner for Physicians: Section 529’s A Perfect Fit

As a financial planner for physicians, I’ve seen situations like this before and I believe a Section 529 College Savings Plan is a perfect fit.

  1. Estate Tax Benefits: Section 529 college savings plans allow grandparents to make a gift to a child which can be used for qualified higher education expenses (QHEE). It's a "completed gift" so that the money leaves the gift-giver's estate (your mom's estate).
  2. Parental Controls: At the same time, you as a parent, retain control of the money. Your child cannot reach the money, so they won’t be using it to buy a bright red sports car.
  3. Right Amount: The amount of money your mom wants to give is slightly less than the annual gift tax exclusion amount of $13,000 for 2012.

One important tip: If you go with a Section 529 college savings plan, make the contribution directly from your mom's account to the plan by check. If you forget to do this (and you make the parents the payee), you’ll lose some of the estate tax benefit. Check with your tax advisor for all the details about how to make this move.