There’s Plenty for Parents to Ponder Before Setting Up Child’s College Fund

Q Our insurance agent is suggesting we save for our child’s education using a variable annuity. He said annuities usually aren’t counted in financial aid calculations. Is that true, and is a variable annuity a smart way to save for college?

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A That depends on how you set it up--and how honest you want to be.

You should know that a variable annuity is a retirement savings vehicle. That’s why there’s a 10% penalty for withdrawing money before age 59 1/2. If you won’t be that old before your child enters college, then a variable annuity doesn’t make much sense. (I’m assuming the agent is suggesting that the account be in your name, because listing it in your child’s name would be pretty ridiculous--not that that doesn’t happen, of course.)

A variable annuity--and saving for college--also doesn’t make a lot of sense if you haven’t already contributed the maximum to workplace retirement accounts and available IRAs. If you can’t manage to max out your 401(k) and fund a traditional or Roth IRA for yourself and your spouse, you’ve got no business buying an annuity or putting money aside for Junior’s college. You’ve heard it here before: Junior can get student loans, but no one is going to lend you money for your retirement.

Variable annuities allow you to invest in a mix of stocks, bonds and money-market securities, and the earnings grow tax deferred until withdrawal. Unlike other retirement accounts, variable annuities have no limits on how much you can contribute. There’s no tax deduction for contributing to an annuity, however, and regular income taxes will be due on the earnings when the money is withdrawn.

Investments you make in stocks and stock mutual funds, by contrast, may qualify for more favorable capital gains tax treatment, and mutual funds also tend to have lower management costs than variable annuities. That’s why many investors prefer to buy stocks or funds directly rather than through an annuity.

It’s true that many colleges do not count retirement savings when making financial aid calculations. That’s because they assume, surprise surprise, that retirement funds are just that, and not devices to smuggle assets past unsuspecting college administrators.

Generally speaking, if you can afford to save much money for college, your kid is not going to qualify for a lot of financial aid. What he does get is likely to be loans, not need-based grants and scholarships.

If you like the idea of tax-deferred college savings, check out one of the college savings plans offered by California, New York and many other states at https://www.collegesavings.org.

Security for Those Who Need It

Q I know people whose annual income is in the middle six figures but who claim they deserve the Social Security payments they get because they paid into the system all those years. Fortunately, more and more thinking people are feeling uneasy about receiving money they don’t need. I am one of them. Forgoing benefits is my way of helping to recreate Social Security as a safety net, which I believe would go a long way toward creating real stability and allowing the more fortunate among us to enjoy our good fortune without guilt.

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A Your stand is admirable, and if more people thought as you did, the Social Security system might limp along for more years than are currently projected. But the well-off folks who are claiming benefits aren’t really doing anything wrong--they did pay into the system all those years and they were promised the benefits, regardless of need.

I know some affluent Social Security recipients who simply write their favorite charity a check each year, equal to the amount of their benefits. Some choose charities that help the elderly poor. Yes, these donors typically receive a tax deduction for their generosity, but it’s a fine gesture nonetheless.

Insurance Hitch on FHA Loans

Q I read your recent discussion of private mortgage insurance and found it very interesting. You didn’t specifically mention FHA loans, however. I have had one since 1993 and was wondering if there is any way I can get out of paying PMI?

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A The short answer is no, unless you refinance the loan.

FHA loans are considered higher-risk loans, because they are typically made to borrowers with less-than-ideal credit or those who couldn’t afford a large down payment. As a result, the FHA version of mortgage insurance can’t be canceled.

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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at [email protected] or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://ukobiw.net/moneytalk.