FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsEasy
A client, age 40, has a stable job, two young children, and a goal of saving for their children's college education, which is still 15 years away. They are comfortable with moderate risk. Which of the following investment options would be MOST suitable for this client's college savings goal?
- AA fixed annuity
- BA whole life insurance policy with cash value accumulation
- CA 529 College Savings Plan invested in a growth portfolio
- DA money market fund
Show answer & explanationAnswer & explanation
Correct answer: C. A 529 College Savings Plan invested in a growth portfolio
A 529 Plan is specifically designed for college savings, offering tax-advantaged growth and distributions. A growth portfolio within the plan aligns with the 15-year time horizon and moderate risk tolerance.
Why the other options are wrong
- A. Fixed annuities offer guaranteed returns but typically lower growth potential than needed for a 15-year college savings goal and lack the specific tax advantages of a 529 plan.
- B. Whole life insurance is primarily for death benefit protection, not an optimal college savings vehicle due to higher costs and lower investment growth compared to dedicated college plans.
- D. Money market funds offer low risk but also very low returns, making them unsuitable for a 15-year growth objective for college savings.
529 Plan Suitability
529 plans are state-sponsored education savings plans that offer tax advantages for qualified education expenses. They are suitable for investors saving for college with a long-term horizon and varying risk tolerances.
- Tax-advantaged growth (federal and sometimes state)
- Qualified withdrawals are tax-free
- Can be invested in various portfolios (conservative to aggressive)
- Beneficiary can be changed
- No income limitations for contributions
Memory trick: 529 Plans: Five-star education, Two-thumbs up for savings, Nine years to grow!