How to Use an Annuity to Pay for College

by Jared Paventi ; Updated July 27, 2017

The cost of a college education continues to rise each year. In 2003 to 2004, the federal government estimated that the cost of one year of public or private college--including tuition, room, meal plan, and books--at $10,636. For the 2007 to 2008 year, that total ballooned to $26,854.

Parents often wait until it is too late to plan for their child's college savings. One tool to help foot the bills is an annuity. These tax-deferred funds allow parents to save for college with minimal impact on their taxes or financial aid eligibility.

Using an annuity to pay for college

Step 1

Meet with a financial planner when your child is young enough for the annuity to make an impact. Annuities typically have a minimum one-time contribution of $3,000. The annuity's ability to be an effective means of college savings is dependent on both the length of the annuity and the amount deposited.

Step 2

Contributed to the annuity. Contributions to the annuity can be made by anyone, be it a parent, grandparent or family member. The annuity is directed by the person who set up the annuity but administered by a bank officer or financial planner. The typical minimum payment to an annuity is $25.

Step 3

Make a withdrawal. When it is time for the child to attend college, they can elect how to receive payments. They can be paid quarterly, semi-annually or annually, depending on when payments are made to the college or when the school's terms commence.

Step 4

Pay attention to the penalties. While there are no penalties for withdrawing money from a college annuity, the document is typically drawn up to disperse a large amount of money over a small period of time. To condense an annuity's payment period to the term of a child's studies, a 10 percent fee may be assessed.

Step 5

Take note of the tax impact. Donors to the fund will pay capital gains taxes under law when the funds are withdrawn. But, that is typically the only tax burden shouldered during the annuity. The student will not shoulder any tax burden.

Tips

  • Consult a financial planner to discuss options available.

Warnings

  • New York State law prohibits gift annuities from being used in this manner.

About the Author

Jared Paventi is the communications director for a disease-related nonprofit in the Northeast. He holds a master's degree from Syracuse University's S.I. Newhouse School of Public Communication and a bachelor's degree from St. Bonaventure University. He also writes a food appreciation blog: Al Dente.