From the October 2007 issue of Boomer Market Advisor • Subscribe!

Be true to your boomer client's school

From diapers to dorm rooms in 18 years flat. That's the natural progression for millions of American children born to baby boomers. And while 18 years can seem like a long time, it more likely passes in a flash. Just ask any boomer parents who realize little Johnny or Suzie -- or both -- are in high school and Mom and Dad haven't started saving for college yet. The situation grows more dire when parents realize they need to pay for college without dipping into their retirement accounts, a ding to savings that takes years to repair.

It can be done, even at the eleventh hour.

"It is never too late to start saving for college," says Don Croghan, the owner of Knoxville, Iowa-based Donald W. Croghan CPA ( ). "It is never too early to start, either."

Short term

For families that have waited until the last minute -- the college-bound child is in high school, for example -- there are ways to minimize the financial implications, but they're less about products and more about process. And the bottom line in that process is cash flow. Where will the money come from on a monthly basis to pay for school without adversely affecting 401(k)s and IRAs? College planners are adamant about staying out of the retirement till.

"I tell my clients that I don't know of any retirement loans for them," says John Nettleton, CPA, CFP, CCPS, president of College Financial Network Inc. in Marlton, N.J. "If worst comes to worst, kids have 30 years to pay off student loans."

"There are no pretty, elegant answers late in the game," says Linda Taylor, a Certified College Planning Specialist and principal advisor at the College Funding Network ( ), in Camarillo, Calif.

But one solution for many boomers involves using their home equity. Not the ideal solution, but, as Taylor says, it beats raiding the 401(k) and paying penalties when a home equity loan has a favorable interest rate and the interest payments are tax-deductible. However, Taylor warns, advisors have to dig deep before setting any kind of plan in motion.

"Vehicles are tricky to write about," she says, "because no one vehicle fits all. Before determining what funding vehicle to choose, there should be a clear understanding of the parents' expectations and goals for their children's education, the maximum they can or will pay for college, as well as a current assessment of the clients' financial plan and cash flow."

To help decide, a family's cash flow needs to be looked at, in addition to the number of children and their ages, the parents' age and health, everyone's income and assets, and other funding sources.

"Then, you need to ask questions about the various vehicles," Taylor says. "What is the guarantee for the principal? What is the projected low-end and mid-range growth? What are the tax benefits? Who controls the funds? How much risk is involved? Are there contribution limits?

Once we have all the answers, we decide what vehicle or combination of vehicles works best with their education and retirement goals."

So the process is as individual and different as the student who needs the funds. A valuable piece in most students' financing puzzle is financial aid, whether that be in the form of loans, scholarships or grants. Parents can do a lot in what is called the base year -- the year before the child begins school -- to ensure their student qualifies for as much aid as possible.

"If I'm a parent and my son is going to school next year, I don't want to take a big withdrawal [from a 401(k) or IRA]," Croghan says. "If I know I have a bonus coming at work and I can defer that until the next year that's good. You don't want to sell stock for a gain in the base year."

Parents need to keep their income as low as possible for the year in which financial aid eligibility will be determined. And since it all comes down to cash flow, advisors owe it to their clients to coerce them into making serious decisions about where their priorities lie. Can they lay off the credit cards? Can they get a vehicle paid off to free up several hundred dollars a month (and then resist the urge to buy a new one)? Cash flow that doesn't affect retirement savings must be generated. And parents cannot be afraid of properly used student loans.

Long term

With even the youngest boomers now over age 40, most of the generation is done having babies, but many still have young children who haven't yet begun kindergarten. There is plenty of time to plan for those educations. More options are available for advisors with clients in this situation.

Of course, the most widely known savings vehicles for college are 529 plans, which are administered by each state or educational institution. Rules vary from state to state, and federal guidelines are always subject to change, but 529s provide a tax-advantaged way to save for future college costs. The most talked-about disadvantage of the plans is the penalty on earnings that accompanies distributions not meant for college costs. That 10 percent penalty, in addition to the ordinary income tax that must be paid on the nonqualified distribution, can be steep. If the child decides not to attend college -- opting instead for life as a bull rider in the rodeo, as one college planner's son did -- his 529 account can be transferred to another family member, but if that family member already has a 529 account in place, the second account could provide far more money than is needed for college, leading to tax ramifications down the road. So while 529 plans get most of the press, college planners have other strategies and vehicles they prefer.

When asked what he recommends to someone worried about funding a 529 plan that never gets used, Croghan turns to a Roth IRA.

"I start out looking at a Roth IRA, put in the owner's name," Croghan says. "I like it for the control the owner has."

Beyond owner control, Croghan likes it because by meeting just a few rules the owner can take out his contributions and the earnings tax free for any purpose, should his child decide to join a band or a monastery. And keeping the IRA out of the child's name is important because, as with several other strategies, the more assets the student has to report, the less financial aid he's eligible for.

According to John Nettleton, another vehicle that works well is cash-value life insurance, especially since a lot of families are underinsured to begin with.

"It is possible," says Nettleton, CPA, CFP, CCPS, president of College Financial Network Inc. in Marlton, N.J., "for a family to fund a cash-value life insurance policy [with the ultimate goal of paying for college]. That money can build up tax deferred or tax free. And, it is not an accessible asset for financial aid purposes. It's money that is off the financial aid screen."

Beth Walker, CCPS, CRPC, head coach at Las Vegas-based College Funding Coaches ( ), agrees with the benefits of cash-value life insurance, especially for parents who own small businesses, as many boomers do. She uses it as part of what she calls a tax scholarship strategy. One part of that strategy involves shifting income to the child so he can pick up income tax credits, which -- along with the money paid as income -- can then be used to fund an investment or savings vehicle and avoid the kiddie tax.

Walker says that, currently, a small-business owner can pay someone (such as a child) less than $4,800 and not incur payroll taxes. She uses her son as an example. His picture is featured on her company Web site, so she pays him modeling fees. And, since even a 5-year-old can't spend that much money on candy, Walker puts her son's earnings in a 20-pay whole life insurance policy, which, in addition to earning cash value, is untouchable for financial aid purposes (along with home equity, annuities and retirement accounts).

Educational planning is an education unto itself. The possibilities are many, whether a family gets a late start or an early one. Advisors who realize the process goes beyond financial products and involves a family and its future are poised to secure new clients on the strength of a skill not many possess.

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