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Advisors Look At When And How To Sell 529 Plans To Boomers

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Advisors Look At When And How To Sell 529 Plans To Boomers


Baby boomers talk a lot about planning to pay for their kids college education, but too few do it, financial advisors agree.

“Theyre too busy spending money,” comments Mark A. Davis, vice president, Haas Financial Services Inc., Southfield, Mich.

Davis and other advisors make a good income, however, counseling the exceptions–those boomers who recognize the need to put money aside for the sake of their childrens or grandchildrens future, and who have the means to do that.

Congress created 529 college savings plans, which are state-sponsored, to encourage savings for the high costs of college. Although clients can only invest after-tax money in a 529 plan, the money grows tax-deferred, as with a 401(k) retirement account. Parents and grandparents alike can set up 529s.

The idea is that when the money is withdrawn for higher education expenses, it is taxed at the students relatively low tax rate, rather than the donors presumably higher rate.

Advisors agree 529 plans arent for everyone. And boomers have to juggle a variety of financial goals.

Given a choice between saving for college and saving for retirement, for instance, “they have to take care of themselves,” observes Michael T. Smith, president of CPS Horizon Financial Group, Hales Corner, Wis.

“Our philosophy is that if youre not saving in your company retirement plan at least up to your employer match, you should save for retirement first,” says Raymond D. Loewe, an advisor with Financial Resource Network, Marlton, N.J. “Because with a qualified plan, you not only have a tax deduction, you also have the match. 529s have no match.”

Robert Cusick, a financial advisor at Investors Insights Ltd., Cortlandt Manor, N.Y., adds that where baby boomers face such conflicting needs, the advisor must be “very creative” in helping them meet their needs.

“If theyve waited until theres a crisis, then you have to look at tools other than 529 savings plans, because you dont have time,” Cusick says.

For instance, perhaps the student can qualify for financial aid, for scholarships or for work-study programs, he suggests.

Another problem with 529s, adds Loewe, is that they are “financial-aid unfriendly.”

Loewe is author of “A Professionals Guide to College Planning,” published by The National Underwriter Company.

“In some years, financial aid will have real impact on the cost of college, so you dont want a distribution from a 529 in those years,” he explains.

Such distributions reduce the amount of financial aid for which the youngster qualifies.

“We have a lot of executives who have multiple kids in college at same time, Loewe notes. “We have one client with $250,000 annual income who will have three of his six kids in college at one time. His college bill is going to be about $1 million. He can pick up $200,000 in financial aid.”

Distributions reduce financial aid packages up to 50 cents on $1,” Loewe points out.

For lower-income clients, 529s are less desirable but can still be a good investment.

Other considerations include how big an impact tax savings from a 529 plan would have on the client.

“The higher your tax bracket, the better they are,” Loewe observes.

How much the client really wants to control the childs college money is another important point.

For some, protecting education funds against the potential impact of lawsuits may be important, Loewe explains. In that case, a 529 may be less advantageous than a custodial account.

On the other hand, the client as owner of a 529 controls distributions of those funds, unlike with custodial accounts, he notes.

Davis notes an advantage of 529 plans is that they are flexible enough to meet changing financial goals.

“Even if the kid never goes to school or the money has to be pulled out for something else, its worthwhile,” he says. “The parent has to pay a penalty and taxes, but they have deferred taxation on the money for a number of years, and they could still be ahead.”

With a total of more than 70 state plans, recommending a 529 can be “a financial planning nightmare,” says Loewe.

Still, advisors have their favorite 529 funds.

Davis says he pays more attention to the 529 fund manager than to which state is the sponsor of the fund.

“Even if you dont have state tax benefits, thats outweighed by performance,” he says.

In that regard, Davis favors 529s managed by American Funds and Fidelity Advisors.

Fidelity, for instance, offers a plan that links the 529 to a credit card.

“Then 2% of all the credit card balances you pay off goes into the 529,” Davis notes.

Other advisors give much weight to the tax implications of a fund.

“You have to factor in the value of these tax benefits and make sure the client is aware of the benefits of their state program,” says Cusick. “For example, New York offers a tax deduction for contributions against your New York State taxable income. New Jersey offers a scholarship for in-state schools up to a $3,000 limit if you have that amount of money in the state plan.”

Cusick also lauds Nebraskas and Alaskas plans for their low cost, wide investment options and performance.

“I also like Arizonas and Montanas plans, because they both offer a product called the College-Sure CD. The interest rate and the results are adjusted periodically, but you are purchasing a portion of a unit of education [i.e., one year of schooling] in the future. Thats the minimum result that can be achieved, so there is a floor: You cant lose money.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 25, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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