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

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

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The idea is that when the money is withdrawn for higher education expenses, it is taxed at the students relatively low tax rate, rather than the donors presumably higher rate.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