Financial advisors take a uniquely privileged position in a client’s life. We may not be family members by blood, but as the stewards of family finance, we’re part of an inner circle of trust.
While we certainly help them manage money, we add even more value by helping a family make personal financial decisions, few of which are more personal than the choice to pursue a college education. I’ve developed some useful strategies for using financial vehicles to help your clients plan for college, no matter where they are in life.
Early Graduation Or Late Registration?
If a family starts saving for college when a child is born, they benefit from having more time to save. But even if college planning doesn’t start until high school, the various paths toward funding remain largely the same.
Saving by itself is rarely enough, however, with public four-year college costs increasing roughly four percent per year over the past 10 years—that’s double the rate of inflation. If your client is going to save, steer them to where their money can make a difference.
A ‘Whole’ World Of Savings
A whole life insurance policy is one of the most versatile financial vehicles available to consumers. I advise many of my clients to put their monthly college savings into one of these policies opened in the name of their child, essentially enabling them to “be their own bank.”
The policy will earn dividends, and loans can be taken out against the cash value and either paid back or netted out against the death benefit.
The child will benefit from the available cash value and the security of a life insurance policy that’s more stable than term life. But of course, this method requires considerable resources up front and discipline along the way.
Whole life provides flexibility, too. As perceptions about the value of a college education change, a parent or child may decide that a four-year degree isn’t a practical option. Thankfully, the dividends earned from a policy can be used for just about anything.
Should the child choose to open a business or pursue a trade, he or she will be able to use the funds as they please.
The Focus Of The ‘529’
A more specific option is a 529 plan, which is eligible for a state tax credit depending on where your clients live. This traditional investment provides a haven for college funds that can grow tax free—as long as the money goes towards a college education, of course.
Let’s say your client has multiple children. I would advise them to save 50 percent of the projected need for one child in a 529 plan; should that child decide not to go to college, the beneficiary can be changed and the plan can continue to grow.
I-R-A Spells ‘No Penalty’
Make sure your client is aware of a clever money move that can be leveraged with an IRA. If your client has invested in one or both of the financial options suggested above, but costs are still too high, money can be taken out of an IRA early and put towards college.
The client will be taxed, but the penalties for early withdrawal will be waived.
What’s In A Name?
Regardless of the type of financial opportunity you steer your clients toward, make sure they aren’t opening too many in the name of a child. For example, if grandma and grandpa want to open up a 529 plan, suggest that they keep it in their names to be safe.
Too many assets in one child’s name can make a negative impact when it comes time to file a FAFSA. All the money your client has saved up can count against the amount of financial aid for which the child is eligible.
Being part of a family’s circle of trust makes us privy to a lot of private emotions. But there’s a difference between making emotional decisions and using emotions to help make decisions. By urging your client to put money aside in one of these financial vehicles, we illicit a different emotional response to those funds as compared to a regular bank account.
It’s no longer just a chunk of savings that clients feel they can spend anywhere—that money is now earmarked as “Johnny’s college fund.”
It’s up to us as financial advisors to take our place in the circle of trust seriously. By helping our clients be realistic and channel their cash flow properly, we can provide practical tools to make higher education a reality.
About the author
Kathleen Benjamin, CFP®, CPA, is a Lifetime and 15-year member of MDRT and serves as Chief Operating Officer and Advisor at BFG Financial Advisors in Timonium, Maryland. With more than 25 years of corporate and financial planning experience, Kathleen has carved a strong niche for herself working with physicians and medical practices. She previously owned her own firm, Cincinnati-based Benwood Financial Group, which eventually merged with Brotman Financial Group to form BFG. She has also held numerous industry leadership positions, including a trusteeship for the MDRT Foundation.
All guarantees are subject to the claims-paying ability of the issuing insurance company.
There is no guarantee that the plan will grow to cover college expenses. In addition, depending upon the laws of your home state or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if you invest in the home state’s 529 college savings plan. Any state-based benefit offered with respect to a particular 529 college savings plan should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances and also may wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan. You may also go to www.collegesavings.org for more information.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regards to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Brotman Financial Group, Inc. and BFG Financial Advisors are not affiliated with Kestra IS or Kestra AS.