Sometimes the worst times make for the best lessons in resourcefulness. Not just for ourselves, either. If we can pass on resourcefulness to our kids, it’s so much more than a money management lesson. It’s a life skill that can help in everything from relationships, to work, to, yes, even parenting.

Over this past week— at end of the college semester parties, and at an award event at the high school where I sit on the Board—there was a lot of talk focused on Fall college tuition and how to come up with it over the summer.

Some folks were worried that even though they have the tuition now, if just one thing changes, they won’t. That change doesn’t necessarily have to be a job loss, maybe just a job reduction. Or for self-employed parents, it could be a big contract that gets put on hold. People were talking and bonding, in an effort to come up with backup plans, to pick each other’s brains for solutions.

I found out that many people don’t know about IRA withdrawals for college tuition. And we all should. There are two big catches—in most cases you need to liquidate the entire IRA, and you will pay some taxes— but as a last resort, it’s a trigger we should be okay with pulling this year. Once I explained it, the stress level in the room shot down, like a hot thermometer run under cold water.

There are some catches, so be clear what they are, but in many circumstances this year, it may be the only option, and even a decent one, especially if your household income has dropped significantly from its norm. Explain this whole following scenario to your kids, too. It will really teach them some essential lessons about how taxation works, and what a zero sum game is.

Here’s the deal: You can always take money out of an IRA for college tuition. You will get taxed on the withdrawal as if it were regular income. But you will not pay the traditional 10% penalty for early withdrawal. You must use the withdrawn money, called a distribution, to pay for school directly. You can’t remove money, for instance, and place it in a 529 college fund. The IRS doesn’t like that. If you reinvest, it is considered a change of investment vehicle, and not condoned. You will be taxed and penalized. And in most cases, you must liquidate the entire IRA, though there are some exceptions.

How to know if you’re the profile who should tap your IRA. You may see yourself in one or more of these characterizations:

1. If you have no other choice, and it’s a matter of your kid going to college, or not.

2. If you’ve already cashed out of investments at a loss in your IRA, and the money is sitting there, dormant, in cash. Many people have done this over the last year. If you’re already in cash, you stand to lose a lot less than those that are still completely invested in the stock market. They may have shares that are deteriorated, but shares can come back. Cash doesn’t.

3. If your income is so deteriorated— and will be for a couple of years—that the tax hit may not actually hit you that hard. This is especially true for people who contribute heavily to IRAs, with a lot more than the annual allowance of $2,000 pre-tax dollars.

Here’s how to figure out if you can wiggle out of the tax bite: First and foremost is whether you have contributed to your IRA with after-tax dollars. If you have not, then you will pay taxes no matter what; you may not offset losses against that money. So, those $2,000 contributions made right before April 15th, which lop the money off your gross income, and lower your taxable income out of the gate—you can’t get out of paying taxes on that money. The IRS doesn’t like giving out double benefits to people. Remember, if it looks like income, and smells income, they’ll tax it. And if you’ve wiggled out of tax on the way in, there’s no wiggling on the way out. You can, however, still take the distribution without the 10% penalty.

But if you have made contributions with after tax dollars, then crunch some numbers. If your income this year is lower than last year—from a job loss, job reduction, losses from stocks or mutual funds you’ve cashed out— or in the red altogether, it will offset that tax liability, at least in part. Remember, the tax they levy is regular income tax. All normal deductions apply.

There are limits to offsetting investment losses with your qualifying IRA withdrawal gain. You can only take up to $3,000 per year of stock losses against the capital gain of your IRA withdrawn money. But, if you actually have more losses than that on the stock market, you can take $3,000 of those losses in future years.

To explain this concept, do show your kids your original buy-in dollar amount for the equity, or mutual fund, or whatever the investment was. If the original purchase price is higher than your stock cash out price, then you get a loss, which is a deduction against regular income.

So, investment losses are one small advantage. But job loss is the big advantage here. Remember, the IRA withdrawal is added to overall income. So if the IRA is equal in amount to what your salary would have been if you had one this year, you might break even with taxes.

Or, if you have a job now but anticipate that your income will be lower next year—your job is going to come to an end, or be reduced— wait until Jan. 1, 2010, and then take the IRA distribution to pay for college. The game here is to play the tax liability against overall income. You want to calculate your losses in wage, and losses from cashed out investments. Have your kids help you figure out the best timing to come up with a zero sum tax liability.

Withdrawing from your IRA may not be your first choice. But, if you’re so strapped you can’t find another way, it’s definitely an option, no penalty. Do consult an accountant or other tax advisor before pursuing this option. Situations vary.

And please share college tuition backup plans that you have in place.

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As the Secretary of the Board at a private school, of course I’m hearing more and more stories about parents struggling to pay for private school (see Private School Bailout post). But what I’m also starting to hear are creative ways people are coming up with to keep making those private school payments.

It’s inspiring, especially the cases where the teenagers whose education is at stake are proving to be incredibly resourceful. There’s one case so striking that I’m starting to believe we should all set our teenagers to the task of playing treasure chest detective.

Let me explain: The principal at the school where I sit on the Board is an exceptional human being. He took an old Jeep Cherokee in lieu of one student’s tuition, because the math-smart kid was blossoming at the school, after a tough time in a public elementary school. Of course word spread, and the joke on our campus—and it’s a beautiful campus, open fields against a mountain backdrop—is that soon people will be bringing in goats.

So one parent called and said her daughter, 16, had spent the entire weekend in the attic, taking inventory, wondering what she could try to sell on eBay. Her mother didn’t have the heart to stop her; she was so organized and industrious, so mature in her thinking that goods could be liquidated and put to good use.

So the girl finds these gold coins that the mother had all but forgotten about; they had been handed down from grandparents, not wealthy ones. At second glance, and after much prodding from the teenage daughter, the mother called the school. Our principal referred her to another Board member who happens to deal in antiques. One of the gold coins was worth $59,000. And there were several of them. The teenager not only saved her private high school education, but found her college education as well.

This story gives me goose bumps because it’s in the fairy tale realm, but it’s also true. Yet I hesitated telling it to the kids in my life because it could be disappointing to send them on a mission that will never result in such glory.

Still, I couldn’t shake the thought that systemizing what that 16-year-old girl did would be of great benefit to any teenager. First of all, taking inventory of family valuables teaches kids to assess a dollar value for goods— a great skill applicable to so many things, from comparison shopping to being responsible about taking good care of valuables.

Even the act of going online to determine what something is worth by finding comparables that have sold is a great skill. And of course just knowing what things in this world cost, and how quickly they lose value, is important.

Want to teach the kids something? Have them look at what your car cost new, and how much its value dropped to the minute you drove it off the dealership lot. It will help them learn how to spend wisely, assess what they really need versus want in goods and services.

So, I decided to give kids a chance to flex their research muscles while earning a commission. First, they assessed the goods in my house. Then I sent them to my brother’s, and other relatives willing to participate. They were allowed to set up an account on eBay, and they got a commission on whatever they sold.

eBay requires the seller to do a lot of monitoring, so it enforces the lesson of following up and following through on things. Of course the commission keeps them motivated. Teaching them eBay also teaches them how to deal with online transaction settlement, which of course leads to the question of what to do with their commission. I think setting set them up with a reloadable prepaid card is a great idea. In some cases, the stuff they sell on eBay can be paid to their card, and then they can take out cash to pay the seller, keeping a commission. They end up running a business.

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I serve as Secretary of the Board of Trustees for a private school, and as such I feel the tension and anxiety among parents. Some can’t help but wonder if they can continue to afford a private education for their kids.

In many cases it depends on how their businesses and careers are going next fall.

Another sticky problem is the private school/college quality trade-off. If the kids continue in private high school, does it jeopardize the quality of college you’ll be able to afford for them? Those college fund statements are painful to look at these days. Even if you start thinking, okay, there will be a rebound next year, so if I earn back this much….it still could be a while before that college fund feels full again.

But no one can wait until next fall to see what shakes out. So while it’s still March, and there’s a little time before the next school year, do some contingency planning.

First thing to get into your head: It’s okay if private school is no longer an option. But before you get to that:

1. If you can, apply for financial aid at the school. Sometimes you have to wait until very late in the year—May or so—before getting an answer for the following school year, so that can’t be your only plan. But do it. It doesn’t mean you’re any less supportive of the school. I know some school environments can add that social pressure. I say, forget that!

2. Barter, defer payment, cut a deal. Also, if you have an imminent situation—you’re not sure you can afford the rest of this year—go now and talk to the school about your financial situation. It may take some pride swallowing, but often schools will work something out with you. There is no shame in this economy. And in that same vein, offer to help out at the school in return for deferred payment, discounts. I know a very skilled computer programmer out of work right now who is handling the computer needs for his daughter’s private school in return for a discount in her tuition.

3. Borrow against your house equity or life insurance. Neither of these are bad ideas if you think your financial hardships won’t be long lived.

4. Look into tapping 529 or 401K money. Check with your investment advisor about these options. There may be situations where you won’t be taxed, or it may be worth it.

But if all the bailout ideas don’t work, you’ll need to plan for public school. You may have more choices than you think. If you hate the local public school in your tax district, apply for a variance.

Visit all local public schools within reasonable driving distance from your home, get familiar and comfortable with them. One of the luxuries of being laid off is you have business hours to do research. If you like a school out of your tax district, you can apply with the School Superintendent’s Office to get a variance.

A variance means permission to go to a school out of your tax district. There is a fee associated with a variance, which will vary, but it’s less than private school. When I looked into it in my area, the variance for the public school I liked was less than half the price of private school. Variances are usually granted if the school grade your kid will be in is not at its class capacity limit. Do bear in mind that you will probably not have school bus service.

If the class capacity generally comes close to filling up each school year, the school may make you wait until very late in the game before granting the variance—late summer, right before school starts. So you’ll be in limbo. But they are worth exploring, and applying for early. It’s March, apply now. Variances are granted on first-come, first-served basis. You find out the details by calling the principal’s office of the school you want to attend, but essentially the procedure is that you write a letter.

To visit local schools, you have to call and ask for a tour. Call the principal’s office, not any other administration person. Pester if you meet a little resistance, explain your situation, and that applying early for a variance will be important. Sometimes they’ll start by asking you to wait for a new student open house orientation, often held in April or May. You can push past this. They’ll be flattered that you want their school, or at the very least the principal will accommodating because variance students bring extra income to the school.

In general, you have nothing to lose. If they turn you down for a variance, then your kid simply goes to the district school.

Also try to involve your kid in some activity—without them necessarily knowing—that involves the public school community they may be a part of next year. Often there are community center summer camps that your kid can become a camper, counselor-in-training, or a full counselor for, depending on age. Community camps are great because they’re inexpensive, and they include kids from a lot of local schools, not just the one in your tax district.

If anyone has a changing schools story to tell, please share it.

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