Finding a balance between retirement savings and college savings represents a challenge many families experience. If you feel overwhelmed, you’re not alone. The struggle is especially felt when parents consider whether to withdraw from their retirement savings to help pay for their children’s college expenses.
Withdrawing from retirement savings or taking a loan against a retirement account reduces your total savings and possibly the earnings on that account. For those not yet 59½ years old, drawing down retirement savings for college expenses will also result in a 10% early withdrawal penalty and a requirement to pay taxes on the distribution.
For these reasons, experts generally say that parents should first save for retirement, then save for college expenses and consider other ways to help their children finance their education. Here are a few tips to help you create a plan for success.
Plan for your retirement first
Airlines tell us to put on our own oxygen mask before caring for our children and the same is true here. Taking the time to create a vision for your retirement and the financial plan needed to secure your future is critical – not just for you, but for your children as well. Parents do not want to burden their adult children financially and those with a retirement plan are less likely to need financial support in their golden years.
In addition to the tax benefits provided by Traditional and Roth IRA’s, 401(k) and 403(b), retirement savings are also often boosted by matches from employers. These are substantial benefits over time. Consider contributing at least an amount equal to the employer match to get an immediate 100% return on your investment.
While you cannot predict the future of your child’s academic plans, you know your own future financial needs better than anyone else. It is also important to remember that you can’t borrow to retire, but your children can make choices to attend less expensive schools, assist with paying for expenses or take out a student loan for college.
Play the long game with college savings
Consider establishing a college savings account, either a 529 College Savings Plan or a Coverdell Education Savings Account. These tax-advantaged savings plans can be established with a minimum investment, usually around $25, and permit tax-free earnings and distributions for funds used to pay for qualified education expenses. Stay motivated by reviewing your savings progress as consistently as you would review your child’s report cards and involve them in the process.
Enlist others to save for college
Teach your children the art of saving, spending and giving early to instill the importance of healthy financial habits. With their first job, encourage your children to practice saving for small goals and even encourage them to invest in their future by contributing a portion of their earnings to their college savings account.
Take advantage of the tax-benefits inherent in both the retirement and college savings plans, contribute what you can on a consistent basis and rest well knowing that you did the best you could for your retirement and your children’s education.