Many parents need to save for their own retirement while also helping their children pay for college. But it can be difficult to save for both at the same time. Here are some tips for coordinating your retirement and college savings goals.
Examine your priorities. While some parents feel an obligation or desire to pay for college for their children, others think it’s more important to improve their own finances so they won’t become a burden to their children later. A recent T. Rowe Price survey of 2,000 parents with a retirement account found that about half would be willing to delay retirement or take on a second or part-time job to pay for college for their children. “Parents should save for their own retirement first before saving for a kid’s college education,” says Beth Kobliner, author of “Make Your Kid a Money Genius (Even If You’re Not)” and a member of the President’s Advisory Council on Financial Capability for Young Americans. “Kids can borrow for college, and they also have a range of options for costs when it comes to what school they go to, but parents can’t borrow for retirement.”
Get a 401(k) match. A 401(k) match is likely to be the best return you will ever get on an investment. “If you’ve got an employer who will match your contributions dollar for dollar up to 6 percent, you can’t beat that,” says Mark Kantrowitz, senior vice president and publisher of Edvisors.com. “It is effectively doubling your investment right then and there.” In addition to the employer contribution, you will also get a tax break and investment returns on that savings.
Consider a 529 plan. Once you have gotten your 401(k) match, you can do a side-by-side comparison of the benefits of saving more in your 401(k), contributing to an individual retirement account or Roth IRA or funding a 529 college savings plan. Make sure to examine the fees and tax implications of investing in each type of account. Contributing to a 529 plan won’t qualify you for a tax deduction on your federal taxes, but it might get you a deduction on your state income tax bill. The money in a 529 plan grows tax-deferred, and distributions used to pay for college are tax-exempt.
Consider your child’s financial aid package. Retirement account balances are not considered when calculating how much financial aid your child qualifies for. “The federal form does not look at retirement money,” Kobliner says. “If you have money in a retirement account, it is not going to hurt you when the colleges are assessing you for how much financial aid you are eligible for.” However, money in a 529 college savings plan is factored into financial aid eligibility. And withdrawals from retirement accounts, including Roth IRAs, are considered income and could reduce the amount of financial aid your child qualifies for in future years. “Distributions from retirement plans count as income on the FAFSA, and that includes tax-free distributions from a Roth IRA, which gets reported on the FAFSA as untaxed income,” Kantrowitz says. “If you’re going to take a distribution from a Roth IRA, you might want to wait until after the student’s senior year in college, assuming they are not going on to grad school.”