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Can You Save For Both Retirement And College?

We all have many financial goals, anywhere from starting a family, to buying a house, to saving for retirement, to funding education expenses. But prioritizing those goals is a different story. 

With so many needs, it can be difficult to separate saving for both long-term and short-term financial goals. One pair in particular many parents struggle with is saving for their kids’ education and their own retirement. 

Between retirement and college, which should come first? Is there a way to prioritize both without negatively impacting your savings strategy? We are excited to explore these questions and more with you today.

Put Retirement First

Many parents want to put their child’s education expenses above their own retirement, and while that is a noble goal, it isn’t the most fiscally responsible. Saving for retirement is one of the most difficult savings goals of your life. With dwindling pensions and the shaky future of Social Security, reliance on personal savings to fund retirement is higher than ever. 

Harnessing your retirement savings strategy is so important for your (and your child’s) future livelihood. As has been stated in the news before, you can borrow money for college, you can’t borrow money for retirement. It is important that you are able to separate the two financial priorities and not sacrifice or tap into your retirement savings to fund education expenses. 

Doing so can hurt you even more than you may realize. By paying for college with a workplace plan like a 401(k), you will incur a 10% penalty for any withdrawals before age 59 ½. Since the distributions are also considered ordinary income, you would be increasing your tax bill for the year. You also would lose the tax-free growth on your savings and not be able to take advantage of compound interest.

Many parents who do this also expect that their kids will help them out financially in retirement. According to a NerdWallet survey, 23% of parents who are saving for college expect their kids to provide some financial support during retirement. This same survey found that 16% of parents expected their kids to cover at least 30% of their retirement income. Relying on your kids for your retirement money can cause tension and hinder their own financial freedom

You don’t want to have to rely on other people for your retirement income. By putting your own wellbeing first, you will improve not only your life but the lives of your kids as well. As a parent and also a child, the best gift you can give your children is to have your own retirement secure, allowing your children’s nest egg to grow freely.

College Can Still be a Priority

Just because you put saving for retirement first, that doesn’t mean that you can’t save for college as well. It just means that you won’t sacrifice your retirement savings for education costs.

If saving for college is still an important financial goal for your family, take a look at your budget and find ways to help contribute additional funds. Start saving as early as possible in order to make the most of your contributions. 

One account to keep in mind is a 529 plan. This savings tool allows you to contribute after-tax dollars into the account with the money growing tax-free and remains tax-free upon withdrawal as long as the money is used for a qualified education expense. You can start contributing to a 529 plan as soon as you have your child to give yourself the most time. You can also encourage other family members to contribute money as well including grandparents and other loved ones.

Parents and grandparents can start their own 529 plan and while not optimal for the FAFSA application, it allows them to get assets out of their estate. Here’s an example. A New York state grandparent who is married can deposit $150,000 into their grandchild’s 529 plan to cover college expenses — an amount equivalent to a $30,000 contribution each year over five years ($15,000 per year is the gift exclusion limit in 2019). When filling out their federal tax forms in 2019, they can elect to include this gift over a five-year period (i.e., $30,000 x 5 = $150,000), thereby excluding the $150,000 from any gift taxes. Inform your accountant that you will need to fill out the IRS Form 709. See also page 7 of Form 709 Instructions on how to fill out the form). 

IRS Form 709 (page 2)

Get your kids involved in the saving process. This can be a great tool to teach them about the importance of long-term savings goals and how to correlate their saving and spending habits with their values.

Goals Need Priorities

Not all of your financial goals will look the same. It is important to be able to separate your short-term and your long-term financial goals, as well as how to prioritize them. When you prioritize your goals, think about your values.

  • What provides the most meaning to your life?
  • How will completing this goal help you feel fulfilled?
  • Can this goal make an impact in my life and in the lives of those around me?

Use these questions to help guide you in prioritizing your financial goals. Remember, may not always be able to fund two huge big-ticket items at once. But that is ok. Keep your needs and priorities at the top of the list and you will put yourself and your family in the best place for success. 

Does your family budget need a refresh? Give us a call and we can help get you on the right track today.