Which comes first?
If you’re a parent, you very likely want to give the world to your children. If money really did grow on trees, you’d be out there in your backyard on a daily basis, ensuring your child could experience all the things that life affords—a fully-funded college education included.
However, the reality is that we have multiple financial goals at any given time and only a finite amount of money. So when it comes to taking care of your financial future versus funding a college savings account so your children aren’t burdened with loans, how do you decide which comes first?
Round one: The fight for putting retirement first
According to this survey, 47% of parents believe it’s more important to save for their kids’ college than their own retirement. While it’s commendable to want to put your kids first financially, the fact is, you have to put your retirement savings first.
Ultimately, you’re responsible for providing for your own future, and self-directed savings accounts such as 401(k)s, IRAs and Roth IRAs are there for you to take the reins in maintaining financial stability throughout your retirement.
The bottom line: while your children can earn scholarships and take out loans for college, you won’t be able to take out a loan to fund your retirement.
Considering playing catch-up? If you plan on putting college savings first and then focusing on retirement savings, keep in mind that you can’t control the stock market and you’re losing out on precious time that your money could be working for you by delaying saving. Not to mention, there’s the possibility of extended unemployment, sickness, disability or more that could leave you strained to even reach college funding and would result in a really painful situation for retirement. This could result in you having to depend on your children to support you during your retirement years, which would defeat the purpose of you stashing money away for them on the front end.
Round two: Fund your retirement
When it comes to saving for your retirement, start by contributing to a tax-advantaged retirement account. Depending on your employer, this may be a 401(k), 403(b) or some other type of tax-deferred retirement plan.
There’s also the option of a Spousal IRA for stay-at-home spouses, SEP IRAs and Solo 401(k)s for the self-employed or a Roth IRA for those who believe tax rates will be higher during retirement and are looking to pay the taxes today to save in the future.
Round three: Plan for college savings
Let’s face it—college can be expensive. However, planning ahead and getting the whole family involved can ensure you all land on solid financial ground.
Consider options for applying for financial aid by submitting the Free Application for Federal Student Aid (FAFSA). Also look into grants and scholarships that could cover portions of tuition, books and fees. There’s also the option of working part-time while in school to help cover expenses.
If you do decide to open an educational savings account for your children, the 529 plan is a popular option. This account offers federal tax advantages similar to a Roth IRA. Taxes are paid on the money before you deposit it. It grows over time and all of that money (principal, earnings and gains) can be withdrawn without any additional taxes when used toward qualified education expenses. Depending on which plan you choose to go with, some states also offer tax breaks on state income taxes. These accounts allow you to choose mutual funds or other similar investments and allocate them based upon the time frame until your child will begin school.
It is possible to plan for both retirement and college; however, the focus must be on fully maximizing retirement savings to start and then stashing away what you can into a college savings account. Plan for yourself first and then get creative to fund education expenses.