Should You Save For Retirement or Your Children’s College?

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As a parent of two boys (and soon a girl), it’s natural for me, as I’m sure it is for you, to always want to put your child’s needs first. But as a financial advisor, I usually recommend to my clients to put their child’s college second to their retirement. I realize this sounds harsh, but it’s a necessary reality for most people.

Since the advent of 529’s plans in 1996, parents have been under the misconception that they should be stocking away as much as possible for their child’s college education, if they can afford to or not. The reality is they should be maxing out their 401(k)/403(b) (especially if your employer matches) or other retirement plans first, BEFORE contributing to higher education. In fact, they should be maxing out their 401(k)/403(b) then maxing out a Roth IRA contribution (if eligible), THEN contributing to their child’s college education.

The Roth IRA is a retirement account that you fund with after-tax money that can grow tax-free and be distributed tax-free for retirement after the age of 59 ½. This is similar to 529’s, only 529’s can only be used for college education purposes, Roth IRAs can be used for anything. This is why Roth IRAs have become a great multi-purpose tool for people who want to save for retirement, but are also thinking about helping their child with tuition down the road. The only down-side to a Traditional or Roth IRA is that their maximum contribution limit of $5,500 ($6,500 if over 50) is much smaller than for 529 plans, which in Ohio, according to CollegeAdvantage.com, is $14,000 ($28,000 for married couples) per beneficiary without incurring any federal gift-tax consequences. If you have money for investing after contributing to your 401(k)/403(b), Traditional IRA or Roth IRA, then take advantage of 529 plans.

Here are some of the top reasons why you should put your retirement first before your child’s college:

Tax Benefits
Ohio taxpayers are only eligible for a deduction up to $2,000 for 529 contributions per beneficiary, per year from their state taxable income. When you contribute to a pre-tax retirement plan such as a 401(k), 403(b) or IRA, the tax deduction limits are much higher (i.e. $18,000 for 401(k)/403(b)s and $12,500 for Simple IRAs).

College is Expensive, but Retirement is VERY Expensive
According to HealthView Services, a 65-year-old, healthy couple can expect to spend $266,589 over the course of their retirement. This does not include out-of-pocket expenses or long-term care costs.

There are Scholarships, Grants and Loans for College, NOT Retirement
According to Debt.org, the U.S. Dept. of Education hands out approximately $46 billion in scholarships and grants every year. If you do the due diligence, your child is likely to find help with tuition. If your child isn’t eligible for scholarships or grants, talk to them about student loans. They are an investment in themselves that, for many graduates, can take a decade or more to pay back. A college diploma is no guarantee of a higher paying job so, make sure they are taking into consideration a career that will at least cover their initial tuition expenses.

Time is Not on Your Side
You only have one shot at retirement. Your child is still young and has time to figure out college or an alternative path. Be selfish when it comes to ensuring you are fully funded for retirement, or otherwise you may find yourself having to one day move in with your college-educated kids.