These days, parents have several financial concerns.
Between spending on day-to-day necessities and investing for the future, balancing your financial priorities today and tomorrow can be challenging. This balance becomes even more critical when considering saving for college and retirement.
Can you save for both goals at the same time? Which should you prioritize? What strategies could bring clarity, purpose, and direction to the process?
Today, we’ll uncover the answers to these questions and more.
You Don’t Have to Choose Between Your Child’s Education & Your Retirement
Even though college costs are on the rise, parents still view college funding as a top financial priority. According to SoFi, about 83% of parents plan to help cover a portion of their child’s education expenses.
The keyword is portion.
Parents don’t have to cover every dollar, cent, fee, and Starbucks runs throughout their child’s 4+ years of earning a degree. It’s all about striking the right balance—something your financial plan can help you do.
Instead of framing the experience as retirement versus college, think about it as retirement and college, knowing that your retirement plan should take top billing.
Comprehensive financial planning is all about using your resources in ways that are most fulfilling to you. If helping out with your children’s education is on that list, we can work together to help you intentionally invest towards that goal.
Here are a few excellent places to start.
But, Prioritize Your Retirement Plan First.
We’ll say it once (and likely, say it again), put your retirement plan first.
You want to have the freedom and flexibility to retire on your own terms. Borrowing against your retirement or skipping a few contributions here and there will really add up. Doing so not only takes away from your nest egg but it may also hinder your motivation and progress toward reaching your retirement savings milestones.
While there may be loans for college, there is no loan for retirement. And as such, you must build a retirement investment plan that works before you add on other goals.
Think about your retirement plan like an oxygen mask on an airplane—you have to put yours on first for a reason.
How can you more intentionally save for retirement?
- If possible, max out your accounts. In 2021, you can contribute up to $19,500 in a 401(k) and $6,000 in an IRA. Maxing out your traditional 401k specifically can lower your taxable income and help you save more for retirement. The same limits apply to Roth 401(k)s, but for those, you contribute after-tax dollars.
- Contribute at least enough to qualify for your company’s match—it’s free money!
- Increase your retirement contributions with raises and promotions.
- Allocate a portion of your bonus or additional paychecks to your 401k.
- Redirect a percentage of monthly spending to retirement—do you really need six streaming services, for example?
- Take advantage of catch-up contributions in your 401(k) and IRA, if age 50 or older.
- Ask your advisor about Roth conversions.
Remember, it’s critical to fund your future first, then turn your attention to other avenues and goals.
Next, Create A Comprehensive College Plan
You can think more critically about building an education savings plan now that you’re saving for retirement with confidence and purpose.
But before you start opening 529 plans, it’s important to get a big-picture view of your child’s college/education goals.
- Does your child know where they want to go to school? What are the financials associated with that type of institution?
- Do you know how much “school” your family can afford? Our complimentary college funding resource helps you start to figure this critical question out.
- What scholarship opportunities should you and your child begin to look at? Perhaps your child is quite athletic or scores high on standardized tests—both circumstances may lead to different scholarship or grant opportunities.
Once you understand a bit more about your child’s desired educational landscape, you can begin crunching the numbers and creating an investment plan.
One of the best ways to invest for your child’s schooling is to open a 529 plan. A 529 plan is a state-sponsored investment account for education. You contribute after-tax dollars, investment earnings grow tax-free, and distributions for qualified education expenses remain tax-free. Though contributions are after-tax, some states offer a state tax deduction for contributions up to a certain amount. Check with your state and plan to see if you qualify!
Qualified expenses may range from tuition and fees to supplies to room and board and more. While you can use 529s for several costs, some important restrictions include application fees, standardized tests, transportation, health insurance, and entertainment/extracurricular expenses.
529 plans offer parents several benefits, including:
- Tax-advantaged option to save for education
- High contribution limits—contribute up to $15,000 (current gift tax exclusion) per parent per year
- Flexibility—you can change beneficiaries if needed
- Use up to $10,000 lifetime amount for student loan repayment
- Use up to $10,000 per year for K-12 education
- Ability to enroll in another state’s 529 plan. You don’t have to enroll in your state’s plan if you find another one with more robust benefits/investment options.
- Potential resident tax benefit—option for a state tax write-off if enrolled in your state’s plan. Bonus: seven states (including Kansas and Missouri) allow you to receive the state tax benefit, even if you’re enrolled in another state’s plan!
In addition to saving in a 529, you can also explore other options like a Roth IRA. Yes, you can use a Roth IRA for education purposes! In this case, you may not even want to draw from your own Roth IRA; you could help your child open, fund, and use their account to cover some college costs. Keep in mind that your child must earn income to be eligible to contribute to a Roth IRA.
Roth IRAs tend to have a more diverse and expansive investment selection, and you have more flexibility with fees and custodians. But the contribution limit is much lower, only $6,000 in 2021, and distributions do count on the FAFSA form, which could hinder financial aid eligibility.
You can consider several other avenues, like your brokerage account, a custodial account, and more; it all depends on which avenues make the most financial sense for you and your family both today and down the road.
We’re passionate about uncovering the solutions that will work for you and helping you reach your education goals.
Keep The Dream (And The Degree) Alive
Your financial plan doesn’t consist of just one singular goal. It’s full of goals, dreams, ideas, and possibilities that bring excitement and joy to your life.
So, your investment plan doesn’t have to revolve around one goal forever; it can and should incorporate several goals that you work toward at the same time—college and retirement are likely some of the two most important on that list.
Crafting a plan to help you accomplish both centers on prioritization, discipline, and a dedicated strategy. Our team would love to help you hone your vision and get you working toward your (many) goals. Set up a time to talk with us more about it today.
The contents of this article are for general information and educational purposes and should not be construed as specific investment, financial planning, tax, accounting, or legal advice. Please consult with a professional advisor before taking any action based on the contents of this article. All investment and financial planning strategies involve the risk of loss that you should be prepared to bear. We cannot guarantee any investment performance whatsoever, and past performance is not indicative of potential future returns.