Here’s a message that all parents need to hear: It’s OK to put yourself ahead of your kids. In fact, putting your retirement needs before their college costs is not only necessary but wise – and even thoughtful too.
Most financial planners advise never tapping retirement savings to pay for your kid’s education. Even as college costs skyrocket, there are still options to borrow that cash, and not so many options to borrow for retirement.
While parents are right to want nothing but the best for their kids, they need to remember to plan for their own best lives, as well. With these competing priorities, it’s natural for parents to wonder: Should I save for college or save for retirement? Here are the main factors you should consider to ensure both your children’s, and your own future is set up for success.
Start with Your Retirement!
Learning to prioritize retirement savings over college funds may feel like throwing your child’s education out the window in favor of your 401(k), 403(b) or other employer savings plan. But that couldn’t be further from the truth…
The fact is the retirement landscape has changed almost as much as the cost of college has risen. Pensions are gone. Social Security’s trust funds are shrinking, which puts benefits payouts in danger. Only around half of employers today even offer plans like a 401(k).
In a nutshell, you’re on the hook for funding your retirement. At the same time, your costs in retirement are likely to be higher than they’ve ever been. (Couples in their 60s should expect to spend over $250,000 in health care costs alone over the course of their retirements.)
Lost Retirement Savings Could Hurt You.
More parents are now thinking twice about using retirement savings to fund college dreams, and here’s why their hesitation is warranted: Paying for school from a tax-advantaged employer retirement account like a 401(k) can hurt you in several ways:
- A 10% tax penalty on early withdrawals below age 59½.
- A potentially bigger tax bill the year of withdrawal as the money you withdraw is counted as income.
- Loss of tax-free growth of your savings. Unlike taxable investment accounts, where you may have to pay the IRS annually for capital gains, employer-sponsored retirement accounts can grow tax-free.
- Less benefit from compounding. Early withdrawals will erode your portfolio’s growth potential.
The pitfalls unfortunately don’t stop with you. Tapping into your retirement savings can boomerang to hurt your kids if they need to provide financial help for you in your later years. Still not convinced? It’s also worth considering:
- There is no guarantee that your child will finish college, in which case you will have spent your savings and not even get a degree out of it.
- Your child can borrow money to pay for college, but there is no “retirement loan” for you to apply for when it comes time for you to stop working.
- While you would like to believe that your child will help you financially as you get older if you pay for his or her education, you cannot predict what the future will bring.
Consider a 529 College Savings Plan
While it’s perfectly normal for students to save and pay for their education, there are options for you to contribute outside of paying from your retirement fund through 529 College Savings Plan.
529 savings plans are investment accounts that provide tax-free growth and withdrawals for qualified education expenses. 529 plans may also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans. Almost every state has at least one 529 plan. There is also a 529 plan operated by a group of private colleges and universities.
A good alternative to a 529 plan for some investors may be a Roth IRA, which allows early withdrawal for qualified expenses like tuition, but has an annual contribution limit of $5,500 ($6,500 if you are 50 or older).
Any wise financial advisor will tell you that using your retirement nest egg, whether it’s the value of your home of years of savings, to pay for college is a big mistake. If you really want what’s best for your kids, ensuring you won’t be a financial burden on them down the road is a great place to start.
Article Brought to You by CKS Summit Group
CKS Summit Group is a retirement income planning firm headquartered in Clinton Township, Michigan with clients throughout the United States. CKS Summit Group Celebrating 20 years.
If you’re looking for fresh new ideas for your retirement income, our cutting edge tactical portfolios help our clients achieve safe, healthy growth of their savings and preservation of their principal balance. Find out more and set up your complimentary strategy session here today.