You want them to have a successful future, but you have a future of your own, too
You know that saving for your retirement is important, and you want to make sure you’re not a burden on your children when your prime earning years are behind you. At the same time, you want to make sure your kids have the best start they can in the working world, and that they have the opportunities a college education provides.
So where should your savings be going first? Should you be funding a 401k or a 529?
“Unless your retirement plan is for your children to take care of you, retirement funding must come before education funding," says senior financial adviser Rick Lowe.
Lowe’s opinion reflects a pretty clear consensus amongst personal wealth and finance experts. It might sound selfish, but think about it: if you don’t fund your own retirement, you’ll be counting on someone else to fund it for you, and chances are that someone will be your kids. Being a little “selfish” now will make things easier for everyone down the road.
Strange as it sounds, making sure your retirement accounts are well-funded now can help when it comes time to pay for college. Your assets are a big factor when it comes to determining the financial aid your children will receive; having money in the right retirement accounts will increase your kids’ eligibility for scholarships, grants and favorable loans.
“You are supposed to cough up roughly 5% of your net worth every year towards college costs, in addition to a large piece of your paycheck,” says Forbes’ William Baldwin. “In the asset calculation the aid formulas have a surprisingly light touch on retirement: they exempt accounts like IRAs and 401ks… While tucked away in a retirement account, your assets are protected from both the tax man and the college bursar.”
That doesn’t mean you can’t save for both college and retirement, but unless your kids are already teens, you shouldn’t be saving for college unless you’ve maxed out your retirement contributions. The right retirement account can also provide a source of backup funding for college.
“The portion of [an IRA] distribution used for qualified higher education expenses is exempt from the 10% early distribution penalty,” says financial aid expert Mark Kantrowitz. “Qualified higher education expenses include tuition, fees, books, supplies and equipment, as well as room and board if the student is enrolled at least half time in a degree program.”
If you’re expecting to start paying college tuition in the next five years or so and you’ve been good about funding your retirement accounts, start socking some savings into a 529. As expensive as college is, your retirement is going to cost considerably more, and the tax benefits of retirement savings will put you and your kids in a better position to pay for college anyway.
You have to save yourself—or in this case, save for yourself — before you can save for others. Make sure you’ll be taken care of in your retirement years, and your kids will thank you for it.