When thinking about what the future holds for your child, one of the biggest stressors comes from paying for college. Trying to save for your own retirement while saving for their education can prove to be a daunting task. You want to ensure they are able to receive a proper education and land a successful job, but you are looking forward to living the comfortable life you have dreamt of in your retirement.
While most individuals deem it easier to save one large lump sum of money to later divide into separate endeavors, financial planning professionals advise dedicating individual accounts for each financial investment. Having all of your money in one place may be easier for short term progress, but this can lead to confusion when the time comes to send your not-so-little one off to college.
Let’s imagine you have saved $250,000 in one large bank account. It seems like a lot of money until you think about the actual cost of college. What portion of that savings will prove efficient enough to pay for college? Will there be any retirement money left? There really is no sure-fire way to tell. If you end up spending too much of it on college, there will be nothing left to enable you to enjoy your “golden years”.
Here are a few topics you should consider when preparing for retirement and college tuition.
Deadlines
There are different deadlines to meet when saving for college and retirement. A college tuition is most likely going to land in your forefront before retirement will. This implies that the amount you are putting back for college should realistically be more than you are tucking away for retirement, as you have a longer period of time to save for that. A child just starting school at age 5 will only have approximately 13 more years before their freshman year, while depending on age, you may have quite a few more years than that before retirement, allowing you a longer period of time to save.
Tax Advantages
There are many types of college savings accounts. 529 college savings plans and Coverdell Education Savings Accounts grow tax-deferred and the proceeds can be withdrawn tax free. This means when it is time to withdraw money for qualified education, you do not have to pay taxes on it. With custodial accounts at least a portion of your earnings will be tax exempt and some or all will be taxed at a lower tax rate.
Rules of Retirement
Some retirement plans allow you to take a portion of your savings for a higher education without paying a penalty. Others may require you to pay back the borrowed amount after losing or changing jobs, plus interest. Some examples of retirement plans would be a 401(K), IRA and/or a Roth.
Prioritize your Retirement
An education is important, but there are various relief programs available to aid students in their search for college tuition. Loans, grants, scholarships and financial aid are just a few examples. There is nothing of the sort when it comes to retirement. Even if your child acquires debt during their search for a higher education it can be thought of as an investment in their future. Much like your retirement savings, which should be considered your reward for all those years of hard work.
M&A Wealth has an experienced financial advisor in Sugar Land that helps families with retirement planning as well as education planning. Contact us today for a free consultation.
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