Should You Save for Retirement or College?

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You’re cruising along at 35,000 feet when the cabin suddenly losses pressure. Yellow oxygen masks deploy from the ceiling, begging to be used. You start reaching for the lifeline but your child sitting next to you screams for help. What’s your next move?

If you follow the preflight safety instructions, you put on your own mask before assisting others, no questions asked. After all, it’s difficult to help others if you don’t help yourself first. This seems straightforward when we’re flying through the sky, but a recent report from T. Rowe Price reveals that it becomes cloudy when we’re on the ground, handling money, as an alarming number of parents are putting their own retirements at risk in order to fund their children’s college expenses.

Nine out of 10 parents believe their children will attend college, and since college typically arrives before retirement, the majority of parents feel like they should put money toward that first and save for retirement after. In fact, 49% of parents are willing to delay their own retirements to pay for their children’s education, while 74% feel guilty they won’t be able to provide more financial assistance. Overall, 63% are concerned about their children having enough financial resources to attend college, the most commonly cited concern besides health care costs.

Naturally, parents want to take care of their children first, but past experiences may be hindering the financial decision-making process. The report finds that 63% of parents believe they took on too much student debt themselves, and 79% want their children to worry less about money while in college than they did. Just over half of the 2,000 American parents in the study say they would take on at least $25,000 in debt to fund their children’s education, with 9% saying “whatever it takes.” Yet 66% of parents are still paying down their own student loans.

Finding a balance with your money is a crucial part of personal finance. Saving for retirement does not have to be mutually exclusive from saving for college. The Cheat Sheet recently spoke to Peg Creonte, Senior Vice President of Business Development at Ascensus College Savings, to better understand how Americans can improve their savings habits with 529 plans.

“Personal finance goals are different for everyone. Standard advice is to set goals according to personal priorities and then find the right vehicle for those priorities. A number one priority is never leaving 401(k) match money on the table. But, we see people in the industry that are actively planning to use retirement savings to help pay for college. If you are in this camp, you should strongly consider allocating some funds to a 529 plan. If you’re using retirement accounts to pay for college, you could incur penalties.”

529 plans are tax-advantaged investment plans to encourage saving for college. All 529 savings plans grow tax-free from federal and state income taxes, and withdrawals are not taxed as long as the funds are used on qualified expenses, including tuition, room and board, mandatory fees, books, and computers. Non-qualified expenses are subject to income taxes and a 10% penalty on the earnings. All 50 states and the District of Columbia offer access to at least one type of a 529 plan.

The 529 account holder establishes an account for the student (beneficiary) and selects how contributions will be invested over time. In general, there are degrees of risk tolerances to choose, and investment options often include stock mutual funds, bond mutual funds, money market funds, and age-based portfolios that become more conservative as the beneficiary nears college age. Account holders may change investment options twice per year, and many plans have contribution limits in excess of $200,000. There are no income limits for account holders.

Creonte recommends starting contributions slowly, and looking for opportunities to place money inside a 529 plan. “Even if you are just putting a nominal amount into a 529 plan, you can use events in a child’s life to encourage contributions toward college savings, in lieu of toys or other type of gifts. Most 529 platforms, including our own, have a third-party gifting functionality built into it, so it’s really easy around the holidays or the child’s birthday to give a gift into the 529 plan. That’s a way you can start college savings. It doesn’t necessarily even have to be your own funds — family and friends can contribute too.”

You can use money from 529 plans on any eligible two- or four-year colleges, vocational schools, and technical schools. If the child doesn’t attend a higher education facility, the plan can be rolled over to another qualified family member, including the beneficiary’s spouse, child, step-child, sibling, step-sibling, niece or nephew, and aunt or uncle. Most states have no age limit for when the money has to be used. If your child receives a full ride for college, the 10% penalty is waived and you only pay income tax on the account’s earnings if you decide to cash out.

As always, you need to do your own homework, especially when choosing 529 plans. You do not have to select the 529 plan offered by the state you reside in, but there might be additional tax benefits if you do, as many states offer a tax deduction on contributions. You should also pay attention to fees. Vanguard announced expense ratio reductions last year that will save an estimated $2 million per year for beneficiaries. Many state 529 plans offer Vanguard investment options, which are routinely the lowest costing funds in the industry.

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