“An inheritance obtained too early in life is not a blessing in the end.” (Proverbs 20:21, NLT)
It’s a question faced by many as they navigate the balance of career and parenthood: save money for your own retirement first—or save for college for your children?
Ideally, of course, you’d be able to completely fund both. But if you’re not prepared for that, you’ll need to take a hard look at your finances. Remember, your children will be able to get loans, scholarships, and work-study programs to help pay for college; there aren’t many options to borrow money for retirement. Plus, by not saving enough for your own retirement, you risk becoming dependent on your children later in life.
If you don’t yet have children, put away as much as you can for your retirement now. Max out your 401k contributions and take advantage of any matching contributions from your employer. Once you have your first child, or if you have young children now, start saving a regular amount for their education each month. College costs are always rising, so you may want to set your goal a bit lower: save to pay half of your children’s tuition, or save what it would cost for them to attend a good state school.
It’s important to keep up with often-changing requirements so you know what your children’s college financial aid options are. The portion of tuition you’ll be expected to contribute is figured by your total assets, which generally include elective contributions to your own 401k, but may not include funds already in any qualified retirement plans and IRAs you have.
A Roth IRA can be an excellent way to save money that can be used either to fund your retirement or college. Individuals may take a qualified Roth IRA distribution tax- and penalty-free. A distribution of Roth IRA assets is considered a qualified distribution if two requirements are met. First, the Roth IRA must satisfy a five-year waiting period, beginning with the first day of the year for which the Roth IRA owner makes a regular contribution or, if earlier, in which the Roth IRA owner completes a conversion or retirement plan rollover. Second, the distribution must be made because of one of the following events.
- Age 59½
- First-time homebuyer
Distributions that meet the above requirements are referred to as “qualified distributions.” While individuals may take distributions from their Roth IRAs at any time, distributions that are not qualified distributions may be subject to taxes (and in some cases the 10 percent early distribution penalty tax). And unlike 529 accounts, there’s no additional penalty if Roth IRA money isn’t used for school.
Let your children know that they will be responsible for coming up with some of the money for their college education themselves. Teach them the importance of saving early, and help them establish savings accounts of their own. Encourage them to look at less expensive schools and to explore their financial aid possibilities for those schools, including student loans.
Even if you’re not able to completely fund your children’s education, with some careful planning and good stewardship, it’s possible to take care of your own retirement needs while still providing your children with some funds for school, as well as with sound money management principles that will last a lifetime.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.