With college costs soaring, it’s no surprise that many parents start thinking about how to pay for college tuition when their children are still newborns.
If this describes you, your lofty plans to save for Junior’s college tuition before he can even walk might not be the best financial move. As difficult as this sounds, you should probably put yourself first. In fact, financial experts say that beefing up your retirement fund should come before investing in a college savings account, including a tax-advantaged 529 Plan. Say what?
It’s true and here’s why: You won’t have to shoulder the entire burden of college but you will have to afford to live when you retire — unless you want to rely on your kids or eat noodles out of a box. To pay for college, in turn, Junior might be eligible for loans, scholarships and grants. None of these are an option for your retirement. "You can get a loan for school but can’t get a loan for retirement," says Andy Tilp, president of Trillium Valley Financial Planning in Tualatin, Oregon.
"Realistically, it’s more important to put money away in your retirement plan than a 529," says Andrew Comstock, president of Castlebar Asset Management in Leawood, Kansas.
To help you save for your retirement and then your child’s college education, here are three ways to get a jumpstart:
1. If possible, start saving immediately with a flexible Roth IRA.
Funded with after-tax dollars, Roth IRA contributions grow tax-free. Here’s another big perk: A Roth IRA gives you the flexibility to use the money for other purposes. For example, if you need to use the funds to pay for your child’s education, you can withdraw money without a penalty. This means you can start saving for your retirement now with the peace of mind that you can use the funds for tuition costs if you need to.
In 2016, you can invest up to $5,500 in a Roth IRA so long as you don’t earn more than $132,000 if you’re a single filer or $194,000 if you’re filing a joint tax return.
2. Take advantage of your company’s 401(k) retirement plan.
Ok, this won’t pay for Junior’s college education unless you want to pay a penalty but it’s a great way to save for your retirement. If your company offers a 401(k), you should definitely be earmarking pre-tax dollars into this account. You likely won’t miss the money as it will be deducted right out of your pay. Plus, if your employer offers a dollar-for-dollar percentage match, that’s free money that you don’t want to pass up. Here’s an example of how this would work: Say you earn $2,000 a week and your employer offers a six percent dollar-for-dollar match. If you are also contributing six percent of your weekly gross income, or $120, into your 401(k), your employer would then deposit an additional $120 into your account. This could amount to about $6,000 of additional retirement savings annually.
3. Once you have a leg up on your retirement, it’s time to consider a 529 plan.
Often considered the best college savings plan, a 529 is a savings vehicle that allows you to put away tax-free money to pay for higher education costs. The plan has many tax advantages plus you can use it for your own higher education or to fund college for a relative if Junior doesn’t go to college. At the same time, a 529 can only be used for educational purposes and if you withdraw the money for any other reason, you’ll be subject to a penalty. To start building a 529 plan early even if you can’t initially fund it yourself, here’s a thought: Why not ask grandparents, aunts and uncles to put money into the account instead of buying more toys as gifts?
"Parents often start (putting money into a 529) early out of emotion. Don’t do that. You have bigger priorities," says Johanna Fox Turner, a senior partner at Fox & Co. Wealth Management in Mayfield, Kentucky.
Image: Gui Vicente