All about the challenges of Midlife Finance

Save for retirement or higher education?

If you have children, saving for their education must be on your mind. A college education will be even more necessary in the future, but the cost is increasing very rapidly. Saving for retirement and a college education at the same time can be quite difficult for an average middle class family. It’s best to max out on the 401(k), Roth IRA, and 529 plan to maximize the tax benefit, but not everyone can do that.

As a parent, I would like to help out with the college education cost as much as possible but, it is even more essential to save for retirement first. A kid has more options when it comes to college than we do for retirement. The student can apply for scholarships and financial aids. And if worse come to worse, he can always take out a loan. There are many ways to mitigate college costs. Attending a community college for the first two years is a great way to save on the basic general education classes. State colleges are also more affordable than a private school. Young people generally have a lot more options than retirees.

If you plan to contribute to your child’s education, it’s best to stash a lot of money in your child’s saving account. It’s better to save in a 529 plan. You can possible save some money on state tax and the asset will only counted less toward the expected family contribution. If the asset is in your child’s account, 20% of it will be counted as financial resources available to pay for tuition. On the other hand, the 529 account will only be rated at 5.6% toward the family contribution calculation.

Another reason to prioritize retirement saving first is because those accounts are not included in your child’s financial aid calculation. If you can choose between a retirement account and a taxable account, the retirement account is the way to go. The money in the taxable account will be counted toward the family contribution calculation. Your retirement account can also be drawn upon for higher education. You can borrow from the 401(k) account for this purpose. You can also withdraw funds from the IRA account for higher education without penalty. It’s best to put off withdrawals until your child’s senior year if possible. The extra income will most likely decrease the amount of financial aid available for the following years.

The fact is that it’s wiser to prioritize retirement saving first, then your children’s education. You can’t get a scholarship or loan to finance your retirement. The asset in your retirement account won’t count toward financial aid calculation so it’s a good place to stash your saving. If you already max out your retirement saving, then the 529 plan is the next place to save for your child’s education.

 

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