Why You Should Prioritize Your Retirement Over Your Kids’ College Savings

Today’s topic is a tough one: your retirement is more important than your kids’ college savings. As a parent of three young kids, I know this isn’t easy to hear. We all want to provide the best for our children, but when it comes to financial planning, you need to prioritize your retirement over their college education. Here are six compelling reasons why this is crucial, no matter where you are in your financial journey. Make sure to stick around for all the details.

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Prioritizing Retirement Over College Savings

The decision to prioritize retirement savings over college savings is one of the most hotly debated topics among parents and financial advisors alike. The truth is, focusing on your retirement first isn’t about being selfish; it’s about making a sound financial decision that benefits both you and your children in the long run. Here’s why:

No Borrowing for Retirement

You can’t borrow for retirement. Unlike college education, retirement has no loan options. Imagine approaching a bank and asking for a retirement loan because you failed to save enough—impossible, right? On the other hand, there are numerous loan options available for college education.

Most of you, especially if you’re high-income professionals like physicians, are well-aware that student loans are readily accessible. Whether it’s federal loans, private loans, or even Parent PLUS Loans, the avenues for borrowing to support education are plenty. This is why the number one reason for prioritizing retirement savings is simple: you can’t take out retirement loans, but you can take out loans for college.

Multiple Funding Streams for College

College expenses can be funded through various channels, unlike retirement, which relies heavily on personal savings and investments.

School Choice Impact on Costs

One of the first decisions impacting college costs is the choice of school. There’s a substantial difference in tuition between an Ivy League school and a state school. For example, Penn State (state school) is much more affordable compared to the University of Pennsylvania (Ivy League). While the benefits of an Ivy League education are considerable, the cost must be weighed against the potential financial strain.

Student Contribution

Students can also lighten the financial load. Scholarships, work-study programs, and part-time jobs are some of the ways they can contribute to their education expenses. Whether it’s earning credits back through work at the institution or getting a side gig, there are multiple avenues for students to pitch in.

Parent Savings

As parents, you might have already set up 529 plans or other savings accounts like UGMA for your children’s education. In states like Florida, you might also have prepaid education plans. These accounts can significantly offset college costs but should not be mistaken as primary savings vehicles at the expense of retirement funds.

Parent Cash Flow

For high-income professionals, maintaining a steady cash flow can also help in paying for college. If your kids were in private school, you’re likely already accustomed to significant educational expenses. Transferring that same cash flow toward college costs can be a seamless transition.

Academic Medicine Benefits

If you’re a physician in academic medicine, many institutions offer substantial tuition benefits, either free or heavily discounted education. Schools like Penn, Vanderbilt, and Yale provide excellent education credits, making college more affordable. Even if you aren’t in academic medicine now, consider switching to such institutions as your children approach college age.

Using Retirement Funds for College

A well-funded retirement plan can be a savior when it comes to college expenses. Opening taxable brokerage accounts to build funds in a tax-efficient manner can serve multiple purposes, including educational expenses and other significant life events like weddings or first home purchases. This flexibility is invaluable.

Overfunding Retirement Accounts

Overfunding retirement accounts and making course corrections over time can lead to ample savings that can eventually be redirected to college costs if necessary. But heed my advice: avoid touching your Roth IRA or 401(k) savings for college. These accounts are your most valuable long-term assets, and taking loans from them can jeopardize your financial future.

Better Tax Benefits for Retirement Savings

Tax Advantages of Retirement Accounts

Retirement accounts like 401(k)s, 403(b)s, and 457(b)s offer much better tax benefits compared to 529 plans. Contributions to these accounts are often tax-deductible at the federal level, which is not always the case with 529 plans, especially if your state doesn’t offer a tax deduction. For instance, states with no income tax, like Florida, offer no special tax benefits for 529 plan contributions.

Backdoor Roth IRA Benefits

Additionally, utilizing strategies like a backdoor Roth IRA can offer significant tax advantages. While 529 contributions may save you some state taxes, the federal tax savings on retirement accounts are generally much more beneficial.

Asset Protection and Estate Planning

Superior Asset Protection

Retirement plans typically offer better asset protection compared to college savings plans. For example, accounts like 401(k)s and 403(b)s are protected under ERISA (Employee Retirement Income Security Act), making them virtually untouchable in lawsuits.

Estate Planning and 529 Plans

Moreover, estate planning becomes easier with retirement accounts. If you hold a 529 plan, it’s usually owned by you with your child as the beneficiary, which could expose it to creditors. However, you can add a successor owner to a 529 plan to avoid probate, which is a useful estate planning trick. Ensure you list someone like your spouse as a successor owner to make transitions smoother should anything happen to you.

Variable Cost of College vs. Retirement

Difficulty in Predicting College Costs

Unlike retirement, college costs are highly variable. You might plan for an Ivy League education when your child is young but end up opting for a state school when the time comes, drastically altering the financial requirement.

Stable Retirement Planning Numbers

Retirement planning, while not immune to economic fluctuations, offers a more stable projection. You can better gauge your needs in your middle to late years of your career, allowing you to plan more accurately.

Potential for Changes in College Costs

Let’s not forget, educational costs are continuously rising. While there is hope they might stabilize or even reduce, counting on this is risky. Thus, it’s better to secure your retirement first before taking chances on fluctuating college expenses.

Tips for 529 Plans

Opening Accounts Early

Open a 529 plan as soon as possible. Even if you aren’t ready to fund it immediately, just having the account open can be beneficial. Grandparents and other family members often love contributing to these accounts for birthdays and holidays.

Grandparent and Family Contributions

Let your family know that contributions to the 529 plan are welcome gifts. This can help build the account without derailing your retirement plans.

New 529 to Roth IRA Transfer Rule

Starting in 2024, the new rule allows you to transfer unused 529 funds to a Roth IRA after 15 years. This is another excellent reason to get the account open early.

Small, Consistent Contributions

Consistency is key. Even small contributions can add up over time. You don’t have to make large monthly deposits; even $100 or $250 per month can make a big difference in the long run.

Holiday and Special Occasion Funding

Think beyond traditional gifts. Utilize holidays and special occasions to make additional contributions to the 529 plan. Limit the amount of material gifts and suggest 529 contributions instead. Your children will benefit more from a well-funded education account than from a plethora of toys and gadgets.

Balancing Priorities

Securing your retirement should always come first. Once your retirement savings are on track, you can then focus on college savings. This approach doesn’t mean you ignore your children’s future; it means you are setting a solid financial foundation for the entire family. Being financially secure in retirement ensures that you won’t become a financial burden on your children later in life, and it also gives you the flexibility to assist them in other meaningful ways.

Your kids can get student loans and scholarships or work part-time, but your best safety net is your well-planned retirement savings.

Common Questions About College Savings vs. Retirement

• Is it selfish to prioritize my retirement over my kids’ college education? No. It’s a prudent financial decision that ensures long-term family stability.
• Can I use my retirement funds to pay for my kids’ college? Yes, but it’s advisable to explore all other options first, such as educational loans and scholarships.
• What are the best savings vehicles for college expenses? 529 plans and taxable brokerage accounts are good options.

Top Mistakes in Prioritizing College Savings Over Retirement

1. Draining Retirement Accounts: Using IRA or 401(k) funds for college tuition is one of the biggest mistakes you can make.
2. Ignoring Available Loans: Failing to leverage student loans or parent PLUS loans instead of depleting personal savings.
3. Overestimating State Tax Benefits: Misjudging the benefits of 529 plans, especially if your state doesn’t offer tax deductions.

Alternative Ways to Fund College Education

• Employer Education Benefits: Look into your job benefits to see if there are any educational support programs.
• Military Programs: Consider ROTC scholarships or other military funding programs.
• Crowdfunding: Platforms like GoFundMe can be used for college expenses.
• Grants and Scholarships: Apply for as many as possible. Resources like Fastweb can be a gold mine.

Conclusion

Balancing your retirement savings with your kids’ college education can be challenging as a parent, but it’s crucial to prioritize your own financial security first. A sound retirement plan ensures that you won’t end up being a burden on your kids later in life and gives you the flexibility to assist them in many other ways. Open a 529 plan, explore various funding streams, and always keep the long-term picture in mind.

 

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Disclosures