It is an all too familiar challenge for many parents – with limited funds, how do you choose between saving for your child’s college education or saving for your own retirement?
On one hand, rising college costs saddle students with enormous debt, forcing many to return home after they graduate. On the other hand, students have access to more sources to pay for their education than you do to fund your retirement.
To help you manage these competing savings goals, we outlined three key strategies from financial experts.
1. Save for Your Retirement First
Even with the rising cost of college, financial advisors still recommend saving for your own retirement first – for good reason. There are no private grants, scholarships or low-rate loans to fund your retirement.
While you may worry about burdening your children with debt, shortchanging yourself now to help them pay for college could backfire. Without enough money saved for retirement, your children may have to end up supporting you.
Experts recommend that you begin saving for your retirement as early as possible with a 401(k), IRA and other investments. 1
2. Plan to Squeeze in Saving for College
To balance retirement saving with college saving, some experts recommend this innovative approach: When your first child is born, open a 529 college savings plan2. For the first five years of your child’s life, increase your 529 contributions while decreasing your retirement plan contributions.
After five years, switch back to funding your retirement plans to the full amount, while continuing to add what you can to the 529 savings plan. Taking this approach puts time on the side of your child’s educational fund earnings, so they will continue to grow, even after you return to saving more for your retirement.
3. Take Advantage of 529 Tax Breaks
One benefit of a 529 college savings plan is your investment grows tax-deferred, so you do not pay taxes on the interest you earn. Plus, the federal government does not tax any distributions you take out to pay for qualified higher education expenses such as tuition, fees, books and certain room and board costs.
Much like your traditional IRA contribution on your federal taxes, many states allow you to claim your 529 savings plan contributions as a deduction on your state taxes, lowering your potential tax bill.
To learn more about balancing saving for college and retirement, contact a Fifth Third Bank financial advisor.