Extra money in the budget? Maybe you’ve been pulled over to another team and received a nice pay bump. Maybe you’ve paid off the fun mobile in the driveway. Either way, if you have extra funds, two options that many clients consider is increasing their 401k contribution or starting a college fund for their kids.
We’ll just start this discussion with the assumption that you are putting in enough money to get the Lockheed match in your 401k.
There are a lot of factors that affect how clients feel about college funding. Many times it depends on how much assistance they received from their parents or how they feel about higher education as a whole. After having this discussion with clients, most feel that retirement should be put ahead of college funding (sorry for the spoiler).
A few thoughts on why I advise saving for retirement ahead of college funding:
- A wide variety of grants/loans are available for college students. There are no loans to fund your retirement.
- You can always pay off a loan for your child when you retire if you have the extra cash in retirement. But it’s unlikely that your kid will help finance your retirement even if you give them a paid-for education. And you don’t really want to shack up with the kids when you retire do you?
- Some parents feel like it’s good for the child to have “skin in the game” when it comes to showing up for those EARLY 8 a.m. classes.
- If you have a retirement surplus, you can use those assets to help fund college expenses*. However, you may be penalized for using college assets for retirement funding.
- Your future college student may qualify for grants and/or scholarships. They may also find funding assistance depending on their academic path or career choice after college (TEACH Grant for example, click here for more info).
- Technology is changing the college experience, and higher education as we know it may change and possibly make it less expensive for future generations.
Other resources for college funding options:
Federal Student Aid Website – Site with tons of info and resources
College Savings 101 – USNews.com resource page if you want to look at college savings options, especially the 529 college savings plan.
If your retirement plan is on track, there is nothing wrong with funding your children’s education in addition to your retirement. Just make sure you have done the analysis to make sure you are on track to retire when you want.
Not sure if you are on track or not? You can check out this article or fill out the form below and we’ll contact you to help you see where you are at.
*Note that withdrawals from certain retirement accounts may be subject to income taxes, and unless certain requirements are met, a 10% penalty tax may apply.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended as tax advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
