Many parents feel that it is more important to save for their child’s education and future rather than for their own retirement, but many financial advisors would disagree. Saving for your own retirement is more important than saving for your child’s education as you can’t take a loan out for retirement purposes, but you can take loans out for college. Let’s try to make sure you are on track for your ideal retirement before we start investing for your children’s future.
First, we would generally suggest that you and your spouse start by contributing up to the match that your employers contribute into your 401(k). This is one of the easier routes to take to help grow your retirement account since the money is automated to be taken out of your paycheck. It also reinforces the principal of saving money on a scheduled and consistent basis.
Next, if you are eligible, you and your spouse can each contribute up to $6,000 into a Traditional or Roth IRA per year (plus a $1000 catch up contribution if you are 50 or over). With a Roth IRA account, you can withdraw the contributions you made at any time without any penalty. When you turn 59 ½ and have had the account for at least five years, you qualify to take out all your money whenever you wish tax-free. What is even better is that if you are using the funds to help pay for higher education, the early distribution penalty is waived.
Make sure you have your retirement plans in place before you start planning on a college savings plan for your child/children. It can be hard to find an extra cash flow to help fund a 529 plan for your child, but one of the nice features of a 529 plan is that it has no monthly commitment. You are completely in charge of when you invest and how much you invest. Simply start by saving what you can, when you can.
Most important, just open the account. You can make contributions at your own convenience and even ask for help from friends and family. One way to help grow your child’s college savings is to ask for payments to their account in lieu of traditional birthday or holiday gifts each year.
Make 2021 the year you start contributing to your own future. Once you feel that you are on track for your own retirement, sit down with your advisor to discuss the best options to start saving for your child’s higher education. We would be more than happy to meet with you and help you figure out the right balance. Get started with free, no obligation meeting with any of our financial advisors.
Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer's official statement, which can be obtained from your financial professional. Be sure to read carefully before investing.
There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors.
If you withdraw money from a traditional IRA before age 59½, your deductible contributions and earnings will be taxed as ordinary income. You may also be subject to a 10% penalty on early withdrawals.
Roth IRA contributions are subject to income limitations.
You may take nontaxable withdrawals before age 59½ if the Roth IRA is held for at least five years and you meet certain distribution guidelines. Otherwise, an early withdrawal before age 59 ½ may be subject to taxes and a 10 percent federal tax penalty.
This article is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.