Is retirement quickly approaching? Do you also have children in the home who will be heading off to college at some point in the future? If so, you may be feeling pressure to save for both retirement and your children’s future college expenses.
You’re not alone. In a recent Gallup survey of parents who have children under the age of 18, 73 percent of respondents said they were concerned about saving for college, while 68 percent said they were concerned about not having enough money in retirement.1
The challenge for many families is finding enough extra money to save for both college and retirement. You may be in the same position. There could be extra funds available to save for college or retirement, but not for both.
In that situation, which goal should be the priority? Both are obviously important. You likely want your child to have access to the best education, but you probably also want to enjoy a comfortable retirement. How do you balance the two?
Uncertainty of College Expenses
It may be tempting to put off saving for retirement in order to save for your child’s education. However, before you go that route, think about the certainty associated with each goal. While it may be probable that your child attends college after high school, it’s virtually certain you will need to rely on your personal savings in retirement.
In recent years, fewer high school graduates are opting to continue their schooling at a four-year college. According to the Bureau of Labor Statistics, in the high school class of 2013, only 65.9 percent of graduates started at a four-year college the following fall. That’s down from a high of 70.1 percent in 2009.2
What are graduates doing instead of attending four-year college? A variety of things. Some are going straight into the workforce. Others are going to community college or trade schools. Still others may simply take some time off to consider their options.
You may already know your child is headed to a four-year university. However, if your child is younger, you may not know that with certainty. It’s possible you could save for college and your child may never need the money. On the other hand, you will almost certainly need to withdraw from your savings when you retire.
Alternative Options for College Funding
Another important factor to consider is your child may have more options to fund their education than you could have to fund your retirement. Retirements are often funded through three different income sources: Social Security, pensions and personal savings. If you don’t have enough personal savings when you retire, there are few alternatives available.
Your child, on the other hand, may find many options available when they reach college. They might qualify for scholarships or be able to work part-time to pay for a portion of college. And, although it may not be ideal, they could also take student loans. You likely don’t want your child to be saddled with debt after college. However, it is a viable funding option they can use for college.
Roth IRA: Balance Both Goals
You may not have to choose between saving for college and saving for retirement. With a Roth IRA, you can simply save money and decide how you want to use it later.
A Roth IRA is a unique savings vehicle designed with retirement in mind. You contribute money into the Roth IRA and then invest it according to your goals and risk tolerance. Taxes on the growth are deferred. And, as long as you make a withdrawal after age 59 ½, all of your withdrawals are tax-free. That means you can use a Roth IRA to set up a tax-free income stream in retirement.
You could also possibly use the Roth IRA to pay for college. If you are over 59 ½ when your child goes to college, you can simply take a tax-free withdrawal from the account at any time.
Even if you are under age 59 ½, though, you still may be able to use it. With a Roth, you can always withdraw your contributions without facing any taxes or penalties. You will pay taxes and possibly a 10 percent penalty if you withdraw your earnings before age 59 ½, but there are no such restrictions on your contributions.
You could put money away into your Roth IRA today, without making the distinction of whether it’s for college or retirement. If your child goes to college and you have plenty of money saved for retirement, you may then decide to withdraw some of your contributions to pay for college. If you need the money for retirement, you could help your child examine other funding options.
Whether you’re saving for college, retirement or both, you may benefit from having a plan in place. Talk to a financial professional and ask them to help you review your goals and needs. They can work with you to develop and implement an action plan.
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