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3 Steps: Don’t Sacrifice Retirement for College Savings

Does your 12-year-old have a burgeoning desire to become a veterinarian? Do you have a four-year-old who wants to “build big things?”

My kids are six and three. They’re already set on becoming a ballet teacher and a tractor driver (yes, a tractor driver!) and like many parents, I’ve taken a stab at saving for college.

But you might be wondering if you’ve got the right approach — after all, you have your future to think about, too.

I’ve often wondered what it would look like if you could see actual green bills stacked up in say, two cookie jars, every single month: a college savings cookie jar and a retirement cookie jar. Think it’s possible to envision what your cookie jars look like each month so you can allocate the right amount of money into the appropriate jar?

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The most critical question is this: Have you started the college savings cookie jar or the retirement cookie jar at all? If not, that’s okay — because it’s never too late! The most important thing you can do is start saving as soon as possible.

Step 1: Do some research.

One of the first things you can do is research your college savings options. I get it — this might sound exhausting (laundry, meet-the-teacher day at school and ballet lessons definitely take priority most of the time) but the “I’ll do it later” attitude sometimes means it never gets done. Here are a few ways you can get started on the major marathon of saving for college (remember, it’s possible!).

529 plans

Check out the 529 plans in your state. More than half of all states offer residents a state income tax deduction or income tax credit on contributions to your plan.

Make sure to decide whether you want to invest in a 529 savings plan or a prepaid tuition plan. 529 savings plans allow you to invest after-tax contributions that grow tax free for qualified educational expenses such as tuition, room, board, fees and books.

Prepaid tuition plans mean you “lock in” your tuition costs by paying in advance on all or part of the costs of attending a specific college or university. There are pros and cons to both options, but a notable “con” for prepaid plans is that a lot of schools have done away with their prepaid tuition plans. Another major consideration is that any funds you invest in a state-run prepaid plan can only be used for tuition and fees at in-state public schools. What if your son or daughter has his or her heart set on going to an out-of-state or private college or university?

Roth IRAs

Did you know you can use your Roth IRA to pay for college? You can withdraw from a Roth penalty free for qualified educational expenses, which is handy if your child decides not to go to college. This can solve the “How much should I save for retirement?” conundrum because you’re literally withdrawing from the same cookie jar. Know that there are limits ($6,000 in 2019) and be sure you don’t withdraw everything during the college years if you’re using your Roth for retirement, too.

Educational savings accounts (ESAs)

Educational savings accounts (ESAs), also called Coverdell accounts, offer tax-free withdrawal options as well. You can only contribute a limited $2,000 per year. There are also income limitations but you’ll benefit from a wide variety of investment options.

Trusts: UTMA/UGMAs

Trust accounts, called UTMAs or UGMAs, are accounts that can contain money until an age that’s determined by your particular state, usually between 18 and 21. Your child (the beneficiary) can do whatever he or she wants with the money, though — so he or she can burn it all up on college or a cruise around the world.

You’ll also need to research which retirement account fits you best if you don’t already have a retirement savings plan put in place. Research 401(k)s, individual retirement accounts (IRAs), Roth IRAs, Roth 401(k)s, SIMPLE IRAs and SEP IRAs or a combination of a few different options on the menu. For example, it’s possible to have a 401(k) and a Roth IRA. Remember, it might be appealing to save money in a Roth for both retirement and college.

Step 2: Think carefully about your two cookie jars.

Have you ever used a college cost calculator? Twelve years from now, a private liberal arts college will cost $368,248 at my alma mater, according to Vanguard’s college cost projector. Eek.

What about your needs? In a similar vein, have you used a retirement calculator? How much are you going to need during your golden years? Are you planning to stay exactly where you are and never move an inch except for a weekly sojourn to the grocery store? Or does your retirement plan involve hitting all 221,800 islands in Sweden — in other words, are you going on a 25-year vacation?

As you might imagine, no two retirements look the same, so whatever your cubemate at your office needs to save for retirement is unlikely to be the same amount you may need as a cushion.

Are you putting too much in the college savings bucket and not enough in the retirement bucket? Remember, there’s a long list of ways to pay for college that don’t require you to cheat yourself out of your retirement savings. They include:

  • Scholarships
  • Grants
  • Your child’s savings and earnings
  • Federal student loans
  • Private student loans

Know how much college will cost you and how much you’ll need for your own retirement. Knowing these numbers will give you a more concrete idea of how much you can reasonably save and also how much you’ll be able to pay out of pocket. Remember: You can borrow for college but you can’t borrow for retirement.

Step 3: Commit. Automatically.

Have you determined that your cookie jars are perfectly aligned with your goals? Or maybe you need to pour more into your retirement cookie jar — and your child may need to rely more on scholarships and loans. Here are the steps you can take:

  1. Talk to your company’s HR office and allocate those new retirement dollars to reflect your new savings plan, or get a 401(k) started if you don’t already have one.
  2. Visit a college savings plan website and make contributions happen automatically every month.
  3. Frequently revisit your allocations to be sure you’re staying the course. It’s okay to change tack after a few years if you think you need to boost your retirement or contribute more to college savings. Whatever you do, make sure you’re saving the right amount for your child’s future — and your own.  

Make your cookie jars count

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Much like parenting, the questions you ask yourself might be endless: Am I giving each cookie jar the right amount of attention? Am I doing the right thing?

Think of it this way: Your kiddo can always get a student loan, but how will she feel if she has to support you in your retirement?

If you can fulfill your kids’ needs and your own, great. Just remember, it’s sometimes okay to keep the cookie jar all to yourself.

Author Bio:
Melissa Brock, higher education and personal finance expert, is the Money editor at Benzinga. She spent the last 12 years working in the admission office of her alma mater. She’s also a mom to two young kiddos and she feels like she spends most of her time at the grocery store.


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