Retirement vs. College: What Should Be Your Savings Priority?


If you have kids, the decision to put all your extra money aside in retirement accounts or prioritize saving for college expenses can be tricky. In this fool live Video clip, recorded on November 3, Certified Financial Planners® Matt Frankel and Robert Brokamp discuss what parents should keep in mind when deciding where to save.

Matt Frankel: The longest is Dave’s, it says “Retirement and college? All the research suggests saving for retirement first, then saving for college. But I can not find anything specific for the transition from retirement only to both. “Have you seen any concrete guidelines to help you understand when retirement savings can end? Well, first of all, I would say it’s not just retirement. I save both for my retirement and for my children’s accounts, their 529s. But I definitely prioritize my retirement savings.

The reason I’m doing this is because it’s easier to pay for your kid’s college from your retirement accounts than it is to pay for your retirement from your kid’s college accounts. It’s like a one-way street. IRAs in particular have this exemption where you can withdraw money early for any reason and for any amount in order to pay for higher education expenses. There is no exception in 529, unless you have been called upon to pay your own retirement expenses.

It’s not just that your own retirement should be a priority. It’s that you can effectively use your own retirement accounts to fund your children’s college if you need to. A Roth IRA makes them a great college investor. It’s essentially the same tax structure as an after-tax 529 plan in terms of tax-free withdrawals. But if you don’t end up finding the money for college, you can just use it for your own retirement. IRAs serve both of these purposes, while college accounts typically only serve one, 529 have retirement or state tax benefits.

If you live in a state that has income tax, chances are good that you expect your contributions to be tax deductible. They have a little extra tax benefit, which is why I contribute both to my own retirement and to the success of my children’s accounts. But if there isn’t enough in these accounts, it’s easy enough for me to dip into an IRA to make up the difference. It was my longest answer.

Robert Brokamp: Yeah, just make sure everyone understands what Matt was talking about. You use your IRA for qualified higher education expenses. You don’t have to worry about that 10% early distribution penalty that you would normally pay if you’re under 59.5, you still owe taxes. But as it pointed out, all the money you put into a Roth IRA comes out tax-free and penalty-free and contributions come first.

Now, once you start withdrawing income from our Roth IRA, it gets a little more complicated. But in 2001 or 2002 I wrote an article on how the Roth IRA is almost that you can use it as an emergency fund because it can be very flexible. Just so you know you can’t do the same with 401 (k) or 403 (b). You can’t use them to pay for your education and avoid that 10% early penalty. I know that. I say this because I know someone who thought they could, took money from other 403 (b) and ended up paying that 10% penalty even though they thought they were exempt because that he used it to pay for his university studies.

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