Like most people, you probably have many financial goals you'd like to accomplish. If you have children, helping them pay for college may top the list.
But the truth is it shouldn't. When it comes to financial priorities — saving for retirement or college, retirement wins easily. Why? Simply put, there are plenty of options to pay for college but there are no scholarships, grants or loans for retirement. And a typical college education lasts four years, while retirement can last 20 years or more. So if you haven't been contributing regularly to your retirement, it's important to start and keep going.
There are many tax-advantaged ways to save for your future, including an employer-sponsored 401(k), 457(b) or 403(b). With these plans, your employer may match your contributions — typically from 2% to 8%, which can really boost your savings. If you can, start by contributing 10% of your paycheck to your plan, or at the very least, take the maximum of your employer's match, or else you're just walking away from free money. Once you get into the savings habit, you won't even miss it. Your contributions will be automatically withdrawn from each paycheck using pre-tax dollars and can defer your tax bill1 until you start making withdrawals at your retirement. Learn more about these retirement plans and contribution limits.
If you don't have an employer-sponsored plan, or you're self-employed, consider opening an IRA — either a Traditional or Roth. A Traditional IRA uses pre-tax dollars, while a Roth uses after-tax dollars. Both act like savings accounts with tax breaks.
College Savings Strategies
Like any long-term goal, saving for college costs is easier to manage when starting early and saving regularly. Even contributing small amounts can make a difference over time. When your children are able to grasp basic money concepts, it's important that they learn how they can help save for their own education.
Remember, there are plenty of ways to save for college, and moves to make it more affordable. For instance, according to recent statistics,2 the average cost of public college is 73% less than private universities, so consider this when school shopping. And going to a community college for the first two years can make good financial sense, because it reduces tuition costs significantly. When it's time, you can make sure to apply for the Free Application for Federal Student Aid, or FAFSA, to be eligible for financial aid, including grants, work-study programs, student loans and scholarships. Learn more about FAFSA.
There are several solutions to get on the college savings bandwagon:
- College Saver Share Certificate is a great way to start saving for your child's college expenses.
- Coverdell Education Savings Account allows contributions up to $2,000 per year, which grow tax deferred and will be tax-free if used for qualified education expenses.
- The 529 Plan, a tax-advantaged savings plan designed to help you set aside money for education, including college or graduate school — for you, your family, or anyone, at any age.
Encouraging family members to donate to a college plan instead of buying toys is another smart move. For instance, some 529 products provide easy gifting portals online. Also, those gifting can write checks using the 529 account number.
Don't Borrow From Your Future
Although there's a lot of news about students suffering from the burden of student loan debt, parents are feeling the pinch too. According to Sallie Mae data, parents' borrowing paid for an average of 10% of college costs and one-third of them said they would help their kids manage student loan payments until they were financially stable. While it's understandable to want to help your kids as much as possible, make sure you're paying yourself first with a solid retirement plan, an emergency fund and not carrying a high debt load. After all, you don't want to be a burden to your adult children when you retire.
- This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
- Source: U.S. News Data.