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The big question: Save
for your children's education or your retirement?
In a perfect world, everyone could save enough to fund their
children's higher education, as well as provide for their
own retirement. But in the real world, many people struggle
to do both, to the point one often takes a back seat to the
other. If this describes your situation, here are some ideas
that might help.
Tax-advantaged saving for either college or retirement relies
on the same basic principle — setting aside money that
grows tax-free until you need it.
There is also some commonality in how the funds for college
and retirement plans can be used. While those plans that are
designed for education must be used for that purpose alone,
it is possible to use some retirement accounts for education.
 IRA
funds
For instance, penalty-free withdrawals can be made from both
traditional and Roth IRAs if the money is used for qualified
educational expenses. With a traditional IRA, however, the
full amount of the withdrawal remains subject to income tax.
Early withdrawals from a Roth IRA that are used for college
expenses are tax-free up to the amount contributed into the
plan. Only the earnings portion of these withdrawals is subject
to income tax.
 So,
does this make IRAs the perfect catch-all for both retirement
and college saving? Not exactly. One big disadvantage is that
you can only contribute $4,000 per year ($5,000 if age 50 or
older) to an IRA. Depending on when you start, this might not
be enough to accumulate significant funding for both college
and retirement.
The
best strategy
Be careful of falling into the deadline trap. It's likely
your kids will attend college before you retire. Since the
tuition deadline is closer, you might be tempted to reduce
or eliminate retirement plan contributions in the early years
of your savings plan in order to focus on education savings.
But a typical retirement will generally last longer and cost
more than your child's education. By putting college
tuition first, you could end up with less than you need in
your retirement nest egg.
What is the best strategy? If you cannot adequately fund both
college savings and your retirement account, maximize your
retirement saving first. There are far more options for financing
college, such as grants, scholarships, student loans, and asking
the student to pay a portion of his or her own schooling.
Whether it's college or retirement — or both — you
need a plan to reach your financial goals. This is where we
can help. Give our office a call today if you would like assistance
in analyzing the options best suited to your circumstances.
©copyright
2007
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