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Retirement fund vs. college fund — planning for the future

Planning for retirement and saving for your children’s college simultaneously can be a challenge.

couple planning finances

In the best of all worlds, parents wouldn’t have to simultaneously juggle finances to manage retirement savings and college funding for their children. For most households, these are both important priorities, so understanding the way college financial aid formulas work can help you formulate a smarter savings plan.

College financial aid

At the priciest private colleges, it’s not unusual for annual costs to exceed $50,000 annually. When colleges calculate ability to pay based on current income, they make no allowance for the need to save for retirement, and contributing heavily to a traditional pre-tax 401(k) fund while your child is applying to or in college may actually decrease the aid you’re eligible for. College funding consultants suggest that parents consider saving more heavily for retirement before kids near college age, cutting back on contributions while you are paying tuition bills and then redirecting more money into retirement savings when your kids finish school.

There are a variety of ways to help cover your children’s tuition, and you should explore them all. Financial aid, scholarships and student loans are three to look at first. And get your own financial house in order now by paying off high-interest credit cards before you fund a Roth or 529 college savings account. It’s not financially prudent to get single-digit interest on these savings accounts while paying double-digit interest on your cards.

Be upfront with grandparents and other relatives who regularly give gifts to your child. Opening a 529 college savings plan and asking for contributions to it instead of other gifts can add up to thousands, and lets everyone make a meaningful difference in a child’s life long after the initial excitement over a new bike or electronic device has faded. Redirecting these gift-givers’ generosity can help pay for many college expenses. Also look into Upromise, a free program where major retailers deposit a portion of what you spend with them into a college account for your child. The incentive for these businesses to participate is that you’ll choose to shop with them more, and you can send invitations in your child’s name to friends and family so that every time they shop your child receives additional contributions.

Retirement savings

For most of us, choosing ourselves at the expense of our children is unthinkable. You do need to put retirement savings away, but that shouldn’t mean you neglect to save for educational costs, too. If your employer offers a retirement plan, especially one with a matching or percentage-based employer contribution, you should join or continue to participate. The money for college has to come from somewhere, but taking it out of your retirement savings isn’t the best strategy due to various tax ramifications. Withdrawals you make to pay for college one year are counted as income, reducing aid eligibility for the next year. If you need to dip into that IRA, wait until the last year of college to minimize the effect and tax penalties.


Join your employer’s 401(k) plan and have deductions taken automatically. Then, budget your net pay to allow funding a college savings plan.

More tips

Ways to take control of your family’s expenses
The 5 rules of saving — when, where and how
5 Ways to stretch the family budget

Please note: Articles and other information included on this website are intended for the general interest of our readers, and are not intended to provide, and do not constitute, legal, financial, health or other advice. Gerber Life makes no claims, representations or warranties as to the accuracy, completeness or appropriateness of this general interest information for your particular circumstances. If you need legal, financial, health or other services, you should contact a duly licensed professional.

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