We’re continuing to share previews of our upcoming book, Better Off After College. From Chapter One, "Pre-High School: Planning and Saving," here are some thoughts on saving for retirement vs. saving for college.
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"As parents you have a primary responsibility to make sure you will be in a strong position for retirement before you move on to help your children with education expenses. You don’t want to risk becoming a liability for your children by prioritizing their educational expenses over the well-being of your retirement nest egg.
Nirav Batavia is a CFA and co-Managing Partner of Forum Financial Management, a Registered Investment Advisor with 3,600 client households and more than $3.8 billion under management. He asks parents three questions to figure out whether and how much a family should save toward their children’s education:
First, is your family currently on track for retirement savings? Very simply, if you are not, you should prioritize your retirement. If you are tracking ahead of your goal, it may make sense to redirect some savings for a few years toward education.
Second, if you are on track with your retirement savings, how much should you contribute to education? This is a personal choice based on how much you want to contribute to your children’s college. The answer is really dependent on the target for college savings and how much time you have until your children go to college.
Third, could saving for college through a 529 be a waste if the child doesn’t attend college? The short answer: usually not. In the next section, we’ll address the ins and outs of a 529 investment account. For now you should know that there are some constraints and penalties if you are forced to withdraw the money for non-educational purposes. A non-qualified withdrawal will be taxed at the parents’ ordinary income rate plus a 10% penalty on any growth.
However, this penalty rarely ever happens because you can change the beneficiary to be any blood relative. Siblings, cousins or grandchildren can use those 529 assets tax-free. That same strategy applies if your student finishes college and still has a little money left over in their 529. Nirav advises clients to leave it alone with the plan of changing the beneficiary to the grandchildren down the line, allowing the account to continue to grow tax-free."