“Save for yourself, and earmark it for education.” That’s what Mitchell Reiner told the New York Times in a recent interview. This was in response to how parents should decide on how to prepare for their child’s education.
Saving for retirement and a college education at the same time is a challenge for many families, but financial planners advise that if funds are limited — and for most people, they are — it is crucial to fund retirement first before contributing to an education fund.
The reasoning? You, or your child, can always take out loans for college, but you cannot borrow for retirement. Planners liken the approach to the instructions given to air travelers: Put the oxygen mask on your own face, before putting it on your child’s. While many parents balk at the idea of burdening their offspring with student debt, shortchanging yourself now to help pay for college can backfire. You may simply be increasing the likelihood that your children will have to support you later in life.
In addition to 529 plans, some financial planners say Roth I.R.A.s can be a good tool for families that qualify, because they can be used for either retirement or college. Rules vary depending on age and other factors. You can withdraw contributions you’ve made to a Roth I.R.A. at any time, without paying taxes or early-withdrawal penalties, to pay for college expenses.
If you tap the earnings before age 59 1/2, however, you’ll pay taxes on that money, but not an extra 10 percent early-withdrawal penalty, if the withdrawal is used for education. Taxes and penalties on the earnings may be avoided, too, if the funds are used for education. (However, Ms. Garcia at Beacon Rock Partners noted, funds withdrawn from the Roth for college may count as income in calculating eligibility for need-based financial aid; money withdrawn from 529 plans does not).
Along those lines, others advise saving some funds in a taxable account, like a brokerage account, for maximum flexibility. You may lose some tax breaks, but you have the option of spending the funds for either retirement or college, as needed. “Save for yourself, and earmark it for education,” said Mitchell Reiner, an investment adviser near Atlanta.
Read the full article in the New York Times