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Financially Preparing for College Without Sacrificing Your Retirement Fund

Financially Preparing for College Without Sacrificing Your Retirement Fund

January 10, 2023
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When it comes to planning for college, there are a lot of decisions to make.

  • How are you going to pay for your child’s tuition?
  • Are you ready to take out loans?
  • And perhaps most importantly, how is this going to affect your retirement fund?

It’s important to consider all these questions as you plan for college, but don’t let the financial aspect overwhelm you. With a little bit of planning and foresight, you can get your child through college without sacrificing your retirement fund.


Tax Strategies and the 529 Plan

According to FinAid.org, “On average, tuition tends to increase about 8% per year. An 8% college inflation rate means that the cost of college doubles every nine years.” This means that it’s important to not only have a handle on saving for college, but you should also understand certain tax strategies as well.

By enrolling in a 529 plan, you can use the account to cover the costs of nearly any college in the country, not just within your own state. Additionally, the savings can be used for education loan repayments up to a $10,000 lifetime maximum per beneficiary.

Here are a few things you should know:

  • Any growth of the money you save in a 529 education savings account is tax-deferred.
  • Distributions are tax-free when used for qualified expenses. Qualified expenses go beyond tuition and related fees and also include room and board.
  • You may receive a state income tax deduction or other state benefits for your contributions.

Saving in a 529 account has relatively little impact on financial aid eligibility if the account is held in the parent’s name (with the child as the beneficiary). If all the funds aren’t needed to pay for undergraduate school, they can be used for graduate school or transferred to another family member. You could also make yourself the beneficiary and further your own education, or save the funds for a future grandchild.


Can a Grandparent open a 529 Plan?

Prior to new upcoming legislation, the ownership of 529 plans was much more impactful. Grandparent-owned 529 plans were treated differently than parent-owned 529 plans when completing the FAFSA (Free Application for Student Aid). Distributions made from a grandparent-owned 529 plan were considered income to the student, which ultimately reduced financial aid eligibility by 50% of the amount distributed from the account. 

Starting with the FAFSA for the 2024-2025 school year opening on October 1st, 2023, distributions from grandparent-owned 529 plans will no longer be considered untaxed student income. In addition, the new FAFSA will no longer include a question about cash gifts from grandparents. This means that grandparents, as well as others outside of the immediate family, will be able to help with the student’s college expenses with no negative implications for federal financial aid.


Saving for the Future – Yours and Your Child’s

Whether you’re at the beginning or somewhere in the middle of saving for your child’s education, you can run projections to see where you are. I recommend taking a look at the college savings calculator at SavingforCollege.com to run the numbers.

No matter where you are in your planning keep this in mind: Your child can likely take out loans for a college education; you cannot take out a loan for retirement. If any of the scenarios below are familiar to you, it’s time to take care of some personal finance issues before you put money away for college:

  • You have a significant amount of bad debt (any debt other than mortgage debt) that needs to be addressed first.
  • You have no emergency savings fund built up.
  • You have first not begun saving for your own retirement.
  • Your time horizon is too short to benefit from the tax benefits associated with 529 plans.

Education and retirement planning can be complicated – that’s why we’re here to answer your questions. And remember that while we would all love to 100% fund our children’s education, they’ll thank us later when we’re not sleeping on their couch in our old age because we didn’t save enough for retirement!