Should You Prioritize Retirement Savings over College Savings?

Jim Dillon |

As a young parent looking to the future, you may be faced with a daunting choice: do you save earnestly to secure your retirement, or save to fund your children’s education? 

It’s possible to do both, but with the cost of college education and retirement rising faster than the rate of inflation, targeting just one of those goals can be a challenge. It’s estimated that 36% of people feel that they’re falling behind on their retirement savings goals*, and if you feel similarly, you may need to assess your current goals and priorities. Here are some things to consider if you’re choosing between saving for retirement or college:

  • Unless you have a guaranteed pension and work benefits, you’re responsible for saving for your own retirement. In contrast, students have access to scholarships and financial aid to help them pursue higher education.
  • Some qualified retirement accounts, like your 401(k) and Roth IRA, are not counted as an asset when determining your child’s eligibility for financial aid. Understanding the Free Application for Federal Student Aid (FAFSA®) form is complicated and beyond the scope of this article, but generally, assets accumulated in your child’s name can count against their eligibility for aid.
  • Speaking of qualified retirement accounts, some accounts, like a Roth IRA, can be used as a source of college funding. Keep in mind that while you can withdraw from your Roth without a penalty, the amount you withdraw is counted as untaxed income on the FAFSA®.
  • Many students aren’t able to make it through college on aid alone and may need to have access to additional savings for college. One option is a 529 College Savings Plan, which offers tax-free withdrawals for college expenses. Consider speaking to a financial professional or college planning professional to learn more and see if this could be part of your college saving strategy.

You Need a Strategy

College is expensive, but saving for it shouldn’t come at the cost of your other financial goals. When planning for higher education, consider how it fits into your full financial strategy, and look into the funding options available for college (i.e. aid, grants, and scholarships). Regardless of your strategy, planning and saving early can help you prepare for college costs when your child is ready to attend.

Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits such as financial aid, scholarship funds or protection from creditors that are only available if you invest in that state’s 529 plan. Consider the investment objectives, risks, charges and expenses before investing in a 529 College Savings Plan. Investments in a 529 plan are neither insured nor guaranteed and there is the risk of investment loss. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. No investment strategy can guarantee a profit or protect against loss. Independent Financial Group (IFG) nor any IFG Registered Representative gives advice on tax issues, these matters should be discussed with your tax professional.

*Source: Board of Governors of the Federal Reserve System, Economic Well-Being of U.S. Households in 2020 - May 2021,

This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.