What should be the saving priority? If you’re like many families, there are only so many dollars left every month for saving. You have to pay everyday expenses such as housing costs, debt payments, utilities, food and more. There are also those discretionary costs that help you and your family enjoy life.
After you pay your regular expenses, there may not be much left to save for long-term goals. That presents the dilemma. Do you save for college or for retirement?
If you have children, you’re likely facing the same dilemma that many parents across the country face on a regular basis. You want your children to get a great education, and you want them to have the financial means to attend any school to which they may be accepted. At the same time, though, you also feel an urgent need to save for retirement.
If your kids are older, the question may be even more urgent: Do you pay for tuition or save for retirement?
The answer depends on your own unique needs and goals. There’s no universal answer that works for every family. However, there are a few points to consider. Take a look at the items below and factor them into your strategy. You may be able to balance saving for both college and retirement.
Make Saving Automatic
One helpful trick in retirement saving is to have the contributions automatically deducted from your paycheck. This often happens with 401(k) contributions. They come out pretax, so you don’t have to see the funds in your take-home pay. You also may be able to set up automatic deductions from your check for your IRA.
By making your saving automatic, you won’t count on receiving the money as part of your normal income. That may help you adjust your budget to accommodate retirement saving with college saving.
Other Options for College
While you likely want to be able to pay for your child’s tuition, it’s important to realize that your child has many more alternative funding options for tuition than you will likely have for retirement. For instance, even if you can’t afford to cover tuition, your child could still access scholarships, grants, loans and more. He or she could even go to community college for two years and then transfer to a four-year school to save money.
You may not have the same alternatives available for retirement. You will likely have Social Security benefits. You may have a pension, rental income or some other source of cash flow. But a substantial amount of your expenses may have to be covered with savings. There are no scholarships or loans available if you fall short.
Best of Both Worlds
You can also save for both goals simultaneously by using a Roth IRA. With a Roth IRA, you don’t get any tax deduction for contributions, but your earnings are tax-deferred and distributions are tax-free after age 59½. Plus, you can always withdraw your contributions tax-free and penalty-free at any age.
Additionally, if you decide to take funds from your Roth for college expenses, you can do so at any age and not pay the early withdrawal penalty. That means you can contribute to the Roth IRA today. If you feel confident in your retirement savings when your child goes to college, you can then withdraw Roth funds to pay tuition. If not, you can use alternate funding sources and keep the money in your Roth for retirement.
Not sure how to structure your savings goals? Let’s talk about it. Hal Hammond in Sarasota can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.
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