When you have kids, saving for college is often a top priority. But you can’t forget about your own financial plans — especially saving for retirement.
For many, this creates a tough trade-off. If you don’t have the means to meet both goals, which should come first? When faced with this difficult situation, it’s usually best to choose saving for retirement. Here’s why.
Loans Are Available for College, but Not for Retirement
College costs a small fortune. Saving enough to pay for it all isn’t easy, which is why LendEDU estimates that the total amount of outstanding student loan debt in the United States is $1.52 trillion.
With student loans, your kids can borrow to help them complete their degrees. Even though these loans can take a long time to pay off and can present considerable financial challenges down the line, it’s an important option that makes sense to consider. When selecting student loans, look for lower interest rates. Max out any offered government loans before looking to private loans. Typically, private loans have higher interest rates and the repayment terms are less flexible.
While the prospect of student loans may not thrill you, if you end up without enough money for retirement, there aren’t realistic ways to borrow. Lenders are happy to give student loans in part because students have their entire careers to pay the money back. But once someone retires, they no longer have the income to repay a big loan.
You Can Use Your IRA Savings to Pay for College
If you save for retirement using an IRA, you’ll still be positioned to pay for college expenses. You can take money out of an IRA to pay for college expenses without owing an early withdrawal penalty, no matter how old you are. This way you can save for retirement and once your kids are in college, you can decide whether you can spare some money for their bills.
However, there are some tax challenges to using an IRA. According to U.S. News & World Report, it can affect financial aid eligibility. Also, traditional IRAs and Roth IRAs are taxed differently. If you pull funds from a traditional IRA, you could face a heavy burden come tax time. So if you take this method, make sure you talk to a financial advisor and clearly understand all the implications.
There Are More Ways to Lower College Expenses
If you fall short while saving for college, your kids have ways to make up the difference while still obtaining a quality education. On the other hand, if you don’t make your retirement goals, your only real option is to cut back on your lifestyle. It’s smart to save more for retirement. If you later find yourself in good financial shape for your retirement goals, you can give some extra money to your kids to help with their student loans.
It’s completely understandable to want to put your kids first. But when you consider your financial planning priorities, remember that you’ll be a much bigger help to your family if you save for retirement first.
