Where to Focus Your Saving: College Fund or Retirement?

Not everyone has the luxury to fully fund a retirement account and a college savings plan simultaneously. How do we choose?

Bobby Lendi, Chief Financial Officer for ASCP, offers some practical tips so you can do both.

“Your personal retirement account or your spouse’s retirement account should take precedence. Ultimately, we are responsible for funding our own retirement,” he says. “Are there options for getting our son or daughter through college? Yes! First, we can determine the college our kid is going to attend. If we can’t afford the $70,000 a year tuition, room and board, we can pull back and focus on a smaller state school.”

Students can also seek partial academic or sports scholarships. When they turn 18 or 19, they can get a job to help pay for their education. And, they can take out student loans.

That’s not to say parents should not contribute to college savings plans. The most popular of these are called 529 plans.  These are college savings plans where parents can invest money, without getting taxed on the capital gains as long as they use the money for college. Many states will offer residents favorable tax treatment for contributing to a 529 plan.

“In my state, I can get up to $1,000 tax credit if I contribute up to $5,000,” Lendi says. “So, it doesn’t make sense for me to contribute more than that. If you get a benefit from your state, go ahead and use that as the target amount you should contribute.”

As for retirement, maximizing your contribution should be the goal. There are two major places where you can try to hit that goal. The first is your company’s 401K, and the other is an individual IRA account. In the 401K, the Internal Revenue Service allows you to contribute up to $19,000 a year, and most companies will match a portion of that. Aim to put as much money toward your 401K as possible. After age 50, there is a catch-up provision which allows you to put an additional $6,000 in the 401K to bring your annual contribution to $25,000.

In an individual IRA account, you may contribute up to $6,000 per year. After age 50, a catch-up provision allows you to contribute another $1,000 annually.

“So, maxing those out will provide added benefits as well,” Lendi adds. “First, you get better tax treatment and flexibility in those 401K accounts and IRAs than in a 529 college savings plan. Second, you’ve laid the base for your retirement income and it’s assured. If that money went off to a college plan, you don’t get a re-do to invest those monies today.”

Watch for more financial management tips from Bobby Lendi in future ASCP News issues!