Finding the Balance Between Saving for Retirement and College

Many parents struggle to find the balance between setting aside money for their own retirement accounts or to help fund a child’s college education. Here are some things to consider:

Retirement Savings

If your main retirement savings vehicle is a 401(k), you can contribute up to $20,500 in 2022, and if you’re at least age 50, that number increases to $27,000. With your employer’s matching contribution, profit sharing contribution, and forfeitures (depending on your plan’s provisions), the maximum “annual additions” that can be contributed to your 401(k) from all sources in 2022 is 100% of your compensation not to exceed $61,000 (or $67,500 if you’re at least 50).

If you contribute to an IRA, you can put away $6,000 in 2022 plus an additional $1,000 if you’re over age 50.

When determining how much you’ll need to save for retirement, consider all sources of income, including Social Security. You can get an estimate of your social security benefits by creating an account on https://www.ssa.gov/myaccount/statement.html.

You can also find online retirement savings calculators that can give you a ballpark figure to work from.

College Savings

Nobody wants to graduate from college with a mountain of student debt, so having money set aside for college is an important part of your financial plan. State-sponsored college savings accounts, called 529 Plans, are a tax-favored way to put away money for college. Different states have different programs, and depending on where you live, you can qualify for a state tax benefit such as a tax deduction or tax credit. Up to $15,000 can be contributed per beneficiary under the annual gift tax exclusion. If a child decides not to go to college, the account can be transferred to another beneficiary. A good resource for learning more about 529 Plans is savingforcollege.com.

There are experts who can assist in identifying schools that fit your child’s academic interests and athletic or musical talents. Grants and scholarships are available for a variety of unique attributes, interests and skills. Knowing the anticipated costs of your child’s college of choice is a critical part of your savings equation.

Coordination Between Retirement Savings and College Financial Aid

College financial aid is based on a student’s financial need, which is the difference between a student’s expected family contribution (EFC) and the cost of attending their college of choice. Most colleges use the Free Application for Federal Student Aid (FAFSA) to determine financial aid awards. Some colleges (fewer than 200) use a supplemental form called the CSS Profile to calculate their institution’s EFC while still using the federal EFC from the FAFSA for awarding federal and state aid. Both the FAFSA and CSS Profile include the value of 529 Plans in their calculation, but they differ on including the value of parents’ retirement accounts – the FAFSA does not consider retirement accounts in their calculation, but the CSS Profile does.

Don’t Wait

It’s important to start saving and let the power of compounding investment returns work in your favor. It might make sense to start by saving aggressively for retirement and then switch some dollars over to college savings, but the key is to start saving early.

Remember that while you can borrow for a college education, you can’t borrow to fund your retirement. Financial planning is best done with the help of a professional to ensure you’re considering all your options and optimizing your tax situation.

Contact us or our friends at Prism Financial Group to discuss your options today.