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Good News - Broward Edition
36 April 2014
FINANCE
Jeff Masters
Good News
When you have limited
funds that you can save, should
you save for your own retirement
needs or for your children’s future
college costs? I always tell people
facing this challenge that they
should make sure they don’t have
to move in with their kids when
they retire, and to encourage
them to prioritize their own re-
tirement savings and investing
first.
The reasoning? You, or your
child, can always take out loans
for college, but you cannot bor-
row for retirement. While many
parents have great emotional mo-
tivation and balk at the idea of
burdening their children with stu-
dent debt, shortchanging yourself
now to help pay for college can
backfire. You may simply be in-
creasing the likelihood that your
children will have to support you
later in life. It costs kids way more
to take care of a parent who hasn’t
taken care of themselves.
Putting yourself first doesn’t
mean you don’t worry about the
kids at all. But it does mean you
need to start worrying as early as
possible. Because the sooner you
start saving for college, the
smaller the drain it will be on your
budget, leaving you more money
to fund your retirement. If, after
analyzing the numbers, parents
do find a shortfall in their retire-
ment savings, they face tough
choices—including spending less
now, working longer before re-
tirement or looking at less expen-
sive schools. Perhaps parents
might aim to save for 50 to 75 per-
cent of college costs and pay for
the rest out of current income at
the time, or with some contribu-
tions from the child’s own em-
ployment.
Look at the 529 Plan
Another way to minimize
the drain from college savings,
freeing up more money to put
away for retirement, is to save on
taxes. Financial advisers recom-
mend using a state-sponsored 529
college-savings plan to set aside
money for future college educa-
tion costs. In a 529, the money
compounds free frommost taxes
and can be withdrawn tax-free to
pay for qualifying college costs
(Withdrawals used for qualified
expenses are federally tax free.
Tax treatment at the state level
may vary). These accounts can be
opened for a few hundred dollars
and funded flexibly or automati-
cally.
Here are some other tips
1. Start early and calculate
how much you’ll need. Saving
early on in your child’s life is one
the best ways to prepare for the
future costs of college. Much like
saving for retirement, the sooner
you begin putting money away,
the better. It’s also important to
recognize that where you keep
your college savings can also play
a large role in preparing for the fu-
ture. Simply keeping college or re-
tirement money in a savings
account isn’t enough. It is imper-
ative that this money works for
you, and continues to grow, so
that its value keeps pace with in-
flation, as well as the rising costs
of tuition.
2. In addition to 529 plans,
Roth IRAs can be a tool for fami-
lies that qualify, because they can
be used for either retirement or
college *.You can withdraw con-
tributions you’ve made to a Roth
IRAwithout paying taxes or early
withdrawal penalties to pay for
college expenses. If you tap the
earnings before age 59 ½, how-
ever, you’ll pay taxes on that
money, but not an extra 10 per-
cent early withdrawal penalty, if
the withdrawal is used for educa-
tion**. Again, this will negatively
affect your retirement, and
should be used as a last resort.
3. Know the pros and cons of
cashing out a retirement account
(IRA or 401k) to pay for college.
Parents want to give their chil-
dren a significant head start in life,
if possible, and for many that
means paying for their children’s
education, even at the risk of de-
laying their own retirement. Don’t
do this! There have always been
alternative methods for financing
higher education, but I would say
that there are very few alterna-
tives for financing your retire-
ment. There are fees, penalties
and restrictions to using your
401k savings that can adversely
affect you, so restrain yourself
from considering this option.
Be aware that if you take out
your retirement you are responsi-
ble for paying ordinary income
tax due on any distributions from
a traditional IRA, and that this
distribution will be added to your
ordinary income, which could af-
fect your child’s ability to qualify
for financial assistance programs.
The opportunity cost, taxes,
penalties, and a lower contribu-
tion limit are the biggest reasons
for not touching your retirement
nest egg when financing a college
education. (This information is
not intended to be a substitute for
specific individualized tax advice.
I recommend that you discuss
your specific tax issues with a
qualified tax advisor).
I strongly suggest exploring
alternative options for paying for
college such as having your chil-
dren secure student loans and
helping pay the loan interest.
When someone is responsible for
repaying a loan, he or she usually
takes the education more seri-
ously. Students should also con-
sider taking on a part-time job
during the year or the summer to
help defray a certain amount of
the expenses. Most people don’t
do a good job saving for retire-
ment, so diverting money from
long-term retirement goals to-
ward paying for the education of
their children is often a costly
mistake.
*Rules vary depending on age
and other factors. For money
rolled into a Roth from a 401k or
traditional IRA, funds need to re-
main in the account for 5 years, or
until the account owner turns 59
1/2.
**Funds withdrawn from the
Roth for college may count as in-
come in calculating eligibility for
need-based financial aid; money
withdrawn from 529 plans does
not.
Jeffrey Masters is president of
Jeffrey W. Masters & Associates
and a locally endorsed
investment advisor by Dave
Ramsey. Please call Jeff for a No
Cost, No obligation Financial
Review to get prepared for 2014.
Reach Jeff at
jeffrey.masters@lpl.com.
Saving for Retirement and College