Your retirement or your kids college?

college or retirementSo, you’ve come to the point in time where you’re debating whether you should save for your own retirement or divert those investments to the future well being of your children. The truth is, research has shown nearly 15% of investors with children under 18, choose to invest in their children over themselves. Is this the right move or not? The answer may surprise you.

How will your kids be able to afford college if you don’t do something for them now? Will they hate you if you don’t do anything for them? Is it your responsibility to do something for them, and forget about your needs? Below, I will walk through the reasons you should consider holding off investing in your child’s education, and instead focus on your own retirement needs.

Too many people allow their emotions to control their mind, and they make poor financial decisions as a result. Just because you think and or know it’s your responsibility to fund your kids educational needs, doesn’t mean you have to do it now, and at the sacrifice of your retirement.

There are alternative means to help them down the road, instead of investing the little you can on them now, you should be putting that aside for your own retirement. Case in point, your kids can take out loans (and or you can take out parental loans on behalf of your child to pay for their education), but you can’t take out a loan to fund your retirement.

Parents should first focus on building their own nest egg, only when they feel comfortable that their needs for retirement have been met should they move to funding educational accounts for their children, such as 529 plans, or Coverdell Savings Accounts. It’s not that you don’t care about them, it’s the smarter financial decision.

A better idea would be to take the opportunity to fund these investments for them instead of buying them toys or other crap for birthday gifts or Christmas or other holidays.

Just because something seems like the best thing to do, it doesn’t mean it always is – you must weight the pros and cons and determine what is the best possible financial decision you can make – and stick to it.

529 Plans encourage saving for future college costs

What is a 529 plan you ask? A 529 plan is simply one of many ways offered by our lovely IRS that allows us to invest and save for college needs tax free. So why is this so neat or any different than simply deducting educational expenses when you incur them? True, you can deduct (currentlythe IRS allows qualifying taxpayers to deduct $2,000 – $4,000 of qualifying tuition expenses) the expenses from your taxes down the road, or hope you don’t make too much to qualify for a tax credit. But, why miss out on the opportunity to have compound interest working for your investments. Of course, you must use the money for college needs or pay a 10% fine and the taxes you would have had to anyways. Now understand, there are two different ways to use this plan, invest on your own or “lock-in” rates with particular schools. Here is a summary below of the two different ways to use this plan. In addition, here is the SEC on 529s.

Prepaid Tuition Plan College Savings Plan
Locks in tuition prices at eligible public and private colleges and universities. No lock on college costs.
All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses. Covers all “qualified higher education expenses,” including:

  • Tuition
  • Room & board
  • Mandatory fees
  • Books, computers (if required)
Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased. Many plans have contribution limits in excess of $200,000.
Many state plans guaranteed or backed by state. No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.
Most plans have age/grade limit for beneficiary. No age limits. Open to adults and children.
Most state plans require either owner or beneficiary of plan to be a state resident. No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.
Most plans have limited enrollment period. Enrollment open all year.

1 Source: Smart Saving for College, FINRA®

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