The ultimate juggling act: 4 ways to save for college and retirement

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With the average price for private college tuition and fees hitting $43,750 for the 2021-2022 school year and public college attendees paying more than $28,000 per year, many parents are nervously anticipating what will happen after their child graduates high school.1 The college financial crunch can also come at the same time you might need to ramp up your retirement savings.

What should parents know about these competing priorities? Are there ways to help children with college costs without compromising your retirement savings goals? Below, we discuss four ways to navigate this ultimate financial juggling act.

Consider using Roth IRA funds for college

One way to balance retirement and college savings is by repurposing retirement funds for college costs. While withdrawing investments from a traditional IRA before age 59.5 can mean paying a penalty (along with any taxes on the amount withdrawn), the rules for Roth IRA withdrawals are laxer. You will be able to withdraw your Roth IRA contributions at any time, without paying a penalty and without paying taxes on these funds.

You can also withdraw investment gains from a Roth IRA and use these funds for qualified higher education expenses as long as the Roth IRA has been open for five years or longer.

Take advantage of employer match

Even if you hope to sink every spare dime into your child's college fund, there is one situation where retirement should always take precedence: when your employer offers a 401(k) match. This match is essentially "free" money, and by contributing enough to get the match, you will essentially double the funds you would otherwise contribute to your retirement account each year.

Split the difference

If you are still not sure whether to prioritize college savings over retirement savings, consider just splitting the difference. Calculate how much you can afford to set aside toward all of your financial goals each month, then place half in a 529 college savings account and the rest in a 401(k), IRA, or Roth IRA. By adding to both accounts, you will avoid having too many "eggs" in a single basket when an unexpected expense comes your way.

Investigate loan options

For those who, like many, have not been able to save the entire cost of a college degree in cash, loans remain an option for both the student and the parent. Before taking out a parent loan, carefully consider the total loan amount and repayment timeline. If you do not want to go into retirement with debt, make sure you take out only what you can afford to repay before then. You will also want to consider how much you are willing to borrow over all four (or five) years and whether your child has access to the funds needed to pay the rest of their college costs.

While loans may not be the right option for everyone, there are some situations in which taking out a relatively low-interest loan may make more sense than withdrawing funds in a volatile market. A financial professional with experience in college funding can be a useful resource here.

Important disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking # 1-05305315.

1What You Need to Know About College Tuition Costs, US News World & Report, https://www.usnews.com/education/best-colleges/paying-for-college/articles/what-you-need-to-know-about-college-tuition-costs

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The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. Please consult professional advisors with regard to your individual situation.

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