There’s a natural sort of push-and-pull when it comes to financial matters. As we work, we may ask ourselves, “What am I working toward?” There are many goals you might consider, but at the top of the list for many Americans is retirement—a time to focus on what’s most important to you.
If you have children or grandchildren it’s also natural to want to provide for them and even help them pay for college. After all, 91 percent of American families see college as “an investment in their future.” However, you don’t necessarily have to choose between your retirement strategy or helping your loved ones finance college.1
Prioritize
There is no “financial aid” program for retirement. There are no “retirement loans.” As important as your children are to you, they have their whole financial lives ahead of them. If you have to focus on providing either for yourself or for your children, it’s wise to put yourself first.
Your retirement strategy is the starting point of this process. Work alongside a financial professional to invest and save. Ask about the products and practices that match your goals, your risk tolerance, and the time horizon you have in mind. With your priorities in place, you can take what you’ve learned and apply it to college savings
Strategize
Making sure your children have choices when it comes to higher education can help shape their future.
Toward the end of high school, consulting your child’s guidance counselor can help you continue to identify scholarships within reach. According to Sallie Mae, 52 percent of American families have a strategy in place to pay for college. Ensure your child’s Free Application for Federal Student Aid (FAFSA) is submitted to avoid missing out on any financial assistance available. An earlier application has a better chance of receiving part of the money the government offers in aid to over 10 million American students. Much of this aid goes to those with the earliest applications, so it’s smart to start early.1
Why is this so important for families of all economic backgrounds? Isn’t it better for a wealthier family to use their own resources and leave this free money for those who need it?
While that’s a noble thought, it ignores a few important factors. First, your wealth doesn’t belong to your adult children. It belongs to you. Finding some or all of the funds for college may help your child get started on their own financially. Second, in some cases, handing over your own money may become a taxable event. You can write a tuition check, but that doesn’t cover all of the other needs a student may have.
Monetize
Just as you likely have a personal financial strategy that includes various retirement accounts, there are college savings vehicles to consider. Before we look at a couple for you, remember, this article is for informational purposes only. It is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your college saving strategy.
529 College Savings Plan -
Offered by states and some educational institutions, these plans allow you to save up to $15,000 per year for your child’s college costs without having to filean IRS gift tax return. A married couple can contribute up to $30,000 per year. Amounts above $15,000 per year ($30,000 for a married couple filing jointly) will incur federal gift tax. However, if the 529 account is not used to pay for qualified education expenses, the earnings are taxable and may be subject to a 10 percent federal penalty tax.2
An interesting exception would be for a grandparent making a $75,000 lump sum contribution. This would be a one-time gift covering five consecutive years. The grandparent could not make another donation in those five years.2
Coverdell Education Savings Accounts (ESA) -
Single filers with modified adjusted gross incomes (MAGIs) of $110,000 or less and joint filers with MAGIs of $220,000 or less can pour up to $2,000 into these accounts annually. If your income is higher than that, phaseouts apply above those MAGI levels. Money saved and invested in a Coverdell ESA can be used for college or K-12 education expenses.3,4
Contributions to Coverdell ESAs aren’t tax deductible, but the accounts enjoy tax-deferred growth, and withdrawals are tax free so long as they are used for qualified education expenses. Contributions may be made until the account beneficiary turns 18. The money must be withdrawn by the time the beneficiary turns 30, or taxes and penalties may be incurred.
Emphasize
Following an appropriate strategy could offer your children in your family a step up that’s increasingly rare. Helping the young adults in your family get this step up can take many forms, all with the potential to offer them a real advantage.
Your strategy for retirement must come first, with your plans for family members coming thereafter. It’s like the airplane safety lecture: Put your own oxygen mask on before you help others. None of this needs to be handled in a vacuum. Talk to a financial professional today about these methods and strategies and how you and your family can benefit from them.
“It’s like the airplane safety lecture: Put your own oxygen mask on before you help others.”
1. SallieMae.com, 2021
2. Investopedia.com, June 15, 2021
3. IRS.gov, January 21, 2021
4. 20SomethingFinance.com, January 11, 2021