Most parents know that saving for college is a top financial priority for the family. But when do you start scraping that money together? When you find out you’re expecting? Once the baby is here? At age one, five, or ten?
With the cost of college tuition in the US rising significantly faster than the rate of inflation, even the least prudent parents understand that they have to start somewhere.
And, as with all things saving, the earlier you get started the better. You’ll have the power of compound interest on your side, which is no small factor: Put away $50 a month for 18 years—a total of $10,8000—and you’ll have $19,141 at the end of that run, assuming a 6% return. Put away $100 a month for nine years—in other words, the same amount of money out of your pocket—and you’ll have only a little over $14,000. And the best place to put this money is in a college savings plan (more on that below).
The problem is, you’re balancing other goals as well—namely, retirement for yourself. And as I’ve said in the past, that comes first. You can’t, as you well know, borrow for retirement, but there is plenty of money available for college, in the form of financial aid and loans. So how do you toe the line? Some suggestions:
Max out your retirement savings. To do this, first figure out how much you need to be saving to meet your retirement goals each month. Wells Fargo’s My Retirement Plan calculator can help. Once you’re on track to meet that goal, you can start focusing your attention on college. Sound selfish? The alternative is spending all of your resources on college, but then you’re likely to have to ask your kids for help during your retirement. I don’t think anyone wants that.
Start when your child is born. As I noted above, getting a jumpstart here will pay, as it does for any savings goal. That said, 529 college savings plans shouldn’t be opened until you’ve actually had a baby, says Rebecca Pavese, a CPA with Palisades Hudson Financial Group. “There is a penalty to get the money back if it isn’t used for education,” she explains—it’s 10% on earnings, though not on contributions. [For that reason] I’d advise that most people wait, and if you really want to get started, put it in a savings account for now—then you can open a 529 when your child is born with a big upfront deposit from that account.”
Consider a Roth IRA. This account will allow you to save for retirement, while leaving the door open to use the money for college instead. The rules say you can pull out money for “qualified expenses”—including higher education—without paying a penalty, provided you’re tapping contributions and not earnings, says Pavese. If, when college rolls around, you’re on track with your retirement savings, you can always dip in.
Unfortunately, not everyone is eligible for a Roth*—use the calculator here to find out if you are (and how much you can contribute each year).
Birthdays and holidays are great saving-for-college opportunities. Family members may want to help out here, and accepting their contributions is a great way to pad your college savings account without sacrificing your retirement. As long as your 529 plan accepts third-party contributions, grandparents and other relatives can simply send a check to the plan (be sure they write the account number on the check, or use the plan’s contribution form). If your plan doesn’t accept contributions from third parties, a relative can always give you the money and you can contribute it on their behalf. For your own part, it might make you feel better to contribute a little something for your kid’s birthday or other holidays as well—perhaps split your budget between presents and a college savings deposit.
Qualified Roth IRA distributions are not subject to state and local taxation in most states. Qualified Roth IRA distributions are also federally tax-free provided a Roth account has been open for at least five years and the owner has reached age 59 or meet other requirements. Withdrawals may be subject to a 10% Federal tax penalty if distributions are taken prior to age 59.