Parents of teenagers have two big expenses looming in the near future: college tuition bills for their children and financing their own retirement. When there’s not enough money to save for both, most parents choose retirement. A recent Sallie Mae and Gallup study found that, when parents were asked what they were saving the most for right now, retirement savings ranked first (27 percent), followed by children’s college costs (14 percent) and an emergency or rainy day fund (14 percent).
Among parents not currently saving for college, 57 percent of parents said focusing on saving for retirement first was part of their reasoning. Many of the survey respondents have bumped up their personal savings rate over the past year, but that money has generally been earmarked as general savings (18 percent) and retirement savings (12 percent). Only 5 percent of families are saving more for college.
A few parents in the study did raid their own retirement stash to pay their offspring’s education expenses. About 3 percent of families took a retirement savings withdrawal to pay for college during the 2008-2009 school year, spending an average of $5,318 of their nest egg, Sallie Mae and Gallup found. And 1 percent of households took a retirement account loan, typically borrowing $5,471.
401(k) withdrawals before age 59½ typically come with a 10 percent penalty on the amount withdrawn. Retirement account withdrawals are also taxed as income, which could affect your child’s eligibility for financial aid in the future. IRA distributions, however, are exempt from the penalty when used to pay for education expenses. And Roth IRA withdrawals only require taxes on the portion of the withdrawal that comes from earnings.
Here are 5 tips for weighing college versus retirement savings.
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Paul Witwer, CFP of CA 8:28PM September 24, 2009