How to save for college and retirement at the same time

Consider these 3 steps for help balancing two of life’s most significant financial goals.

Planning for retirement and saving for educational expenses at the same time can feel hard to balance. Some parents may even feel they have to choose one or the other. But balancing these goals isn’t an all-or-nothing proposition.

With the right plan in place and personalized guidance, achieving both goals are within reach. Here are steps to get started.

In this article:

  1. Prioritize saving for your retirement first
  2. Open a college savings account when your child is young
  3. Talk to your student about costs, expectations and options
  4. Questions to discuss with us

1. Prioritize saving for your retirement first

Even if you’ve decided to help pay for your child’s college expenses, your priority when saving for college and retirement should be to save for retirement first. The reason is simple: While there are multiple options for paying for college, from private and federal loans to grants and scholarships, you can’t borrow to fund your retirement. Also, every dollar used for college can mean several fewer for retirement due to years of compounding and lost investment earnings.

Here are a few actions to get started:

  • Start saving for retirement as early as possible during your working years. Maximize the time horizon for your investments to grow and give you flexibility when funding other financial priorities later in life. 
  • Take advantage of automatic and regular payroll deductions. If you have a retirement account through your employer, automatic deductions can help you save consistently over time, especially if you:
    • Contribute at least the amount your employer will match
    • Set your contributions to automatically increase every year
  • Consider opening additional accounts that allow you to save for retirement but are flexible for withdrawals for education without penalty. For example, although Roth IRAs are designed for retirement, the IRS allows parents to use Roth funds to pay for their child’s college expenses, without incurring any penalties. But talk to us before doing so. Using your retirement funds will put a dent in your future savings while forgoing the potential for tax-deferred growth. Additionally, you may need to pay income taxes on parts of the withdrawal if you are under 59.5 years old.

Advice spotlight

Contribute as much as you can to a Roth IRA

In general, it’s not advisable to use your retirement funds for your child’s educational expenses. But a Roth IRA does offer you the freedom to do so if it makes sense for your unique situation. If eligible, consider maxing out a Roth IRA, giving you more flexibility in the future.

2. Open a college savings account when your child is young

Once you’re on track to your retirement goals, you can confidently turn your focus to saving for your student’s higher education. First, set a goal (our college savings calculator can help). With this estimate in hand, research which tax-advantaged college savings account is fitting for your family.

One option is a 529 plan, which allows you to put after-tax money into an investment account on behalf of a designated beneficiary, usually a child or grandchild. Contributions grow tax-free until they’re ready to be withdrawn for qualified educational expenses, which include tuition, fees, books and even loan payments.

Here are a few actions to get started:

  • Open an account early. If your retirement contributions are adequate, set up a 529 plan when your child is young (ideally upon birth) to benefit from a longer time horizon.
  • Automate your contributions. Like retirement planning, consider setting up weekly or monthly contributions to a 529 plan to save incrementally and effortlessly.
  • Tell your family about your child’s 529 plan. Because anyone can contribute to it, family members and friends can also help fund the account. In lieu of physical gifts for birthdays and holidays, give family members the option to contribute to your child’s 529 plan instead.

Advice spotlight

Excess 529 plan funds will soon be eligible to transfer to a Roth IRA

Beginning in 2024, beneficiaries of 529 plans that have been in place for 15 years or more can transfer assets from the 529 plan to a Roth IRA. There are limitations to this new rule, but the provision may alleviate a parent’s potential concern that they are over-funding a 529 plan.

3. Talk to your student about costs, expectations and options

As you get closer to your student’s college years, consider formally discussing goals and options with them. With college costs rising, parents and students will want to be on the same page.

Here are a few thought starters for your conversation:

  • Know the numbers. Have a clear sense of how much your student may need and how much you plan to save.
  • Set expectations. Be open about your family’s budget and if you’re expecting your student to contribute in some way. Consider overall financing: How will student loans, grants and scholarships factor in?
  • Explore your options. Discuss careers and areas of study that interest your student — including expected salary upon graduation — and which schools may be the best fit. Is it worth exploring alternative options like completing required courses at a community or online college before transferring somewhere else for advanced coursework?

Questions to discuss with us

  • Should I revisit my retirement contributions? Does it make sense to increase the amount I’m putting away?
  • In light of my education saving goals, would it make sense to open or allocate more money to a Roth IRA (which allows me to save for retirement, but is also flexible for withdrawals for education without penalty, if necessary)?
  • Can you help me balance my competing financial priorities and determine how much money I can feasibly allocate to my education savings goal, while also staying on track for retirement?
  • Can you help me compare different educational savings accounts to determine the best option for my situation?
  • Can you help me identify opportunities to increase savings over the years — such as capturing raises, bonuses and excess cash flow when expenses go down?

How we will help

When saving for college and retirement, we will help you make informed decisions and collaborate on strategies that strike the right balance for your family.