Your own convictions may lead to a natural choice,
but if you’re torn, your age is probably the most important variable to consider. The older you are, the more sense it makes to weight your savings toward retirement accounts because you’ll have less time to build your retirement savings after your kids are through with college. If you’ll be 591/2 or older while your child is in college, you may want to put the bulk of your savings into retirement accounts, such as IRAs or Keogh plans. That will let you take advantage of the tax deferred growth in those accounts, but because you’ll be old enough to make penalty-free withdrawals by that time, you’ll have the flexibility to tap the money for college costs if you choose to.
Maximizing contributions to a 401(k) plan with
your employer also makes sense, but unless you leave
your employer, you’ll have to tap the money through a
loan rather than an outright withdrawal.
■ If you leave your employer after age 55, you can then
withdraw the money without penalty.
■ If you leave before age 55, you can roll the money
over into an IRA, then withdraw it penalty-free after
age 591/2 (or earlier if it is part of a series of roughly
equal payments, determined by your life expectancy,
that lasts for at least five consecutive years and until
you’re 591/2).
Another plus for retirement accounts is that, at
most schools, they’re not taken into consideration
when determining your financial-aid eligibility.
If you’re relatively young, you might choose to save
more heavily toward college first, then concentrate on
retirement after your kids graduate from college. But
don’t ignore retirement savings entirely. If you have a
401(k) plan at work, for instance, contribute at least
enough to take full advantage of any employer match.
That free money is too good an offer to pass up. You
may even want to contribute up to the maximum, to
take advantage of the tax break that lets your account
grow tax-deferred, bearing in mind that you can borrow
the money later for college expenses.
In Keoghs, SEP–IRAs and some IRAs, your contribution
is tax-deductible, but you can’t borrow from
these plans, and there’s a 10% penalty for withdrawing
money before you reach age 591/2 (with the one exception
described above). So contribute to these only after
you’ve met your college savings goals.
Read More : Saving for College or Retirement?
