Couple discussing whether to pay for college or save for retirement with financial advisor, while daughter colors at the table.

Save for retirement or college?

It doesn't have to be an either-or, but there are important considerations to review.

Many people assume when it comes to building retirement savings or stashing money for college, it’s too hard to do both.

Retirement vs college savings

Many parents face the question, “Should I save for college or retirement?” If you don’t want your children supporting you in retirement, it’s a good idea to save for both. A great start is making sure you’re meeting your retirement goal first and then decide whether — and how much — you can afford to start saving for college.

Managing college and retirement savings

First, contribute to a retirement plan through your employer, if you have one. Make sure you are contributing enough to your retirement plan to receive the full employer match. There’s no gray area there.

Once you’ve done that, some of the accounts that do double duty are a good choice. With a Roth IRA, you can pull out your contributions at any time, and qualified distributions from a Roth IRA in retirement may be tax-free. With a 401k, when you move jobs you can move the 401k with you. When the kids get closer to college and you’re closer to retirement age, you’ll have a much clearer picture of how you can use the money to reach either goal.

Plan for retirement

Even if you have delayed becoming a parent, and want to save for their college, you need to prioritize retirement. Unlike college, no one is going to provide you a scholarship and no one is going to give you a loan for retirement. And you might find yourself in a situation where you want to continue to work but can’t or can’t find the work. It’s not always completely in your control when you retire. Keep in mind the tax benefits such as reducing your taxable income by putting money towards a 401k.

How do parents pay for college?

Start saving money as soon as your child is born, if not beforehand. Even putting $50 aside each month will add up when they are ready to go off to college. “Found” money can be a good way to save for college without sabotaging your retirement. Get a credit card that deposits rewards directly into a college savings account or get a card that has a good rewards program and just deposit it back into a 529 plan. Once your children are out of daycare, allocate that same money into their college fund.

Start a college fund

Instead of gifts during birthdays or holidays, ask your family to help invest in your child’s future by saving money for college tuition by providing a gift of education. They can put the money they would have spent on a gift into a 529 plan, education savings account or college fund. The earlier money is invested the higher it will grow to help cover the cost of their college education. Our college calculator can help you determine how much could be needed.

Remember, your priority should be saving for your retirement, however with budgeting and planning both are possible.

Neither State Farm nor its agents provide tax or legal advice.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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