Hello All,
Today’s posting is on the question of whether you should fund your children’s education or your own retirement.
Most personal finance advisers argue that all things being equal, it’s better to fund your retirement than fund your child’s education. The rationale is threefold:
1) If you are not financially well off, you’ll be less of a burden to your children
2) Scholarships and loan programs are available for students, but not for retirees
3) Acquiring assets like real estate or 401k accounts means that you’ll have more options
In our view, the last point is the most compelling. If you prioritize funding your retirement you’ll have more flexibility when it’s time to pay for your children’s education. For example, if your 401k account is flush, you’ll be able to take a loan against the balance (clicky). Alternatively, if you own your home you can always use the equity to put junior through school.
Of course, we do recommend contributing a modest amount directly to your children’s education. Why? Even a token amount like $25 or $50 a month can have an empowering effect on you and improve your family’s cohesion. – So basically, saving will bring you into the process and your kids won’t feel they’ve been left in the cold. There are several ways to do this:
1) UGMA and UTMA accounts. The Uniform Gift to Minors Act and Uniform Transfers to Minors Act allow you to set up a trust for the benefit of your children. How it works is you control the decisions made in the account but your child is the legal owner of the assets. They can be set up in most banks and brokerage accounts. Contributions over $10,000 may be subject to gift taxes and in some circumstances the first $1,400 of investment income is tax free.
2) 529 Plans. Named for the section of the IRS code that created them, 529 plans allow you to contribute up to $100,000 to an account for your children’s education. As long as the money stays in the account its’ growth, dividends and capital gains are protected from Uncle Sam. Starting in 2002, you can take withdrawals tax free. For more info on this, check out savingforcollege.com.
If you’re researching the topic, www.scholarshare.com is a good resource as well.
To conclude, it’s generally a better idea to prioritize funding your retirement. However, we don’t recommend neglecting your children so some modest savings via a UGMA/UTMA or 529 plan may be appropriate.
Best,
James&Miel
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