Many of us, including your AT&T investment advisor, have been there—working through college fueled on ramen, caffeine and student loan debt. So it’s not surprising, according to one industry expert, that young parents are making it a priority to save for their children’s future college expenses. But is this strategy short-sighted? Consider this interesting statistic: as of 2013, 65.9 percent of recent high school grads enrolled in a two- or four-year higher education institution, leaving a third of all young adults without any concerns about college costs*. And this trend continues to grow, three years later.
Even more compelling, of those who chose to go to college, according to the National Center for Education Statistics, about four times as many students are enrolled in public higher education institutions than private schools, so their tuition expenses are much lower. If your student does end up taking out student loans, employers looking for college grads are sweetening the deal by offering to pay down these balances. You very well could preserve your retirement plans and successfully support your child’s post-secondary education at the same time.
According to one investment writer, when it comes right down to it, better tax breaks and other incentives make prioritizing your 401k or another retirement fund a wiser decision. Citing Savingsforcollege.com, he states that currently 34 states offer residents a state-tax deduction on deposits made to qualifying 529 college savings plans. Because those deductions tend to be applied to a limited annual deposit amount, and only to lower-rate state taxes, the potential tax savings are far less than the tax reduction you would receive from making deposits to a pre-tax retirement plan like an IRA, 401(k) or 403 (b).
The bottom line here—depending on your income, diverting money into a pre-tax retirement plan could actually save you a substantial amount of money, (up to 10 times as much for a family earning $100,000 in taxable income, for example) in state and federal income taxes in the year the deposit is made. You could then take what you saved on taxes by saving for retirement, and plan to use that amount to make a contribution to a 529 college savings plan.
The suggestion here is not to abandon plans for your child’s education, but to think about the strategy behind your long-term goals for your family. Fortunately, there are smarter ways to save without compromising your retirement plans and your children’s college education. It always makes sense to visit an investment advisor to examine your options. If you don’t have one, we can help. Visit mooneylyons.com to discover how working with a wealth management firm can help you pursue your financial goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary.
Withdrawals from tax-deferred retirement accounts are taxed as ordinary income in the year of the withdrawal.