Financial Solutions

Balancing retirement savings with college goals.

PROBLEM: Matt and Paula Long, both 34, of Lancaster, Pennsylvania, are the parents of two: Alyssa, 6, and Jason, 3. Like many parents with young children, the Longs are doing a financial balancing act: saving for retirement and their children’s education. The Longs started to save for schooling early on. “When our first was born, we opened a 529 plan for her,” Matt says. “With the second one, we started a Coverdell education savings account.” But, their retirement savings ran a distant second.

CONSIDERATIONS: There is nothing wrong with a college savings program, as long as you fund your retirement first, says Rusty Dicks, the Longs’ Thrivent Financial for Lutherans representative. “When I talk to my clients, I reiterate the same thing: Make sure you have enough for retirement and make sure you’ll be protected if you die. Once you do that, if you still want to put money aside for college funding, use college accounts.”

Deciding to put your retirement savings before education funding can be a difficult decision to make. “I walked the Longs through several considerations,” Dicks says. “If you put all of your money in a college-specific account, your options become limited. What if your kids don’t go to school, or they receive a full-ride scholarship, or they go into the service and they don’t need that money? If you take it out and use it for something other than college, you pay taxes and a penalty on the earnings. And if your child qualifies for financial aid, any money in a college savings account may count toward the amount you are required to pay.”

SOLUTION: Following Dicks’ advice to put retirement savings first, the Longs opened two Roth IRAs, one in Matt’s name and one in Paula’s. Once they reach the maximum contribution for the year, they will again start to fund the children’s accounts.

Since contributions to a Roth IRA can be withdrawn tax and penalty free, and earnings can be withdrawn penalty free for educational purposes, the Longs will have money available should their kids need it. At the same time, they are securing retirement income for themselves.

—Sarah Asp Olson

Note This! Look for more tips on college funding in the Spring 2008 issue of Thrivent magazine.