This month’s topic doesn’t necessarily fit completely into the “Retirement Income Toolbox” category, it certainly is closely related to how people save their money along the way. This month I wanted to touch briefly on the subject of saving for college for your children. Many people save as much as they can into their IRAs and 401ks and figure they will just use some of this money when comes time to pay their children’s school expenses (Their friends have told them they can use some of this money from these savings without penalties or they have read something on the internet etc.). In many cases the amount(s) that is available to use out of their retirement account towards their child’s education doesn’t begin to cover the overall cost (Regardless of the amount saved due to withdrawal limitations) and still might come with some taxes and/or penalties. The calculations are not cut and dry and simple when it comes to figuring this out.
If you are planning to set aside money for your children’s education it is much more beneficial to place these funds in an account specifically designed for this type of savings. There are generally two types of accounts (529 plan and ESA, Education Savings Accounts) that are much more tax efficient than using your IRA or other type of retirement account for college savings.
According to Paul F. Campos, a law professor at the University of Colorado, Boulder, had the inflation of the price of a new automobile increased as much as the cost of and educations has, the average new car would cost over $83,000 today.
As you plan your savings and retirement accounts we suggest you take the time to meet with a qualified advisor who can help you correctly open and fund the correct accounts for the appropriate type of savings that you are planning on using them for. We urge the younger clients who are still in the processing of having/raising children to begin setting aside money appropriately for their college education beginning when their children are very young.