college

Saving for college not top priority

Have a retirement plan

"You can borrow if you need to for college education. You cannot borrow to fund your retirement," says Jeffrey D'Italia, senior financial professional with Firstrust Financial Resources, a wealth management firm in Philadelphia.

While students have scholarships, grants, loans and alternative aid programs to help foot the cost of four years of college, parents have few outside resources to help fund 10, 15 or 20 years or more of retirement.

Choosing retirement over college savings can actually help pay for school, too. Retirement accounts, including 401(k) plans, IRAs, pension plans and annuities, are among the few savings vehicles that aren't counted in the federal aid methodology that determines a family's expected annual contribution to college expenses. Low, middle and upper-middle income families who may qualify for need-based aid can actually increase their likelihood of landing help from Uncle Sam and their college of choice by maxing out their retirement accounts before saving for college.

There is one way to save for retirement and college without losing financial aid, says Gary Gilgen, director of financial planning for Rehmann Financial wealth advisory firm, which is headquartered in Michigan.

"(Parents can) put money in a Roth (IRA) and still use it as cash reserves and retirement all in one bucket," he says. "They could then pull that out and use it when the time is right for funding education."

Traditional and Roth IRAs are tax-favorable vehicles that allow parents to withdraw funds without a 10 percent penalty if the proceeds pay for college. IRA funds won't be counted in the federal aid methodology as long as they're in an IRA. Once the family starts taking withdrawals, however, that money does count as income. For every dollar withdrawn from an IRA, the student can lose up to 50 cents in federal financial aid.

There may also be tax implications. Parents who withdraw funds from traditional IRAs will have to pay federal income taxes on the withdrawal, as well as state income taxes where applicable. Withdrawals of earnings from Roth IRAs that were set up five years before or longer are tax-free if the accountholder is age 59 ½ or older. But if withdrawals are made within five years of opening the account, taxes are due only on the earnings of the account, not the original contributions since those are made with after-tax money.

So, however you decide to help your child, just make sure you're on track for retirement before using your IRA funds for college.

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