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  • 1. Balancing College and RetirementSavingStephanie Yates Rauterkus, PhD
  • 2. •AgendaFamilies & Finance FAQ #1 How Did Our Parents Do It? Hint: Things were different! FAQ #2 What’s More Important? Sending the kids to college or retiring comfortably. FAQ #3 How Do We Do Both? We’re all in this together! FAQ #4 How Do We Get the Kids Involved? Rev up those college fund engines! FAQ #5 How Exactly Do We Get the Ball Rolling? We can do this the easy way or the not so easy way.
  • 3. •How Did Our Parents Do It? Hint: Things were different then! • Purchasing power increased dramatically from the 1950s to the 1970s. • Many people had pension plans entirely funded by their employer. • College tuition was much less expensive then. • Parents tended to start families at a younger age The average college tuition at a In 1980, the average tuition at 4- public, 4-year institution is $7,605. year institutions was $3,499 in It is $27,293 at private institutions. today’s dollars.
  • 4. •What’s More Important? Send the kids to college or retire comfortably?IVY LEAGUE SCHOOLS RETIREMENT• The most expensive schools cost • You’ll need about $700,000 to more than $30,000 a year. retire at 65 with $40,000 in annual• If you choose this option, you will retirement income. possibly spend most of your money • If you choose this option, your on college instead of retirement. children may have to go to a less• A few years into retirement, you expensive school. may run out of savings. • Your retirement savings should be• If you cannot make ends meet on enough to keep you from living in Social Security and retirement, poverty and/or turning to your what do you do? children for help.
  • 5. •How Do you Do Both?Remember that you’re all in this together!• Make it clear early on that your children are going to have to pay for pert of their college expenses themselves.• Explain that you need to plan for your own retirement so that you do not become a burden on them when you get older.
  • 6. •How Do you Get the Kids Involved? Rev up those college fund engines!• Have children allocate a portion (25-50%) of their income (babysitting, gifts, etc.) to a college fund.• Set up a bank account for each child specifically for their college fund.• Ask that friends and relatives consider making donations to your children’s college funds at gift-giving times.• Review the college fund statements with your children regularly.
  • 7. •Consider Simplicity What to do if funds are limited . . .• Put every dollar you can into tax-deductible retirement plans.• The contribution is tax deductible so the earnings are tax-deferred.• You can withdraw funds for your child’s college education penalty-free.• You are less likely to spend money that is invested in a retirement plan.• Financial aid calculations do not consider retirement plan assets to be available for college expenses.
  • 8. •The Pros and Cons of Paying for College with Retirement FundsPROS CONS• You can typically borrow up to 50% • Withdrawing retirement funds of 401k funds at a low rate (prime + reduces the long-term productivity 1-2%). of your retirement account.• Paying college expenses with 401k • If you borrow from a 401k and you loan funds has no impact on a student’s eligibility for need-based quit your job or are terminated the financial aid. loan must be paid back in full• IRA withdrawals for college usually within 60 days. expenses are exempt from early • IRA withdrawals may be subject to distribution penalties. income tax.• Limiting IRA withdrawals to only • Withdrawn IRA funds can your contributions eliminates negatively your child’s financial aid income taxes. eligibility in the following year.
  • 9. •Putting Funds in Your Child’s Name Only Think twice! • If you have extra money to save beyond your retirement plan limits ($16,500 or $22,000 if you’re over 50), you may not want to put it in your child’s name. • The tax benefits are outweighed by the impact on your child’s financial aid eligibility. • Funds in your child’s name are under your child’s control . . . 35% of your child’s assets are 6% of your assets are considered to considered to be available for be eligible for college expenses college expenses every year. every year.
  • 10. •Saving for College Through 529 Plans Something to consider after you address your retirement needs.• No federal taxes when earnings are used for qualified expenses like tuition, room and board, books and more.• The money can be used at thousands of eligible schools nationwide.• Anyone can make contributions regardless of their income.• Contributions can be as low as $15 per month.
  • 11. •Types of 529 Plans Not all are available in Alabama. . .• Savings – work like a 401K or IRA. • Direct Sold – investors purchase directly from the plan manager. No sales charges. • Broker Sold – investors purchase through a financial adviser but may pay sales charges or incur other fees that are used to compensate the adviser.• Prepaid – allow you to pre-pay all or part of the cost of an in- state public college education and can be converted to private and out-of-state colleges.
  • 12. •529 Plans in Alabama What you should know about Sweet Home Alabama.• Contributions, including rollover contributions to an Alabama 529 plan of up to $5,000 per year by an individual and up to $10,000 per year by married taxpayers filing jointly who each make their own contributions are deductible in computing Alabama taxable income.• Plans (managed by Union Bank & Trust Company):• CollegeCounts 529 Plan• CollegeCounts 529 Fund Advisor Plan• Prepaid Affordable College Tuition (PACT) Program: closed to new enrollments
  • 13. Questions?Ask them now or drop me anote:Stephanie Yates Rauterkussrauter@uab.edu