College Planning

The financial planning landscape has long been dominated by the singularly daunting challenge of funding one’s retirement.  With undergraduate degrees becoming more pedestrian and postgraduate degrees being increasingly desired in the professional workplace, many parents are faced with the challenge of funding not only their retirement but also their child(ren)’s potential college career.  Some of the many questions new parents face when thinking about college savings are:

  • We still have some time before our child(ren) begin college.  With our current budget we cant afford to save for retirement and college at the same time; how should we prioritize these two hurdles?
  • What type of account should we look at setting up and how should we allocate our investments?
  • We don’t yet know how much our child(ren)’s education will cost; how can we determine how much to save each year?

When prioritizing college and retirement expenses, it is easy to get caught up in how much one should save in their IRA or college savings instrument and how to best split savings especially when starting out.  One way to approach this issue is by setting out to save only for retirement with a traditional IRA.  One of the lesser known facets of IRA’s is that retirement funds can be withdrawn penalty free (income tax still applies) to pay for higher education expenses.  This ensures a retirement nest egg while having contingent funds for education should they be needed.

There are a multitude of options available when considering which type of account to use when saving for a child’s college education.  One of the more popular options available is the 529 plan which allows for funds to grow tax free as long as they are used for a qualifying higher education expense.  The main drawback with such plans is that if they child chooses not to attend college, the funds are subject to a 10% penalty upon withdrawal.  For this reason our firm recommends using an individual or joint brokerage account which will allow for the greatest flexibility upon fund withdrawal.  The risk allocation of one’s portfolio will understandably decrease as the child gets closer to college age since recouping potential market losses becomes harder given a shorter investment time horizon.  To that TTP Investments would shift from a growth to a balanced risk objective commensurate with the firm’s portfolio management strategy.

See the College Planner to determine the potential cost of college education.

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