What Should I Fund First? My Retirement Accounts Or A College Fund?

With so many demands on a family’s budget, you can’t do it all. Lots of people are forced to choose between fully funding a retirement plan for mom and dad and diverting some or all of the available cash savings to fund college. Which should come first?

All things being equal, fund retirement first. Here’s why:

Your children will have access to a lot of resources to help them finance their education. Between scholarships, need-based financial aid, and the post-9/11 GI Bill for military veterans, there are a lot of ways to pay for college. If all else fails, credit unions, banks and colleges will happily lend students money to attend the college of their choice.

Nobody is going to lend you money to live on in retirement.

Our suggestion: Keep several months’ worth of expenses in your credit union checking account. Get some life insurance in place. And then, fund your retirement accounts – as much as you can.

If you are eligible for a 401(k) plan, and your employer matches your contributions, contribute as much as you need to fully take advantage of the match. Then contribute to IRAs and Roth IRAs, if you qualify.

When you are fully funding all your retirement accounts, then it’s time to consider college funding plans like Section 529 plans and Coverdell Education plans.

You can always change your mind: The law generally allows you to divert retirement funds for childrens’ college expenses penalty free. But you cannot divert Section 529 money to retirement without paying a penalty.