Want to Open a 529 Account for Your Kids? You Need to Do This First

About one-third of American families use college savings plans -- mostly in the form of 529 plans -- to help set aside and invest money for their kids' college expenses. This is certainly an admirable goal, but many Americans save for college while simultaneously not saving enough for their own retirement.

There are a few reasons why it's generally not a great idea to prioritize saving for college over your own retirement.

Saving for college takes care of your kids now

Most parents want to set aside money for their kids' college to give them a financial head start in life. And it certainly makes sense to want them to graduate without the burden of debt when they're starting their careers.

However, if you're putting your kids through school at the expense of your own retirement, you could potentially have the opposite effect over the long run. After all, if you run out of money in retirement, your kids could end up having to dip into their savings accounts to financially support you. In fact, 32% of adults ages 40-64 provide regular financial support to their parents, and 42% expect to be doing so at some point in the future, according to an AARP survey. A sufficient retirement nest egg can help your kids avoid this.

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It's also important to keep in mind that it's rather easy to borrow money for college if your kids need to. But it's not an option to borrow enough money for a financially comfortable retirement if you don't have enough in savings. So, what's better? Your kids being in debt debt, or potentially having to financially support you when they're trying to raise their own families?

To be sure, it's great to aspire to do both. But the point is that your own retirement savings should take priority. If you want to contribute to a 529 after making your retirement contributions, by all means go for it.

Retirement savings can be flexible

One big reason to err on the side of saving more for your own retirement is that there are ways to make sure your own retirement needs are taken care of while also leaving yourself the flexibility to help your kids pay for college if you're in a position to do so.

Specifically, the IRS provides an early withdrawal exception for IRAs that allows for penalty-free withdrawals to be used for qualifying higher education expenses.

A good rule of thumb is to aim to set aside 10% of your income in retirement accounts, not including any matching contributions from your employer. But that doesn't necessarily mean you need to put 10% of your salary into your 401(k). One suggestion if you're worried about saving for college and your own retirement is to contribute to an IRA as well as your employer's plan.

The idea is that if you're on track to have enough saved for retirement elsewhere by the time your kids are starting college, you can use some of the money in your IRA to help pay for it. But if you need the money for your own retirement, you have the option of leaving it there. Plus, it's worth noting that a Roth IRA has the same general tax structure as a 529 plan, so many families specifically use them as 529 alternatives.  

The bottom line on retirement savings and college

529 plans can be great tools to help families plan for college expenses. Not only is your money able to grow tax-free, but you might even be able to get a state tax deduction for your contributions.

However, it's important you aren't sacrificing your own financial security in retirement by saving for college. An IRA can allow you to set yourself up for flexibility to do both and could be an excellent choice for savers who aren't sure if they'll be in a position to pay for college.