Saving for Retirement or Your Kids' College: Which Comes First?
Updated: 4 days ago
Key points
Many parents feel they should save for their kids' college before anything else. There's a strong case for putting your own retirement first, but it's a personal decision, not a rule.
College can be paid for in several ways, including financial aid, scholarships, and loans. There's no loan that pays for your retirement.
Retirement account balances aren't counted as assets on the FAFSA, though withdrawals count as income. A 529 owned by a parent is counted, but its effect on aid is modest.
Saving for both is possible. Many families fund retirement first and add smaller, steady amounts to a 529.
Some retirement money can also serve as a backup for education costs, but every dollar used that way is a dollar less for retirement.
I wrote about the moment a banker asked whether I was maximizing my retirement accounts, and the belief it made me unlearn, in The Financial Belief I Had to Unlearn: "My Kids' Education Comes First". This post is the practical side of that decision: saving for retirement vs college, and how to weigh the two.
I have two 529 accounts, one for each of my kids. Right now I'm not contributing to them, because my goal is to save for retirement, though I'll probably get back to them in the future.
I want to help my kids from a place of overflow, as a true gift: not as an obligation, and not at the expense of my own life goals and financial stability. To me, that means a 529 should help with their education costs, not cover them completely, and certainly not the full cost of a private university. They can apply for scholarships and grants, work a bit, maybe during summers, and if it comes to it, take a loan. Education is a great thing, and I'm all for education and opportunities, but it shouldn't become an unbearable burden for parents.
That's my choice, and it isn't the only reasonable one. Here's how to think about the trade-off for your own family.
Why Retirement Often Comes First
There are many ways to pay for college, and few ways to fund retirement
College can be paid for with savings, current income, financial aid, scholarships, work, and federal student loans. Those loans have limits: a dependent undergraduate can borrow up to $31,000 in federal student loans in total, and since July 1, 2026, new Parent PLUS loans are capped at $20,000 a year and $65,000 per student (StudentAid.gov). Retirement has no equivalent. If you reach your 60s without enough saved, there's no loan or scholarship that turns into retirement income.
Your kids' path may look different from what you expect
Your kids may choose a traditional four-year degree, a trade, a certification, starting a business, or no further education at all. Retirement savings serve you whatever they decide. A 529 is limited to education: it now covers more than college, including apprenticeships (IRS), but money used for anything else has its earnings taxed and penalized. That risk is smaller than it used to be, for reasons covered below, but it's real.
Time does most of the work
Retirement savings usually have the longest time to grow, often several decades. Money you don't put into a retirement account in your 30s or 40s can't be made up later at the same cost. For example, $500 a month growing at 7% a year becomes about $610,000 after 30 years, but only about $260,000 after 20 years. To reach the same $610,000 in 20 years, you'd need to save about $1,170 a month.
Illustrative example: 7% is an assumed return, not a forecast, and fees and taxes are ignored.
Retirement accounts often come with extras
An employer match is money you only get if you contribute. Retirement accounts also come with tax breaks, and limits that reset every year: space you don't use this year is gone. Why these accounts are worth using at all is covered in Tax-Advantaged Accounts: Why Use Them Instead of a Regular Brokerage Account.
Your security can help your kids later
In my view, a well-funded retirement is also a gift to your kids: it makes it less likely they'll need to support you financially later in their lives.
The Other Side of the Decision
Putting retirement first doesn't mean college doesn't matter.
Student debt has a real cost. Loans have to be repaid, with interest, often in the years when your kids are starting their careers. In my family, how much to borrow will be my kids' decision. A lot depends on the expected return on their education and on how the education and job markets will look 10 or more years from now, which none of us really knows.
Parent loans compete with retirement. Parent PLUS loans are borrowed by the parent, which can be in the years just before retirement, and repaid from the same income that would otherwise go to retirement savings.
Values and expectations differ. Some families see paying for college as a parent's responsibility. Others expect children to share the cost. Neither is wrong, and it's worth deciding what you believe before choosing the numbers.
A 529 plan has real advantages. Growth and withdrawals for qualified education expenses are tax-free (IRS), and many states offer a state tax deduction for contributions.
How Financial Aid Treats Each One
Where your savings sit can affect how much federal financial aid your kids may receive, based on the FAFSA, the federal financial aid application.
Retirement accounts, such as 401(k)s and IRAs, aren't counted as assets on the FAFSA. But withdrawals, including tax-free withdrawals from an IRA, count as income, and income has a larger effect on aid than assets (Federal Student Aid). The FAFSA uses income from two years earlier, so a withdrawal in 2026 affects aid for the 2028–29 school year.
A 529 owned by a parent for the student counts as a parent asset. Parent assets count at an effective rate of up to about 5.64% in the aid formula, compared with 20% for assets owned by the student (Federal Student Aid).
A 529 owned by a grandparent isn't reported on the FAFSA, and since the 2024–25 school year, withdrawals from it no longer count as income for the student.
Aid rules change, and many private colleges also use their own form, the CSS Profile, which can count assets differently. Check the current rules on StudentAid.gov and with each college when the time comes.
Saving for Retirement vs College: Doing Both
It doesn't have to be all or nothing. Some ways families combine the two:
Retirement first, then a smaller 529 contribution. Once you're consistently funding retirement at the level you've chosen, even small, automatic monthly contributions to a 529 add up over many years.
Gifts from family. Grandparents and relatives can contribute to a 529, or open one themselves.
A specific goal. Instead of trying to cover everything, some parents pick a target, such as a set number of years or a share of in-state tuition.
A 529 is also more flexible than many parents expect, which lowers the risk of saving "too much." You can change the beneficiary to another family member, such as a younger sibling. Up to $10,000 can go toward the beneficiary's student loans (IRS). And unused money can move into your child's Roth IRA: up to $35,000 over their lifetime, if the 529 has been open at least 15 years, excluding contributions from the last five years, within the yearly IRA contribution limit, and up to the child's earned income for that year (SECURE 2.0 summary). State tax treatment of these options can differ. I cover how a 529 works, including these options, in How a 529 Plan Works: Rules, Flexibility, and Common Questions.
Using Retirement Money for Education
Some retirement money can serve as a backup if education costs come up:
Roth IRA contributions can come out anytime without tax or penalty (IRS).
IRA withdrawals for qualified higher education expenses avoid the 10% early-withdrawal penalty, though income tax still applies to pre-tax money and to earnings (IRS). This exception applies to IRAs only, not to 401(k)s.
A 401(k) loan lets you borrow from your own balance and repay it, with real risks if you leave your job. I cover it in Borrowing From Your 401(k): How a 401(k) Loan Works and When It Makes Sense. A 401(k) hardship withdrawal for tuition may also be possible, but it's taxed, usually penalized, and can't be paid back.
Treat these as a backup, not a plan. Every dollar used for education is a dollar less for your retirement. Money taken from a Roth IRA can be put back within 60 days, once in any 12-month period (IRS); after that, only as a new contribution within the yearly limit. These withdrawals, including tax-free withdrawals of Roth IRA contributions, also count as income for financial aid two years later, as explained above.
How to Think About It
There's no answer that's right for every family. Here's how I'd frame it:
If you don't have an emergency fund or you have high-interest debt, that usually comes before both. I cover both in Part 2: The Foundation: Your Emergency Fund & Debt-Free Numbers.
If you're not yet getting your full employer match, that usually comes next.
If your retirement savings are on the track you've chosen, adding a 529 can make sense, especially if your state offers a tax deduction. Not every state does: California, where I live, doesn't.
If you're behind on retirement, catching up there first protects you, and your kids still have other ways to pay for college.
If family members want to help, a 529 is an easy way for them to contribute.
Summary
Saving for your kids' college and for your own retirement are both worthwhile goals, but they don't have the same options: college can be paid for with aid, scholarships, and loans, while retirement depends on what you save. For many families, that makes retirement the first priority, with a 529 added once retirement is on track. The right balance depends on your values, your situation, and what you want to make possible for your kids.
FAQs
Should I save for retirement or my kids' college first? Many families put retirement first, because college can be paid for with aid, scholarships, and loans, while retirement can't. It's a personal decision that depends on your values and situation.
Do retirement accounts count against financial aid? The balances don't: 401(k)s and IRAs aren't counted as assets on the FAFSA. But withdrawals, including tax-free Roth IRA withdrawals, count as income on the FAFSA two years later.
Does a 529 plan hurt financial aid? A parent-owned 529 counts as a parent asset on the FAFSA, which has a much smaller effect on aid than student assets. A grandparent-owned 529 isn't reported.
Can I use my IRA to pay for college? Yes, as a backup. IRA withdrawals for qualified higher education expenses avoid the 10% penalty, though income tax still applies to pre-tax money and earnings (IRS). Roth IRA contributions can come out anytime without tax or penalty (IRS).
Can grandparents contribute to a 529? Yes. They can contribute to a parent's 529 or open their own for the grandchild.
Transparency Note: I'm the human behind the keyboard — the ideas, stories, and decisions here are mine. I collaborate with AI throughout the writing process: brainstorming, drafting, smoothing out grammar and flow, assisting with research, and creating the visuals you see throughout my posts.
Disclaimer: The information provided in this blog post is for educational and informational purposes only. I am an AFC® (Accredited Financial Counselor) Candidate, not a Certified Financial Planner (CFP®), Certified Public Accountant (CPA), tax advisor, attorney, or Investment Adviser Representative (IAR). The content herein is not intended to be a substitute for investment, tax, or legal advice from a licensed professional. Always seek the advice of a qualified professional with any questions you may have regarding your individual financial situation. The opinions expressed are my own and do not represent the views of my current or former employer.
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