Finding money to put away for retirement is a challenge for
all, but studies show that parents who help to finance their children’s higher
education needs may face an additional challenge in understanding savings
In light of the rising cost of college tuition, the
increasing student loan debt and escalating interest rates for federal loans,
parents have begun to take steps to avoid saddling their children with higher
education debt. One way they are doing this is by investing more in 529 plans,
also known as “qualified tuition plans”—tax-advantaged savings plans that can
be used to pay for college or graduate school tuition.
According to Strategic Insight (SI)’s “529 Industry
Analysis” for 2012 (see Figure 1, above right), 529 assets are currently
estimated to be $180.3 billion as of this year’s first quarter, reflecting a
7.0% increase from assets of $168.5 billion in the fourth quarter of 2012 and a
14.0% increase from assets of $158.2 billion in the first quarter of that year.
These all-time-high numbers indicate that participants may
be diverting investments from their retirement plans into 529 plans. According
the SI report, plan participants have been borrowing from their retirement
products to fund college costs: 401(k) loans are used 24% of the time and traditional
or Roth individual retirement accounts (IRAs) 16% of the time.
However, this decision to provide for children instead of
themselves could hurt parents in the long run. “Failing to help participants
save for college expenses will limit and potentially derail your ability to
help participants get retirement ready,” notes Paul Curley, director of College
Savings Research for Strategic Insight.