Are a you a single mom who puts the education of your children above your own retirement?
If so, you’re not alone. In a study referenced by Forbes, it was found that half of all single moms put their child’s education as their long-term financial priority, even above saving for their own retirement.
So, a lot of questions arise from the findings of single moms and their financial priorities. Why are divorced moms putting their kids’ college savings first when they are arguably a child’s priority?
Are there options for single moms that allow them to save for retirement and secure their children’s educational future?
What do most financial advisors recommend?
A Divorced Mom’s Guide To Saving For Their Kid’s College
Let’s dive in.
Divorced Moms Who Pay for Their Child’s Education Often Do So Out of Guilt
The above referenced study found that single parents are more likely to feel an obligation to help their adult children financially than traditional parents.
Often, single mom’s feel guilty about the divorce, not being able to spend as much time with their kids as they’d like (due to balancing careers), and because they want to give their child one less thing to think about in their future as they feel they have scarred them through the divorce.
So, what are the options for single moms to explore for a solid retirement and college savings balance?
Balancing Retirement and Your Kid’s College Fund
Most financial advisors would recommend that your retirement planning should come before that of your child. A couple of key reasons for this include the fact that retirement does not benefit from any federal loans whereas there are several ways to finance college. Further, tax breaks for investments are more generous than those for college savings, but there are ways to impactfully save for both.
What are the Best Options for College Savings?
Many single moms begin to consider their IRAs when thinking of ways to strategically pay for the education of their children. Turns out there is a much better way to save for both, and the college route generally involves what is called a 529 plan.
529 plans are qualified tuition plans and are tax-advantaged savings plans specifically designed for education-based saving. You have the option of two plans, depending on your ideal situation.
The first is prepaid tuition plans. These allow account holders to buy credits at participating educational institutions for the child’s future tuition.
The second college savings plan allows account holders to open an investment account that operates more like a traditional interest-bearing account, except directly aimed at educational savings.
Some of the benefits of a 529 plan include:
- No dollar limit on contributions
- You can use 529 plans to pay for elementary, middle, high school, or college
- The ability to withdrawal the amount of any earned scholarships penalty-free
- Protection from creditors in the event of a civil lawsuit, bankruptcy, etc.
Are there any negatives of a 529 for college savings?
There are some negatives to 529 plans. For starters, you can’t take income tax deductions for contributions, meaning you must pay federal taxes on the funds before adding them to the account. Another negative that is similar to many federal retirement plans is that you will be penalized if you withdrawal from the 529 account and don’t use the money for qualified education-based expenses.
What if My Child is Already College Age and I Don’t Have Savings?
While most financial planners would never recommend planning to use an IRA for college, there are some scenarios where it may be the only option. For example, if the divorced parent has not had time to contribute to a 529 plan, their sole option for helping their child may be to use their IRA.
The good news is that there are exceptions for IRA deductions specifically used for education expenses where no penalties will be incurred. This means you may be able to withdraw IRA earnings penalty-free, but not tax-free when you use the money for college.
This option, while not recommended, is ideal for single moms who have not planned on funding their retirement and saving for college.
In the perfect situation, a divorced mom will have multiple accounts set up to contribute to both their own retirement as well as the education of their children.