College Savings vs. Retirement Savings: A Guide for Parents and GrandparentsHelping a child or grandchild pay for college is one of the most meaningful financial gifts a family can give. But it can also create a difficult question: How do you support a loved one’s education without putting your own retirement at risk? That question matters more than ever. According to Sallie Mae’s How America Pays for College 2025 report, undergraduate families spent an average of $30,837 on college during the 2024–25 academic year. The same report found that 74% of families used parent income and savings to help pay for college, contributing an average of $15,754. For parents and grandparents, those numbers can be significant. College funding is important, but retirement funding is essential. Students may have access to scholarships, grants, work-study programs, and student loans. Retirees do not have the same flexibility. That is why education planning should be part of a broader financial plan—not a separate decision made in isolation. Start With the Bigger Question: Can You Afford to Help?Before deciding how much to contribute toward college, parents and grandparents should first review their own financial foundation. That includes:
The goal is not to avoid helping. The goal is to help in a way that is sustainable. A parent who pauses retirement contributions for several years to pay tuition may feel good in the short term, but the long-term tradeoff can be costly. A grandparent who writes a large check without considering future care needs may unintentionally create financial strain later. A better approach is to define what you can contribute comfortably, then build the education strategy around that number. College Savings Should Not Come Before Retirement PlanningA common planning mistake is treating college as the more urgent goal simply because the bill arrives first. Retirement may be further away, but it is often the larger and less flexible goal. There are loans for education. There are no loans for retirement. Parents and grandparents should be cautious about:
This does not mean families should avoid paying for school. It means the education funding plan should work alongside retirement planning, not against it. Planning for Multiple Children in CollegeFamilies with more than one child may face overlapping college years. This can make costs difficult to manage without a clear plan. Start by estimating each child’s likely education path. One student may pursue a four-year private university. Another may begin at community college, attend an in-state school, or pursue a trade or credentialing program. Families should discuss:
Having these conversations early can reduce emotional decision-making later. Encourage Affordable College ChoicesCollege selection is one of the most important financial decisions a student and family will make. A school may be a great academic fit, but that does not automatically make it a great financial fit. Students should be encouraged to compare schools based on net cost, not just sticker price. Important factors include:
Involving students in the financial conversation can be valuable. When students understand the tradeoffs, they are often better prepared to make informed decisions about borrowing, working part-time, applying for scholarships, and choosing a school that aligns with their long-term goals. How 529 Plans Can Help Parents and Grandparents Save for EducationA 529 plan is one of the most commonly used education savings tools. These plans are state-sponsored, tax-advantaged accounts designed to help families save for qualified education expenses. The IRS describes 529 plans as qualified tuition programs that allow contributors to prepay or save for a beneficiary’s qualified education expenses. Earnings can accumulate tax-free, and distributions are generally not taxable when used for qualified education expenses. A 529 plan may be used for expenses such as:
Recent federal rules have made 529 plans more flexible. Beginning in 2026, qualified K–12 expenses are limited to $20,000 per year per beneficiary, up from the prior $10,000 federal limit before December 31, 2025. IRS guidance also includes expenses such as curriculum materials, tutoring, standardized testing fees, dual enrollment fees, and certain educational therapies for students with disabilities. 529 Plan Benefits for Financial Aid Planning529 plans can also be useful from a financial aid planning perspective, though the impact depends on who owns the account and which aid formula is being used. Parent-owned 529 accounts are typically treated more favorably than student-owned assets for FAFSA purposes. Recent FAFSA changes have also made grandparent-owned 529 plans more attractive because distributions from grandparent-owned 529 accounts are no longer reported as student income on the simplified FAFSA. Vanguard notes that starting with the 2024–2025 academic year, the simplified FAFSA no longer requires cash support or distributions from a grandparent-owned 529 to be reported. That said, financial aid rules can differ by institution. Some private colleges use the CSS Profile, which may treat family assets differently than the FAFSA. Before making major contributions or withdrawals, families should understand how the account may affect financial aid eligibility. Common 529 Plan MythsMyth 1: Unused 529 funds are lostUnused 529 funds are not automatically lost. In many cases, the account owner can change the beneficiary to another qualifying family member. In addition, certain unused 529 funds may be rolled over into a Roth IRA for the beneficiary, subject to strict rules. The IRS states that these rollovers must be direct trustee-to-trustee transfers, are subject to annual Roth IRA contribution limits, have a $35,000 lifetime limit, require the 529 account to have been open for at least 15 years, and cannot include certain recent contributions and earnings. Myth 2: 529 funds can only be used in one stateMany 529 savings plans can be used at eligible institutions across the country, and sometimes even at eligible institutions abroad. Families should still compare plans carefully, especially if their home state offers state tax benefits. Myth 3: The state tax deduction is the only factor that mattersA state tax deduction can be helpful, but it should not be the only consideration. Fees, investment options, performance, plan rules, and flexibility all matter. The SEC’s Investor.gov notes that fees and expenses reduce returns and can vary based on the type of 529 plan, whether it is broker-sold or direct-sold, the plan itself, and the underlying investments. Watch the Timing of 529 WithdrawalsOne of the most important 529 planning details is withdrawal timing. When using 529 funds for college expenses, it is generally wise to align withdrawals with qualified education expenses paid in the same tax year. Poor timing can create unnecessary tax reporting issues or increase the risk that a withdrawal is treated as nonqualified. Families should keep records of:
If 529 withdrawals exceed qualified expenses, part of the earnings portion may be taxable and could be subject to an additional federal penalty. A Balanced Strategy for Parents and GrandparentsA strong college funding plan usually combines several sources instead of relying on one account or one person. Potential funding sources may include:
The right mix depends on the family’s income, assets, goals, time horizon, and retirement readiness. For some families, it may make sense to fully fund a 529 plan early. For others, smaller monthly contributions may be more appropriate. Some grandparents may prefer annual 529 gifts, while others may want to coordinate education funding with estate planning. The key is to avoid guessing. College Savings vs. Retirement Savings: The Bottom LineHelping a child or grandchild pay for college is a generous goal. But it should not come at the expense of your own financial independence. A thoughtful plan can help answer questions like:
At Onitus Capital, we help families coordinate education planning, retirement planning, tax strategy, and investment management into one cohesive financial plan. If you are trying to balance college savings with retirement goals, now may be a good time to review your strategy. Frequently Asked QuestionsShould parents save for college or retirement first?Retirement should generally be prioritized before college funding because students may have access to scholarships, grants, work-study, and loans. Retirees do not have the same funding options. The best approach is to determine a sustainable education contribution that does not compromise retirement readiness. Are 529 plans good for grandparents?529 plans can be useful for grandparents who want to help fund education. Recent FAFSA changes have made grandparent-owned 529 plans more attractive because distributions are no longer reported as student income on the simplified FAFSA. However, CSS Profile schools may use different rules. Can 529 plans be used for more than college?Yes. 529 funds may be used for qualified higher education expenses, certain K–12 expenses, registered apprenticeship programs, qualified student loan repayments subject to limits, and certain postsecondary credentialing expenses. What happens if a 529 plan has money left over?Unused 529 funds may be transferred to another qualifying beneficiary. In certain cases, funds may also be rolled over to a Roth IRA for the beneficiary, subject to IRS rules, annual contribution limits, a $35,000 lifetime limit, and a 15-year account requirement. Can 529 withdrawals create taxes or penalties?Yes. If 529 withdrawals are not used for qualified education expenses, the earnings portion may be subject to federal income tax and an additional 10% federal penalty. State tax consequences may also apply. Important Disclosure: This material is for informational purposes only and should not be considered investment, tax, legal, or accounting advice. 529 plan rules, financial aid treatment, state tax benefits, Roth IRA rollover rules, and education funding strategies can vary based on individual circumstances. Consult your tax, legal, and accounting professionals before implementing a strategy. Investing involves risk, including the possible loss of principal. Onitus Capital does not provide tax or legal advice. |
1. SallieMae.com, How America Pays for College, 2025 |
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