Date: May 20, 2024

Avoid These 4 Retirement Planning Mistakes When Funding College

Paying for your child’s (or grandchildren’s) college expenses can significantly strain any family’s finances. With rising tuition fees and escalating living expenses, the financial burden of college education is becoming increasingly challenging to manage.

As a high-net-worth individual, the dilemma is balancing the desire to provide a quality education for your family along with having a comfortable retirement. Failing to strike the proper balance can easily lead to higher debt, reduced savings, postponed retirement, or a dramatic reduction in your standard of living once retired.

This is where the services of a highly skilled retirement planner can benefit your financial future. Heritage Capital LLC specializes in retirement planning for high-net-worth individuals. We’re a fee-only financial advisory firm based in New Haven, CT. Our experienced fiduciary financial advisors can assist you in crafting a strategic education funding plan that addresses retirement and your children’s (or grandchildren’s) educational goals. 

This article will cover some common mistakes some make when planning for college expenses. We discuss how to avoid these and how Heritage Capital can help. 

Mistake #1: Waiting Too Long To Start Saving

One of the most common financial missteps is delaying the start of saving and investing for education costs.

A straightforward and commonsense solution is to begin early. Immediately following the birth or adoption of a child, open a tax-advantaged 529 college savings plan and invite family and friends to make contributions. Maintain the momentum of savings through regular monthly, quarterly, or annual deposits, and then the power of compounding can take effect. 

529 plans are available to everyone and have no income limits. Benefits include tax-free growth and withdrawals for educational expenses like tuition, fees, books, and some living costs. 529 plans offer various investment options, including mutual funds and ETFs. You can select your risk level based on when you need the money, making it easy to customize your investment strategy to meet your goals.

Contribution limits depend on the state; for example, Connecticut’s limit is $550,000 per beneficiary. Contributions can qualify for the annual gift tax exclusion, currently $17,000 per donor per beneficiary. In Connecticut, contributors can get a state income tax deduction of up to $5,000 for single filers and $10,000 for joint filers, making these plans particularly attractive for state residents.

By saving money today, you may be able to avoid the need to tap into your income, loans, or additional savings in the future. Using retirement funds for a child’s college should be a last resort.

Our fiduciary financial advisors at Heritage Capital can offer personalized help understanding 529 plans and how they can help you with your education savings goals.

Mistake #2: Overlooking Tax-Efficient Withdrawal Strategies

Funding education can involve tapping into various investment accounts. The tax implications of withdrawing funds from these accounts differ significantly and could lead to unnecessary tax burdens. Here are some important considerations:

Traditional IRAs and 401(k)s: Withdrawals for qualified higher education expenses from these accounts before age 59.5 are exempt from the 10% early withdrawal penalty. However, they remain subject to ordinary income tax, which can impact the net amount available for college expenses and begin a downward spiral in your retirement planning.

Loans against retirement plans: These can threaten retirement savings due to missed investment growth and potential tax consequences if not repaid. It’s essential to consider these risks before proceeding.

Home equity loans: Although they may provide competitive interest rates, they may jeopardize your home’s equity, and the interest may not be tax deductible when not used for home improvements.

Roth IRAs: Contributions made with after-tax dollars can be withdrawn tax-free and penalty-free anytime, making them advantageous for funding education. If the account has been open for five years, earnings can also be withdrawn tax-free for qualified education expenses before age 59.5. However, ROTHs are arguably the single greatest account invention of all time, and it’s very difficult to build significant balances. This option should be a last resort. 

An advisor at Heritage Capital can assist you in developing a tax-efficient withdrawal strategy for funding college expenses. 

Mistake #3: Failing To Evaluate the Full Range of Financial Aid and Scholarship Options

Many high-net-worth individuals (HNWIs) mistakenly believe their financial status automatically disqualifies them from financial aid for their children’s education. However, numerous opportunities may still be relevant, regardless of family wealth.

  • Federal and state grants: While these are generally need-based and typically not applicable to HNWIs due to income and asset evaluations, it’s important not to dismiss them outright without a proper assessment.
  • Scholarships: A broad spectrum of scholarships focus on academic achievements, artistic or athletic talents, community involvement, or specific demographics rather than financial need. These can significantly reduce education costs and are often overlooked by wealthier families.
  • Work-study programs: Federal work-study programs offer students the opportunity to earn money while studying, helping to offset education expenses. Participation isn’t solely based on extreme financial need and can be a practical option for many students.
  • Negotiating with colleges: In certain situations, you may be able to discuss adjustments to your financial aid package with colleges. This could involve presenting your child’s academic credentials or comparing more generous aid offers from other institutions. Private colleges with larger endowments tend to be more flexible with need-based aid than public institutions.

By thoroughly exploring all options, you could significantly reduce the financial burden of education costs.

Mistake #4: Not Regularly Reassessing Financial Goals and Strategies

Unexpected circumstances, such as job changes, stock market fluctuations, or changes in your child’s (or grandchild’s) educational plans, can drastically impact your financial situation. A static financial plan can quickly become outdated as your circumstances evolve. 

Regularly re-evaluate your plan for adjustments to ensure it remains aligned with your current needs and future aspirations. This might involve:

Revisiting college cost projections: Tuition costs can fluctuate, so keeping an eye on updated figures allows you to adjust your savings strategy accordingly.

Reassessing investment risk tolerance: As you approach retirement, your risk tolerance might shift towards a more conservative investment approach. Regular reviews allow adjustments to your investment portfolio to reflect your risk profile better.

Adjusting retirement contributions: Changes may necessitate adjustments in how much you can contribute towards your retirement plan. Regularly assessing your budget can help ensure contributions are realistic and aligned with your financial goals.

Major life changes: Events like divorce, health issues, caring for elderly parents or grandchildren, marriage, or the death of a spouse greatly affect one’s life emotionally and financially. Reassessing your present life circumstances is crucial to keeping education funding goals on track amidst life changes.

Overlooking these financial changes can be a huge mistake, potentially derailing your retirement plans and leaving you unprepared for future needs.

Get To Know Heritage Capital

Juggling college expenses and planning your retirement can be complicated. We understand what’s involved and can help you avoid costly mistakes.

Our team at Heritage will create a personalized retirement plan that considers your entire financial picture. We factor in your desired retirement lifestyle, college funding needs, tax implications, and risk tolerance to develop a strategy that maximizes your potential to meet your long-term objectives.

We are a fee-only firm and don’t accept compensation from anyone other than our clients. This means you won’t feel any sales pressure, and we’re motivated only to do what’s best for you.

Contact us today to set up a free consultation. We’ll examine your situation and discuss how we can help you with your education and retirement goals.

plan a bulletproof retirement


Paul Schatz, President, Heritage Capital