Suze Orman Says This Is ‘the Biggest Financial Mistake Parents Are Making’

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The personal finance expert urges parents to rethink their college saving strategies.

Key points

  • Orman says parents prioritizing college savings over their own retirement are making a mistake.
  • Saving for retirement is important so you’ll have funds if you have to stop working earlier than expected or make less money later in life.
  • An IRA is a good option for many people because if you have savings to spare, you can withdraw funds early for higher education costs with no penalty.

It’s a dream of many parents to help their kids pay for college. And there are some fantastic investment vehicles set up for just this reason, such as the 529 Savings Plan and the Coverdell ESA.

However, personal finance expert Suze Orman recently said in a LinkedIn article that many parents don’t quite have their priorities straight. The 2022 Retirement Confidence Survey by the Employee Benefit Research Group found that more than 40% of parents are saving less for their retirement than they otherwise would because they are also saving for a child’s college expenses. While it may seem like an odd thing to say — after all, isn’t saving money always a good thing? — Orman has some pretty solid reasons.

Why retirement savings should be parents’ first priority

Orman’s central point is that by not investing enough for your own retirement, you’re setting yourself up for financial discomfort down the road. In other words, if you don’t have enough savings as you enter retirement, you’ll have to make sacrifices to your own quality of life or risk running out of money — or both.

It’s common for parents to run out of money in their retirement and be forced to rely on their adult children for financial support. As a Certified Financial Planner myself, I’ve seen the tremendous financial burden that aging relatives without adequate retirement savings can put on families, and it is certainly not a good thing.

Orman correctly observes that many parents figure they’ll either start saving more aggressively once their kids reach college age or simply spend a few extra years working before they decide to step away. But there’s no guarantee that you’ll be healthy enough to work, or that you’ll still have a well-paying job at that point in your life.

A retirement account and college savings account don’t have to be two different things

One potential workaround if you’ve been saving for college at the expense of your own retirement is to redirect the college saving deposits into an individual retirement account, or IRA. Even if you have a 401(k) or similar retirement plan at qualifying work, you may still for a traditional or Roth IRA contribution with excellent tax benefits. And there can be a big reason to use an IRA for at least some of your retirement savings.

Specifically, IRAs, and not 401(k) plans, have an early withdrawal exemption that allows for penalty-free withdrawals for higher education costs. Roth IRAs even have the same general tax treatment as a 529 savings plan — that is, you don’t get a federal tax deduction for your contributions, but qualifying withdrawals are tax free, no matter how much your investments have returned.

The idea is that once your child reaches college age, you can assess your retirement savings to determine if you’re on track for a comfortable and secure retirement. If the answer is yes, with money to spare, you can use your IRA to help your kids pay for college. But if you can’t afford it without short-changing your own retirement, you can simply leave the money to grow in your IRA. Depending on where you live and how you save for college, you might miss out on a state tax deduction for your contributions, but that can be a small price to pay for financial flexibility.

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