7 Reasons to Prioritize Retirement Over Your Child's Education

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By Joe Udo

If you have children, you most likely wonder whether to prioritize their higher education or your own retirement savings. The average debt load for the class of 2012 was nearly $30,000, and that's a tough way to start out. As a parent, I want to help my kid as much as I can, and I'd hate for him to have debt before he even earns his first regular paycheck. Currently, we are able to save for our retirement and our child's education at the same time, but many parents aren't able to do that. If you can't save for both, here is why saving for retirement should be the first priority for most parents:

Financial aid. There are myriad financial aid options for college students. They can apply for federal student aid, grants and a variety of scholarships. These financial aid packages might not be enough to pay for all costs, but they can help quite a bit.

Stay at home. One option to help reduce the cost of higher education is to stay at home while attending a local university. The tuition is just one cost of attending a university. The dorm, meals, phone and utility bills are a significant portion of the price tag. Living at home might not be as appealing to the kids, but it's a good option if you want to reduce the cost of higher education.

Community college. You can significantly reduce college costs if you attend a community college for two years and then transfer to a prestigious university to finish the degree. Delaying attendance at a higher cost university will give the family two more years to save, and the cost will be much less than going to a 4-year college the whole time. Of course, the student will also be able to stay at home and save on the cost of living as well.

Factor in the cost. The cost of higher education should be factored in when your family explores college options. Ivy League colleges are great, %VIRTUAL-article-sponsoredlinks%but they cost significantly more than in-state public colleges. If you can't afford to pay the bill, then be realistic and rule it out early. Of course, if your student is exceptional and can get scholarships from those private colleges, then the cost might end up being quite similar to an in-state school.

Work part time. Students can work part time to help pay for their education. Typically, students only attend classes a few hours per day, so they should have some extra time to work. It makes them feel like they have a stake in the game if they help pay for their own education. People rarely appreciate things that are free.

Roth IRA. Saving for retirement in a Roth IRA is very flexible. You can tap your Roth IRA to help pay for college if that's necessary because you can withdraw your contributions at any time without penalty. And the earnings accumulated in the Roth IRA can be used to pay for higher education without being subject to the 10 percent early withdrawal penalty (if you are younger than 59½), but you will have to pay income tax on that portion of the distribution. However, the amount you withdraw from your Roth IRA will be factored into the financial aid calculation.

Student loans. Students can get loans to help pay for college, but you can't get any loans for your retirement. It's tough to start out with debt, but graduates have a lot of time to pay it off. Life can be much more difficult if you don't have much retirement savings when you're older.

As much as you want to help pay for your child's university education, resist the urge to prioritize it over your retirement. If you divert your retirement savings toward your child's higher education costs, then your children might need to supplement your retirement. That can be just as financially draining as a student loan. There are many financing options available when planning for college, and you should consider as many of them as you can.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.

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Retirement Tax Heaven (and Hell)
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7 Reasons to Prioritize Retirement Over Your Child's Education
Where you live can have a huge impact on your tax bill in ways that may surprise you. Some states are more tax-friendly for retirees than others -- particularly if you are living on a fixed income -- can have a big impact on how much you have left over to spend.

Click through our gallery to see which states qualify as "heaven" and which are "hell" for income tax, pension, social security benefits, sales tax and property tax.

Read Kiplinger's Article

Next: States With No Income Tax
Don't assume that a state with no income tax qualifies as a tax haven. High sales and property taxes can more than offset the absence of an income tax.

7 States With No Income Tax
South Dakota
(N.H. and Tenn. tax only dividend & interest income that exceeds certain limits.)
Next: Pensions - Tax Heavens
Only three states exempt virtually all retirement income (including public and private pension benefits, 401(k) and other retirement-plan distributions, and IRA withdrawals) from state income taxes.

3 Best States for Pensions

Next: Pensions - Tax Hells
Five states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, but most of them also have fairly high top tax brackets.

5 Toughest States for Pensions
Rhode Island

Next: Social Security Benefits - Tax Heavens
36 states and the District of Columbia don't tax Social Security.

36 States That Are Heaven
Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming
Next: Social Security Benefits - Tax Hells
The remaining 14 states tax Social Security benefits to some extent.

14 Tax Hells
Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. (Iowa will gradually phase out its Social Security tax by 2014, starting in 2008)

Next: Sales Taxes - Tax Heavens
These five states have no state sales taxes.

Top 5 States
New Hampshire

Next: Sales Taxes - Tax Hells
These five states each have a state sales tax of 7%, the highest in the nation.

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New Jersey
Rhode Island

Next: Property Taxes - Tax Heavens
Based on data from a 2006 Census Bureau survey and Tax Foundation calculations these are the five states with the lowest median real estate taxes.

5 Best States for Propert Taxes
West Virginia

Next: Property Taxes - Tax Hells
At the other end of the spectrum, these five states have the highest median real estate taxes. (from highest to lowest according to 2006 Census Bureau survey and Tax Foundation)

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