Sit a couple in their forties down and ask them what they're saving for, and the two answers come back almost in unison: college for the kids, and our own retirement. Both are real. Both are worth saving for. But one of them has a financing alternative, and the other does not.
The asymmetry that should guide your priorities
Your child can borrow for college. You cannot borrow for retirement. If you fund college at the expense of your own savings, you are not just deferring your goal — you are potentially shifting a burden to your children later, when they're trying to fund their own kids' college and save for their own retirement at the same time.
The order of operations we generally recommend:
- Capture your full 401(k) employer match — that's a 100% return you can't get anywhere else.
- Fund a fully diversified emergency reserve (3–6 months of expenses).
- Max out Roth or Traditional IRAs if you're eligible.
- Push 401(k) and IRA savings to the maximum until your retirement projection is on track.
- Then start the 529 — to whatever extent the budget allows.
Step 5 is rarely zero. But the right number depends entirely on whether step 4 is funded.
Why 529 plans still beat the alternatives
- Tax-deferred growth, tax-free withdrawals for qualified education expenses (tuition, books, room & board, and up to $10K/year of K–12 tuition).
- State income tax deduction in many states. Illinois residents using Bright Start or Bright Directions get a state deduction of up to $20,000 (married filing jointly) per year.
- Owner-retains control. Unlike a custodial UTMA account, the account owner — usually the parent — keeps control of the assets forever. If the child doesn't use the funds, the owner can change the beneficiary or take the money back (subject to tax and a 10% penalty on the gains portion).
- Rollover to a Roth IRA. As of 2024, unused 529 balances of up to $35,000 lifetime can be rolled into the beneficiary's Roth IRA (subject to annual limits and a 15-year account-age requirement). That removes much of the "what if they don't go to college" risk.
Grandparent-owned 529s used to count against a student's federal financial aid badly. As of the 2024–25 award year, the FAFSA no longer asks about cash support from anyone, which means grandparent 529 distributions no longer reduce aid eligibility. This single change made grandparent-owned plans dramatically more useful.
How much is enough?
There is no universally right number. What we model with clients:
- Public in-state, four years: target funding of about half of full cost — financial aid, work, and modest borrowing fill the rest.
- Public out-of-state or modestly priced private: target two-thirds of full cost.
- Elite private: target full cost only if it doesn't pull retirement saving below the trajectory it needs to be on.
These are starting points. They get adjusted for sibling counts, college selectivity goals, and what the household's retirement trajectory will actually tolerate. Run the projection together — not one in isolation from the other.
