A Late-in-Life Child Poses a Challenge

Our ReadersWho: Tim Taglauer, 49, and wife Lisa, 44Where: Luray, Va.Question: Focus on college or retirement?

For Lisa and Tim Taglauer, the conundrum of whether to save for college or retirement is especially puzzling. Married for nearly 20 years, the Taglauers are now the proud, late-in-life parents of 1-year-old Katelyn. They've put their former plans for an early retirement on hold while they juggle their jobs, day-care costs and the prospect of sending a child to college while they are collecting Social Security. "I'll be going to parent-teacher conferences with my walker," jokes Tim.

The Taglauers, who both work for Shenandoah National Park, contribute about 17% of their joint income (including employer contributions) to the federal Thrift Savings Plan. Their savings will supplement their federal pensions and Social Security benefits, and as federal retirees they qualify for subsidized health insurance for life.

Rather than starting a college savings fund, Tim wonders whether the couple would be better off building up his Roth IRA. Once he turns 591/2, long before Katelyn will be old enough for college, he could withdraw money from the Roth tax-free for any purpose. He figures that he and Lisa could use the money to pay Katelyn's tuition or to supplement their retirement income if she doesn't go to college.

Tax trump card. Most investors should focus on retirement savings first. But the Taglauers are well on their way to covering their retirement-income needs, says Brian Jones, a financial planner and vice-president of CJM Wealth Advisers, in Fairfax, Va. Jones suggests that they continue to fund their TSP accounts and open a Virginia 529 college-savings account.

In addition to offering tax-free withdrawals for qualified college expenses, the 529 plan provides an added benefit over a Roth IRA: a Virginia state income-tax deduction of up to $2,000 per account per year. Tim and Lisa could each establish a 529 account for Katelyn, which would allow them to deduct up to $4,000 in annual contributions from their state income taxes.

To come up with the cash to fund the college account, Jones suggests that Tim and Lisa shift the $300 a month they had been paying on a now-retired car loan to the 529 plan. By adjusting their tax withholding, they can increase their monthly income (and their savings) by an extra $150.

priorities. For people who don't expect to collect a pension or won't have access to retiree health benefits, saving for retirement is the priority, says Christine Fahlund, vice-president and senior financial planner for T. Rowe Price. Fahlund recommends that by the time you retire you have enough savings to equal ten to 12 times your final salary.

A comfortable retirement cushion would make it easier to use other sources of funds, such as loans, to finance college when the time comes, says Fahlund. You and your children have other ways to pay for collegeQincluding scholarships, summer jobs and, in many cases, gifts from grandparentsQthat aren't available for funding your retirement.

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