Saving for your child\u2019s college education can seem like a daunting task. Unlike with retirement savings, few clear guidelines exist. College costs vary widely depending on where your child goes to school and whether they qualify for financial aid.\r\n\r\nSo, how can you afford your child\u2019s dream school, without sacrificing your own retirement fund? The key is to start saving early and identify the savings vehicle(s) that aligns best with your long-term financial goals.\r\n\r\n\r\nCollege Savings Plan Options\r\n529 Plan\r\nOne of the most common ways to save money for education is the state-sponsored education savings plan: the 529. 529 plans benefit over traditional taxable accounts because their investment gains grow and can be withdrawn tax free as long as they\u2019re used for qualifying expenses. Many states also offer additional tax benefits to local residents who invest in their respective state\u2019s plan. While there is no limit on annual contributions, there are lifetime limits that vary by state, which are typically $200,000 or more.\r\n\r\n529 plans may be even more attractive thanks to tax reform that was signed into law in December 2017.\r\nThe Tax Cuts and Job Act includes a provision that allows 529 plan funds to be used to pay for qualifying elementary and secondary school expenses, as well as college expenses.\r\n\r\nBefore the tax reform legislation, any 529 plan withdrawals that were not used to pay for qualified higher education expenses were subject to ordinary income tax and a 10% tax penalty on the earnings portion of the distribution. Now, up to $10,000 of 529 funds can be withdrawn per child each year to help cover primary and secondary private school tuition.\r\n\r\nKeep in mind, you\u2019ll likely want to consult a professional to ensure if the state-sponsored 529 plan you have conforms to the new rules before taking a distribution.\r\n\r\nStudent Loans & Aid\r\nStudent loans offer several long-term benefits and can fill big financial gaps. Yes, loans shift the burden of repayment to your child, and student loan debt can be a scary thing, but this method also helps them build credit as they pay it back. There are a few options if you decide there is a financial need to take out student loans or aid.\r\n\r\n\r\nFederal Aid\r\nFederal Student Aid (FSA) \u2013 part of the U.S. Department of Education \u2013 is the largest source of financial aid in the United States, offering loans, grants and work study funds. Federal loans have flexible repayment options and competitive rates. They also offer deferments and other features that most other loans don\u2019t.\r\n\r\nFederal grants can be merit-based, need-based or student-based, and do not need to be repaid. Many factors determine your aid eligibility, and the financial aid office at your college will use these to determine how much financial aid you are eligible to receive.\r\n\r\nKeep in mind, all students filing for federal financial aid must file the Free Application for Federal Student Aid (FAFSA). Regardless of your financial situation, if you\u2019re enrolled at least half-time in a school participating in the Direct Loan Program (most schools in the United States), the FAFSA process can open the door to many grants and loans.\r\n\r\n\r\nSubsidized v Unsubsidized Loans\r\nThe federal government pays the interest on a subsidized student loan while the student is in college or if the loan is deferred. Unsubsidized loans accrue interest when the loan begins. There are borrowing maximums, depending on the year in school, including for graduate students. Interest rates and fees vary.\r\n\r\nState Aid\r\nState governments also offer grants, scholarships, work-study funds, state loans and tuition assistance.\r\n\t\r\nInstitutional Aid\r\nSome colleges and universities provide aid to their students through scholarships, grants and work-study programs via institutional aid programs that come from their own resources.\r\n\r\nPrivate Loans\r\nAn alternative to federal loans, especially if you need to borrow a higher amount. However, these loans are more expensive, averaging 9-12% annually. Keep in mind, the interest rates for federal student loans \u2013 the types of loans your children might take out if they need to \u2013 are usually less than what you can make by putting your money in a good long-term investment strategy.\r\n\r\n\r\nAs always, you should not sacrifice your retirement for your children\u2019s education. You can always borrow for college; you can\u2019t borrow for your retirement. The interest rates for federal student loans \u2013 the types of loans your children might take out if they need to \u2013 are usually less than what you can make by putting your money in a good long-term investment strategy. \r\n\r\nCoverdell Educational Savings \r\nA Coverdell Education Savings Account (ESA) is a trust or custodial account whose sole purpose is to pay for qualified education expenses for beneficiaries under the age of 18 (or special-needs beneficiaries). Formerly known as a low-contribution education IRA, a Coverdell ESA may be used for private K-12 education expenses or qualifying college expenses (tuition and fees, books, supplies, equipment, room and board). While there is no limit on the number of accounts your child may have, there are limits to total contributions. \r\n\r\nCoverdell ESAs enjoy tax benefits similar to a Roth IRA. Money grows tax deferred and may be removed tax free for qualifying expenses, although contributions themselves aren\u2019t deductible. According to the IRS, if an account\u2019s distributions aren\u2019t more than your child\u2019s qualified education expenses at an eligible educational institution (in one year), then your child won\u2019t owe tax on the distributions.\r\n\r\nCustodial Accounts\r\nCustodial accounts \u2013 aka Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts \u2013 are another way to save for college expenses. An adult, such as a parent or grandparent, is the custodian for this type of account until your child reaches the age of majority, usually 18. UGMA accounts can only hold money and securities while UTMA accounts can hold other types of property. As with many of these methods, custodial accounts have distinct benefits and drawbacks. \r\n\r\nIRAs\r\nIRAs offer greater flexibility when saving for college \u2014you maintain full control over the underlying investments. But, this also means they require greater responsibility and may not be ideal for \u201chands off\u201d investors. You would be responsible for monitoring and maintaining the portfolio allocation over time. This could complicate things because you would be saving for two different timelines, your retirement and college goals.\r\n\r\n\r\n\tTraditional IRAs\r\nThese accounts are tax deferred, so money is deposited pretax, and taxes are not due on principal or earnings until withdrawal. While distribution is taxed at your ordinary income rate, you can withdraw money penalty-free at any age for qualified educational expenses, such as tuition, books, fees and supplies. \r\n\r\n\tRoth IRAs\r\nThese accounts are tax exempt, which means money is contributed after tax, but earnings and dividends accrue tax free (though they are subject to early withdrawal restrictions). A Roth IRA may be beneficial if you\u2019re unsure whether your child will attend college or if you want to maintain monetary flexibility. This makes a Roth IRA a great investment option if you\u2019re willing and\/or capable of sacrificing its use as a retirement vehicle. It is important to prioritize your own retirement over paying for college \u2013 you can get a student loan for college if needed, but there\u2019s no loan for your retirement. Keep in mind, there are investment and income limits to a Roth IRA. If you\u2019re eligible for a Roth IRA, contribute to that account before a 529 plan.\r\n\r\n\r\nOur Take\r\nSaving for your children\u2019s education is obviously important, but making sure you are saving for your retirement can be even more important. Remember, your child is likely able to borrow for higher education expenses, take advantage of state grants and financial aid awards, or work a part-time job to help offset college costs. Chances are, these types of aid aren't available for your retirement.\r\n\r\nIf you\u2019re confident your child will attend college, consider maxing out any retirement account options \u2013 such as a 401k (especially if your company matches) or IRA \u2013 before you fund a 529 or any other education-specific account. The tax deduction and long deferred growth of retirement accounts tends to outweigh the tax-free growth in your 529 for a shorter period of time. If you\u2019re eligible for a Roth IRA, you should consider contributing to that account before a 529. \r\n\r\nTo learn more about these types of savings vehicles and how they fit into your overall financial strategy, read our free Personal Capital Guide to Saving for a Child\u2019s Education.\r\n\r\nRead the Free Guide\r\n\r\n\r\n\r\n*This post was originally published on September 6, 2018 and has been updated for accuracy based on new policy.\r\nDisclaimer: The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Third party data is obtained from sources believed to be reliable; however, Personal Capital cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.