Saving for college: timing, taxes, and smart strategies

Sending your child to college is exciting, but it can also feel overwhelming. Tuition, housing, books, and fees add up quickly, and the choices you make today can determine whether college becomes a source of pride or financial stress.

People often approach college savings by setting a target amount and then putting aside a set amount toward that goal each month. But saving smart for college is about more than setting a goal.

In this article, we will look at why timing, tax strategy, and smart account selection matter more than the sticker price of your children's education and how you can help your loved ones without derailing your retirement plan.

Common college planning mistakes

When it comes to saving for college, the biggest potential misstep isn't how much you save, it's when and how you save. Here are a few of the most common mistakes we see people make:

Poor timing

Compounding is powerful, but it only works if you start early. The longer you wait to start saving, the more you'll need to contribute each month to stay on track.

Tax inefficiency

Many families ignore the advantages of accounts like 529 plans or use taxable accounts without understanding the long-term tax drag of capital gains. Others dip into their 401(k) without considering the penalties or the impact on their own retirement plan.

Prioritizing college over their own retirement

Treating college savings as an isolated goal ignores the opportunity cost of those dollars. Over-allocating to tuition before securing your own financial foundation creates a funding gap, a shortfall that can force you to delay retirement or reduce your future lifestyle.

How much will you fund?

College costs more than tuition alone. Room, board, books, fees, and inflation all add up, and costs vary widely between public vs. private schools and in-state vs. out-of-state options.

Instead of asking, “How much should I have saved by the time Susan turns 18?” think in percentages: Do you want to fund 50%, 75%, or 100% of Susan's college?

There's no universal right answer. Some families aim to cover half, others plan for the full cost. What matters is choosing a target that works within your broader financial picture, including retirement readiness, income, number of children, and tax situation.

3 steps to save for college the smart way

The right approach depends on your timeline, tax situation, and long-term goals.

Step 1: start early

If you're like most people, you are wondering when to start saving for your child's college education. The answer is simple: as soon as you can.

Your saving timeline will have a large impact on the outcome. The earlier you start, the more you'll have the power of compounding on your side:

• The earlier you start, the lower your monthly contribution will need to be
• The later you start, the more you'll have to save

Even if you start late, you can catch up, but your trade-offs will increase.

Step 2: use tax-advantaged accounts

Now that we've talked about when to save, let's look at how where you save can influence your college savings tax strategy.

529 Plans: One of the Most Tax-Efficient Ways to Save for College

Tax benefits of a 529 Plan include tax-deferred growth, which allows your money to compound more quickly, plus tax-free (qualified) withdrawals. Many states also offer additional 529 tax advantages such as tax deductions or credits when you contribute.

Plus, 529s offer estate-planning flexibility, letting grandparents and other family members contribute.

401(k): Avoid This Option Unless Absolutely Necessary

While technically you can tap into retirement accounts for college, it may not be advisable for several reasons, including:

• Early withdrawal penalties
• Withdrawals count as income, which triggers income taxes
• Pulling from retirement savings increases the risk of falling short in your golden years.

Taxable Accounts: Flexible, but Inefficient as Far as Taxes Are Concerned

Taxable accounts (e.g., your savings account or investments) offer flexibility but carry capital gains tax and ongoing tax drag, which can reduce growth over time. The returns on these accounts are taxed, which slows growth compared with tax-advantaged accounts.

For some families, taxable accounts make sense as a supplement, especially if you've already maxed out 529 contributions.

The trade-offs depend on your situation. The choice isn't always clear-cut. Often, a combination of accounts, weighted toward 529s for tax efficiency, creates the most balanced strategy.

Step 3: prioritize your own retirement savings over paying for your children's college

According to a 2025 Citizens Bank survey, more than 60% of parents expect to delay their retirement to pay for their children's college expenses. In addition, 30% say they are borrowing against their 401(k) or liquidating personal funds to cover college costs.

Your children can borrow for college, but you cannot borrow for retirement.

While you can help your children, it's generally wise to consider impacts to your retirement plan. A common planning framework looks like this:

This approach is designed to support your long-term financial health while still making meaningful progress toward your college savings goals.

Final note: 4 reasons to revisit your college savings plan

Your college savings plan isn't set in stone. Here are four times when you should re-evaluate:

Regular check-ins can help you adjust contributions, account choices, and timelines, keeping your strategy aligned with what your children want and what your retirement needs.

Plan, calculate, act

Saving for college doesn't have to be overwhelming. By starting early, emphasizing tax efficiency, and prioritizing your retirement, you can help fund your child's education without compromising your future.