You got married, saved a down payment, bought a home and started a family. You're on track. Now comes another big question. Assuming your resources aren't unlimited, should you save first for your kids' college expenses or your own retirement?  Often, new parents' first instinct is to start socking away college dollars. After all, they want the best for their children and, chronologically, college comes first. "People say, 'My son was just born. I want to start a 529 (state college savings) plan.' It's so emotional. They want to do something for their kids,'' observes a 50-something dad who is about to send his oldest off to college and has advised new parents at the forum Bogleheads.org. He adds: "I ask them 'What are you doing now?' and they say, 'We're saving $2,000 in a 401(k) and $2,000 in one of those 529s.' If all they can save is $4,000 a year, they should put it all in retirement.''  Financial planners who specialize in college funding, as well as retirement specialists, tend to agree with this savvy dad. One reason is the arcane rules affecting college financial aid, which even those earning up to $200,000 might qualify for if they have more than one child attending the priciest private colleges. (Current annual cost, including room and board, now exceeds $50,000 at some of these schools.)  While financial aid formulas have been tweaked repeatedly in recent decades, one feature that has remained constant is the inconsistent way they treat retirement savings. On the one hand, money squirreled away in parents' 401(k)s, IRAs and other retirement accounts (even a $1 million nest egg) isn't counted as parental assets available to pay college bills. (This is true even at those private schools that expect parents to tap into their home equity, as well as other assets not in special retirement accounts, for college. These schools require parents to fill out the College Board's Profile form in addition to the Free Application for Federal Student Aid form, known as FAFSA.)  On the other hand, when colleges calculate your ability to pay out of current income, they make no allowance for your need to save for retirement--even if you don't have a traditional employer-provided pension or much already in retirement accounts. Moreover, contributing heavily to a traditional pre-tax-401(k) while your child is applying to or in college, can actually decrease the aid you get. It may sound crazy, but these retirement contributions decrease the federal income tax you pay, which, as the colleges figure it, increases the amount left for them to take.  That leads Russell, Pa.-based college funding consultant Troy Onink, president of Stratagee.com, to suggest the following sequence: Parents should save heavily for retirement before the kids are college age, cut back on retirement contributions while they're paying tuition bills, and then, when the kids are through school, redirect all the income they were sinking annually into tuition back into retirement savings.  Deborah Fox, who runs Fox College Funding in San Diego, echoes that strategy and offers another reason retirement saving should come first. "No one can borrow for their retirement, but if push comes to shove, they can at least borrow a portion of what they need for college funding," she says. In fact, Fox recommends parents have their kids take out at least some of the government- guaranteed college loans available to them "so they have some skin in the game." (That's what she's doing now with her own college son.) After a student graduates, parents, if they have sufficient funds and feel generous, can pay off the loans for their kids, she suggests. (Currently, undergraduates can take out between $5,500 and $7,500 a year in federally backed Stafford loans, depending on their year in college.)  Putting retirement saving first doesn't mean you shouldn't save for college too, particularly if you are unlikely to qualify for much financial aid and are able to save more than the $16,500 annual worker contribution limit for a 401(k). (Those who are 50 or older can put away $22,000 this year.)  The money for college is going to have to come from somewhere, besides loans, and taking it out of a retirement account usually isn't a good strategy thanks to various tax and financial aid gotchas. "If you have to tap your retirement accounts, it puts you in a worse position for college financial aid,'' notes CPA Joe Hurley, founder of savingforcollege.com, which ranks 529 plans. That's because any withdrawals you make from your retirement accounts to pay for college one year, are counted as income to you and reduce your eligibility for aid the next. (If you need to dip into that IRA, wait until the last year you're paying college bills to do it.)
Sure you want the best for junior. But for most parents, retirement savings should come first. One big reason: The way college financial aid formulas work.