You're headed for retirement – and your kids are headed for college. Both are incredibly costly: The average American will need upwards of $1 million to retire and, these days, a college education can easily set you back $100,000 or more, depending on the choice of school. These estimates can only increase over time.

Ultimately, everyone wants the best for their kids – and striking a savings balance between the college kitty and the retirement nest egg seems logical. However, in economic reality, it can be difficult to save for both at the same time. So how do you prioritize saving for your own economic future vs. filling up the kids' college fund? It's a common financial conundrum that requires a big picture perspective.

Many people turn to tax-advantaged investment vehicles such as IRAs (individual retirement accounts) and 529 college savings plans (see Are 529 College Savings Plans Right For You?), but there's simply no one size fits all formula. Parents with several children, for instance, carry more college financial burden than those with just one child. Those with minimal retirement savings and few working years left need to save faster versus those who plan to work for another 20-plus years. And children who are committed to becoming engineers or doctors might require less financial assistance in the long run, given that they'll be more likely to be able to tackle their own student loans after they graduate.

Assuming you can't easily fund both goals, financial experts generally advocate retirement as the first savings priority. That's because you need more money for retirement than you do for college tuition – and your child can borrow for college, but you can't borrow for retirement.

In other words, sacrificing your 401(k) won't do your kids any favors. If the cash runs out during your retirement, it will be up to them to support you. Plus, by putting away extra funds in a retirement account now, you stand to benefit from the extra time these assets have to grow in the long term.

Another compelling argument for putting retirement savings first is that doing so boosts your child's financial aid prospects. When means-testing family assets (to determine what funds can be contributed to education costs), many schools do not include the parents' retirement savings in the assessment process.

If you have access to an employer-provided savings plan, such as a 401(k), it makes sense to put money there as the first priority. This is probably the easiest (and most common) way to save for retirement, because you simply funnel money into savings directly from your paycheck. The key is to start saving as early as possible and to ensure you're receiving the most benefit from this savings vehicle. Take full advantage of employer match contributions as these can equate to a substantial guaranteed return on investment.

Be warned that any dips into your 401(k) (to pay college fees, for instance) are subject to income tax and withdrawal penalties. (see Can savings from a Roth 401(k) be used for college without penalty?). If you want to put monies that could be spent for college into a retirement vehicle, consider a traditional IRA or Roth IRA instead (see below).

Financial advisors generally won't encourage it, but parents can now use individual retirement accounts to help pay for college. Rules associated with both types of IRAs – traditional and Roth – have been amended to allow withdrawals for qualified higher education expenses. If you meet the requirements, these accounts may also provide a smart place to stash college savings, as they can offer more freedom and flexibility both in terms of where your funds are invested and how you distribute them.

Unlike a 401(k), IRA accounts allow you to withdraw money to pay for college fees and associated costs, if you must, without paying a penalty. The funds can go toward college costs for yourself, your children and your grandchildren.

In the event that your child does not go to college, your invested funds can be redirected towards your retirement (unlike 529 plans, which impose withdrawal penalties in this regard). And while there's no tax deduction for contributions made to an Roth IRA (you do get them for a traditional IRA), all future earnings are sheltered from taxes, thereby offering genuinely tax-free growth. (The Roth's benefits come at the other end, when withdrawals are not taxed – see Roth Vs. Traditional IRA: Which Is Right For You?)

Let's hope you're in a position to put money in the higher education piggy bank, too. Just as with retirement funds, the earlier you start, the better. The easiest and most preferred way to save for college is with a 529 college savings plan, which is operated by a state or educational institution. (See 529 Plan Tutorial for more on how they work.) As with a 401(k), you can have money taken directly from your paycheck on a pre-tax basis; unlike a 401(k), you can get outside help to fund this account. You can encourage relatives to contribute, for example, as birthday and holiday gifts.

There are two main types of 529 plans:

• Prepaid tuition plans allow you to pay for your child's college tuition at current prices; however the plan covers the future (higher) cost once your child has reached college.

• College savings plans function somewhat like an IRA as far as contributions go, in that the investments you choose are subject to market risk with no guarantee they will perform. (College savings plans typically offer more varied investment options.) When your child commences college, you can make withdrawals up to the amount of qualified higher education expenses.

Provided you end up using the funds for college costs, 529 earnings will be tax-free in retirement. You may also be able to deduct some of your contributions on your state income tax return, depending on where you live and which 529 plan you use. However, in the event that your child does not go to college, withdrawal penalties apply. You can compare 529 plans at savingforcollege.com and collegesavings.org. To help your decision, see 529 Risks to Take (Or Not).

Each savings vehicle comes with its own distinct tax advantages and disadvantages, so it's important to determine where your money will work hardest for you. (For more on this, see Clearing Up Tax Confusion For College Savings Accounts.) Weigh the benefits, fees and tax implications of putting more in your 401(k) versus contributing to an IRA or funding a 529 plan. And remember that some retirement accounts have their own rules with regard to early withdrawals for college-related costs.

There are many other ways to plan for and pare down college expenses that don't compromise retirement, even if your child will be headed off to school soon. (See Last-Minute Strategies To Help Pay For College.)

• Explore more affordable colleges and the various grants and scholarships available to students. An increasing number of colleges are offering means-tested scholarships for low income families.

• Your child may be eligible for a financial aid package or tuition assistance program.

• You could also make your goal more manageable by contributing a portion of college costs, rather than the entire cost, with your children taking student loans to cover the rest if they don't qualify for scholarships.

A comfortable retirement or the best head start for your kids? It could be the modern American family's most agonizing financial quandary. No one wants their kids to commence adult life towing hefty college debt, and everyone wants the healthiest nest egg possible.

Thankfully, you will find a range of savings vehicles designed to accommodate both. It comes down to making the most intelligent savings decisions for your family. And regardless of your account formula, the sooner you start the better. Putting your money to work now only improves the likelihood of a prosperous financial future – for you and your kids.