Save for Retirement or Put My Kid Through College?

4075547422_112bac81a8Image courtesy of Tulane Public Relations

As the costs of attending a four-year college or university in the United States continue to rise, so do the number of parents who have or are tempted to take money from their retirement accounts in order to send their child(ren) to college.

Although the desire to provide your child with a fully funded college education is natural and admirable, robbing your retirement savings to do so is likely to be a grave financial error. And, even though being weighed down with too many student loans can be a problem of its own, remember this: you (and your child) can borrow money for college costs. You cannot borrow money to support yourself when you retire.

Many parents who were (or still are) burdened with student loans of their own have a strong desire for their children to avoid that particular hassle and instead make a debt-free entrance into adulthood. However, it’s crucial that you are able to support yourself during retirement, because the other option is to have your children care for you in your golden years. Frankly, the cost of some student loans will be much cheaper and easier for them to deal with than supporting you (and potentially your spouse) indefinitely.

Withdrawing money from your retirement accounts will do more than just reduce the balance. In fact, the lowered balance may be the least of your concerns. You will lose out on the compound interest that your retirement account(s) gain over time. Also, withdrawing money from a retirement fund can count as income which would then be taxable. With the additional income, many parents may render themselves ineligible for financial aid the following year. Another thing to keep in mind is that anyone under the age of 59 1/2 who borrows from their 401(k) will be required to pay the loan back with interest within five years.

The key to saving for both retirement and college is careful and deliberate planning. Research and invest in a 529 college savings plan. A 529 plan will allow you to save money at your own pace, making withdrawals when necessary without being charged any fees, and without being taxed. Studies show that parents who invest in a 529 plan are significantly more successful at paying for at least a portion of their child’s college tuition.

In order to be consistent, set up automatic withdrawals from your paychecks that go directly into your 529 account. This will remove the need for you to deposit money into the account, which may result in hesitancy when funds could be used elsewhere. Try to gradually increase the amount you deposit on a yearly basis or as you get income raises. Apply bonuses, tax refunds, inheritance money, and/or other financial windfalls to your 529 college account (at least in part). Ask friends and family members to donate to your savings plan in lieu of gifts whenever possible.

Sallie Mae’s Upromise program is a fantastic way to save money for college without really doing anything at all! Upromise allows you to earn up to 5% cash back on purchases made through their more than 800 affiliated online retailers. You can even earn money by eating at participating restaurants and by using e-coupons for grocery and drugstore items. Getting grandparents, aunts, uncles and other close family members to participate will help you increase your savings by leaps and bounds!

Even though the general advice is to avoid taking money from your retirement account to pay for your child’s college tuition, there are exceptions to every rule! There are some instances where it can be ok to dip into your 401K in order to write those tuition checks. Check back here next week to learn when and why doing so would be advisable.

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3 Responses to Save for Retirement or Put My Kid Through College?

  1. Pingback: Retirement and Student Loan Debt: How They’re Connected | Veitengruber Law

  2. Pingback: Foreclosure in the Golden Years: A Real Problem in America | Veitengruber Law

  3. Pingback: How Can I Afford to Send My Child to College? | Veitengruber Law

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