Using Your Retirement Savings To Pay For Your Kids College

Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Facing the high costs of college tuition can be daunting for parents, especially when considering the potential impact on your retirement savings. With 68% of parents contemplating using their retirement funds for their children’s education, it’s clear that finding a sustainable funding strategy is a top concern for many families.

In this guide, we explore a variety of strategies to fund your child's college education without compromising your financial future. From understanding the benefits of 529 plans and IRAs to considering home equity options.

We'll guide you through the alternatives to ensure that both your child's educational dreams and your retirement plans remain on solid ground.

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Make a budget

First and foremost, you'll need a budget! When creating your budget, one of the most important points you should make is to figure out how much money you actually need for an average month. 

To do this, use the following formula:

"I need $____ at the end of each month to live." 

Just add up your monthly bills to find out how much that number is. Also, make sure you are not spending more money than you make.

The next step would be figuring out how much money your household brings in at the end of a pay period. 

One way to do this is by taking into account all sources of income - including wages or salaries, other taxable personal income (such as investment dividends), business income from trade schools, sole proprietorships and farms, unemployment insurance benefits received within last year** - before any adjustments are applied.

A Budget is simply a plan for how you allocate resources over time! The benefits of budgeting are huge because a budget will force you to face your spending habits head-on, pinpoint where necessary adjustments need to be made- which helps more of your hard-earned cash go towards saving or paying down what's truly important to you! 

For more information on creating a budget, learn about the 50 30 20 budget rule.

Consider the pros and cons of using retirement savings to pay for your kid's college

The Pros: A tax-deferred environment in a retirement account may keep your money in a form of savings that is taxed less than an investment in a brokerage account. The income tax deduction for contributions to a qualified retirement plan may help reduce federal taxes overall. And you can use up to $130,000 from an IRA or 401(k) account without penalty before age 59½, which might be even more valuable. 

The Cons: If you don't pay attention to how much money is being withdrawn from the account and when it's being withdrawn then this could have devastating long-term consequences with regard to not being able to retire when financially scheduled and worst yet not having anything left after college.

People like to think they can use their retirement savings to pay for their kids' college education, and while there may be a little more wiggle room in some years than others, it's generally not a great idea.

That's because you'll be eating up your retirement savings at the same time that your parents and grandparents probably did.

The way you get around this is by using un-borrowed money from other sources such as parental income, personal income earned on the side of employment outside the home, or investing in alternative investments such as real estate.

Create an emergency fund in case you need money for something else

The best emergency fund should be enough to cover six months of living expenses. So if you earn $30,000 per year, you'll need about $60,000 in your emergency fund.

An emergency fund is the one saving account that almost nobody has - but almost everybody should have. 

These emergency funds are designed to quickly supplement crucial expenses so they don't put pressure on other savings accounts like retirement or education funds!

University Student Tip: Life insurance policies are often an inexpensive way for students to protect their families during what can be a very uncertain time full of risk exposure. These policies serve as financial protection against the cost of unexpected death!

Learn how to build your retirement funds during covid.

Consider alternatives to pay for college

Before using your retirement savings, exhaust other options to pay for college costs. Look into scholarships, grants, student jobs, Parent PLUS loans, and using current income. 

These alternatives allow you to preserve your limited retirement funds:

• Apply for scholarships and grants - There are many scholarships and grants available that don't need to be paid back. Have your child research options and submit applications.
• Have your child work and save - Getting a part-time or summer job can help your child contribute to their own college costs. This teaches financial responsibility.
• Parent PLUS loans - As a parent, you can take out loans under your name to help pay the cost of college. This can supplement other savings.
• Use current income - Some expenses may be manageable with current parental income rather than dipping into long-term savings.
  

Consider what will happen if your child doesn't go to college or decides not to finish their degree

If your child doesn’t pursue higher education, it will be difficult for them to find a higher paying job. In the talent-driven global economy, there's no shortage of jobs that want college degree requisites.

Employers often interpret educational attainment as a signal of intelligence and skills. College graduates are typically better educated and more capable than people without degrees - even if they don't know what they're doing with their degree yet.

Don't be afraid to push your kids in the right direction--a GED is not a guarantee for success in life, but it can help with an entry-level job position.

If your kid is having trouble after high school, talk to us or make an appointment with a counselor at school before thinking of alternatives like leaving school altogether. There are lots of out-of-school opportunities available! 

Ask yourself whether any extracurricular activities will provide skills that they will need to get into college or find work later on--team sports, band, academic clubs are all good examples. 

Talk with your spouse about how they feel about this idea before making any final decisions

Always talk to your spouse first before making any large financial decisions, especially when it's regarding your retirement account or 401k. You should take into account what they feel regarding the idea of using your retirement savings to pay for college expenses.

It's also important to talk with them before making any final decisions about withdrawing money from a 401k or IRA early. There can be taxable events and fees triggered because of it.

Are there other alternative options to college?

You can also talk with someone at a local school or campus who can help, whether it be a guidance counselor, principal, etc... There are often out-of-school vocational opportunities that students could explore while continuing their education too!

Ask yourself whether there are any extracurricular activities that will provide skills you'll need later on in life—like team sports, band, academic clubs, and more!

Understand the impact on your retirement

Withdrawing from retirement accounts early can significantly reduce the total amount you'll have saved by retirement.

• Run calculations to see the difference in your retirement savings if you withdraw money now.
• Compound growth over decades can make a huge difference. Show how much less you could have available later.
• Note that your child can take loans for college but you can't take loans for retirement. Retirement savings are limited.

Consider alternatives if college doesn't work out

There are other paths besides a 4-year college degree right after high school.

• Consider trade schools and certifications that lead to solid careers.
• College can be attended later in life if desired. It's not the only option immediately after high school.
• Encourage exploring gap years, travel, work experience, or military service after high school.
  

What is the best way to transfer money out of my retirement account?

Determine the best way to withdraw funds from retirement accounts without paying taxes. You should speak to a tax specialist first before making any large financial decisions.

Retirement accounts, such as IRA and 401(k)s, come with tax advantages under most circumstances. This is because of the traditional role they play in society: the money in these retirement accounts is supposed to be used for post-age 65 healthcare needs and also to provide a stream of income during retirement. 

When you withdraw money from an IRA or 401( k ) account, it's assumed that you'll use it for pre-retirement expenses like education and caregiving for elderly parents. That means when you file your taxes in April (or whenever), there will be no penalties and no taxes.

If it is an IRA account, you need to know the specifics of IRA withdrawal rules. If it's not an IRA account or Roth account, then there are no penalties or fees associated with withdrawing funds from retirement accounts before retirement age.

Find out how much money you should have in your savings account

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