As the cost of college heads for the stratosphere and student loans become more costly due to higher interest rates, many families may find themselves a bit cash-strapped and begin to look at their retirement fund (401k, 403b, IRA) to cover their education expenses.
While it’s a natural tendency to want to do all you can financially to make sure your kids get the best education possible; we highly caution against tapping your nest egg to pay for your children’s education. Why?
The average age of parents with college bound kids is 40-45. These parents are at the back-end of the Baby Boomer wave. Twenty years from now when these current college bound parents are approaching 65 years of age, the majority of baby boomers will be 70-80 years of age!
This huge number of older Boomers may end up draining the government’s Social Security and Medicare/Medicaid coffers. Will the government have to raise YOUR taxes to offset these older Boomer’s old age costs? If so, the amount of money you will have available for retirement could go down!
Did You Know That Your Retirement Plan Is Fully Taxable?
Since your 401k/403b/IRA is fully taxable at ordinary income tax rates, raising taxes to support these older Boomers at the time of your retirement could dramatically reduce the amount of money you’ll have to live on… when you need it the most!
In addition, if you do borrow money from your 401k to pay college expenses and then switch jobs; please be aware that the loan must be paid back right away, typically within 60 days of the time you leave. And if you don’t have the cash to pay off the 401k loan, then the loan balance may be considered a taxable distribution. This means you would owe ordinary income tax plus a 10 percent penalty if you’re under the age of 59½.
Nobody can predict whether the government will raise taxes to offset the aging costs of baby boomers. However, as a parent with college bound children, you need to look at the bigger picture. You need to plan for college by addressing your retirement first.
Before you ever consider taking money from your retirement account to finance your children’s education, please give us a call. We may have alternative strategies that can help you pay your college expenses without raiding your retirement accounts.
The author of this newsletter is Brock Jolly.