For Mark Roberts’ Use: Along the road to retirement, you might encounter many hazards that can set back your financial goals. From failing to max out your retirement plan contributions, to overlooking tax consequences, there are plenty of mistakes to be made. But you probably wouldn’t think of parenting as a potential retirement pitfall!
You want the best for your children, so it’s second nature to reach for the checkbook when it’s time to send them off to college. And with average costs for a private, four-year university hovering around $40,000 annually, that tuition bill can create quite a dilemma for you. Without the cash on hand, you might be tempted to borrow from your retirement fund.
It’s second nature to do whatever it takes to ensure a comfortable future for your kids. But borrowing from your retirement account is almost never a good idea. Between unforeseen tax implications, penalties, and lost interest on the money, you would be putting a major dent in your retirement savings. In the vast majority of cases, it’s nearly impossible for you to fully recover this money lost for your fund. Parents who borrow from themselves to pay college expenses often end up retiring later than planned, or they are forced to live on less retirement income than they would have liked.
That’s bad enough, but the truly unfortunately part of this mistake is that it can be so easily avoided. Most families have plenty of other options to fund college tuition. You might qualify for more federal or state financial aid than you believe, and there are numerous private scholarships going unclaimed during some years. Even if you don’t qualify for grants, your child might be able to use a work-study program to help cover tuition.
Of course, the best option is the one you choose years in advance. A 529 savings plan allows you to set aside money for college, with all taxes deferred. Once your child begins college, withdrawals can be used to cover qualified expenses, and you won’t pay federal income taxes on the money. Qualified expenses include tuition, fees, books, supplies, and room and board at any accredited post-secondary institution.
As with any investment fund, your 529 plan will include some risks. Call us for more information, and we can help you plan for college expenses while protecting your nest egg.