For Mark Roberts’ Use: Life sure has a sense of humor sometimes! Just as you hit the peak of your career and you’re finally getting caught up on retirement savings, the kids are ready to leave the nest. For most young adults, this means going off to college. Like most parents, you want to give them the best possible start in life, but that can often translate to a five-figure annual tuition bill. Ouch!
For most parents, borrowing money from their retirement fund seems to be the only solution. But before you take such drastic action, you should fully understand the long-term (basically, permanent) consequences.
First, you could trigger tax implications or penalties if you take money from your 401(k). Then, of course, the obvious problem is that you will lose interest that would have accrued on that money. Remember that interest compounds in these accounts, so you’re losing not just interest, but interest upon interest upon interest!
If you take a loan from your retirement account, your fund’s rules might not allow you to make contributions until the loan is repaid. There again, you are losing not only time (interest), but also the tax benefits for each year that you would have been making contributions.
Most people who borrow from their retirement accounts end up retiring later than they had planned. Right now, that might seem like a fair trade-off. You retire a few years later, and your child gets a solid education. But it might not feel like such a good decision years down the road, when illness, disability, or a poor job market forces retirement. We can’t always predict the future, so retirement planning often revolves around making the best possible decisions today.
Luckily, there are other ways to fund college tuition. But there is only one way to fund your retirement. So keep making those regular contributions, and avoid taking money out of your retirement account. If you can begin planning early enough, a 529 account allows you to stash money in a tax-advantaged college savings plan. If it’s too late for that, talk to a financial aid counselor. You might be eligible for more help than you think.
As always, give us a call before making drastic decisions with your retirement account. We can help you identify alternative strategies and make a plan that best suits your needs.