For Mark Roberts’ Use: With average annual costs for a private, four-year college reaching over $39,500 in 2012 – and increasing every year – it’s no wonder parents are reaching desperate conclusions regarding their children’s tuition. Unfortunately, many are making a common mistake that drastically affects their retirement plans: they’re raiding their 401(k) funds to cover the cost of college.
Taking early withdrawals from retirement accounts is rarely a good decision. Penalties, unforeseen tax implications, and lost interest on the amount withdrawn puts a major dent in retirement savings. Parents who make this mistake end up retiring later than planned, or discovering their savings doesn’t provide adequate income in retirement.
The most unfortunate thing about this retirement planning mistake is that it could have been easily avoided, by investigating other options to fund college expenses. Some families qualify for more federal and state financial aid than they would have expected. Many don’t even bother to search for private scholarships, and quite a few don’t consider work-study options.
Possibly, the best option is to plan ahead for college expenses in the same way that we plan for retirement. A 529 savings plan allows parents to set aside money for college, with all taxes deferred. When children begin college, withdrawals are not subject to federal taxes as long as the money is used for qualified higher education expenses. Qualified expenses include not just tuition, but also fees, books, supplies, and room and board at any accredited post-secondary institution in the country.
A 529 savings plan is an investment fund, however, and comes with certain risks. Consult with your financial advisor about the benefits and drawbacks of a 529 plan. The bottom line is that it’s important to take a proactive role in planning for college expenses, so that you’re never forced to raid your retirement fund when there are plenty of other ways to fund a college education for your children.