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Trouble Paying Your Kid’s Tuition? Don’t Touch Your Retirement! By: Jimmy James  |
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 The economy is getting worse everyday. And as personal finances get squeezed by expenses such as rising tuition costs, it can be tempting to take money from retirement accounts to help meet rising costs.
But think before you act.
Breaking into 401(k) and other retirement savings can have serious financial consequences, and any parent thinking they should, needs to consider other alternatives. There are a large percentage of people who believe that saving for their kid’s education is more important than saving for retirement, which stands in direct opposition to what most experts advise.
Before you choose between your retirement and your kid’s education, here are some thoughts to consider:
• You’ll escape an early distribution penalty, but… Any withdrawals from an IRA you might take for your child or grandchild’s education (as well as your own or your spouse’s) can be taken out without the usual 10 percent penalty on early distributions before age 59 ½. But you really need to talk with a tax advisor or a financial planner to determine whether your IRA withdrawals will have to be reported on your Form 1040.
• You might hurt your kid’s chances for financial aid: The entire withdrawal from an IRA -- whether taxable or not -- must be included as income on the following year's application for the Free Application for Federal Student Aid, or FAFSA. Family income does more to influence financial aid than the size of the family’s assets, and dipping into your IRA can potentially damage your child’s potential financial aid. Check with a financial planner who specializes in financial aid strategy before you make a move.
• Don’t even consider a ‘hardship withdrawal’ from a 401 (k) plan: Earlier this year, the Transamerica Center for Retirement Studies reported an increase in workers taking loans from their 401 (k) and other work-based retirement savings. Eighteen percent of those surveyed reported they took loans from their retirement plans in 2007 compared to 11 percent in 2006. Yet keep in mind that while most plans provide an option for hardship withdrawal for emergency medical or funeral expenses, the IRS restricts use of those funds for home purchases or tuition expenses.
So what do you do? Besides talking to a tax professional, it makes sense to find time to speak with a financial planner who can take a look at your overall financial situation and determine alternatives to raiding your retirement. A financial planner can help you take a comprehensive look at spending, saving and investment decisions you’ve made so far and seal up the leaks – then you can discover whether you have smarter options to pay your child’s tuition. They include:
• Starting a search for scholarships and grants with your kid: See if there are sources of grants and scholarships not only in your community, but also within your industry. Understand what a prospective student’s college choices might offer in terms of aid from its endowment. Also, some employers offer scholarships for their employees’ kids. Start searching online, at the office and by phone for such aid. Go online and do a general search for such aid.
• Fine-tuning your negotiating skills: Parents need to become more aggressive about negotiating tuition, room, and board at colleges where either they or their children have been accepted. A financial planner with expertise in college planning can help parents understand where those savings might be against the student’s qualifications for getting into the program of their choice.
Information for this article provided by the Financial Planning Association (FPA).
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