Your Retirement Plan Is Not Your Kid’s Education Plan | Felinton Elder Law Estate Planning Asset Protection

Your Retirement Plan Is Not Your Kid’s Education Plan

I don’t often do this, but in this one area I am going to make an unequivocal statement: Don’t even think about using your retirement plan to fund your kids’ college education. Why, you ask? Well, there are numerous reasons. The most important being that you want your kids to become financially responsible and independent. And, equally important, you want to be able to retire comfortably.


Reasons Why

Here are a few more good reasons to add to your list. There are actually ways that paying for your kids college with a tax-advantaged employer retirement plan can really hurt you. For instance, if you withdraw anything from your retirement plan before you reach 59 ½ years of age, you’ll be hit with a 10% tax penalty. You’ll also get hit with a tax bill for the tax year in which you make the withdrawal since that money is counted as income.


Ordinary Taxable Income

I mentioned other ways of paying for your child’s education. One of the most often used is student aid. If you use your retirement funds to pay for education, it can actually hurt your child’s ability to qualify for student aid. Here’s why. Once again, pulling cash out is going to be considered “ordinary income” and may put your total wages for the year beyond what qualifies for assistance.


Educate Yourself

Your kids’ education is important and so is your retirement. So, it’s important to educate yourself to the many other financial ways of helping your kid get an education.

You want your retirement account to grow tax-free. And funding your retirement account is actually an advantage when applying for financial aid because retirement accounts aren’t counted when considering if a family economically qualifies.


Accomplish Both Goals Without Compromise

Of course it’s important to help your kids get a college education. And, the beautiful thing is that you can accomplish that goal without compromising or jeopardizing your retirement goals. Working with an estate and asset protection attorney to include a child’s education goals as well as your retirement among your financial goals could be very advantageous.


Give Yourself And Your Child Every Advantage 

According to a recent survey by Sallie Mae, one of the nation’s largest student loan lenders, about one-third of Americans with kids under 18 say they plan to use retirement savings or “could use if needed” to help pay for their children’s education. What many parents don’t understand is that by using their retirement savings to help their kids through college may only put more stress on their children when they see their parents struggling financially in retirement.

Giving your child the advantage of a good education is every parent’s dream. The smart way to accomplish that goal is to do it without putting your own retirement at risk. It’s like the instruction you get on an airplane. If you’re traveling with a child or someone who is not able to help themselves and the oxygen masks come down. Put your mask on first. Because if you aren’t in a position to help yourself first, you won’t be able to help your child.