Educational attainment is a bedrock of the American Dream. We all want our kids to do better than us, and we’ll do anything to help them achieve that! There are dreams, and then there’s reality: college costs have exploded over the last twenty years. Most parents and some grandparents find themselves fighting a battle on two fronts: saving for retirement and college at the same time.
You might be eyeing your individual retirement account (“IRA”) for help. Is it worth tapping your IRA to help pay for college? Let’s talk about it!
You can use IRA money for qualifying educational expenses. One advantage of an IRA withdrawal is that the money can be used for any qualifying educational expense (think tuition, student fees, etc.). Importantly, the withdrawal amount cannot exceed the amount of your qualifying expenses.
But the disadvantages are obvious. You’re taking away from future retirement savings, and you’re reducing the amount of earning power you previously held. You’re also faced with the fact that IRA annual contribution limits ($6,000 for 2021) can make it hard to restore your previous savings level!
There are ways to replace what you take out. Currently, for people over 50, the law allows you to make extra contributions of up to $1,000 a year. While this isn’t much, it can at least help restore some of your withdrawal.
No matter what you do, it’s usually wise to seek input from a financial professional. Withdrawing from an IRA to pay for college has many unseen consequences that can harm your retirement plan and make your golden years a bit leaner. One of your best bets is to plan carefully for college as soon as possible for your children or grandchildren, so you’re not forced to decide between retirement or college.