Raiding your retirement to pay for college

Find ways to help kids without risking your safety net

Conventional wisdom suggests, as do prudent advisers, that you should never, ever raid your retirement accounts to pay for your children’s or grandchildren’s college costs.

After all, you or your children can borrow money to pay for school; you can’t do the same when it comes to your retirement. But as parents of college-age children look at the financial aid packages now arriving in their mailboxes, and as these very same parents look at their first quarter balances in their 401(k) and IRA accounts, it would be hard not to ask the question: Are there times when it makes sense to raid your retirement account to pay for college?

Generally the answer is no. “The problems with using retirement accounts to pay for a child’s or a grandchild’s education are real,” said David Mendels, director of planning at Creative Financial Concepts. For starters, he said most of us have inadequate retirement savings and can ill afford to use them to pay for anything other than their intended purpose.

Others are of the same opinion. “My initial advice would be ‘don’t do it!’ but blanket statements are dangerous,” said C.E. Scott Brewster of Brewster Financial Planning.

So what then are exceptions to the rule?

Are you 100% funded?

Well, in rare instances it might make sense as part of an overall plan. “If someone was 100% secure in their own retirement and did not need the money they might then use some of their IRAs or 401(k)s to pay for their children or more likely grandchildren’s college costs,” said Brewster.

He noted, for instance, that many grandparents pay no taxes at all because they have high medical costs that as a tax deduction wipe out any taxable income they have. “Those grandparents in a 0% tax bracket might find distributing some money from their retirement plans is a very wise thing to do,” said Brewster. “Better to distribute it when you are in a 0% tax bracket to pay [for] grandkids’ college or grad school than leave the IRA or 401(k) to your grandkids when you die and then when they take the money out the grandkids could be in a 50% tax bracket—federal and state—if they, because of great schooling, became a doctor or lawyer or other high-income professional.”

The bottom line, said Brewster, is if you take money out of IRAs and 401(k)s, make sure you have a plan and know why it is an intelligent thing to do.

Pay interest on college loans instead of raiding retirement accounts

Others agree that it makes sense to raid your retirement accounts, but only under rare conditions.

“The only exception would be if someone’s retirement account was so well funded and they were absolutely certain that the market was not going to go south in their lifetime and they know they will never outlive their retirement savings,” said L. Ann Coulson, an assistant professor at Kansas State University. “Then raiding retirement funds would be fine.”

The only problem is that it is unlikely that any of that would happen. “The reality is that there are too many uncertainties with retirement and retirement savings,” said Coulson.

Others note that raiding one’s retirement account leaves one little time to make up for any distributions. “The older you are, the less time you have to make up for the loss,” said Rosilyn Overton, an associate professor at New Jersey City University.

To be fair, Coulson said, there are ways for parents to help their children or grandparents to help grandchildren pay for college costs without putting their own retirement at risk “If they truly want to help their children/grandchildren, let the child borrow conventional student loans and then the parent/grandparent can pay the interest costs on the loans while the child is in school—that way interest is not accruing on interest,” she said.

Then once the child has graduated, if the parent is feeling fairly confident about retirement savings, they can help the child pay the loans off. But, Coulson noted, that should she would be much more comfortable if they used current income rather than retirement funds to do that.

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