Middle-aged parents face two huge expenses: college costs for their children and the even larger eventual cost of retirement. Many find it hard to juggle the two and get confused over priorities and where to allocate resources. A recent Gallup survey done for Sallie Mae, the large student lender, found that 6 percent of parents in 2010 had withdrawn money from an employer retirement savings plan or an IRA to cover college costs for a child. That compared with 3 percent who took retirement withdrawals for college expenses the previous year, Sallie Mae said. The average withdrawals also grew, to $8,554 from $5,318. Three percent of parents also said they took a 401k loan for college costs.
This can cause big problems later in retirement, says New York’s College Savings Plan. Parents who rob from their retirement accounts to pay college bills are probably doing so during the ages of 40 to 60. That gives them little time to make up for the hit to their retirement accounts. The 529 plan sponsor noted that while an $8,554 withdrawal doesn’t sound big, it adds up if done for all four years of college, and gets worse if done for a second or third child.
Also, it said building up debt in a 401k plan before retirement adds to a potential retiree’s financial burden. It also notes that parents must pay income tax on withdrawals from an employer savings plan or an IRA. If done before age 59.5 from an employer plan, an additional 10 percent tax penalty is assessed (the penalty is waived on IRA withdrawals for college.) The withdrawals, taxes, and penalties leave parents with less money in their retirement plans to compound and grow for the future.
Parents should realize that as expensive as college seems to be, it is limited to the years a child is in college. Retirement, however, can last for many years and the overall expense can be hundreds of thousands of dollars higher. In the end it may be better to have children borrow for their own education than to endanger your retirement.
