Don’t Sacrifice Your Retirement for Your Child’s College Education
The Rising Cost of College Tuition
If the idea of having to pay for college seems overwhelming, you are certainly not alone. The cost of college tuition and fees has been steadily increasing over the years, making it increasingly difficult for families to afford higher education for their children. According to US News and World Report, the average tuition and fees for the 2022-2023 academic year were as follows:
- $10,423 for state public colleges
- $22,953 for out-of-state public colleges
- $39,723 for private colleges
These figures represent only averages, and if your child chooses a more expensive school, your costs could be even higher.
Ideally, you would have money saved up in a savings account, a 529 plan, or elsewhere to pay for college. However, if your savings are not enough to fully cover the costs, you might be tempted to tap into your Roth IRA to pay for college.
The Temptation of Tapping into Your Roth IRA
A Roth IRA allows you to take withdrawals without penalty to cover the cost of higher education. While this may seem like an attractive option, it’s important to consider the long-term consequences of this decision.
The Problem with Tapping Your IRA Early
Typically, touching an IRA before age 59 1/2 incurs an early withdrawal penalty. However, for Roth IRAs, which are funded with after-tax dollars, you can generally avoid early withdrawal penalties if you only tap the principal portion of your account, not the earnings portion.
But it’s important to remember that the main purpose of an IRA, whether it’s a traditional or a Roth, is saving for retirement. When you remove funds from your retirement account, you are left with less cash for your senior years.
Not only will you be sacrificing your major drawdowns, but you will also lose out on investment gains. Let’s say your Roth IRA offers an average annual return of 8% and you make a withdrawal of $20,000 at age 50 to pay for college tuition. If you don’t retire until age 65, you will have lost 15 years of potential earnings, resulting in a loss of nearly $63,500.
Don’t Put Your Retirement at Risk
It’s natural to want to do your best to cover the full cost of your child’s college education. However, raiding your savings, especially your retirement funds, can have serious consequences for your future financial stability.
There are several alternatives and options your child can explore to make college more affordable. They can consider choosing less expensive schools, working while studying, or a combination of both. Encourage your child to apply for scholarships, grants, and financial aid to help offset the costs.
It’s important to recognize that if you take too much out of your savings to pay for your children’s college, you may find yourself financially struggling in retirement. At that point, you may have to rely on your adult children for financial support when they’re trying to establish their own families and careers, creating a situation where nobody wins.
The Importance of Planning for College Expenses
It’s never too early to start planning and saving for your child’s college education. Here are some tips to help you prepare:
- Start saving early: The earlier you start saving, the more time your money has to grow.
- Consider a 529 plan: 529 plans offer tax advantages and are specifically designed for education savings.
- Encourage your child to save: Teach your child about the importance of saving and encourage them to contribute to their own college fund.
- Explore scholarships and financial aid: There are numerous scholarships and financial aid opportunities available. Encourage your child to actively search and apply for these.
- Compare college costs: Help your child research and compare the costs of different colleges to find the most affordable options.
By planning ahead and exploring all available options, you can help ensure that your child’s college education is financially manageable without sacrificing your own retirement.
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Summary
Paying for college tuition can be an overwhelming task, with the rising costs of education putting a strain on families’ finances. While tapping into your Roth IRA may seem like a viable solution, it’s important to understand the long-term consequences.
Withdrawing from your retirement account can result in lost earnings and a significant impact on your future financial stability. It’s crucial to explore alternative options and encourage your child to pursue scholarships, grants, and financial aid to make college more affordable.
By starting early and planning ahead, you can ensure that your child’s college education is financially manageable without jeopardizing your retirement. Take advantage of savings accounts, 529 plans, and other education-specific savings tools to build a strong financial foundation for your family’s future.
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If the idea of having to pay University it seems overwhelming, you are certainly not alone. For the 2022-2023 academic year, here’s what the average tuition and fees looked like, according to US News and World Report:
- $10,423 for state public college
- $22,953 for out-of-state public colleges
- $39,723 for private college
And these are just averages. If your child chooses a more expensive school, your costs could be even higher.
Ideally, you have money saved up to pay for college, or in a savings account, a 529 floor or elsewhere. But if that’s not enough to fully cover your costs, you might be tempted to tap into your Roth IRA to pay for college.
The good news is, you’re allowed to take Roth IRA withdrawals without penalty to cover the cost of higher education. The bad news, however, is that if you go this route, you could end up shorting your retirement income down the line.
The problem with wiretapping your IRA early
Typically, touching an IRA before age 59 1/2 incurs an early withdrawal penalty. The rules here may be slightly different with Roth IRAs, as these accounts are funded with after-tax dollars. In that case, you can generally avoid early withdrawal penalties if you only tap the principal portion of your account, not the earnings portion.
But remember that the main function of an ANGER, whether it’s a traditional or a Roth, is saving for retirement. And so when you remove funds for another purpose, whether it’s to pay for college or to buy a house, you’re left with a lot less cash for your senior years.
And remember, it’s not just your major drawdowns that you’ll be down. You will also lose your investment gains.
Let’s say your Roth IRA offers an average annual return of 8%, which is slightly lower than the average stock market return over the past 50 years. Let’s also assume you make a withdrawal of $20,000 at age 50 to pay for college tuition. If you don’t retire until age 65, that means you’ve lost 15 years of earnings in your retirement plan. The total damage? Nearly $63,500.
Don’t put your retirement at risk
It’s natural to want to do your best to cover the cost of college in full. But if you raid your savings to pay for your kids’ college, you could find yourself short on retirement funds. This is a risk you don’t want to take, especially when there are several options your kids can explore, whether it’s choosing less expensive schools, working while studying, or a combination of both.
Also, recognize that if you take too much out of your savings to pay for your children’s college, you could end up financially struggling in retirement. At that point, you may have to come to your adult children for money when they’re trying to establish families and careers. And in that situation, absolutely no one wins.
Our best stock brokers
We looked through data and user reviews to find the handpicked rare picks that earned a spot in our list of the best stock brokers. Some of these best-in-class picks pack valuable benefits, including $0 on stock and ETF fees. Start and review our best stockbrokers.
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