Using retirement savings to fund your kid’s college education is a decision fraught with long-term consequences.
“retirement accounts are designed to provide financial security in your later years,” said Kevin Shahnazari, founder and CEO of FinlyWealth. He explained that withdrawing from retirement accounts for educational expenses jeopardizes that security. “Unlike student loans, which can be discharged or deferred, money taken from retirement accounts cannot be replaced, putting future financial stability at risk,” he said.
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Below are some reasons experts advise against using your retirement savings to pay for your kid’s college education.
Also see how to send your kid to college without going into debt, according to financial experts.
You’ll Be Left Financially Vulnerable When You Retire
According to Shahnazari, using retirement savings to cover college costs is often a misguided choice that can jeopardize long-term financial security.
One primary reason he said experts advise against this is the irrevocable nature of retirement funds.
“Once these savings are withdrawn, they are not easily replenished,” he said. “Retirement accounts like 401(k)s and IRAs are designed to provide financial security in your later years — withdrawing from them to fund education can leave you financially vulnerable when you retire.”
Mindy Yu, CIMA, director of investing at Betterment at Work, agreed. “Your child’s college education shouldn’t come at the expense of your own retirement stability,” she said.
Plus, she explained that if you withdraw before you turn 59 1/2, you risk a 10% penalty and income taxes, all while reducing the value of your savings. “Not to mention you’ll have to rebuild your nest egg down the line,” she said.
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You’re Underestimating How Much You Will Need in Retirement
Moreover, many people underestimate how much they will need in retirement, so withdrawing funds for education purposes could make that worse.
“Parents may underestimate how much they will need in retirement and overestimate their ability to recover from such withdrawals,” Shahnazari said. “It’s essential to recognize that retirement savings are not just a backup plan; they are critical for maintaining your lifestyle when you no longer have a steady income.”
There Are Alternative Funding Options for Education
Additionally, Shahnazari said there are often alternative funding options available for education, such as scholarships, grants and student loans.
“Unlike retirement savings, these resources can help alleviate the burden of college expenses without compromising your future,” he said. “By prioritizing your retirement savings, you ensure that you have a stable financial foundation, while also encouraging your children to explore various funding avenues for their education.”
Yu noted there are better options to pay for education, such as 529 plans, education savings accounts, custodial accounts, scholarships and federal student loans, which are designed to fund education without jeopardizing your financial future.
For example, education savings accounts — tax-advantaged accounts designed for saving for education — are a viable option for those who meet the income eligibility, according to Yu.
“Contributions are not tax-deductible, but qualified withdrawals like tuition, books, and certain room and board costs are tax-free,” Yu said. “Unlike college costs, retirement has no alternative funding sources like loans or grants, and tapping into these funds prematurely risks insufficient savings when you’re no longer earning an income.”
Another option, according to Yu, is to encourage your child to complete the Free Application for Federal Student Aid (FAFSA) to access federal grants, loans and work-study programs.
“From there, you can also consider scholarships from private organizations. If they have access to relatively lower interest rates and flexible repayment options with federal student loans, that might even be a better alternative than having to dip into your own retirement savings,” she explained.
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This article originally appeared on GOBankingRates.com: Expert Take: Don’t Use Your Retirement Savings To Pay For Your Kid’s College
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