Funding An Education With Retirement Assets

In an ideal world, parents would be able to save enough in a Coverdell Education Savings Account or a 529 Savings Plan to fund their child’s education.  However, with skyrocketing college costs, this may not be feasible.  Another option parents can consider is borrowing against your home, but this runs the risk of losing your home if you cannot make loan payments.

This leaves many Americans to turn to their biggest pile of cash—their retirement savings.  Below are the two main ways to tap into retirement savings:

1. Loan from your employer’s plan. Retirement plan require no credit check and the interest goes back into your account.  Yet you must consider some of the downsides that include paying taxes on the interest when you eventually withdraw even if you already paid taxes on it.  This may be your best option if you can afford the payments and you can pay it off before you leave your job.  If not, it may not be worth the risk.
2. Withdrawals from a retirement plan. The main advantage of withdrawals is that you do not have to repay it.  Hence, your retirement savings are permanently reduced.  Depending on the type of account and your age, the withdrawals may carry taxes and penalties.  Also, keep in mind that taxable withdrawals can reduce your child’s eligibility for future financial aid since they are counted as parental income. 

See Erik Carter, Should You Use Retirement Assets For Education Expenses? Forbes, Oct. 24, 2014.