Bronfman Rothschild in Madison, Wisconsin. “This is not ideal, because it reduces your retirement savings, but it is an option.”
It could hurt your kids, too
Tapping your retirement savings can boomerang to hurt your kids if they need to provide financial help for you in your later years.
“We see clients want to help their kids through college at the expense of their own retirement, and we always advise against it,” says Matt Ahrens, a financial advisor at Integrity Advisory in Overland Park, Kansas. “Parents have to understand that sacrificing to help their kids through college may only put more stress on their children when they see their parents struggling financially in retirement.”
A more immediate blow: Using your retirement funds could hurt your child’s ability to qualify for student aid. Why? The cash is considered “ordinary income” and may put your total wages for the year beyond what qualifies for assistance.
Because retirement accounts aren’t counted when considering if a family economically qualifies, “funding your 401(k) or 403(b) is an advantage for college financial aid,” says Kimberly J. Howard, a certified financial planner with KJH Financial Services in Newton, Massachusetts.
Cash them out, and that exclusion goes away.
A 529 plan is the best way to save
More Americans tuck college savings into ordinary bank accounts (45 percent) than a 529 savings plan (29 percent), according to the 2018 Sallie Mae survey. But 529 plan investments have much more earning potential than an ordinary savings account, which often grows less than 1 percent a year.
“Parents of young children should start a 529 fund right away, and add money every month. Every little bit helps, and it will have the advantage of years of compounding,” Ahrens says.
“The first savings a family should make should be into their retirement account at work in order to get their company match. Then the remaining savings can be split between retirement — either at work or into a Roth IRA — and a college savings plan, like a 529 plan,” says Derek Hagen, a certified financial planner with Hagen Financial in Minnetonka, Minnesota. This article was provided to The Associated Press by the personal finance website NerdWallet . Kevin Voigt is a writer at NerdWallet. Email: email@example.com . Twitter: @kevinvoigt.