Do your chil­dren a fa­vor: Pick re­tire­ment sav­ings over tu­ition

The News Tribune - - Business - BY KEVIN VOIGT NerdWal­let

Most fi­nan­cial plan­ners ad­vise never tap­ping re­tire­ment sav­ings to pay for your chil­dren’s ed­u­ca­tion. Even as col­lege costs climb, there are op­tions to bor­row that cash, whereas it’s of­ten noted that you can’t bor­row for re­tire­ment.

Yet about one-third of Amer­i­cans with chil­dren un­der 18 say they plan to use re­tire­ment sav­ings or “could use if needed” to help pay for their chil­dren’s ed­u­ca­tion, ac­cord­ing to a re­cent sur­vey by Sal­lie Mae, one of the na­tion’s largest stu­dent loan lenders.

The good news for re­tire­ment sav­ings is that num­ber is declining – in the 2016 edi­tion of Sal­lie Mae’s sur­vey, 39 per­cent of par­ents said they planned or may use re­tire­ment sav­ings as a last re­sort to fund their chil­dren’s ed­u­ca­tion.

More par­ents are now think­ing twice about us­ing re­tire­ment sav­ings to fund col­lege dreams. Here’s why their hes­i­ta­tion is war­ranted.

Lost re­tire­ment sav­ings could hurt you: Pay­ing for school from a tax-ad­van­taged em­ployer re­tire­ment ac­count like a 401(k) can hurt you in sev­eral ways:

AA 10 per­cent tax penalty on early with­drawals below age 59 1⁄2.

AA po­ten­tially big­ger tax bill the year of with­drawal as the money you with­draw is counted as in­come.

Loss of tax-free growth of

A your sav­ings. Un­like tax­able in­vest­ment ac­counts, where you may have to pay the IRS an­nu­ally for cap­i­tal gains, em­ploy­er­spon­sored re­tire­ment ac­counts can grow tax-free.

Less ben­e­fit from com

A pound­ing. Early with­drawals will erode your port­fo­lio’s growth po­ten­tial.

But if you’re go­ing to tap into your re­tire­ment sav­ings, ex­perts say the “least worst” op­tion is to fund a Roth IRA. Un­like qual­i­fy­ing con­tri­bu­tions to a 401(k) or tra­di­tional IRA, Roth IRA con­tri­bu­tions aren’t tax-ex­empt. But as a re­sult, there are also fewer re­stric­tions on early with­drawals.

“You can with­draw any Roth IRA con­tri­bu­tions that you’ve made without penalty,” says Crys­tal Wip­per­furth, a cer­ti­fied fi­nan­cial plan­ner with 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 ac- counts (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.

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