Many people think that using a retirement account looks like an easy way to pay for your children’s college costs, but you should do some research before you make that decision. Learn why that will cause more problems than it will solve.
It’s a natural thought to consider borrowing from your retirement account to pay for your children’s college education. The fact is that college is expensive, and it seems to be going up in cost every year.
To pay for it, it’s natural to look at your assets to see if there is an easier way to pay for it. However, just because the money is there, doesn’t mean you should borrow from retirement accounts to pay for college costs.
1Should You Borrow From Retirement Accounts?
The truth is that if you choose to borrow from retirement accounts, it could very well cause more problems that it will solve. It can be bad for you as well as for your children.
It’s one thing to help your children with their college expenses when you can afford it. However, it’s a completely different issue if you are paying for their college at the expense of your future.
2The Risk To Your Financial Future
Every penny that you borrow from retirement accounts means there will be less money there for you when you hit retirement age. If you think it’s stressful finding ways to pay for college, imagine how much more stressful it will be if you are on the cusp of retirement, but you don’t have enough money to live on.
Due to increased medical costs as you get older, your expenses at retirement are likely to increase. If you are not financially sound upon retirement, you will put more pressure on your children’s finances at that point.
Borrowing from your 401K, pension, etc not only puts your own financial future at risk, it is also risking your children’s financial future.
3Penalties and Taxes
Another consideration is the substantial penalties that are assessed if you withdraw money from retirement accounts before your retirement age. In addition to large penalties, you will also be subject to taxes on the withdraw, depending up on the specific type of account because the withdraw is treated as income.
When you consider the future risks and the extra costs of penalties and taxes to borrow from retirement accounts, it’s pretty clear that the price is too high.
4What Your Children Will Learn
Before you make the decision to borrow from retirement accounts, you should carefully consider the message you are sending to your children. Do you want them to learn that when they can’t afford something they want that someone else will find a way to buy it for them? Do you want them to learn that it’s a better idea to use money that is set aside for their future instead of finding other ways to pay for the things they want?
That is what you will be teaching your children if you borrow from your retirement account to pay for their college education.
5Prepare Your Children For Their Financial Future
Your children will be much better prepared for their own financial future if you help them with their college expenses, but you also involve them in helping with the costs.
They can start saving a portion of their income as soon as they start working part-time as a high school student.
6You Don’t Have to Borrow From Retirement Accounts If Everyone Is Prepared
The key to helping your child get a quality college education is to prepare everyone for what is expected of them. Your children need to know how much responsibility they will have related to their education.
Knowing what to expect will help them focus on saving money and getting good grades so scholarships are available.
7What Your Kids Will Learn
One of the best lessons you can teach your children is that if they can’t afford something, they shouldn’t make a bad financial decision to pay for it. Instead, they will learn to work hard, save money and be financially responsible. Isn’t that exactly what you want for them?
If they need to help with their college expenses, they will also have more value for their education and they will have a much brighter financial future based on the lessons they learned.
What Do You Think?
Have you heard any stories about people who have made the decision to borrow from retirement accounts to pay college costs? Did they still think it was a good idea when they reached retirement age?
