Using retirement savings to fund your kid’s college education is a decision fraught with long-term consequences.
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“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.
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According to Shahnazari, using retirement savings to cover college costs is often a misguided choice that can jeopardize long-term financial security.
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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“Once these savings are withdrawn, they are not easily replenished,” he said.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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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.”
Additionally, Shahnazari said there are often alternative funding options available for education, such as scholarships, grants and student loans.
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