A few days ago on CNN Money, there was an article about how 24% of parents said that they planned on using their retirement accounts to help pay for their kids’ college. This got me thinking: Would I be willing to put my retirement at risk to pay for my son’s college costs?
The answer: Probably not.
Does this make me selfish? Or does it make me prudent? (Or maybe a little of both?)
I don’t really know. What I do know, though, is that raiding my future financial freedom to help my son in college might not be the smartest thing — for either of us. My husband and I plan to help my son out in college, but we’re not going to pay for the whole thing. And we’re certainly not going to do it at the expense of our future.
Why Raiding Your Retirement Funds is Bad for You
Obviously, when you raid your retirement funds to pay for your child’s college education, you are leaving less money for you. If you are already concerned about your ability to retire comfortably, you won’t make matters any easier by reducing the amount of money you have available. You might have to turn to debt in order to make up for it, and there are few things in a financial life as devastating as debt on the eve of retirement.
Another concern includes the penalties. In the U.S., you can withdraw money from an IRA to pay for your child’s schooling without paying the 10% penalty, but your withdrawal may still be subject to income taxes. Your 401k will be subject to taxes and the penalty if you are not at the appropriate retirement age. In Canada, withdrawing money early from your RRSP in order to help your child with college costs will result in taxable income. Paying these extra taxes, on top of taking that money out of your future, can be terrible for your financial future.
You might say that your children, grateful, will take care of you later, but you really don’t know what will happen.
Why Raiding Your Retirement Funds is Bad for Your Children
It may seem counter intuitive to think that raiding your retirement funds to pay for a child’s college education is bad for the kids. However, it is teaching your child something that may not be of service to him or her down the road: That there is no reason to pay for things oneself.
Many children today have a sense of entitlement that comes as a result of parents providing them with everything. Imagine how much more a child might value his or her education if he or she worked for it! I’m not saying that you can’t help at all, but I do think that you should have your child contribute to the cause. We have a 529 set up for our son, and you can establish a RESP in Canada that can build up savings for college. You can ask your child to help contribute to the college savings fund, as well as use your own funds.
Another possibility is to have your child take care of tuition. My parents made it clear that they expected me to be responsible for my tuition. They covered my housing and bought a meal plan for me, and paid my auto insurance premiums (as long as I maintained a good student discount and didn’t commit infractions). Because I knew what was coming, I worked throughout high school and received a scholarship to help with tuition. A part time job helped me earn some extra money. I learned valuable lessons about hard work, and providing for myself that I would not have learned if my parents just paid for everything.
There are numerous options for helping your child pay for college without putting your retirement at risk: College savings accounts, scholarships, part time jobs, grants and student loans. However, these things require planning. So, if you don’t want to choose between your child’s education and your retirement, it is a good idea to be clear about your expectations, and make plans now.