Retirement and Paying for College

Planning for retirement and paying for college go hand in hand. Whether you’re a parent or a college graduate looking to pursue a graduate degree, there are a number of factors to consider. We strongly encourage you to fund an IRA, 401k, or other employee-sponsored retirement plan. And we hope that you’re able to maintain that account for the sole purpose of funding your retirement, while saving separately for college. Understandably, that’s not always possible as other situations arise and you may need to tap into your retirement account to pay for college. Here’s what you need to know.

Avoid Penalties

Depending on the type of retirement account, you may be susceptible to penalties if you make early withdrawals—typically before the age of 59.5. IRAs afford you the opportunity to use withdrawals in certain instances—such as paying for higher education for yourself, spouse, child, or grandchild. A Roth IRA falls under different rules, as do 401ks, 403bs, and other employee sponsored plans. Check with your plan sponsor and avoid costly early withdrawal penalties.

Withdrawals May Affect Financial Aid

In addition to being hit with penalties, using funds from an IRA may impact financial aid. Students must report income and asset information on the FAFSA. However, funds held in an IRA—traditional or Roth—is exempt until it is withdrawn. A withdrawal from an IRA counts as income for the following year. Plan ahead and calculate your yearly costs to determine what makes the most financial sense. It might mean using an IRA withdrawal to pay for senior year when financial aid for the following year is not an issue.

A 529 Plan

Like an IRA, a 529 Plan is a tax-advantaged savings plan designed specifically for financing college. Why a 529 Plan? It’s specifically designed to fund college education. It has higher contribution limits. Parents and other relatives can fund it. And withdrawals don’t effect financial aid.

There’s no one-size-fits-all solution to planning your retirement and paying for college. Start early and stick to a plan. Let’s work together to get started.