In the world of financial planning, I'd get my wrist slapped for tapping my retirement account for a legitimate emergency. But using retirement to pay for college is like committing the cardinal sin of personal finances. After all, my retirement is meant to remain undefiled until I reach full retirement age or at least age 59 and a half. It's money just for me. However, we decided to carefully take money out of our retirement accounts to pay for our sons' college bills in the past several years. I'm extremely "debt averse," which is why I refused to look into student loans for my children. And even though I should have accumulated a massive college fund for my children, I failed miserably in that area. I made the assumption that they would attend college in-state and receive merit-based scholarships. Now that it's just about over, I can asset the damage that's been done to our retirement futures.
Using the Roth IRA
Our first move was to take money out of our Roth IRA accounts. We expected our older son, who was working, to take money for college out of his Roth IRA first. We then took money out of my Roth IRA. Our Roth IRA had served as a backup emergency fund. Using a Roth IRA for college is ideal because we were not penalized and didn't have to pay taxes as long as we didn't touch the interest or gains.
Dipping into savings
After we took out what we could from our Roth IRA accounts, we dipped into our emergency savings. Our thinking was that we could replenish our Roth IRA or backup emergency fund. Although we couldn't max out our Roth IRA due to the college expenses, we could slowly build back up our savings. Since the college bills were only due each semester, we had time in between to rebuild our savings accounts.
Taking a 401(k) loan
Our third strategy was to take out a loan from my 401(k) at my job. I always hear people warn against taking out a loan because the total amount will be due if a person leaves the company. In my case, the ownership of my company switched hands. The new company had a different brokerage firm handle the 401(k) loans. Even though the money to pay back the loan could no longer be deducted from my paycheck, the brokerage firm that handled my 401(k) loan had no problem setting up automatic withdrawals directly from my bank. The key to making it work for us was to take out a 1-year loan instead of spreading out the payments.
I don't regret using my retirement accounts to help pay for college. I'm glad my younger son took a semester off after receiving his associate's degree to carefully consider his next step. I didn't want to pay for classes only to have him change his mind about his career path. Even though we nearly depleted our Roth IRA accounts, our 401(k) and Rollover IRA accounts are still in tact for retirement. We still have another 25 years before we will retire. Some experts would have told me to tap the equity in my home to pay for college. But that idea made me a little queasy. Parents always have to make difficult decisions when it comes to their children's college expenses. For me, it was about picking the option that would help me sleep at night.
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