David Lerner Associaties: Are You Robbing Retirement to Pay for College?

David Lerner Associaties: Are You Robbing Retirement to Pay for College?

Core Facts

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Many families today are faced with two competing long-term financial goals: saving for retirement and saving for their children’s college educations. Unfortunately, the slow economy and stock market losses over the past few years have made achieving even one, not to mention both, of these goals more difficult for many people.

A recent report published by Sallie Mae entitled, “How America Saves For College,” reveals how difficult meeting both of these goals has become. While 60 percent of the respondents said that they are focused on saving for retirement (compared to just half who said they are focused on saving for college), one-third of them said they intend to use some of their retirement savings for college.

As college draws nearer, families are more likely to anticipate needing to tap their retirement savings to pay for college. Less than half (44 percent) of families with children under the age of 6 say they plan to use retirement savings to pay for college, but nearly three-quarters (74 percent) of families with teenagers say they anticipate doing so.

Among parents who are currently paying for their children’s college, six percent say they are drawing on retirement funds to help meet college expenses either via a loan or withdrawal from their retirement plan. The average amount borrowed or withdrawn is $6,475, according to the Sallie Mae survey.

Make Retirement the Priority

Many experts say that if families have to choose between saving for retirement and saving for college, they should make retirement the priority. “This is because families may be able to tap into other sources to help pay for college like loans, grants and scholarships,” says David Lerner Associates Branch Manager Jonathan Hurwitz. “But outside of Social Security and a pension plan, if you’re fortunate enough to have one, savings will be the primary source of retirement income for most people.”

Taking out money early from a qualified retirement account can result in the assessment of current taxes and penalties. Withdrawals from IRAs and 401(k)s before age 59½ may be subject to a 10 percent penalty plus taxation at ordinary income tax rates. “Money that is not in your retirement account no longer has the potential to grow,” Hurwitz adds. “This can significantly impact the size of your retirement nest egg over time.”

Also, keep in mind that withdrawals from 401(k) plans will result in additional family income, which could reduce eligibility for financial aid. And while 401(k) loans are not subject to immediate taxation and penalties, they do have to be repaid with interest in five years, or immediately if you change jobs.

A better alternative, Hurwitz suggests, may be to set up a separate account (in addition to your retirement account) that’s dedicated to college savings. Section 529 plans are one popular option. Operated by states or educational institutions, they come in two forms: prepaid tuition plans and college savings plans. These plans allow tax-deferred growth and tax-free distributions if the funds are used for qualified higher education expenses.

A study conducted by the College Savings Foundation found that families with 529 Plans have saved more money for college than those without them. Twenty-two percent of 529 owners have saved between $10,001 and $25,000, according to the study, while only 9 percent of non-529 owners have saved this much. And 18 percent of 529 owners have saved between $25,001 and $50,000, while only 4 percent of non-529 owners have saved this much. Almost half of families without a 529 plan have no college savings at all.

Kill Two Birds

Hurwitz says there is one savings vehicle that may be used to effectively save for both retirement and college: the Roth IRA. “Before age 59 ½, you may be able to take a distribution from your Roth IRA without tax or penalty when used for qualified higher education expenses. If the kids don’t go to college, your Roth IRA funds can be used for retirement.”

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.


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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com

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Jake Mendlinger
Account Manager
516.829.8374 X 232

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