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How to Pay for College Without Ruining Your Retirement Plan

Sending the kids off to college is a proud moment most parents await with anticipation. Moms and dads spend countless hours raising their kids to become young adults who study hard so they can get into a good college. And many parents spend equally as much time saving up to pay for that university experience.

Finding the money to send one or more children to an institute of higher learning can be an exciting ⁠— if not scary⁠— prospect. The cost of a college education in America continues to rise, along with related expenses and student loan debt.

At Wealth Legacy Institute we are well versed in the many ways parents and caregivers typically pay for their children’s (or grandchildren's) college education expenses. With a bit of education, planning, and some smart spending, you can pay for college without spoiling your retirement planning goals.

Education Savings Accounts (529 Plans)

A 529 plan is an investment account many parents or grandparents use to set aside money for college expenses. With a 529 plan your earnings grow tax-free, and you can withdraw funds tax-free if you use them to pay for qualified education expenses, such as:

  • Tuition
  • Fees
  • Books
  • Supplies
  • Equipment
  • Computers
  • Sometimes room and board

Funds from education savings accounts apply to costs at any eligible institution nationwide. You can also withdraw up to $10,000 per year tax-free (per beneficiary) to pay for tuition at private, public and religious K-12 schools.

As CERTIFIED FINANCIAL PLANNERS™, we want to make sure our clients also know what is not covered by a 529 plan. Technically you can use your money for anything you want, but non-qualified expenses will incur ordinary income taxes and a 10% tax penalty.

Related costs that are not covered include:

  • Student health insurance
  • Transportation costs
  • Student loan payments

Pay-As-You-Go

Some of our clients pay for their children's college education as they go, setting aside money each quarter or term for tuition and expenses. If you decide to go this route, we strongly recommend crunching the numbers to create a realistic budget. Otherwise, you might let retirement planning fall by the wayside as other expenses take precedence.

When budgeting to pay for college without ruining your personal retirement plan, be sure to:

  • Calculate monthly and per-semester costs, including differences for private vs. public or in-state vs. out-of-state tuition
  • Check to see if any scholarships or grants are available
  • Consider ways your child can reduce housing costs such as living off-campus or with roommates

Talk to your financial advisor, such as a CERTIFIED FINANCIAL PLANNER™ (CFP®) to make sure you can continue contributing your own retirement investment plan while paying for college.

Using Retirement or Home Equity

When college admissions roll around, some parents or caretakers find themselves unprepared, or not where they had hoped to be with their retirement investment plan. At this point, it may be tempting to dip into your retirement nest egg early. Although many people do this, it puts you in a very precarious financial situation.

At Wealth Legacy Institute, we urge clients to steer clear of this option. Before taking a home equity line of credit or cashing in your 401(k) to pay for college, remember this:

  • Your child can take out a student loan, but you can’t take out a "retirement loan" to cover what your retirement investment plan didn’t
  • There are no guarantees your child will finish, use their degree, or pay you back

To avoid getting caught by surprise, think ahead for the future. Put a wealth management plan in place long before it’s time to start applying for colleges.

Financial Planning Takes the Stress out of Paying for College

Thinking about college expenses can be daunting, even with a good plan in place. Despite the stress, you’re always better off with a plan. When you work with Wealth Legacy Institute, you’ll get a retirement investment plan based on your financial and personal goals so you can retire comfortably and stress-free.

The best financial advisor in Denver - or anywhere, for that matter, is the one who has your best interests at heart. That’s why a fiduciary financial advisor who is a CERTIFIED FINANCIAL PLANNER™ is the best person to guide you through the process of budgeting for college expenses (and plenty of other financial decisions too).

Learn how the right mindset, better habits, and a solid financial plan can help you live your dream retirement lifestyle. Get the Money Secrets eBook.

 

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