Keeping your retirement savings plan on track while you balance college tuition for you child (or children!) can be difficult. Fortunately, there are several ways you can do both at the same time:
Invest into a 529 account. A 529 account is a savings account dedicated to higher education costs. Saving early and often is the best way to accumulate assets into your child/children’s 529 accounts so that the amount you may need to withdraw from your retirement accounts is minimized or eliminated. 529 savings accounts also have advantageous tax benefits and many states offer an income tax break for your contribution.
Develop a strategy for withdrawing from your retirement accounts. Once 529/designated college funds are depleted and you consider using your retirement funds, it’s important to consider your various accounts – different account types have different rules and penalties for withdrawal – as well as your tuition funding options, amount needed for college expenses, and your time horizon.
In addition to making tax efficient withdrawals, it’s important to ensure those withdrawals don’t set your retirement plans askew. Look for ways to avoid withdrawal penalties and to make up for the money you are diverting toward covering college expenses. There are a few tools and techniques you can use to do so. Here are a few:
- Redirect savings straight to paying for college expenses. If necessary, stop making retirement contributions and redirect those funds directly toward college expenses.
- Borrow from a 401(k). You can essentially take out a loan from yourself by borrowing from your employer sponsored 401(k) – many plans allow you to withdraw the lesser of 50% the account value or $50,000. Payback varies by plan but generally is amortized over 5 years. Because you took a loan from yourself, the interest rate is also paid back to you – automatically deducted from your payroll. Moreover, this is non-taxable.
- Withdraw from your IRA. You can avoid the 10% penalty for withdrawing funds before 59 ½ from your IRA if the money is used to pay for college tuition. However, the funds are taxable and you must be disciplined in order to pay the money back into your IRA. (To avoid the 10% penalty, the school reports to the IRS the net out of pocket costs of attending the school. If your withdrawal amount is less than that amount, you can claim an exemption from the 10% penalty.)
These are just a few of the options you have for funding your child’s college education. Developing a sound strategy to pay for your child/children’s tuition is complex, and can be difficult to do alone – that’s where we come in. At Liberty Wealth Advisors, college savings is part of the comprehensive financial planning all LWA clients have access to. We use state of the art technology to help you calculate how much you need to save for your child/children’s education and can help you choose a saving strategy that’s best for you and your needs, so that you can focus on your family, not your finances.
*Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.