August 2, 2017

Approaching the overwhelming cost of college is a challenge that many parents are thinking about this summer as they are preparing to send off their new graduates to college. With the cost of graduate school as well as college on the rise, many prospective students and parents are looking towards retirement accounts as an effective way to pay for school.

According to a recent study conducted by Sally May & IPSOS, up to 6% of parents withdrew from their retirement savings such as an IRA or a 401(k) to help pay for a child’s college. Since the price of college has gone up, it may the case that parents do not have enough set aside to pay for college. There are some considerations to evaluate before using an IRA to pay for school:

•       Withdrawals prior to age 59 and a half can lead to a 10% penalty except in situations like putting down a payment on a first home or higher education expenses. The expenses have to be for a child, grandchild, a spouse or yourself. When withdrawing from an IRA, a student or a parent can pay for tuition, books or other qualified education expenses with no penalty.
•       There are major differences between using a traditional IRA and a Roth IRA for higher education costs. The best approach is to use a Roth IRA to pull out without a 10% early withdrawal penalty.
•       You can roll a 401(k) into an IRA to pay for educational expenses.

A withdrawal from an IRA can impact financial aid. Students who apply for need based financial aid have to report asset information and income on the free application for federal student aid. Money inside a retirement account such as a traditional or a Roth IRA are assets that are exempted from being evaluated on the FAFSA, but withdrawing funds from an IRA account does count as income over the following years.