Ask Terry Questions Using a traditional IRA to pay for kids college

Using a traditional IRA to pay for kids college

By Terry Savage on September 26, 2019 | College Savings / Student Loans

Within my 2 kids college education I can see I will end up with somewhere near $250,000 in loans. I have $140,000 in a traditional IRA and I am thinking of pulling some out to pay for each child’s last 2 years of school. Is this a reasonable option?
I will pay for the first 2 years with a loan. My wife and I will still have $170,000 in a 401(k) and will also have a pension for retirement. We are 47 and still contributing to both the 401(k) and the pension fund. We have approximately $230,000 equity on our home.

Terry Says

You are allowed to withdraw money from your IRA (don’t call it borrowing!) penalty-free, even if under age 59-1/2, if the money is used for college expenses, including room and board.

And I agree that this might be less expensive than being stuck in high-rate and high-fee Parent Plus loans.  (You can’t use a future withdrawal penalty-free to pay down the Plus loan. So this is a decision you must make now.

I hate to see any withdrawals from an IRA for any reason, because you lose all the future tax-deferred growth on the money, as well as the money itself.  I hope your well-educated children will take care of you in your old age if you run out of money!

Two other alternatives. First, consider the first two years at a local community college, then transfer to a university. That will save a fortune!  And, second, do a thorough search at Scholarships.com before making this decision.  Oh, and be sure to file the FAFSA form.  See my upcoming column on that topic.  Federal student aid is a definite first step.

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