Parents who fund their children’s college tuition by dipping into their 401k retirement accounts may be putting their financial future at risk, according to a study from Sallie Mae.
With tuition costs reaching unsustainable levels, parents frequently raid their personal retirement accounts for extra monetary support.
“The economy is putting pressure on families in terms of whether they’re saving, how much they’re saving and where they’re saving,” said Sarah Ducich, senior vice president for public policy at Sallie Mae.
The report, “How America Saves For College,” surveyed more than 1,600 parents with children ages 18 or younger and found that half of parents claimed to be focused on college savings.
The trouble arose with the finding that most families, who say that they are saving for college, also report that they consider their retirement savings fair game to aid with the expenses. These parents fail to realize that they actually make themselves worse off by dipping into what looks like an extra source of funds.
The initial withdrawal can count as income, which is taxable — and that additional income will reduce a family’s financial aid eligibility the following year.
“Between the tax impact and the reduction in aid eligibility, the family may net very little return on their investment,” said Mark Kantrowitz, publisher of Fastweb.com, a free scholarship matching service. “It also sacrifices retirement funds,” he continued.