Should You Ever Tap Your Retirement Savings to Pay for College?

If you're worried about the ever-rising cost of college, you're no doubt in good company. For the 2023-2024 academic year, the average cost of tuition and fees at a public in-state college is $10,662, says U.S. News & World Report. And it only gets more expensive from there if you go to an out-of-state public college or a private university.

If you have multiple children, you may be especially concerned about your ability to cover their higher education costs in full -- even if you've been saving consistently for that purpose since they were young. If you have a pile of money sitting in your IRA, you may be tempted to take a withdrawal to cover some college expenses.

Normally, IRA withdrawals taken before age 59 1/2 are subject to a 10% early withdrawal penalty. But there's an exception for funds used to pay for college. So technically, you may be able to get away with taking money out of your IRA without an immediate financial hit. But if you go this route, you might face a really scary long-term financial hit.

You don't want to end up short in retirement

Any funds you take out of your IRA before retirement are funds you won't have available for your senior years. But do remember that it's not just the money you remove itself that you won't have later on. You'll also lose out on growth in your brokerage account. And that's where you might really get hurt.

Let's imagine you're $15,000 shy of being able to pay for your kids' college in full, so you remove that money from your IRA at age 50. Let's also assume that you're planning to retire at age 67, and that your IRA investments deliver an average annual return of 9%, which is a little bit below the stock market's historical average.

In that scenario, you might say to yourself, "Well, I guess I'll have to get by on $15,000 less in retirement. But in reality, you're looking at a shortfall of about $65,000 when you account for lost investment gains.

And there lies the danger of tapping your IRA ahead of retirement, even if it's for a good reason. You don't want to end up in a situation where you don't have enough money to pay your senior living expenses because you were putting your kids' education first -- even though that's a noble thing to do.

Talk to your kids about college expenses and set expectations

Maybe you consistently put money into a savings account or a 529 plan for your kids' college, but you can't quite swing the cost of the schools they're looking at. At that point, rather than raid your retirement account, have a conversation.

Explain that you only have a certain amount of money to allocate to college expenses, and so your kids have a choice -- they can either opt for a less expensive school, try to get scholarships, work during their studies to pay as they go, or borrow money to cover that shortfall. All of these are reasonable approaches to take. 

You may also want to encourage your kids to start at community college, which tends to be a lot less expensive than a four-year college. Many college students spend their first few semesters knocking out required classes. Your children might as well do that at community college at a fraction of the cost and then transfer those credits over. 

Of course, you'll need to make sure that's an option. But if it is, it could spare all of you a world of expense. And it could make you feel a lot better about leaving your retirement savings alone.