I have heard it a million times. You can take out a loan for college, but you can’t take out a loan for retirement. I hate the cliché. What’s worse is the fact that the cliché isn’t even true. I could take out a loan for retirement in the form of a home equity line of credit or a reverse mortgage. It’s also frustrating to me that experts never point out it’s possible to save for retirement and my children’s education at the same time. For me, the solution was a Roth IRA account. According to a recent article by the New York Times, simultaneously saving for college and retirement is a challenge. Of course, it’s not as much of a challenge for people who start saving in their 20s. The New York Times article highlights the predicament of an older couple with two young children. The father’s children won’t be in college until he is in his 60s. My children attended college when I was in my early 40s. Even if I had been an older parent, I could have turned to the Roth IRA.
Getting an early start on saving
People who don’t have children in their 20s won’t fund a 529 college savings plan, especially if they aren’t even sure if they will ever have children. I opened a Roth IRA in my late 20s. Although extremely high earns aren’t eligible to save using a Roth account, most people aren’t making a ton of money in their 20s. The key for me was to reserve some of the money in my Roth IRA in a money market account so I wouldn’t have to sell stocks or other investments when the market was down.
Taking a loan from my 401(k)
I don’t regret taking a loan from my 401(k) to pay for some of my son’s college classes. The fact is, I was motivated to save more for retirement knowing I might also use some of the funds for my children’s education. I didn’t have to pay taxes or early withdrawal penalties when I tapped my 401(k). I simply paid a small set-up fee for the loan, which I paid off in less than one year. My retirement savings wasn’t devastated by the move. Moreover, my son didn’t need to pay back a student loan for the rest of his life. Some parents think they are smart to co-sign a student loan instead of dipping into retirement, but I’ve had friends who were burned when the government docked their Social Security checks to cover unpaid student loans.
My younger son is still in college. I continue to use my Roth IRA to save for his college classes. I take out my Roth contributions which do not trigger a penalty or tax. We also qualify for a tax credit, which helps when it’s time to file the taxes. If I switch jobs, I would be able to tap my Roth 401(k) once I rolled it over into a Roth IRA. As far as I’m concerned there are so many ways to save for retirement and college at the same time, that it’s not really an either or debate. I use my contributions to pay for college while letting the gains continue to grow for my retirement.
More from this contributor:
Saving Trumps Paying Off Debt in my Family
Using my Roth to Pay off the House
Saving for Retirement for my Future Self