Tuesday, October 5, 2010

More Parents Raiding Retirement Accounts for College

A study released today by student loan provider Sallie Mae and the Gallup Organization shows that 25% of the nation's parents are now raiding their retirement accounts to pay for their children's education, regardless of the tax consequences. This news is disconcerting on a number of levels, namely that parents don't have enough money saved up elsewhere for college but also because of the large tax burdens that can arise from tapping a 401(k) or IRA prematurely.

Even worse, parents are using investment vehicles that have a dubious track record when it comes to producing the returns needed when college comes calling. CNNMoney reports that "the most common way that parents reported saving for college was with CDs or general savings accounts. Some 50% used those more traditional forms of saving, according to the survey." Adjusted for inflation, these savings accounts aren't going to produce the returns necessary for a tuition payment. Thus, that means that parents using them will have to save that much more, just to be in the ballpark of a tuition payment.
The moral of the story? Save early and often for whatever goal you would like to achieve so that you're not stuck tapping funds that should be used only for retirement.

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