DEAR TRUST OFFICER: Should I withdraw or borrow from my 401(k) plan to help pay for my child’s college expenses? —PUZZLED ON FUNDING
DEAR PUZZLED: As a general rule, impairing your retirement savings to meet current spending needs is not a good idea, even for higher education expenses. There are other sources of funds for education needs—in contrast, in retirement, when one is on a fixed income, borrowing to meet expenses is problematic.
What you take out of your plan now can be hard to replace later. It’s been estimated that it can take six to ten years to fully restore a retirement account that has been tapped to meet four years of college expenses. In part, that’s because one misses out on the compounding of investment income during the period. For longer time frames, the stock market has produced higher total returns than the interest rates on student loans. The other part is that it can be hard to get back into the saving habit.
The better approach is to save for higher education early, separately from retirement savings, so as to put time on your side and minimize the need for loans when the college years arrive.
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