Soon after a child is born, many parents follow a predictable set of steps. After all the birth certificate and Social Security paperwork is completed, and the health insurance and life insurance beneficiary information is updated, many new parents will take steps to start a college fund for their child.
Apart from specialized (a little used) accounts offered by some state agencies, there’s really nothing that specifically or uniquely a “college fund.” Your college fund is whatever you find to be the most effective method for accumulating funds that you used to pay for your child’s higher education expenses.
But even though we have almost 20 years to save for each of our children’s college expenses, it’s not uncommon to come up short. It may be due to competing financial obligations, changes to a person’s financial situation, or simple procrastination. The all too common result is that parents can find themselves with a child heading off to college soon, but not a large enough college fund to pay for tuition and other expenses.
Some parents begin to get creative in trying to come up with ways to fund their child’s college education, and will consider dipping into their own retirement nest egg to help. Here are some considerations for using your self-directed IRA to pay for your children’s college expenses.
The IRS regulations permit you to take an early withdrawal from your self-directed IRA without having to pay a 10% penalty, provided that the educational expenses meet certain requirements. The exception also applies to situations where you want to pay those expenses on behalf of your grandchildren.
The upside of this is that it can reduce the amount of money you or your child may have to borrow to pay for college, and it will provide less of an immediate disruption to your lifestyle. Without the need for a large amount of college loans, your child or grandchild will be able to begin their post-college career in a much stronger financial position.
But while using your self-directed IRA as a supplemental college fund might be less of a disruption to your lifestyle now, it can have significant impacts later on. Any time you reduce the size of your retirement nest egg you are reducing the power of your account to compound in value over time.
Some will point out that while it’s always possible for your child to choose a less expensive college further education, there are limits to how low you can go on your own personal budget during retirement.
The best approach to using your self-directed IRA may be to view this as a supplement to whatever other planning and saving you do for your children’s college education.