Lumping Retirement Savings Accounts with Education Funds? Think Again.
March 26, 2026 | By Steven DiGregorio
Planning for College
Investing and financial planning can be complicated. Many parents direct all of their savings into one account to maximize their investments. Discerning how much of your savings should go towards your child’s education and how much should be set aside for your retirement can be difficult to discern, if not down right confusing.
Many financial planners recommend establishing separate accounts for your education goals and retirement savings to clearly assign how much is devoted to achieving both your financial goals. Financial advisors often suggest establishing a dedicated college savings accounts.
Withdrawing from your retirement savings to finance your child’s education is of course an option. The Internal Revenue Service (IRS) will permit you to take penalty-free early distributions for qualified higher education expenses. Take a distribution to pay for qualified expenses before age 59 1/2 and you will be exempt from any early withdrawal penalty, but will still be subject income tax. Err on the side of caution, consult your financial advisor before making any withdrawals from your IRA or Roth IRA.
Most colleges consider distributions from IRAs as income, that hurts when applying for financial aid packages. Because income weighs more heavily than assets in these calculations, IRA distributions may actually reduce the amount of financial aid your child may receive. You can borrow from your 401(k) plan, but that will impede the growth of your retirement account.
Home equity loans, student loans, grants and scholarships can finance your child’s education. Set up a 529 pre-paid tuition plan or a 529 college savings plan.
Establishing a dedicated college savings accounts can save raiding your retirement accounts — reduce the risk of becoming a financial burden on your children upon your retirement.
Pre-paid tuition plans generally permit you to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements.
College savings plans generally afford “account holders” to establish an account for the “beneficiary” purpose of paying eligible college expenses. College savings investment plan options typically include stock mutual funds, bond mutual funds, and money market funds. Always consult your financial advisor to cover limitations that may exist from state to state and for colleges considered.
Please note that the content of this blog does not constitute tax advice and is only intended for the educational purpose of the reader. Please consult your tax advisor for specifics regarding your circumstances.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
About Compass Asset Management Group
Compass Asset Management Group’s boutique-style firm utilizes research from some of the largest names on Wall Street in combination with our combined three decades of market experience to provide strategic, tactical and dynamic investment management. Our investment philosophy is prudent and value driven. Compass Asset Management Group, LLC delivers tailored financial planning, estate planning and investment management. We pride ourselves on providing comprehensive wealth management and advice to our clients through frequent, personal consultations, and always keep their financial goals top of mind.
Make the right choice with your financial future. Consult Compass Asset Management Group for advice & guidance that will change your life.
COMPASS ASSET MANAGEMENT GROUP | 100 STONY BROOK COURT SUITE C | NEWBURGH, NY. 12550
845.563.0537
Sources:
Article retrieved on April 25th, 2016 from https://advisor.fidelity.com/app/item/RD_13569_44029.html?sapl=email&camp=PDM1798&prgm=387543&clientId=RKVX54TotSk%3D&cid=PDM1798&bid=2414615. Thinking about using your retirement savings to pay for college. Think again. Planning, Viewpoints & White Papers, Fidelity Investments.
Article retrieved on April 25th, 2016 from http://www.sec.gov/investor/pubs/intro529.htm. Investor Publications, An Introduction to 529 Plans, U.S. Securities and Exchange Commission.
Tags: 529 College Savings Plans, college, college savings
