Parents often tell College Coach’s Saving for College experts that all, or a large part, of their plan to pay for college involves loans or withdrawals from their 401ks or 403bs. We try to help them find an alternative college finance strategy, as using these accounts to pay for college can be expensive and ruin a parent’s retirement security.
A brief reminder: what is a traditional 401k/403b?
When you fund a traditional 401k or 403b, you allow your employer to take some of your paycheck and deposit it in your retirement account. You don’t have to pay taxes on the income that you save. This is called pre-tax salary deferral. You invest the deposit in assets that you hope will grow in value, and you do not have to pay tax on interest, dividends, or capital gains that are earned within the account. This is called tax-deferred growth. When you do withdraw funds from your traditional 401k or 403b, you must pay income tax on those funds.